SSR takeover targets 2 – Wotif, NRW and Westoz

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The takeover approach for Goodman Fielder this week and the $800 million merger of Roc Oil and Horizon Oil is further proof that mergers and acquisitions activity is quickening.

In Part 1 of our SSR investigation last week, the Switzer Super Report predicted a sharp increase in M&A activity in 2014, thanks to improving business confidence, low financing costs, and the need for companies to grow by acquisition.

Add another factor: CEO envy. Watching their peers do big deals will surely get rival CEOs pushing their boards to approve a high-profile takeover – and more boards giving the green light when they see others do the same. Never underestimate the human factor in M&A.

I nominated six possible takeover targets last week: Perseus Mining, Reckon Group, Automotive Holdings Group, iiNet, NIB Holdings and iCar Asia.

Six more stocks are added this week. Several should be considered speculative, as they range from minerals explorers and producers to mining-services companies, biotech firms and even a Listed Investment Company (LIC) for good measure. With some of those sectors under immense pressure, rapid consolidation through takeovers seems a good bet in 2014.

Here are the six stocks:

1. Wotif.com Holdings (WTF)

The former internet star has fallen from a 52-week high of $5.63 to $2.69; reportedly appointed Goldman Sachs, presumably as a precautionary move to advise on any takeover approach; and received an ASX query about its price fall.

Wotif.com is an interesting target. It has an excellent position in the Australian online travel industry, a prominent brand, and a large user base. Although travel margins are under pressure, online travel has stellar long-term potential as people book bigger trips via the net.

Wotif.com looks a good fit for some large US travel companies, and at its current price is reasonably valued – which is a lot more than you can say for most internet stocks.

Also, the “network effect” of a prominent website – where more users attract advertisers, and vice versa – is usually easier for cashed-up predators to buy than build. Like other successful internet businesses, Wotif.com has high returns on capital and high operating margins.

Wotif.com will be a prime target if its price decline continues. Its largest shareholder owns 20%, according to Morningstar data, meaning the register is sufficiently open to facilitate a takeover, possibly a bidding war, if a few offshore players slug it out for one of the market’s better-quality internet companies.

2. NRW Holdings (NWH)

Rationalisation in Australia’s mining-services sector is certain as falling commodity prices and the slowing mining investment boom crunch service providers. The only question is whether cashed-up players buy assets from the receivers rather than on-market.

I wrote last week that investors should approach takeover targets with a mindset of finding quality, undervalued companies in their own right, and treating any takeover as a bonus rather than the sole reason for investing.

NRW Holdings is a good example. It has produced a solid ROE over a long period, has a strong market position, and a healthy balance sheet. It might well be an acquirer, and looks undervalued after falling from a 52-week high of $1.62 to $1.12.

NRW has a reasonably open share register, with stock held by several institutions, and $174 million in cash and short-term investments, versus a market capitalisation of $312 million. The mining-services sector has immense challenges and investors need to tread warily, sticking to better-quality stocks, such as Monadelphous Group and NRW.

My guess is cashed-up predators might wait longer before striking, given this sector has much more pain – and lower asset values – ahead. NRW would be a smart acquisition.

3. Westoz Investment Company (WIC)

There is huge interest in LICs this year as big-name fund managers, such as PM Capital, launch LIC IPOs, and as established funds raise capital in well-supported offers.

The boom in SMSFs, reforms that banned conflicted sales commissions for financial advisers, and the chase for dividend yield, have put LICs on the map. Many now trade at a premium to their pre-tax Net Tangible Assets (NTA) after persistent discounts in recent years.

Expect some sector consolidation as better-performing LICs take over those trading at unrealistic discounts to NTA, to achieve sufficient scale and liquidity, and get on the radar of larger financial-planning groups.

Westoz traded at an 11% discount to NTA – meaning you could purchase its assets for 11% less than they were worth – at 31 March 2014, ASX data shows. Its portfolio returns have been patchy in the last three years, probably because of the downturn in small resource stocks, and the fund’s high cash weighting last year.

The 2013 annual report of Westoz, a subsidiary of Perth financial-services group Euroz, shows two shareholders owning a combined 30% and remaining shares spread across the top 20 investors.

A good judge of small stocks, WAM Capital, has Westoz as a top 10 portfolio holding. Regardless of takeover, Westoz looks undervalued compared with several similar-sized LICs.

4. Tiger Resources (TGS)

The emerging copper producer has a key drawback for takeover: its location. A prospective bidder would need to take on the sovereign risk of operating in the Democratic Republic of Congo. Doing so would gain exposure to our market’s fourth-largest and lowest-cost copper producer, at a sharply lower price.

Tiger has fallen from 61 cents in 2011 to 33 cents, despite significant “de-risking” of its operations, having moved from explorer to producer. Unlike many emerging mining stocks, Tiger does not have the headwind of needing to raise hundreds of millions of dollars to get to production – a turnoff in a capital-constrained market for resource companies.

It produced 41,255 tonnes of copper-in-concentrate in 2013 – 4,000 tonnes above earlier guidance – and is moving towards 50,000 tonnes of high-grade copper annually. Tiger says it has more than $1 billion of contained copper in its stockpiles. The stock is capitalised at $277 million, and Tiger estimates operating cash flow of $114 million in 2014.

Its share register is open: the largest investor, Antares Equities, has 7.2%, and BlackRock has 4.7%. Well-performed small-cap managers, such as Contango Asset Management and Acorn Capital, are on the share register. There is unlocked value in Tiger, but African copper exposure comes with high risk.

5. Gryphon Minerals (GRY)

Still on Africa, Gryphon Minerals is another former star gold explorer that has hit tough times on the market. From $2 in early 2011, Gryphon has tumbled to 13.5 cents in a “perfect storm” of falling gold prices, rising sovereign risk in Africa, and concerns about capital-hungry explorers.

For all its market woes, Gryphon still has a 3.6 million ounce resource at its Banfora Gold Project in Burkina Faso in West Africa, which complies with the Joint Ore Reserves (JORC) Code. And plenty of funds by junior miner standards: $48 million in cash and short-term investments at January 2014, which compares with its $56 million market capitalisation. The market clearly doubts Gryphon will ever get to production.

Gryphon has moved to a low-cost, start-up heap leach operation that it believes will provide a faster payback on $79 million in capital costs, and get it to production by first-quarter 2016.

Gryphon has looked cheap for the past two years, and keeps getting cheaper. It must be on the radar of North American gold producers, given its low-cost exposure to a large resource. The share register is conducive to takeover with no dominant investor.

Gryphon is highly speculative. But with much of its market capitalisation accounted for in cash and short-term investments, it looks a reasonable bet for a bigger player that can ride out a lower gold price and capitalise when the precious metal eventually turns higher.

6. Reva Medical Inc. (RVA)

High-quality, undervalued life science companies could become takeover targets as the current global rout in biotech stocks runs its course. Medical device maker Reva Medical is an interesting contender. It raised $85 million in 2010 and attracted a strong board of directors for a company its size. The $1.10 issued securities are now 16 cents after commercialisation delays and changes of product focus.

Reva is developing a bioresorbable coronary stent to restore arterial blood flow to the heart. Unlike conventional metal stents that act as permanent scaffolding within arteries, Reva’s scaffold stents are designed to be absorbed by the body after the healing process. Permanent scaffolds can cause long-term complications for some patients and are not needed when the artery heals.

Judging by its share price, the market has lost patience with Reva and its management. But for all its problems, it still has a high-value portfolio of intellectual property, is targeting a multi-billion-dollar global market, and expects to be in production with an upgraded technology in mid-2016.

A global rival might see Reva’s $52 million market capitalisation as a cheap entry point to snap up its bank of patents. It had US$19.2 million in cash at 31 December 2013, and an open share register.

Reva will need a capital injection to get its upgraded product, the Fantom Skaffold, to market, so acquisition by a larger, better-funded rival makes sense at the current share price.

– Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. All prices and analysis at 30 April 2014.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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