Takeover rumours

When I first started dabbling in the stock market, like many investors I tended to concentrate on larger companies that were generally household names. However, I soon moved away from these companies towards the smaller types of organisations I invest in today. There are many reasons why I quickly moved away from investing in big caps, but the main one would be because small caps are often overlooked and under-researched whereas the larger companies are analysed to death by hundreds of professionals. It therefore seems likely that there is more chance of spotting a bargain amongst the small-caps.

However, that doesn't mean that there aren't bargains to be had even in the FTSE-100.

I am always interested when I hear takeover talk mentioned in the papers and elsewhere, and keep a watchful eye on potential targets.

Back in 2002, there was a lot of talk in the press about Safeway supermarkets being vunerable to a takeover, and having cast an eye over the fundamentals, I decided that the shares did look cheap. I waited a while for the rumours to die down before buying a small stake. The share price drifted for a few weeks/months before Morrisons eventually made their successul bid, and I was able to bag a 20% profit.

So where are the rumours that just won't go away at the moment?

Well amongst the larger caps, Man Group seems to be popular, and further interest has been aroused by Odey Asset Management recently taking a near 5% stake in the group. I've no idea whether or not a potential bidder may appear, but certainly the rumours have lingered for some time. I haven't researched the fundamentals, but I am aware that the shares have fallen considerably from their peak, that the company has been struggling to hold onto it's investors and that its AHL fund continues to underperform. On the plus side it appears to offer a double digit dividend which, if it can be held, is not to be sniffed at. Break-up value is touted to be around the 50p-75p mark.

An investment in Man Group would look very tempting if the share price were to drop to within this range.

Another large company where takeover talks have often arisen is Sainburys. In truth, this looks a safe company in which to 'park' your money, offering a very healthy dividend yield, slow but steady growth in earnings and with substantial property assets on it's balance sheet.

In 2007 the Qatari backed Delta Two fund held talks over a 600p per share offer for the group, but backed off because of the credit crunch. However, during the summer, rumours about renewed interest surfaced once again.

My instinct tells me that either one or both of these giants will eventually fall prey to a takeover bid, and although you're probably not going to achieve a multi-bagger with either one, traders with a short/medium term horizon may make a healthy profit.

I don't own shares in either company, but I will keep them on my watch list, although I do tend to stick to my small caps these days.



My recommended investment books:-

http://astore.amazon.co.uk/httpmichae1mb-21

Well worth a read!!

I have decided to add a link to my blog pages which list my favourite investing books. It may be of interest to some of you. Personally I have read some of the books more than once, and they have proved invaluable to me in helping form my investing strategy. The link is given below:-

http://astore.amazon.co.uk/httpmichae1mb-21

My particular favourites are 'The Intelligent Investor' and 'Security Analysis' by Ben Graham and 'One up on Wall Street' by Peter Lynch. For the serious investor, Graham is a must read in my opinion.

Updates - Indigovision, Avesco and Interior Services Group

A quick update on three shares I hold, and have mentioned recently.

ISG kicked off the week with encouraging news about £100m worth of contract wins in the UK and overseas.

David Lawther, ISG Chief Executive, said:
"We continue to see robust demand for our services from our blue-chip customer base, both in the UK and overseas."

Clients include Heathrow airport and Marks and Spencer.

http://www.isgplc.com/home/default.asp

The shares went ex-dividend this week and have dipped a little, but with good news about economic growth in the UK also announced this week, I am optimistic about future prospects here.

River and Mercantile Asset Management picked up an additional 200,000 shares on Friday to increase their holding to above 5%.

Richard Murray, Avesco's Chairman, continued to increase his holding in the group picking up another 20,000 shares at 159p and 160p. Over the last month or so he has topped up his holding by spending around £125,000. He owns over 20% of the company.

It's worth taking a peek at Creative Technology's facebook page for a glimpse of Avesco's recent contract wins:-

http://www.facebook.com/creativetechnologygroup?sk=wall

Notably there is a Brazilian project mentioned which is important given that Brazil will be hosting the next football World Cup and Olympic games.

No news on the Disney case yet, although this is an interesting article:-

http://www.dailybusinessreview.com/PubArticleDBR.jsp?id=1350208605438&9th_Circuit_airs_arguments_over_game_show_Millionaire_profits&slreturn=20120927041916

It hints that Disney's appeal may not be successful.

However, I'm happy to hold these whatever the outcome. This is a growing company that will be throwing off cash in the future. Avesco has performed exceptionally well despite the less than conducive economic conditions.

Finally, Indigovision's former Chief Executive looks to have finally thrown in the towel and has sold his entire holding. Clearly he no longer harbours ambitions about regaining control of the company, which allows management the opportunity to concentrate on moving the business to the next stage without unwelcome distractions.

Trakm8 revving up?

In September 2011, I mentioned that I had purchased shares in an outfit called Trakm8.

It's a real tiddler, but I think it has excellent potential.

For almost a year the share price changed very little, and hovered around a mid-price of about 13p. However, recently there have been signs of life, and Friday's mid closing price is 19.5p.

In my opinion this is a great little company. Growth in revenues over the past two years have been 22% and 25% respectively, and in a recent trading statement, it appears that the first few weeks of the new financial year have been encouraging and growth has continued.

The company is profitable, cashflow positive, has a robust balance sheet, healthy margins, and a high percentage of it's revenues are recurring.

Since issuing their results in July, they have announced a major contract award with Motorola Solutions. They have released technology updates and a product launch ("eco^N can enable the vehicle operator to reduce fleet fuel consumption by up to 20%. This product has already undergone extensive fleet trials and the savings have been proven." - sounds like a winner with today's sky high fuel prices). The Directors' have made share purchases to the tune of £140,000 (4.2% of the company) at a 21% premium (17p) to the prevailing offer price at the time. Finally they bought back  2% of the issued share capital.

At today's price the company is still only valued at about £3.7m, shares are thinly traded and illiquid, but with a medium to long term horizon I have high hopes and am very encouraged by all of the noises coming out of the company.

I like the management who draw relatively modest salaries but have a lot of 'skin in the game'.

As with all growth companies it's the potential future earnings to keep an eye on, and it's probably not worth guessing this year's EPS figure. However, if they continue with their  double digit revenue growth then it's not too difficult to see them earning between £500,000 and £1m profit in the not too distant future which equates to EPS of between 2.6p-5.2p. Apply a modest 12 times earnings and the share price would be between 31p-62p (although proven growth companies often trade on a far higher multiple).

It is a company at an early stage of development and all the usual caveats apply, but so far so good!

A bear raid on Avanti

I've always thought that shorting shares (for PIs) is a very risky practice, particularly since it involves spreadbetting (from my understanding) where gains and losses can be very substantial indeed.

However, it hasn't stopped one well-known bear raider, and a few others from shorting Avanti shares following their recent results. Their arguments can be read on the Avanti thread on ADVFN.

As I have already stated in two previous posts, Avanti is a speculative punt for me, but I continue to hold and may add on any further price weakness.

Whilst revenues were well below the level that they had indicated only a month or so earlier, I'm prepared to take their explanation at face value where they say that they have decided to adopt a more conservative approach to aspects of their accounting in preparation for their listing on the main exchange.

Herein probably lies a conundrum for the shorters. They have centred their arguments around Avanti's accounts, and inferred a lack of transparency. However, I'd question why the company would expose itself to the more rigorous scrutiny of the main exchange, if they were trying to keep their accounting practices under wraps. Surely they would have just stuck with AIM and reported the £17.5m in revenues? Furthermore, seven Directors have just picked up another £166,000 worth of shares between them to add to their existing holdings. Either all seven are insane and happy to throw good money after bad or they believe in the future of the company.

With all speculative companies, one of my main worries would be cash and the possibilty that they burn through it too quickly and have to tap shareholders for extra funds. However, Avanti seem to have enough for the forseeable future, and I am reassured by the following statement:-

"The Company also continues to evaluate options for additional satellites, but only if they can be prudently debt financed without recourse to shareholders".

Which clearly suggests they wish to preserve shareholder value.

Futhermore, the bears have conveniently ignored the very positive steps forward that Avanti have made and are achieving. Two fully operational satellites and a further fully financed satellite currently being built. Capacity on the satellites is selling well and on target (£11m per month).

It's also worth noting that the current market value of the company is not substantially above its tangible NAV.

For now I'll assume that Avanti's biggest mistake was not informing investors beforehand of the change in accounting practice. That said, if they had released this news without the positive news about progress, then the shares would probably have fallen further, so in retrospect it was probably the right move to wait.

As I've already said, I wouldn't bet the house on Avanti, but I am still optimistic that over the next few years the company could generate an excellent return.

Good luck to the shorters if they can make some money from a very risky approach, but I'll stick with my long game and avoid all the unnecessary stress. Touch wood it's served me well so far.

Avanti results and Disney appeal

I took a brief look at Avanti's results before popping out for the day, and revenues aside, the tone of the report looked upbeat. When I came home to see the drop in the share price, I assumed that both satellites must have fallen to earth later in the day, and that they hadn't been paying the insurance premiums.

Fortunately no such event had occurred, and I took the time to read the report more thoroughly. As I said in my weekend post, this is a speculative punt with a view to the long term. Can't see any reason to change my mind. I'll continue holding, and may add a few if the price dips again. Clearly the Directors still feel confident since the tone of the report is very positive, and five of them have been topping up their holdings at around the £3 mark.

On a separate issue, Disney and Celador were back in court again today. You can see a brief report on the day by following the link below:-

http://www.hollywoodreporter.com/thr-esq/disney-urges-court-appeal-overturn-377909

It would be fantastic for the court to uphold the original verdict, but since Avesco's SP doesn't contain any premium for the possible payout, in my opinion, it's all to gain and nothing to lose.

Avesco is a growing company that will be throwing off cash to its shareholders over the next few years. I think it's undervalued without any payout. Full year figures should be good, and the noises coming out of the company are encouraging. Richard Murray has been a recent purchaser of shares on two separate occasions.

Worth noting that if the Court of Appeal does uphold the verdict then I would expect the SP to double overnight. Although, I'm unclear whether further appeals are possible.

Speculate to accumulate?

Earlier this year I made what I would consider to be a highly speculative purchase of shares in a company called Avanti Communications. Avanti had been on my radar for some considerable time, but given the stage of its development in early 2011, a price of £7+ was certainly more than I was prepared to pay. The company’s shares were subsequently the target of a well-known “shorter”, and the price fell rapidly over the year to a low of around £2.40 if memory serves me correctly.

However, I kept the company on my monitor and decided to take the plunge around April 2012, buying shares at around £2.60. Since that time the shares have recovered to the current price of £3.44.

I could never classify my purchase of Avanti as an investment, more a speculative punt, but I am becoming more confident that this could be a multi-bagger in the making.

Firstly, the trigger for my purchase of Avanti shares came when in February this year they announced the fundraising for their third satellite HYLAS 3, alongside a positive trading update and a statement stating that “in the current climate (the company) does not intend to pursue further equity raisings for satellites in addition to HYLAS 3” and “Subject to suitable market conditions the Company intends to seek a premium listing on the Official List of the London Stock Exchange in 2013”.

Directors have been regular purchasers of company shares; trading updates have been encouraging and recently the launch of HYLAS 2 went smoothly. Given the costs associated with building and launching satellites and all the inherent risks, I’d imagine that barriers to entering their chosen market are high.

If things do continue to go well for Avanti then shareholders should be richly rewarded with capital growth and hopefully dividends in the longer term. However, on the flip side there are probably a thousand and one things that could still upset the applecart, hence until there are visible significant revenues, cash flow and profits it remains highly speculative. Brokers quote anything from £6-£20 a share as possible in the medium term (which probably tells you everything you need to know i.e. just pick any number out the air?).

Results will be released this Wednesday with an update on HYLAS 2, and it will be interesting to see the numbers and the capacity being filled on both HYLAS 1 and 2.

It’s not a company I’d bet the house on, but nevertheless you wouldn’t need to since if it is ultimately successful, even a fairly modest stake could quickly become more significant.

Interior Services Group

 “An international construction services company delivering fit out, construction and a range of specialist services”,.

I was attracted to the company by a hefty dividend, low P/E ratio and Director purchases despite the company clearly competing against a lack lustre UK economy, competitive pressures and the inevitability of squeezed margins.

As ever, I wasn’t expecting a quick turnaround on this investment, but longer term it looks a good bet.

Whilst it was disappointing that they reduced dividend payments in the current year, the yield is still over 6%, and management are committed to a progressive dividend policy. The company is still heavily reliant on the UK, but overseas operations are growing rapidly and there is plenty of cash on the balance sheet. Hopefully, the UK is seeing some green shoots of recovery.

The 2012 outlook statement was encouraging without being overly optimistic.

I bought shares at around £1.35, and did see them fall back to just over £1 at one point, however, they have recovered since and I am now slightly in profit.

Having seen what happened at Zetar yesterday I’m intrigued, whilst I’m pleased with the rapid share price recovery, I see no particular driver for it at present. Yes, in the long term I believe that the company will prosper and the share price improve considerably from here, but I wonder why there has been a sudden interest at this juncture.

Interior Services have talked about acquisitions to fuel further growth, but like Zetar will they become the prey. If share price action is anything to go by then, given the similarities, the answer is possibly yes.

Sweet profit at Zetar

Well you don't expect that kind of RNS after hours on a Friday evening, but I'll take it!!!

It appears that a German company called Zertus have made a cash offer of £2.97 for the entire issued share capital of Zetar.

As you may remember, I bought shares in Zetar in July 2011 (see blog dated Monday 25th July 2011) for around £2.20.

If you read the post then you will see that, longer term, I believe that they are probably worth between £4-£4.50.

However, I'm not going to turn my nose up at a 33% profit in just over a year. Where to put my profits next is the question that will occupy me now, although there are still plenty of small cap bargains.

I suppose that the offer wasn't a surprise really, and in my July post, I did say the following:-

"There has been plenty of consolidation in this sector in recent times (think Cadbury’s and Uniq). In fact whilst Zetar are looking towards organic growth, they are keeping an eye out for small bolt on acquisitions, although will they inevitably become a target themselves?"

 

Plenty of small cap companies are still hugely undervalued, the predators know this and are sniffing around.