As you may know, DJS is currently $3.92 and there is a fairly solid bid on the table for $4. Existing shareholders at 10 April will also receive a 10c fully franked dividend. The takeover arbitrageurs recommend buying the stock for a 2.0% return (excluding the dividend) plus potentially more upside should a higher bid develop.
So is it a buy? For me personally, I am increasingly wary of quick small profit opportunities. They usually don't work out as well as expected, are very time consuming, hugely stressful, and the opportunity cost is huge. So increasingly I'm restricting myself to deep value ideas that have substantial upside that I don't have to watch the screen daily and stress about. So with all this in mind, my benchmark is that I only buy DJS if I am not concerned to see the deal fall over and continue to hold it as an investment with the potential for lots of upside.
Will the deal succeed? Woolworths (South Africa) wants to buy DJS through a scheme-of-arrangement meaning at least 75% of all DJS shareholders will need to vote in favour. This shouldn't be a major problem. The bigger problem will be that Woolworths shareholders are also required to separately vote on the takeover and also agree to a very big capital raising. It would be silly to think this is a certainty. So while I have no view on whether the deal will complete, it is certainly not a lay-down. And the most likely Australian buyer, Myer, has declared it won't be bidding for DJS which massively reduces the odds of a bidding war.
The extreme pessimism has dissipated from the stock reminding me of the Howard Marks quote "If I were asked to name just one way to figure out whether something is a bargain or not, it would be through assessing how much optimism is incorporate in its price".
DJS has a market capitalisation of $2.11bn and owns an unbelievably well located property portfolio with brokers valuing it anywhere from $500m to $1bn (the big variable being the development potential in the Sydney Market St property). Zero net debt. Let's keep things simple and take an average estimated value of the property at $750m. That leaves the rest of the business valued by the market at $1.36bn. Very crudely, adding some additional rent back in to the P&L produces a full year estimated NPAT of ~$100m. This gives a PE of 14. Going forward profits may move higher or lower depending on management and just how much impact the internet will have etc - I will smarter people than me decide that. The valuation isn't actually so high, but not exactly deep value. There are other ways to look at valuation and I may be wrong of course, but for me I want simple cigar butt stories.
Will the deal succeed? Woolworths (South Africa) wants to buy DJS through a scheme-of-arrangement meaning at least 75% of all DJS shareholders will need to vote in favour. This shouldn't be a major problem. The bigger problem will be that Woolworths shareholders are also required to separately vote on the takeover and also agree to a very big capital raising. It would be silly to think this is a certainty. So while I have no view on whether the deal will complete, it is certainly not a lay-down. And the most likely Australian buyer, Myer, has declared it won't be bidding for DJS which massively reduces the odds of a bidding war.
The extreme pessimism has dissipated from the stock reminding me of the Howard Marks quote "If I were asked to name just one way to figure out whether something is a bargain or not, it would be through assessing how much optimism is incorporate in its price".
DJS has a market capitalisation of $2.11bn and owns an unbelievably well located property portfolio with brokers valuing it anywhere from $500m to $1bn (the big variable being the development potential in the Sydney Market St property). Zero net debt. Let's keep things simple and take an average estimated value of the property at $750m. That leaves the rest of the business valued by the market at $1.36bn. Very crudely, adding some additional rent back in to the P&L produces a full year estimated NPAT of ~$100m. This gives a PE of 14. Going forward profits may move higher or lower depending on management and just how much impact the internet will have etc - I will smarter people than me decide that. The valuation isn't actually so high, but not exactly deep value. There are other ways to look at valuation and I may be wrong of course, but for me I want simple cigar butt stories.
In short, I can't see large gains to be made from here and potentially lots of headaches so it's not the stock for me.
Regards,
Kristian
Disclosure: no position in DJS
