Strong early showing from takeover ideas – we add OzForex

Financial Journalist
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There are two rules when it comes to buying “takeover targets”. Rule one: buy undervalued companies that are good investments in their own right, regardless of takeover. Rule two: never forget rule one.

Sharply higher global merger and acquisition activity- and a spike in domestic M&A activity – has newspapers speculating on the next targets. Expedia’s recent takeover bid for Wotif.com Holdings, foreshadowed in this column, has prompted talk of a wave of other takeovers in the technology sector as global players seek scale.

That might happen. But chasing fully or mostly overvalued tech stocks higher, in the hope of takeover, is risky. A better strategy is starting with undervalued stocks that have strategic appeal for corporate predators, and can still provide good returns in the absence of takeover.

This approach has produced strong early returns for 13 takeover ideas identified over two stories for The Switzer Report in April.The portfolio of stocks has produced an average 14% return in about three months, using mid-April share prices as a starting point.

To put that return in perspective, the S&P/ASX Small Ordinaries Accumulation Index has returned 1% so far this year. The S&P/ASX 200 Accumulation Index has returned 5.25%.

To recap, takeover targets nominated were: Perseus Mining, Reckon Group, Automotive Holdings Group, iiNet, NIB Holdings, iCars Asia, iProperty Group, Wotif.com, NRW Holdings, Westoz Investment Company, Tiger Resources, Gryphon Minerals and Reva Medical Inc.

Five stocks taken off list after fast gains

Wotif.com soared 23% from $2.60 in mid-April to $3.30. Although Wotif.com faced growing competition in accommodation bookings from larger global rivals, it looked significantly undervalued in April. With the board recommending Expedia’s bid, Wotif.com drops off this list.

iCar Asia also comes off the list – on valuation grounds – having soared from $1.10 to $1.68 since mid-April. I see no reason to keep stocks on the list because they have not been taken over. Carsales.com is the obvious buyer of iCars, but with the stock up 53% since mid-April, it is time to take profits in what is still an early-stage company.

The same goes for iCar’s sister company, iProperty Group. It has rallied 32% from about $2.50 in mid-April to $3.30. Speculators could retain iProperty in the hope of further price gains and potentially a takeover, but a $600-million valuation for a barely profitable company is too rich for me.

We’ll also cash in our chips on Africa-focused gold explorers Perseus Mining and Gryphon Minerals, up 21% and 39% respectively since mid-April. Both stocks still look undervalued and I expect greater consolidation of West African gold stocks in the next two years. But in this market, investors need to be nimble, taking quick profits on small resource stocks when they are offered.

Of the remaining eight stocks, Reckon Group keeps a prime spot on my takeover list. It looks moderately undervalued in its own right, and significantly undervalued compared with fast-growth rival Xero. It is unlikely that four big accounting software players will slug it out in this market for too long. Market consolidation to two, possibly three, big players seems likelier. Reckon is up 6% since mid-April and is one of the market’s better-run small companies over the past decade.

NIB Holdings and iiNet are up 10% and 9% respectively in the past three months. Both retain their spot, with the original thesis of greater consolidation in the health insurance and telecommunication sectors in the next 18 months alive and well.

Of the rest, listed investment company Westoz is up 9% since mid-April, Reva Medical is flat, Tiger Resources is off 1%, and Automotive Holdings Group is down about 5%. NRW Holding has disappointed with a 10% drop. But so far, so good, with no savage losses.

As to new stocks, I’ll go out on a limb and add OzForex Group, which listed on ASX in October 2013 after raising $439 million. The provider of online international payments shed almost a quarter of its value in late May after announcing lower-than-expected growth in customer acquisitions and higher costs. At $2.67, it is still up on its $2 issue price.

Two new targets added

OzForex has three attributes I look for in takeover targets. First, it is undervalued after falling from a 52-week high of $3.50. Second, it has an open share register. Third, it has a highly disruptive business model as online financial service providers increasingly threaten traditional financial services companies in coming years. This gives OzForex significant strategic appeal to a larger global financial services provider. To a predator, it looks like a company that is easier to buy than build.

OzForex Group (OFX)


It might be too soon to nominate OzForex as a target. But its undemanding valuation provides comfort for long-term investors, and parts of the financial services industry have a big target on their back from aggressive online players that can compete at a sharply lower cost base.

The next target added is Ten Network Holdings. The embattled TV network continues to disappoint with poor programming choices, ratings woes and downgrades to market guidance. Plenty of good investment judges have been caught in a classic “value trap”: Ten looks cheap, but is arguably overvalued given short-term earnings problems and the long-term structural threat as consumers access free-to-air digital channels and watch more content online. Morningstar’s fair value per share of 13 cents compares with a 28 cent share price.

Ten Network Holdings (TEN)

One wonders how much longer Ten’s key shareholders will persevere. For all its problems, Ten still has a valuable position in free-to-air TV and potential for significant strategic value to be unlocked, with the right management initiatives and some much-needed programming success. Speculators must be prepared for potentially further share-price losses in Ten this year before a predator steps up.

More takeover targets will be added in coming columns.

Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at 15 July 2014. Starting point for analysis of returns was April 15.

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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