Investors Can Find Some Of The Best Opportunities In The Smallest Listed CompaniesThe Acquirer's Multiple
During his recent interview with Tobias, Adrian Saville, CEO and founder of Cannon Asset Managers in South Africa, discusses how investors can find some of the best opportunities in the smallest listed companies. Here’s an excerpt from the interview:
Tobias Carlisle: So, tell us a little bit about Indequity, because that was one that was, it was a fascinating discussion yesterday, so it’s a genuine nano cap and we should point out that the rand is, there’s about 15 rand to the dollar.
Adrian Saville: Correct.
Tobias Carlisle: But, I do love this story, and I love the fact that you know it so well even though you’re CEO of Cannon, and you’re all over this tiny nano cap.
Adrian Saville: Yeah, we own a reasonable stake in this business now. We have been invested for a long time. Indequity, when we most recently increased our investment in the business, had a market cap of just over 30 million rand, that makes it tiny.
Tobias Carlisle: It’s $2 million US.
Adrian Saville: In dollar terms, $2 million dollars. You corrected me yesterday when I said no one listening to this is going to be interested, and you said, “I don’t know.”
Tobias Carlisle: I don’t know, listen to this. This is what you get for staying to the end of the podcast. You get a nano cap that’s genuinely undervalued.
Adrian Saville: So, Indequity has … When we raised our stake recently, market cap of just over 30 million rand. On the balance sheet, 40 million rand in cash, no debt, and then along with the 40 million rand in cash a 1.2 million US dollar listed equity portfolio, so that 1.2 million US dollar is another 15 or 16 million rand. Add the cash and the listed portfolio together and you’ve got 55 million rand in highly liquid daily priced assets, cash and listed equity. The market cap is just north of 30 million rand, no debt on the balance sheet. In addition, the company is profitable, its most recent earnings 13 million. So, you’re paying 30 million for 13 million in earnings, that’s two or three multiple on earnings and dividend paying. That dividend translated into about a 10% dividend yield.
Adrian Saville: To add to all of this, our frustration is lack of liquidity, and the executive, the board is frustrating us further by acquiring and canceling their own shares. Immediately you go, “well, how am I ever going to realize value?” And, quite honestly if the investment horizon in Hummingbird is five, or ten, or forever then why do we want to realize the capital? We want this beautiful little business just to keep powering away, generating the earnings, and returning those earnings to us in the form of dividend, and another way in which you return earnings is you buy back and cancel shares. It’s not different to a very handsome dividend.
Tobias Carlisle: Much more tax efficient.
Adrian Saville: And much more tax efficient, so they’ve been buying back and canceling their own shares, which does leave you with a liquidity problem. We’ll live with that liquidity problem, and from where we made our most recent acquisition at about three rand a share, that share price has set up quite smartly, it’s now trading at around six rand a share, so the market cap has repriced. Even at these levels we think it is worth substantially more, just the insurance license carriers value, forget about the rest.
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