Some insights into what drove the selling pressure that started on 8 March with Challenger (Greencape Capital) disclosing it sold 14.6m shares via either it’s nominees JP Morgan or Citicorp. The date of the sale is 12 March but given volumes on the day were 1.7m I assume it covers sales back to the release of results on 28 February which is the only way to get to the number of shares sold. 

Or it’s a block trade that is not recorded in the trade numbers yet (which may also explain the $0.29 price which is well below the average for the date range), but wouldn’t explain the on market volumes unless it’s the buyer of those share that had the opportunity to sell at a higher price before buying at $0.29 (like that ever happens!).  The timing just on or after the half year results release gives a hint that it maybe an insider or someone who has similar trading restrictions – will have to wait for subsequent disclosures, but no other indication at this point.

JP Morgan and Citicorp nominees has a total of 11m shares at IPO ($0.20 per share), and Challenger reduced it’s position from 33.2m (7.96%) to 27.8m (5.23%) so had bought most of it’s position post IPO. A healthy gain on sale and still a significant position, but it could be a case of “right sizing” the position, needed capital elsewhere or based on valuation… they probably wont tell!

My current take is that it’s a relatively small shift in positions by relatively large holders in a low liquidity stock – hence they are paying a liquidity premium. That is it’s just volatility in price rather than a shift in value. Hence I am happy to top up at the discount.

Disc: I own RL+SM

Close The Loop has significant selling pressure today – obviously the market disagrees with my valuation published yesterday! So, I doubled my position at 30c, somewhat surprised when my low-ball offer triggered.

So currently the market is valuing CLG on less than 7x FY24 expected FCF. PE is under 10 adjusting the Comsec PE for today's price move. 

Looks like someone with a large stake sees better use for the money. IPO investors are still up 50% and given a lack of dividends, insiders may need some cash… Will be looking for change in ownership declarations coming up.

Disc: I own RL+SM

Value on ISP Tek Service acquisition (43-56c): Some ways to look at the post-acquisition value based on the company presentation of the deal and expected outcome.

·        Firstly share count changes: 44.6m shares for part of the consideration, capital raise 1 for 80m shares at $0.33 and capital raise 2 for 56.4m shares at $0.33 (total A$45m raised from sophisticated & professional investors…hmmm). Plus in 2026 a possible US$15m of shares at $0.74 from convertible notes, which doesn’t impact the current capital structure (just a note).

·        So the transaction will result in shares have gone from 335m to 516m, adding A$37m net debt (per proforma balance sheet), hence EV at $0.35 per share will be A$218m (M cap 181m+net debt 37m), if they are able to achieve the post-acquisition NPAT of A$23.8m then it’s trading just under a P/EV of 9 and a PE of 7.6. 

·        It is also expected to be 100% accretive on an EPS basis, which for H1FY23 was 1.2c for the half year, so full year doubled is 4.8c which at the current price of $0.35 per share gets us back to the PE of 7.3. I think a PE of 10 or more is a reasonable expectation, which if it gets to that in a year is $0.48 and discounted at 10% is worth $0.43 today.

·        In total US$15m of 3 year convertible notes are being issued at a 4% interest rate and convertible at $0.74. That’s not a great rate of interest for the bearers unless they think they have a good chance of upside on the conversion, but the conversion is at over double the current share price. If we take $0.74 as a reasonable value in 3 years, discounted at 10% it is worth $0.56 today.

·        So a value range of 43-56c could be justified out of the deal, it also justifies “sophisticated and professional investors” being interest to buy at 33c. This just a perspective on value from the deal and ignores both the opportunities and risks for the business going forward that come from the deal.

Announcement (17/3/23): Close the Loop Group to acquire 100% of American refurbished Electronics business ISP Tek Services registered in Southlake, TX, USA. Anticipated completion date of 28/4/23

Disc: I own in RL