ECL.AU - Excelsior Capital Limited

[kab60]

Why don't they take it private? Only reason I can think is that being public with a rock solid BS helps them win orders, but the upside seems pretty huge for Leanne. Could be financed with the BS. Anyone into aussie takeover-rulles and know whether we risk getting Brookfielded? I bought a position, Leanne also bought more the other day. Pretty crazy setup (though that big Rio Tinto mine is delayed).

 

In the short term, they are trying to create an asset management subsidiary that they can potentially spin off at a later date if they are successful with capital raising and performance.  So there is no short term 2-3 year risk of a take under.  In the long run, I generally find these large insider/family control companies to not think about these topics like a distressed investor like a Brookfield or Oaktree.  If they have a public vehicle, they tend to leave it alone.  Culturally, I believe having a publicly traded company in Australia is more of a social status.  Back to the fundamentals, it trades below liquidation value, pays a healthy dividend, and actually has a pretty good operating business.

I don't see why their AM aspirations (which I'd value at 0) would stop them from during a takeover. At these levels it must be very tempting, and I'm not sure there's much social status either in owning a majority stake in an illiquid microcap nobody has ever heard of. Protection for minority investors doesn't seem too great here, and since I actually think Glennon has a thoughful investment strategy (no idea on his returns, just read some of his fund letters and he seems rational - though), why wouldn't he buy hand over fist? This is not some obscure situation or overly complex situation. The value is actually extremely visible which means we either have a 100$ bill lying around, or there's a lot of fear of a take-under. And probably more risk than I initially assumed.

[Cicero]

Anyone still following the situation? They cut the dividend which I thought was interesting in light of the liquidity and cash generation of the business.

[AJB96]

Here is my latest update:

 

Excelsior Capital Limited named Oliver Schweizer to the board of directors. Oliver Schweizer runs 22 Capital. 22 Capital specializes in "Corporate transaction advisory services, business and financial instrument valuations, and opportunistic investments."

 

This is the second recent appointment of a director with primarily capital markets experience (the other being Danny Herceg who joined the board on October 4th).

 

I can't help but draw the conclusion that a sale of the electrical services division is a real possibility.

 

Legend Corporation (a good comparable to ECL's electrical business) was acquired at 8x EV/EBITDA in August of 2019.

 

Based on the 2019 statutory accounts, ECL's electrical business delivered $8.107m in EBITDA and at the same 8X multiple as the Legend acquisition, it implies a value for the electrical business of $64.9M or $2.24 per share. If ECL sold the electrical services business, I would expect them to distribute those proceeds to shareholders via a special dividend.

 

Value of the Electrical Services Division (per share): $2.24

Net Cash and Investments (per share):  $.63

Total Per Share Value: $2.87

 

This compares to the current share price of $1.17. The stock remains very cheap.

 

2020 should be an exciting year for Excelsior Capital.

 

Sources: 

 

https://www.asx.com.au/asxpdf/20200113/pdf/44d7jyp4rrkwhr.pdf 

https://22corporateadvisory.com.au/

https://www.afr.com/street-talk/bye-bye-legend-adamantem-secures-shareholder-vote-20190808-p52fdh

https://www.legendcorporate.com/investor_relations/asx/445s28bf1nn1qz.pdf 

https://www.asx.com.au/asxpdf/20191025/pdf/449vscpmvf3tz6.pdf   

[Cicero]

Thanks Alex. Helpful colour.

 

8x EBITDA seems almost a bit conservative given the economics of the business and the current point in the mining cycle. Let's see how it plays out. 

[AJB96]

A group of large ECL shareholders have organized an activist campaign and are calling for ECL's board to sell the electrical services business and distribute the proceeds from a sale to shareholders. There will be a shareholder vote and if it's successful the board would be compelled to follow through with this plan and sell the company.

 

The activist group pegs the value of the electrical services business at $1.75 - $2.40 per ECL share and when adding the value of the investment portfolio (another ~$0.65 per ECL share), ECL's stock is worth $2.40 - $3.05 per share. That compares to today's price of $1.20. The stock is obviously very mispriced.

 

"Businesses like ECL's electrical services business change hands regularly. Based on recent sales, we think ECL's electrical business is worth $50m at an absolute minimum and perhaps even $70m or more - i.e. $1.75 to $2.40 per ECL share. This is in addition to the investment portfolio which is worth ~.65c per share."

 

Here is the filing:

http://www.cmilimited.com.au/DownloadFile.axd?file=/Report/ComNews/20200817/02267321.pdf

 

With shares trading at ~$1.20, this would be a major windfall for shareholders.

[Cicero]

Thanks Alex. Saw the announcement this morning. Finally something moving! Not sure it is the best time to sell the electrical business, but otherwise agree with the observations of the shareholder group.

[NeverLoseMoney]

Some big and exciting news at Excelsior Capital. A group of large ECL shareholders have organized an activist campaign and are calling for ECL's board to sell the electrical services business and distribute the proceeds from a sale to shareholders. There will be a shareholder vote and if it's successful the board would be compelled to follow through with this plan and sell the company.

 

The activist group pegs the value of the electrical services business at $1.75 - $2.40 per ECL share and when adding the value of the investment portfolio (another ~$0.65 per ECL share), ECL's stock is worth $2.40 - $3.05 per share. That compares to today's price of $1.20. The stock is obviously very mispriced.

 

"Businesses like ECL's electrical services business change hands regularly. Based on recent sales, we think ECL's electrical business is worth $50m at an absolute minimum and perhaps even $70m or more - i.e. $1.75 to $2.40 per ECL share. This is in addition to the investment portfolio which is worth ~.65c per share."

 

Here is the filing:

http://www.cmilimited.com.au/DownloadFile.axd?file=/Report/ComNews/20200817/02267321.pdf

 

In my opinion, this is in the best interests of every shareholder including controlling shareholder Leanne Catelan. This activist campaign is certainly an exciting development for ECL shareholders and I think it has a good chance of being successful in spurring action by the company. With shares trading at ~$1.20, this would be a major windfall for shareholders.

Glad to see we now agree after ~1.5 years.

 

As I feared, Glennon's performance as an investment manager for ECL did turn out to be terrible, as pointed out by the activists.

 

With Catelan now holding close to 50% I wonder how the activists expect to get enough votes. But it's certainly good that they make themselves heard and let Catelan know that they're not happy.

 

It's still my view that a delisting is the end goal of Catelan. The lax delisting rules in Australia make this far too easy and that's why the stock has traded were it has over the last few years. If a shareholder has the capacity to hold on to their shares no matter what, especially in the event of a delisting, I think this should work out well. If enough stubborn shareholders show their support, perhaps it will motivate Catelan to sell sooner rather than later. Time value of money matters and if Catelan realizes she can't scoop up many more shares at depressed prices, she won't have much to gain by letting shareholders hang a lot longer.

[Cicero]

It's still my view that a delisting is the end goal of Catelan. The lax delisting rules in Australia make this far too easy and that's why the stock has traded were it has over the last few years.

 

I agree that the delisting threat has a lot to do why this trades the way it does. However, I understand that end of last year the listing rules have changed (now you need a special resolution instead of an ordinary one). In addition there is the possibility to petition a court and the takeover panel depending on the circumstances if you believe it harms your interest as a shareholder. No idea how that works in practice and it probably is cumbersome and expensive if it works, but I think the hurdle to achieve a delisting is higher than it appears at first glance as long as there is a sizable minority. Real risk is time in my view. 

[Scunny Bunny]

https://hiddenvalue.blog/2020/08/18/excelsior-capital-asxecl/

 

Good history lesson in here. Salacious details (rumoured) have been omitted by the author BTW.

[NeverLoseMoney]

The activist proposal to wind-up the company didn't make it: https://asx.api.markitdigital.com/asx-research/1.0/file/2924-02294231-2A1256622?access_token=83ff96335c2d45a094df02a206a39ff4. As expected with Catelan effectively in control of the company.

 

@Cicero: thanks for pointing out the changes in the Australian delisting rules! From what I was able to find, the special resolution that is now required means that a delisting proposal would need at least 75% of the votes to get approved.

 

I think Catelan would not be able to get a delisting through currently. So, how is she going to play this? Continue to leave minority investors hanging for some more years and try a few more tender offers at depressed prices? Or is she willing to sell the company in the near future because the list of stubborn minority shareholders that don't want to sell at depressed prices is too large?

[Cicero]

Below my two cents. Note that this is all based on "evidence" that is quite flimsy, quite possible that I am cherry picking data that fit my biases:

- Leanne Catelan's endgame seems to be to turn the company into a family office. The job for CFO was posted a while ago on Linkedin and it was described as a 'family office' position which I thought was telling. Moreover, if you look at the notes the company has a lot of tax loss carryforwards and franking credits. If Leanne plays it smart she could end-up with a AUD 30-50 MM investment portfolio that she owns 100% and not pay taxes (neither corporate nor personal) on any returns for a few years. Not bad I think 

- Timing of the CMI disposal: I think this will happen in the not too distant future (couple of years?). Oliver Schweizer is a new director that was recently appointed to the board and as alexbossert pointed out his experience is geared towards M&A. Secondly, it is possible that one of the reason Leanne did not sell CMI so far is that doing so would have invalidated the tax loss carryforwards (there is a rule in Australia re consistency of business) 

- I have never met Leanne, but the feedback from people who did was pretty consistent in that she is neither particularly interested in the business nor particularly clever when it comes to business decisions (some of the strategic decisions of the company over the last few years are testament to that). If you look at Leanne's FB profile you can see that she is travelling quite a bit. Seems to me she just wants to enjoy life 

- That said, I don't think she hellbent on cheating shareholders. Yes she is taking advantage of the low share price through buybacks and buying more shares herself. But she is not trying to depress the share price (have a look at the latest AGM presentation on how the outlook is portrayed)

- Think the recent activist campaign has probably reinforced her desire to bring this to a conclusion. If you read the board's letter in response to the activist demands sounded a bit panicked to me. 

- So in summary I think they will sell CMI and this turns into a cash box. At that point Leanne will make an offer to take out minority shareholders. It will be difficult for her to argue for a large discount to NAV given that it will be mostly cash at that point. But say she pays NAV (which should be AUD 2.5-3+ per share), in that case she gets to keep franking credits and the tax loss carry forwards (which together currently stand at about AUD 1 per share in value I think if you assume 30% tax rates for both, but unadjusted for any share buyback that she will probably have to make). Pretty good outcome for her + she no longer has the hassle of dealing with a public company. The offer would also help with the delisting, as without one you can oppose the delisting regardless of the percentage she holds. 

 

What would change my mind:

Leanne recently sold her house (called 'Bomera' you can google the article) for AUD 34 MM, so probably does not urgently need cash. If she cuts the dividend to zero, that would clearly be a bad sign. 

I read Oliver Schweizer's appointment as a sign that they will sell CMI, but also possible that they will end up buying something; given the track record that would be quite negative as well.  

[AJB96]

 

As I feared, Glennon's performance as an investment manager for ECL did turn out to be terrible, as pointed out by the activists.

 

Excelsior Capital's investment portfolio earned a total return of 2% over the two years Michael Glennon managed it. Nothing to write home about. However, I'm not sure I'd characterize it as terrible performance, particularly in light of how tough this market environment has been for deep value investors. Since Michael Glennon started the Glennon Capital Small Companies Portfolio in June 2010 he has outperformed the index by over 120%. Not too bad.  It's really irrelevant at this point, he is no longer at the company.

 

Excelsior Capital has been a successful investment me and others on the CoBF board who purchased while the shares traded below NCAV. It's rare to see a quality business that's profitable trading below NCAV. I purchased my shares at $1 and sold for an average price of $1.60. Along the way they paid $.16 in dividends. This is not a company you want to buy and hold forever but the stock is compelling when it's trading below NCAV.

[NeverLoseMoney]

 

As I feared, Glennon's performance as an investment manager for ECL did turn out to be terrible, as pointed out by the activists.

 

Excelsior Capital's investment portfolio earned a total return of 2% over the two years Michael Glennon managed it. Nothing to write home about. However, I'm not sure I'd characterize it as terrible performance, particularly in light of how tough this market environment has been for deep value investors. Since Michael Glennon started the Glennon Capital Small Companies Portfolio in June 2010 he has outperformed the index by over 120%. Not too bad.  It's really irrelevant at this point, he is no longer at the company.

 

Excelsior Capital has been a successful investment me and others on the CoBF board who purchased while the shares traded below NCAV. It's rare to see a quality business that's profitable trading below NCAV. I purchased my shares at $1 and sold for an average price of $1.60. Along the way they paid $.16 in dividends. This is not a company you want to buy and hold forever but the stock is compelling when it's trading below NCAV.

I'm glad the investment worked out for you in the end. However, what you just wrote seems quite different in sentiment from what I read in the original write-up that you posted almost two years ago.

 

I also can't view or download the attached write-up anymore. Have you removed it? If so, why and when?

 

If people want to read that original write-up, it can still be viewed at ValueInvestorsClub: https://www.valueinvestorsclub.com/idea/Excelsior_Capital/4180272031

The price was $1.41 at that time. The author thought the business was worth $2.63, excluding any value for tax losses.

[BG2008]

For what it is worth, I have moved on from this name.  I have learned the hard way that small cap net-nets should be sized at 50bps or 1% and life is too short to be pray for management team to do the right thing.  I would rather have a 15% in a company trading at 60 cents on the dollar, good balance sheet, good corporate governance and good assets/business.  I did okay with this investment.  I think I had a 10% IRR between the dividends and price appreciation.  But the position sizing was wrong. 

[Cicero]

 

I purchased my shares at $1 and sold for an average price of $1.60. Along the way they paid $.16 in dividends. This is not a company you want to buy and hold forever but the stock is compelling when it's trading below NCAV.

 

Interesting. Up until recently you were relatively bullish. Did you learn anything that changed your mind?