All shares 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 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 acquiror’s bid to delist them?
Good quality underlying business(es) and low valuation are a key starting point but, a step further, you are also looking for either 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 cheque size needing to be written is not too large and the underlying company is not too debt-laden (for leveraged buy-out purposes).
Using Iress’s filter, 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 too: I’ve then dropped companies with an average ROCE across the last three years that is less than 10%.
- Not to debt-laden: I’ve filtered out companies with Interest Covers lower than 3.0x and an average Debt:Equity greater than 30%.
- Logic Filter: Finally, I’ve excluded all the stocks that I think are “zombie stocks” and of no use to anyone.
Here is the final list:
| Code | Name | Industry | Market Cap. (Rm) | ROCE (%) | 3yr Ave. ROCE (%) | Interest Cover (x) | 3yr Ave. D:E (%) |
| ACT | Afrocentric | Health Care | 2,932.98 | 17.50 | 16.93 | 9.60 | 16.90 |
| AIP | Adcock Ingram | Health Care | 7,856.42 | 18.40 | 19.67 | 23.80 | 4.40 |
| ALH | Alaris Holdings | Technology | 328.43 | 17.30 | 29.80 | 72.40 | 4.10 |
| AME | AME | Consumer Services | 169.55 | 18.50 | 23.40 | 23194,0 | – |
| ARL | Astral Foods | Consumer Goods | 5,803.09 | 15.90 | 27.27 | 10.30 | 5.53 |
| BCF | Bowler Metcalf | Industrials | 805.19 | 16.60 | 15.40 | 229.50 | 0.17 |
| DRD | DRD Gold | Basic Materials | 12,692.16 | 21.30 | 10.23 | 15.20 | 0.93 |
| MIX | Mix Telematics | Industrials | 5,145.10 | 15.10 | 15.97 | 12.90 | 4.83 |
| PBG | PBT Group | Technology | 376.77 | 21.70 | 14.63 | 34.50 | 2.20 |
| PMV | Primeserve | Industrials | 104.52 | 16.30 | 17.97 | 26,0 | 14.27 |
| RMH | RMB Holdings | Financials | 2,018.74 | 117.60 | 38.90 | 104.60 | 4.37 |
| 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 their 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 their skills at capital allocation…
- Alaris Holdings: Alaris has been quietly building a global niche defence sector business. While I think they probably want to remain listed from a governance and stakeholder perspective, it may make an interesting acquisition for a large player in this sector (like Reunert).
- 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 acquiror 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.
- DRD Gold: 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 play that is not avoiding South African mines (e.g. 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 their European expansion takes off, perhaps they would prefer to keep profits in their hands and out of their customers’ lines of sight? Perhaps they like their blue-chip client-base taking comfort in the governance and transparency that comes with a listing?
- Primeserve: 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 realization phase and, thus, will 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—QSR 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.
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