All share prices on all stock markets around the world are minority valuations; they reflect what markets think an investment without control is worth.
The moment an investor takes control of a company, though, they can – effectively – access the cash flows of that business. And for this reason, that control is worth something. Therefore, bids to take control of companies tend to be at premiums to quoted share prices.
Given the combination of low valuations, high costs and small cheque sizes, the small- and mid-cap market has seen a steady rate of delistings from the JSE.
Given the above explanation and the practical nature of needing to convince investors to part with their shares, these bids to delist stock tend to be at premiums to the market prices and, thus, an astute – and somewhat lucky – investor can make a tidy profit getting ahead of them.
What characteristics make a company consider delisting, or even become subject to an acquirer’s bid to delist them?
Good-quality underlying business(es) and a low valuation are a key starting point.
You are also looking for either an anchor shareholder, who will probably be the one taking it private, or a free float of tired shareholders who will jump at a quick payday.
It also helps if the size of the cheque needing to be written is not too large and the underlying company is not too debt-laden (for leveraged buyout purposes).
Using Iress’s method as a base, I’ve built the following filter on the JSE to try to find stocks that meet this checklist:
- Not too big: I’ve cut out any stocks larger than the smallest stock in the Top 40 index.
- Nicely profitable: I’ve removed companies with a return on capital employed (ROCE) of less than 15%.
- Nicely predictably profitable: I’ve then dropped companies with an average ROCE across the last three years that is less than 10%.
- Not too debt-laden: I’ve filtered out companies with interest covers lower than 3 x and an average debt:equity greater than 30%.
- Logic filter: Finally, I’ve excluded all the stocks I think are ‘zombie stocks’ and of no use to anyone.
Here is the final list:
|Code||Name||Industry||Market cap (Rm)||ROCE (%)||3-year ave ROCE (%)||Interest cover (x)||3-year ave D:E (%)|
|ARL||Astral Foods||Consumer goods||5,803.09||15.90||27.27||10.30||5.53|
|SUR||Spur Corporation||Consumer services||1,864.53||21.40||24.20||26.60||2.50|
|THA||Tharisa plc||Basic materials||7,562.50||18,0||13.43||12.30||24.93|
Finally, here are my extremely brief thoughts on each one – all pure speculation from my side:
- AfroCentric: The obvious suitor for a takeout would be Discovery, but the Competition Commission would be unlikely to allow that. Thus, with strong underlyings and a clear strategy for growth, the group probably prefers to remain listed to give all stakeholders comfort.
- Adcock Ingram: Bidvest controls this group and, despite all its protests to the contrary, would be a logical buyer here. Even at a good premium to its share price, Bidvest should find this acquisition accretive and the cheque size quite digestible. In fact, if Bidvest never makes a bid for this stock, I would have to question its skills at capital allocation.…
- Alaris Holdings: Alaris has been quietly building a global niche defence sector business. While I think it probably wants to remain listed from a governance and stakeholder perspective, it may make an interesting acquisition for a large player in this sector (like Reunert).
- African Media Entertainment (AME): A strong anchor shareholder in a share that seldom trades does beg the question: why remain listed?
- Astral Foods: As a largely institutionally held stock, Astral is unlikely to delist itself. That said, institutional money is transient and if an acquirer were to offer a high enough premium, fund managers would probably be quite tempted to take the return and run.
- Bowler Metcalf: Like AME, insiders are large shareholders here and questions have to be asked about how much value they are getting from their listing.
- DRDGold: Mining stocks are hard to call and gold stocks are harder still, yet DRD could make for a nice bite-size acquisition by a larger player that is not avoiding South African mines (such as Sibanye-Stillwater).
- MiX Telematics: A strange beast, and thus hard to call. Cartrack’s pivot to a primary listing on the Nasdaq, though, does speak volumes about what executives in this sector may think about a JSE listing.
- PBT Group: Similar to AME and Bowler Metcalf above, with strong insider ownership and an illiquid share. Particularly as its European expansion takes off, perhaps it would prefer to keep profits in its hands and out of its customers’ line of sight? Perhaps it likes its blue-chip client-base taking comfort in the governance and transparency that comes with a listing?
- Primeserv: I am getting tired of writing this, but like AME, Bowler Metcalf and PBT group above.
- RMB Holdings: Post-unbundling, directors have stated that this vehicle is in an asset realisation phase; we will thus probably see it selling off its assets, settling its liabilities and doing a final distribution over the next few years.
- Spur Corporation: This is a particularly interesting one, not just for all the above boxes it ticks, but given that it has seen its founder exit and quite a bit of churn through its executives. While any bidder for this asset would need a strong stomach – the quick-service restaurant sector has suffered during this pandemic – an attractive price may persuade the key institutional shareholders to part with sufficient script that control and, perhaps even, a delisting could be achieved.
- Tharisa plc: Like DRD, but with a strong anchor shareholder that is unlikely to either execute or allow for a delisting.
Listen to Nompu Siziba’s interview with Sasfin Securities deputy chair David Shapiro on delisting (or read the transcript here):
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Keith McLachlan is a small cap analyst.