Companies

“Where Art Thou, White Knight?” – LTC Corporation’s Privatization Offer.

My style is to normally have some frivolous stuff at the start, before jumping into the hardcore investing stuff.

705) white knight.png

But since I’m here paging for some deep pocketed white knight to look at unlocking the value for LTC Corporation (further), I’d better just get into it right at the get-go.

Last Friday (I think it was the 9th Feb), was one of those rare days whereby I literally bounced around with a spring in my step. EVERYTHING went well for me that day. Like everything. But I’ll just talk about 1.

It was 1 of those days whereby I could play tennis with a brick wall… and win. In short, invincible.

The day started with a barrage of text messages from some fellow investors:

696) LTC 1.jpg

For the uninitiated, Alain T is a fellow value investor, and I’ve previously published (with permission of course), his work on LTC & S i2i:

What Makes You Think You Can Win? The Case For The True Value Investor – LTC Corporation & S i2i Limited

As you can see, here we are, postulating about a possible privatization offer. We wouldn’t dare bank on that, but one can certainly hope. And the story continues:

697) LTC 2.jpg

698) LTC 3.jpg

Then 15 mins later, we’re high-fiving each other:

699) LTC 4.jpg

700) LTC 5.jpg

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And it wasn’t just text messages. It was emails as well. Emails such as these put a smile on my face. Always nice to hear from fellow drs:

702) LTC email

So there we are. I took my own sweet time and only just got around to really looking at the offer documents yesterday (After my hot valentine’s day date, of course). Let me break it down right now.

LTC’s family dominated management is offering a buyout of all minority shareholders at an offer price of $0.925. At 1st glance, it’s a great deal. For starters, it exceeds the highest share price LTC has ever reached, since the year 2000.

703) LTC share price.jpg

This means that any shareholder who has bought shares in the past 18 years, would’ve made money. That’s pretty much everyone.

For me personally, since my ave. price is around $0.72, this would give me a ROI of about 28.3%. Not great, but not too bad either. Especially since it’s coming at a time when I’d like to liquidate something. So timing’s good.

Since the offer price is also a massive 45% gain from the last traded price before the trading halt, it’d also give a massive bump in portfolio values compared to the start of the year, so I’d really like to see how STI ETF beats me this year.

But the Chengs fail to illustrate how fantastic a deal they’re getting as well.

So let TTI illustrate it.

1. Offer price is at a steep discount to book value

As of the mrq, LTC’s book value is a massive 164.51 cents. This means that the offer price is a mere 56% of the book value. The Chengs are buying 164.51 cents worth of assets per share, for a mere 92.5 cents.

2. Steel prices are rising

As I’ve illustrated in previous LTC posts, LTC’s inventory is booked via a weighted ave cost method. This means that in a rising steel price environment, their profits are MAGNIFIED.

LTC Corporation & Asia Enterprises Holdings – What Are Investors Missing?

under “Inventory Accounting”

3. Solid Balance Sheet, FCF Generative

The Chengs are offering 92.5 cents… for a company’s whose book value is 164.51 cents, of which 28.6 cents are held as cold hard cash. The company has next to zero debt. ($4,000 of debt. LOL, yes! $4k!)

As I’ve illustrated in earlier posts as well, the company is also FCF generative, year in, year out.

4. Project Pipeline & Future Potential

I’m sure the Chengs know this.

LTC’s residential property development in Penang is proceeding well (Gem Residences).

Their SG industrial properties  (Lion Buildings) has previously been written down, and with it’s central position just beside an MRT station, as well as a backdrop of recovering demand for industrial spaces, there’s great potential for upwards revaluation of the property, even without redevelopment.

5. Lowball Offer Price

Perhaps, even the Chengs know this:

704) Offer price.jpg

The thing is, I can understand how hard this must be for a potential white knight to come and make a higher bid.

The Chengs control just under 50% of the company. Any offer price would’ve to extend to the shareholdings of the Chengs as well. And if the white knight is not looking to operate the company as a private entity, they have to worry about getting into a war and eventually having the Chengs sell out to them instead.

Although I think that’s a highly unlikely scenario.

The Chengs WANT this. They just want it cheap.

Hell, I think even at $1.10 per share, they’d snap it up in a jiffy! 

Cos even at $1.10, it’d represent a mere 67% to book value. That seems fair, since we do have to give a discount to book value for acquirers. (Again, I wrote about it some time ago. Steel players have to be acquired in it’s entirety, at a discount, since their book value mainly comprises rebar steel. It’s kinda like a “bulk discount” if you’re buying a lot of inventory at 1 go)

Remember the book value, the cash holdings, and the fact that their inventory would be inherently revalued upwards in an environment of rising steel prices.

What Next?

The acquisition offer is such that the offer will only be valid if the offerer receives acceptances resulting in the offerer owning at least 90% of the company.

That’s the threshold required to compulsorily delist the company. (Cos anyway, if it’s not, SGX will suspend trading in the company if the public float falls below 10%)

In other words, as it stands now, if the final result is such that the offerer does NOT own 90% of the company, this offer may cease to be valid.

They do reserve the right to lower the acceptance rate to 50% though, although they won’t be able to delist the company then. (They’d just acquire more shares)

Although the Chengs now collectively own just under 50% of the company, trying to get 90% acceptance is not that easy. We just need a few larger shareholders dissenting and holding out. And for all we know, that might be a real possibility.

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Bunch of secret shareholders hiding their holdings under nominee accounts in banks and brokerages.

Plus there’s the highly respected Morph Investments. Those guys are long term value investors, showing up in top 20 shareholder lists in various deep value situations, and they’re certainly extremely patient guys.

It’d be certainly interesting to see if they’d agree to let go of their substantial stake at a discount.  I wish they’d let me know their thoughts. I’d be happy to vote the same way they do.

So it’s certainly not impossible for the Offerer to fail to own 90% of the company. The holdings of the nominees alone would account for more than 10%.

Right now, the share price trades at a puny discount to the offer price, indicating that the markets generally do not think there’d be a competing offer, and that there’s a high likelihood of the offer succeeding.

So for minority shareholders, this presents a conundrum.

You see, it makes sense to just accept the offer right now. Simply cos if there’s a higher competing offer and LTC Corporation is forced to raise it’s offer as well, the new, higher offer price will be offered to those who accepted early as well.

But accepting the offer right now, also increases the odds of LTC Corporation reaching that 90% threshold, thus putting off any white knight from making an offer.

It kinda reminds me of the prisoner dilemna in game theory.

This is from Wikipedia, about the prisoner dilemna:

Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communicating with the other. The prosecutors lack sufficient evidence to convict the pair on the principal charge. They hope to get both sentenced to a year in prison on a lesser charge. Simultaneously, the prosecutors offer each prisoner a bargain. Each prisoner is given the opportunity either to: betray the other by testifying that the other committed the crime, or to cooperate with the other by remaining silent. The offer is:

  • If A and B each betray the other, each of them serves 2 years in prison
  • If A betrays B but B remains silent, A will be set free and B will serve 3 years in prison (and vice versa)
  • If A and B both remain silent, both of them will only serve 1 year in prison (on the lesser charge)

So the most logical, best case scenario for the general good of both, would be for both to remain silent. Yet, remaining silent, runs the risk of serving 3 years if the other party betrays you.


Alright, so that’s where it stands with LTC Corporation.

Shareholders should be expecting offer documents to reach them sometime next week or the week after.

WHERE ART THOU, WHITE KNIGHT?

So guys, have a great Chinese New Year ahead!

Peace out.

 

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Evidence Based Investing – TTI’s Case Reports

In medicine, clinicians have to practise evidence-based medicine.

What does that mean?

It means you can’t just carry out a procedure or a treatment, based on your mood, your personal beliefs or what you personally think will work, even if you have strong personal grounds to believe it’d work, or even if you have good intentions.

You get into trouble for doing that.

Good intentions, no matter how pure, is not a defence.

Everything must be evidence based, that is, based on literature from research work done by heroes who devote their lives to doing research, all for the betterment of mankind. (I say heroes and I genuinely meant it, cos most research work is actually relatively poorly remunerated, with a lot of hard work. It’s just shitty work IMO, despite how much the gov tries to promote it and all the life sciences nonsense.)

Amongst the different levels of evidence, there’s the gold standard at the top, the double blinded randomized controlled trials (RCTs). That’s like the strongest evidence.

case report

Then there’re also the case reports, which are great for learning from fellow colleagues, but may not provide very strong evidence. Still better than relying on your personal beliefs.

Anyway, here’re TTI’s case reports for my brand of deep value, investigative, no-nonsense digging type of contrarian investing. (And here I’d help InvestingNote by promoting them a bit)

Over at IN, I have made 5 estimates:

Alliance mineral 1

Alliance mineral 2

blackgoldnatural

CDG estimate

Geo energy

And the cumulative result of these 5 estimates are:

Market estimates results


(Please don’t bother to join IN to follow me, I don’t think I’d be making estimates that often anymore.)

Now…. of these 5 estimates, 2 have hit, 2 are ongoing, and 1 has been widely off the mark.

Of the companies that the 5 estimates involve, 4 of the estimates are done with lots of loving care, due diligence, seriousness and are evidence based.

The last 1 was done somewhat as an experiment, with next to zero research, with callousness and I think I spent a grand total of 15mins looking at it.

Hazard a guess, which is the one with no effort put in? No prizes for guessing.

TBH, I don’t really know what BlackGoldNatural is doing right now. I roughly know they’re in the coal industry from my work with Geo Energy, but that’s about it. I made the estimate after reading 1 solitary article about them winning some contract.

And THAT, is why casual, read-the-news-and-invest, is suicidal.

(well, my estimate for Geo Energy hasn’t hit the mark, but for all practical purposes, I’d consider it has, since it rose as high as $0.31, just barely below my $0.32 estimate. Plus I’m deeply in the money on this one, having gotten in right from the start when it was unloved)

Geo Energy Resources Investing Thesis – Part I

Geo Energy Resources Investing Thesis Part II


Finally, let me give just 1 more “case report” as evidence.

Sometime in Nov (2 months ago), I posted my investing thesis for Shinsho Corporation:

TTI’s New Core Position: Shinsho Corporation & Kobe Steel

In my most recent post, I said that this week is exciting, as the major steel makers would be posting results.

Experts In WEF Davos + Updates On Shinsho Corporation

And THIS, is what Shinsho Corporation did today (at the time of typing this):

Shinsho corporation

With this, my large core position is looking real pretty today, with an approximately 24% gain or so in the past 2months++.

And that’s not taking into account Fx gains, which has fortunately, worked out in my favour as the JPY strengthened of late. That’s gonna add a few more % points to that 24%.

I think Shinsho Corporation was a classic case of contrarian investing: Having the balls to take a position when the world says no. Right after I built my position, even more of the world said no. And as late as just a few weeks ago, naysayers continue to think that there isn’t much value left to capitalize on.

Today, things have swung to my side, as a bit more of the world is starting to recognize what I saw 2 months ago.

Yet the difficulty in contrarian investing, lies in truly believing that you’re right while the general market is wrong. That’s something very difficult to do, especially if the share price continues to move against you. Afterall, we validate our investing prowess by the share price.

IMO, the only way to really stand firm in the barrage of dissenting information and opinions, is to know what you’re investing in, and know it better than the other guys.

Even with the massive jump today, Shinsho’s share price is still a tad below what I deem to be fair value. But I’d have to reassess it again tonight or over the weekend, cos global markets are looking shaky of late, there may be some better opportunities thrown up elsewhere that’d warrant deployment of capital.

I’d like to see how STI ETF can beat SG TTI this quarter; I’d really have to screw up big time for the next 2 months for that to happen.