From 300p to 30p in the blink of an eye, then doubling in value in just a few days. Analyst Edmond Jackson examines events at this former high-flyer.
The proposed de-listing of iEnergizer Ltd (LSE:IBPO), an Indian software/services group registered in Guernsey, has re-kindled historic concern about foreign-based companies on AIM, and also how the London Stock Exchange allows companies to list only a slither of equity such that majority shareholders can dictate affairs.
In this situation, the 62-year-old founder and chief executive owns nearly 83% of this business, and it appears just over 14% is held by five institutions, leaving just 3% possibly with individuals. Until it declared intent to de-list last month, it had been a substantial business, with a market value over £900 million last autumn and making £60 million equivalent net profit in its year to 31 March 2023.
Old hands know de-listings are hard to avoid. If after years of investing over market cycles, you have not ended up with at least one shareholding de-listed, you might not be engaging sufficient risk.
While the knee-jerk reaction tends to be one of disaster, let us not forget one of Warren Buffett’s chief maxims, as part of focusing on long-term business value not near-term market value, is to “invest as if the stock exchange might shut down tomorrow”.
I first set the context of why iEnergizer is quite unusual.
De-listings generally happen to failing companies
I ended up involved in two de-listings, one from the 2000 dotcom boom and another in the 2009 commodities boom.
AIM-listed iCollector was an early online auction site that ran into funding challenges and was acquired by a US auction site which itself de-listed. Fortunately, a stockbroker agreed a disposal that qualified as a tax loss.
Then AIM-listed Western Canadian Coal was acquired by Canada’s Walter Energy, which became over-indebted at the top of the commodities cycle, filed for chapter 11 bankruptcy protection in 2015 and de-listed.
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It then proved very hard to make a disposal, and despite an older investor reassuring me that HMRC takes a realistic view of negligible value claims, in negotiation with that office I was told firmly: “If there is any chance, however small, of some recovery in value then the stock does not qualify.”
HMRC’s tough stance is exemplified eight years later by Walter remaining de-listed with no value ascribed. But it helps explain why investors rush to sell when a company initially declares the intent. Most people want to avoid hassle, salvage what value is possible and move on.
Consequently, iEnergizer plunged 90% from 310p as low as 30p before recovering to over 70p. It’s currently 62p. The stock’s last day of dealing is expected to be 24 May after which it will be traded on what is called a matched-bargain basis.
Logic suggests market is due another technical drop
While there have not been any regulatory news service (RNS) announcements from iEnergizer as to institutions selling, only AXA and Premier Asset Management are over the 3% disclosure level for dealings. I would be surprised if funds stay on given their mandates are typically to hold liquid securities.
Individuals have to ponder what reality lies ahead, given they’ll be very minority holders in a private company headquartered in Uttar Pradesh, India, that will have no UK operations or directors. It seems quite ruthless already, how a meeting to consider if the de-listing is appropriate, will be held in Guernsey despite iEnergizer currently having a London office.
Yet there does not appear any ulterior motive other than most shareholders having convinced the board it no longer makes much sense for this business to remain on AIM. They would have known that the news would hit near-term market value, but implicitly are fully confident in intrinsic value.
Mind, the stock will not be subject to the UK takeover code and there seems a risk – quite like in the UK, anyway – of compulsory acquisition of your shares. But a matched-bargain trading facility is proposed. Mind also, it implies the CEO can set his price as the likely main buyer.
Why did the shares rebound 130% from their low?
Cynically, a “dead cat bounce” does often happen after any big drop.
In iEnergizer’s case, however, records as audited by Grant Thornton suggests a substantive business.
Reporting in US dollars: revenue, profit and margins have grown consistently and impressively, although I question how this business, having international operations, was able to avoid any financial disruption from Covid lockdowns.
iEnergizer - financial summary
Year end 31 March
|Turnover - $ million||147||157||177||195||200||260|
|Operating margin - %||20.0||21.3||25.6||28.8||28.8||35.1|
|Operating profit - $m||29.4||33.3||45.3||56.1||57.6||91.4|
|Net profit - $m||15.0||20.4||31.7||45.0||48.9||74.5|
|Return on capital - %||18.3||19.9||29.8||29.9||30.9||42.4|
|Reported EPS - cents||7.9||10.8||16.7||23.7||25.7||39.2|
|Normalised EPS - c||7.9||10.7||16.7||23.7||25.7||39.2|
|Operating cash flow/share - c||16.3||20.6||17.0||31.5||31.9||50.1|
|Capital expenditure/share - c||0.7||0.9||2.7||2.3||1.5||12.2|
|Free cash flow/share - c||15.6||19.7||14.3||29.2||30.4||37.9|
|Dividend/share - c||0.0||0.0||13.6||16.9||19.4||28.8|
|Earnings cover - x||0.0||0.0||1.2||1.4||1.3||1.4|
|Cash - $m||21.4||38.4||44.3||48.5||61.0||69.0|
|Net debt - $m||53.7||21.8||2.0||-5.0||106.0||87.4|
|Net assets/share - c||47.1||57.8||72.9||73.9||15.6||30.8|
Source: histroric company REFS and company accounts
There is also barely any differential between reported and normalised earnings, where vicissitudes of corporate life typically mean some extent of adjustments over time.
Yet there is a strong record in cash flow per share – it should not be possible to fudge cash – in support of dividends per share growing from 13.6p in respect of the March 2019 year, to 28.8p for 2022.
A curiosity was a February 2021, $165 million total loan package in support of a 49.4p equivalent special dividend, and debt refinancing. That equated to just short of £94 million - 57% of the debt raised – being paid out. At least it was not in support of sustaining ordinary pay-outs, and it shows the 83% holder liking dividends to an extent that material pay-outs will continue as a private company.
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On which basis a speculative “buy” case can be construed, based on simple net present value math of a few years’ dividends.
Despite forecasts expecting around 20p a share equivalent in respect of the March 2023 year, 11.1p was paid at the interim stage, implying a full-year pay-out more like the 22p targeted for 2024.
At 70p a share to buy, and assuming a slightly progressive pay-out, it would therefore only take around three years before a holding pays for itself. Assuming you do not get compulsorily bought out, say at the last available market price.
Considering many people are prepared to fritter money away on what are inherently gambling instruments – CFD’s, spread bets, options and crypto currencies – iEnergizer is plain vanilla equity. It amounts to a “special situation” where you need to consider, does the current seemingly low price outweigh risk of no liquid market from 25 May?
Opaque business description but plenty of employee reviews
Examining iEnergizer’s website, I find it hard to explain in plain English exactly what the company does. That is not untypical of modern technology, although Buffett would implore only invest in what you understand.
At least there are 544 employee reviews on the Indeed website, underlining a genuine business, if averaging just over three out of five as a place to work.
Its stock market history has involved a roller coaster: rising from 140p in 2010 to 365p at end-2012, then slumping to 12p by end-2015. It then rallied in a volatile trend to over 500p last summer and was near that level as recently as November.
Experienced investors who understand the risks may find iEnergizer interesting to follow this month. I would rather hold its unlisted equity than any cryptocurrency.
For less-experienced investors, or simply if you prefer to eliminate potential hassle, the only responsible rating I can attach is “sell”. It will be interesting to follow as a case example in de-listings, if it does indeed generate a luxuriant yield play in a private company.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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