Bioquell – When a share buyback may reduce share price

Over the past few days, I have been trawling the internet searching for any recent buyback announcements which could lead to purchase opportunities. I came across Bioquell.

In the latest financial year, Bioquell profited greatly from the disposal of TRaC, and as a result they have large amounts of cash on their books for which they have no use. As a result, they have announced an offer to purchase 50% of the outstanding shares (43.7m outstanding) for £43.7m at a value of £2 per share, a net return of £1 per share

Naturally, the question of the effect of this followed. The firm currently has a share price of 171p, leading to a market cap of £74.7m. The cash element of the market cap can surely be valued at market price, i.e. the return of £43.7m of the firms cash should decrease the market cap to £31m (£74.7m-£43.7). Further, there will be half the number of outstanding shares (21.85m), resulting in a price per share of c.142p per share.

There are further factors at work – is the market overvaluing the cash element of the balance sheet? One the cash has been removed, ratios such as current ratio, debt/equity etc. will go askew. Further, using the latest financial year earnings of c.£600k profit from ongoing activities, the P/E will then be c.48, down from c.110. This is already a market correction, but as the company significantly weakens its balance sheet we might be able to expect that a P/E this high is unwarranted.

It is worth noting that you may already be able to purchase shares at a price of c.142p. How? Dependent on the format of the selection of shares for buyback (this has not yet been decided), it could be that each person who offers their shares has half bought back, to remain fair. The effect of this is that you could purchase 2 shares today for a total cost of 342p and receive 200p for one share, leaving you with 1 share remaining at a cost of 142p. I expect a selection similar to this – it is the management who wished to return cash to the shareholders. The management has a stake in the firm, and as such will wish to benefit from the cash return, however if their shares happened to be selected and another shareholders did not, they would be open to any number of misconduct charges. As such, I expect it to be a fair representation.

I have no experience in shorting and have never read much about the practise, however I am following this to see how the market treats this buyback. If I were to have a position, I would be short, most probably using American options, but this is strictly a learning experience.

The author has no position in Bioquell.

Gestamp Funding 2020 5.875% Senior Secured Notes

While researching special situations, I came across a tender offer made by Gestamp to repurchase 2020 5.875% Senior Secured notes for a consideration of €1032.5 per €1000 principle amount. At the time of writing, the bonds are quoted at 102.53, i.e. €1000 principle will cost you €1025.3.

This opportunity offers a return of 0.7%, over the course of 8 days (tender offer payable May 12), less transaction fees.

An important note is that €100,000 principle is the minimum denomination, with €1000 euro increments.

Risks

-Forex

-Inability to purchase at 102.53 due to quantity required.

EDIT: Quoted (http://www.quotenet.com/bond/EO-Notes_201313-20_RegS-Bond-2020-XS0925126491)

EDIT: Offer expires 9 May 11pm UK London time

Update on strategy

Whilst searching for these net nets, I came across a term NNWC – Net Net Working Capital. This is described as total cash + .75*receivables +.5*inventories – Total liabilities.

This is an interesting figure, and is closest to the expected liquidation value. It discounts many companies which are cheap by NCAV who have exceptionally high inventories, for example. One thing I have noticed is that this throws up a high proportion of businesses in healthcare, which could be due to the large requirement for cash and the high burn rate in the industry.

I have, using an app on my phone, initiated an entire portfolio made of these firms without any detailed analysis, as a personal experiment (NOTE, not as part of my search for high quality undervalued stocks), for 2 major reasons.

Firstly, I expect that none of the firms are of sufficient quality that I would want to invest, so rather than trying to pick one or two which I believe may be reasonable purchases, the entire bunch creates a reasonable diversification.

Secondly, so that I can gain some experience ‘holding’ (hypothetically, I know) this type of investment.

I will update this every few weeks, looking to sell when prices have risen to a more reasonable level.

I would expect, in an overall portfolio, that investments like this might make up no more than 15% of the portfolio – with a guide running at 5-10%, dependent on the risk appetite of the investor, and also on the availability of opportunities both within the NNCW and other areas of the portfolio.

Investment Strategy

I have not as of yet detailed my investment strategy.

I like to look for net-nets. These are firms which trade at a discount to current assets-total liabilities.

I first develop a list of net-nets, using a screener like one found of graham investor.com. I have decided for now to stay away from Chinese stocks due to the recent fraudulent behaviours.

After generating a list, I start to look for occurrences where price/NCAV (Net Current Asset Value; Current assets- total liabilities) is roughly 2/3 or less.

I then try to determine quality, as well as being critical on the type of current assets, i.e. do they have a growing amount of inventories, which might represent the fact that they are unable to sell these inventories, and that they should take a major haircut or even be excluded from calculations.

I am as of yet to find any, once I do posts will be made. I thought I should outline my procedure from the get go.

Kobex Capital Corp.

When I started this blog, I had no real interest in searching for situations such as this, I just happened to stumble across it when it came up as cheap on P/B on a screen that I was using (Zacks). I started examining the firm and quickly thought that I had come across a goldmine, since the offered value had no indication that it was in Canadian dollars on the reports I had read, and the share price I had seen was denoted in USD (at $.49, compared to an offer price of C$.655). Having not yet found my first ideal investment, you can imagine my excitement at this stage. The reality of the situation is somewhat less overwhelming, however still offers a reasonable return over a particularly short investment period with extremely limited down-side risks.

Kobex Capital Corp. have recently announced the intent to offer a ‘Substantial Issuer Bid’. The expected value of this bid is around C$0.655 per ordinary share, compared with a bid price of C$0.64 at the time of writing.

This offer is expected to be issued and paid for by early/mid June, making the investment time frame is less than 2 months. The offer is extremely likely to materialise, since it is pursuant to a binding letter of intent. The other option under the rules of the LOI, if the decision is made not to make the offer, is to return the cash to shareholders. Either situation offers similar returns.

Potential down-sides:

Exchange rate risks
An offered value of less than C$0.655 (although this is unlikely – this figure was arrived at by calculating the total cash and cash equivalent then deducting that costs of the bid)

Although this opportunity does not offer huge return expectations, with an expected gain of 2.34% less brokerage fees, I believe the lack of risk and short time frame involved warrant the investment.

Disclaimer: I currently hold no shares in Kobex Capital Corp.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

If you choose to purchase stock, remember that capital is at risk, and that I am not liable for any loses you may realise as a result of your investment.