liquidation

> 25% return in less than a month?

/ Maarten Pieters / 4 Comments

I acquired shares in Input Capital the last few weeks, after reading a post about a potential liquidation and the company subsequently launching a significant tender offer.

Input Capital – Liquidation Finally Makes it Interesting?

When I started acquiring shares I was convinced that the tender offer wouldn’t get filled and that I would therefore be able to tender my shares at the maximum of the range. In case I was wrong, I would have to be more patient and see how the liquidation scenario would play out. The shares trade at a significant discount to book value and the tender offer would amplify this.

The tender offer is priced at $0.60-$0.70. With the current turmoil I am not fully convinced anymore that the tender offer won’t get filled.

The business and the impact of Corona

The Company offers financing solutions to Canola farmers in Canada. The key products are as follows:

  • Mortgage streams: a mortgage whereby the farmers can pay interest in Canola
  • Capital streams:  provision of upfront capital with the right to buy future Canola production at a discount to expected market prices

Both solutions are exposed to Canola prices. The Company explains that there gross margin remains positive, even if Canola prices would drop to the marginal costs of production of farmers.

I believe the impact of Corona on the business to be limited:

  • While lockdowns and travel bans are in place for people, most trade continues
  • Canola is primarily used in food products, food demand is not impacted by Corona

I contacted management and they confirmed that there is no impact on the business so far and that they don’t expect a significant impact.

Scenario 1. The tender offer won’t get filled

ROI (at $0.55 acquisition price): 0.70 / 0.55 = > 25% in less than a month.

There are c. 62m shares outstanding (excl. out the money options) of which management owns c. 18m (skin in the game). Management indicated that they will not participate in the offer. So there are c. 44m that might get tendered.

In July the company bought back c. 16m shares in a Dutch tender auction at the maximum of the price range of $82ct per share for a total of c. $13m. Management did not participate in the offer. The offer was not fully subscribed as the company intended to buy back shares for a total amount of $15m. This tells us that July last year, there were no shareholders left who wanted to liquidate their position at a value of $82ct per share.

Under normal circumstances, the likelihood of the current tender offer getting filled in full would be really low. Why would you not particpate at $82ct in July 2019 and do participate at $70ct less than a year later? The business didn’t experience anything really noteworthy in the meantime. Book value per share increased from $1.15 to $1.24.

Scenario 2. The tender offer get’s fully subscribed at the low end of the range

Assuming that management doesn’t particpate you will be pro-rated and get a c. 30% fill in a “worst case” scenario, where all other shareholders tender.

ROI 30% of position (at $0.55 acquisition price): 0.60 / 0.55 = c. 9% in less than a month.

As a result book value per share will increase from $1.24 to $1.40. So you will basically own $1.40 of book value for $0.55.

  • Book value mainly consists of monetizable items.
  • Based on the fairly recent tender offer of $15m, management (with skin in the game) believes that the fair value is at least significantly above $0.82. Why risking $15m instead of distributing it as a dividend?

Not too bad to own shares in a company likely to get liquidated at such a discount. It might take a couple of years, but you get paid a $0.04 dividend in the meantime and likely also get the option to participate in future tender offers (in case you would like to exit).

Risks

Links

Daily Canola Prices

Input Capital – Liquidation Finally Makes it Interesting?

https://ca.finance.yahoo.com/news/input-capital-corp-announces-substantial-233800500.html

 

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Kubera Cross-Border Fund, liquidation at a more than 50% discount

/ Maarten Pieters / 2 Comments

I posted about this liquidation on August 20 2017. At that time, the Kubera Cross-Border Fund was already in liquidation mode. It was about to close a sale of their largest asset, a stake in Planet Cast Media Services, valued at $23m. The deal finally closed on June 14 2019 (more than 2 years after the announcement of the sale!) at a value of $20m (a small discount to the initial agreement + FX effects). The company made a distribution on July 19 of 0.18 USD per share.

The remaining net asset value of the company is 0.116 USD per share while shares are available at ~0.050 USD per share. This represents a discount of more than 50%. The shares are very illiquid, but from time to time larger blocks are sold. With a bit of patience, you should be able to acquire a sizeable retail position.

 

 

Net asset value

The assets consists of a stake in Synergies Castings Limited (manufactures alloy and chrome plated wheels for OEMs), a tax fund to be received from the Indian tax authorities and positive net working capital.

The fund has annual costs of approximately 600k USD per year (administratitive and liquidation costs). Management of the fund explained me that they are currently assessing options to reduce these costs significantly, potentially including a delisting of shares. They expect to provide more details soon.

I expect a long liquidation process (Indian authorities have showed to move slowly) and therefore estimate cash burn and liquidation costs for a period of 2 years adjusted for some savings. If we further take the book value for granted, total distributions add up to 0.108 USD per share (116% upside).

If we discount the stake in Synergies Castings Limited and the tax refund by 50% and take 2 years of current annual expenses we still break-even. Downside seems well protected.

For the tax refund I believe that it is unlikely that it will be lowered as it is based on simple tax rules, however I have no experience with similar situations in India. The actual refund should amount to $4.85m, it is valued at $4m on the balance sheet to take into account the time value of money and uncertainty with regard to timing. So there could be further upside.

Synergies Castings Limited

https://www.synergies-castings.com/

The fund agreed to sell its complete stake in the company for $14-16m in four tranches ($2m discount if consumated within 18 months) in August 2017 to a buyer (I believe to be the founder of Syergies Castings Limited) who at the time still had to find buyers. A strange situation. I believe that the founder basically guaranteed to buy the stake at this price and believed that he could find buyers for a higher price.

Payments for the first two tranches were received soon after the agreement. However, the 18 months have passend and the 3rd and 4th tranche are still open. The fund also received an advance of $1m (liability on the balance sheet) which is a penalty which the fund can keep in the case the 3rd and 4th tranches don’t close. The fund values the remaining stake based on the lower range of $14m out of caution. The fund is in discussions with the buyer/founder and confident that they will eventually close the sale, although with further delays (based on conservation with the funds manager the Indian and US market conditions are not as favourable as a couple of years ago, however they see this as a temporary issue).

The company is still growing revenues and profits and makes investments for the long term (https://www.thehindubusinessline.com/companies/synergies-castings-to-set-up-a-650-cr-greenfield-plant-in-visakhapatnam/article23738268.ece).

This indicates that there are no real issues in my opinion. The business itself is not wonderful. EBITDA margins are in the 11-15% range historically, I have no view on capex but for a manufacturer with a high degree of automation this is likely substantial.

Below an overview of historic performance. The fund explains that revenues, EBITDA and net income increased in both FY18 and FY19.

Synergies castings

 

Kubera Cross Border Fund’s liquidation offers more than 30% upside

/ Maarten Pieters / Leave a comment

This is a special situation investment where the Kubera Cross Border Fund is in the process of selling their latest assets and returning proceeds to shareholders. I estimate the net proceeds per share, if all goes well, at 39ct USD per share of which I expect ~20ct USD to be returned before year-end. The shares currently trade with a bid/ask of 25ct/31ct. The company trades on the AIM market of the London Stock Exchange. The shares are extremely illiquid.

I submitted a full write-up on http://www.microcapclub.com to apply for membership, hence I am not sharing further details here.

KUBC1

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary/KYG522771032MUUSDAIM.html?lang=en

 

Please… sell me some more shares

/ Maarten Pieters / Leave a comment

When I invest in a company I want to make sure that I understand the company’s filings properly and that I have a good view on the sources I can use to obtain company information.

My mother tongue is Dutch, however the number of (interesting) companies trading on the Dutch stock exchanges is very limited. As a result I mostly invest in US securities. Which also have the advantage of clear reports which are easily accessible.

The disadvantage here is that my fellow investors, #competitor’s, also know their ways to find all relevant data and are part of probably the largest investment group in the world (investors who understand English). My investing edge has to come from better interpretation of available information rather than investigative work to find more information than the competition.

For US illiquid nano/micro-cap securities the disadvantages are limited from my experience. Hence, this is where I invest a large part my portfolio.

From time to time, when I can’t find anything interesting in the US, I start looking at securities on other exchanges. About two years ago I stumbled upon a very interesting liquidation play where my estimate of proceedings to investors was ~200% higher than the stock price with limited risks. It took me about a month to buy some shares. I think that the shares only trade 1 or 2 days per month. Bid/Ask spreads are often ~100% (Ask two times the Bid).

During the last two years unexpected uncertainties arose. About 50% of the company’s value became at risk. At this point I even tried to sell some shares at 50% of net asset value (NAV). Luckily for me it was impossible to do so. The Bid/Ask spread was 200% and all my sell orders were cancelled because they deviated too much from the Bid price. My broker couldn’t help it. Once you get into this stock, it is impossible to get out.

Recently the story de-risked tremendously. About 50% of the company’s net assets consists of cash at this time, which will be distributed to shareholders. The current bid is approximately 30% of the company’s NAV per share and the current ask is approximately 75% of the company’s NAV per share.

At this time my buy orders are also being cancelled as they deviate too much from the current Ask. Hopefully I will be able to buy more shares soon and share the idea on this blog.

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