Well, that was an unexpected early Christmas present. Last week, I wrote to you about how bullish I was on the Australian outdoor advertising sector and why my fund owns APN Outdoor (APO) and Ooh Media (OML). Yesterday, completely out of the blue, APO and OML announced a merger of equals, which I think is a MAJOR WIN/WIN for both sets of shareholders and assures further outperformance from these stocks as they eventually become one.
This is the no.1 and no.2 player in the structurally growing sector of outdoor advertising merging. The revenue and cost synergies are larger, and the merged company becomes a $1.6b market cap growth stock that is investable to all investors.
The final piece of what is undoubtedly positive news was both companies UPGRADED earnings guidance as part of the merger announcement. This is a merger of two strong companies that have structural tailwinds.
My argument last week in favour of the sector and both stocks was that the industry is growing at double digits, the earnings of both stocks are growing at double digits, yet both stocks traded on P/E discounts to the market. They were and remain structural growth at a reasonable price investment.
The merger in point form summary and some key slides:
- APN and OML have announced a merger whereby OML shareholders receive 0.83 APN shares for every OML share.
- Both Boards have recommended the transaction
- Conditions include no regulatory intervention, OML shareholder approval and other customary conditions
- Both companies have agreed to cap final December 16 dividends at 12.5c for APN and 10c for OML respectively
- The merger is expected to deliver pre-tax cost synergies of at least $20m per annum and the companies believe the deal will deliver FY16 pro forma EPS accretion of 14.7% and 14.2% respectively
- OML is expected to vote in March 17 with implementation in April 17
- As part of the announcement, APO provided a positive trading update.
All in all, I think this is an excellent result for both APO and OML shareholders, of which my fund is both. The combined entity is significantly stronger and more profitable than either standalone options. This is a classic merger of equals that makes sense and I will continue to hold both stocks, as I think this deal assures my investment thesis is right. The good news is that in April, when the merger completes, I will only have to hold one stock to get leverage to this structural growth theme known as outdoor advertising. I hope some of you bought some APO and OML last week after my note.
I thought I better update you on the APO/OML developments as that is a major development, but I also wanted to finish the year with one highly speculative idea to put in your Xmas stocking.
I want to reiterate that this is a HIGHLY SPECULATIVE IDEA and NOT SUITABLE TO ALL INVESTORS.
The stock I am writing about today is Kidman Resources (KDR), a stock that has the potential to be the largest lithium producer in Australia.
The reason KDR has a market cap of just $176m is that there is, in my opinion, a spurious legal claim of ownership of its major resource, Earl Grey, by another small mining company. Without that legal claim, which only came recently, I would strongly suspect KDR’s market capitalisation would be double the current market cap.
My view is that legal claim will be resolved and upside value will be released in KDR. In reality, the discounted current value of KDR is based off this legal claim, which I think will be resolved.
So why am I so bullish on KDR??
Firstly I am bullish on lithium and I note that FOB 6% lithium prices have advanced to US$905t versus current market estimates of $700t. I believe in structural demand growth for lithium, based on growth in battery demand for electronic cars etc. The tables below are from Galaxy Resources and are a good macro summary of Electronic Vehicle (EV) growth and potential associated demand growth for lithium.
Secondly, the Earl Grey deposit is a world class hard rock lithium deposit with the potential to be at the bottom of the lithium cost curve, due to the scale of the deposit and its flay lying nature.
The simple point is that Earl Grey is a world-class lithium discovery. My personal view is the stock is very cheap versus its grade, scale and potential.
Obviously, this is high risk and speculative, but my experience in mining investment suggests that the underlying resource decides the success of the investment. Remember, I was the first East Coast broker to ever recommend Fortescue (FMG) about a decade ago.
If KDR successfully settles any legal action, a view I feel is likely, then it would be fair to assume KDR would be re-rated to peer group sector valuations. In that scenario, I would be expecting to see a KDR share price above $1.00, which makes KDR at 58c a solid risk/reward opportunity.
To put this in context, I currently have 2% of my fund in KDR as our no.1 play on potential large scale lithium exposure, yet with the investment sized in the portfolio to represent that it’s highly speculative and the volatile nature of mining exploration stocks.
Anyhow, that’s my idea for the Festive Season and 2017 – KDR.
I hope you all have a safe and happy New Year.
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.
