The objective you hear from many value investors is to buy $1 of assets for 50 cents. The headline I used here is the opposite, what we should be avoiding.
Trading in a couple of wind-up situations I have observed this year has left me scratching my head. It has looked to me like investors paying around $1 for 50 cents of cash!
Contrarian Value Fund Limited (ASX:CVF)
CVF was a LIC winding up its assets and returning everything to shareholders. This was made clear prior to the last major capital return with a January 13th ex-date. On January 5th they had notified the market there would be a capital return of 31.5 cents a share (Jan 13 ex-date).
The NTA just prior to this capital return was noted to the market on January 4th. It was over 97% of the assets in AUD cash, and it totaled 32 cents a share. The 32 cents a share NTA was a figure that attempted to take into account taxes and winding up costs.
Once the shares were to trade “ex” the 31.5 cent capital return, we should therefore expect less than 1 cent a share of value approximately exists in this business right? We weren’t given any decimals in terms of this 32 cents NTA figure. If we assume it was 32.00 cents, that leaves half a cent a share in value as a final payment after all estimated wind up costs.
Some readers now might reasonably point out there could be some value to other investors interested in acquiring this listed “shell” on the ASX. Even giving this some thought, I find it difficult to assume any more than up to a $1 million in value in terms of that. With 69 million shares on issue, IF that extra value existed, it could be another 1.5 cents a share perhaps. All in all, I find it hard to see any more than 2 cents a share of value once this trades “ex” the 31.5 cents capital return.
CVF Trading on Jan 13th ex-date
On the ex-date the shares rather than trading at about 1-2 cents that I might have expected, spent a few hours in the morning with plenty of volume near 4 cents a share! Hence my headline on this blog post, paying $1 for 50 cents of assets.
I am not talking about insignificant volume either with it only being a couple of traders potentially making an error with $5k trades. We are talking in the vicinity a couple of hundred grand in dollars of turnover. In this case the company was now so tiny after a wind up it may have been 10% of the register. I didn’t see any substantial shareholding notices in the weeks after, so my guess is a range of shareholders bought and sold on this day. I was one shareholder who sold any remaining shares above 3 cents, and I still am scratching my head who was buying these shares. Some were buying around 4 cents a share this day.
On Feb 18th the company notified the ASX it had left almost $700k in cash, or about 1 cent a share in value. Whilst they did report of some interested parties interested in acquiring this shell, the board suggested it wasn’t likely an attractive offer would be made. In other words no one wanted to buy the shell for much more than 1 cent a share.
At this stage I don’t see any good result for those buying these shares heavily between 3-4 cents a share on the ex-date. The company suggests a final return will only be close to 1 cent a share at best.
Before I try to explore what such buyers are thinking in these situations, I will go through another example.
Amaysim Australia Ltd (ASX:AYS)
AYS was also a wind up but a bit different in that shareholders could alternatively choose to accept a scrip takeover from WAM Capital Limited (ASX:WAM).
Without getting too bogged down into details over that, I will try and outline how things stood as we approached a significant ex-date for the shares on March 30th. Shares on the 30th traded ex 50 cents worth of dividends / capital returns. (a 26c fully franked div & a 24 c capital return).
The WAM takeover offer of AYS closed at 7pm on March 30th. Now this is the part that I could be corrected on. My thinking is that if you bought shares on March 30th, it is not possible to accept the takeover bid. After all, settlement of the shares would need to occur first, and then you would need to get your broker to facilitate acceptance. Now if readers out there somehow bought on the open of trading, settled the shares hours later, then accepted the WAM bid before 7pm I would be interested to know. Perhaps then I can get my head around some of the trading that I am about to go into discussing.
It would also be good to learn if other investors do have the ability to settle trades and accept takeover bids so quickly. My gut feel however is the trading I observed on March 30th ex-date in AYS probably simply was not rational, and shades of what I saw in the CVF example.
My take on it is that most investors buying in the opening hours on the 30th could not accept the takeover bid. As alluded to above, it therefore is effectively a wind up play. Since you are buying on the ex-date, the following represents the assets you would effectively be buying.
So a mid point of around 20 c a share estimation, and where you have to wait a period of months to receive all of this. There is quite a wide range of proceeds the company has suggested however. i.e. total leftover could be circa 17 to 23 cents.
AYS Trading on March 30th ex-date
Now I was expecting AYS shares to therefore trade somewhere in that 17 to 23 cent range. I didn’t have any further insight to be much more precise than that. I didn’t study up on whether the range provided by AYS would be over conservative or not.
I can only assume however, that the final proceeds wouldn’t be so difficult to estimate such that the final payments ended up amounting to more than 30 cents for example.
Some trades I think from memory in AYS went through in the high 30s! That may not have accounted for much volume though.
Where there was quite a bit of volume, was around the 32-33 cents mark for the first hour or so of trading.
If the AYS distributions estimates from this point happened to come in at the low end of the range (17c), that as I suggested in the blog title, is a bit like paying $1 for 50c worth of cash?
AYS had another trading day on the 31st before being de-listed on the ASX. The last traded price was 21 cents, well within the 17-23 cents remaining distribution guidance range. If those more in the know think the company was being too conservative with the distribution estimates, perhaps 21 cents could potentially be rational. The amount of trading done near 30 cents however on March 30th still puzzles me. Here we are talking about a lot more dollars traded than the CVF example. On the 30th it would have been around $3 million in total. Over $1 million in the first hour or so at those elevated levels of 32/33 cents that I described.
Possible explanations to all of this
Part of the reason for this blog post is maybe other investors out there can offer more info. Maybe with CVF were there parties that wanted the shell so badly they could outlay $100-200k on expensive trades?
As I said, could early buyers of AYS on March 30th somehow still convert to WAM scrip?
The CVF example involves smaller amounts of money and I am inclined to think it was just irrational behavior from retail investors. Much larger amounts were involved with the AYS trading I discussed so am curious to hear if anyone has a theory I have missed.
Or as I shall explore now, is the market choc full of participants who treat it all like a casino and buy stocks on the spur of the moment without any research?
Initially I thought it couldn’t be to do with my last sentence. After all surely the dollars traded is too much for that? After seeing some comments on Hotcopper though maybe things just are crazy. It was an eyeopener a couple of months back when I first visited the reddit ASX_bets thread.
After all, when Gamestop shares had its spike of interest in late Jan, the stock on the ASX with the same ticker basically doubled in price immediately for no other reason!
Forum comments on CVF / AYS
Now I hope this doesn’t come across as having a go at those making comments on forums on these stocks. I point them out only because I think it is important to get across the message that buying stocks that you don’t know what is behind the business can be dangerous in the long run. We are currently still in a very forgiving market so now it probably feels like the opposite. The less you know the more money you make!
CVF forum comments on the ex-period
AYS forum comments on the ex period
Once again I am not having a go at those who might have more important things going on in their lives than being over the top of this. The point is if you are not aware of what happens around the ex-date of such lumpy payments, shouldn’t you just stay away from the stock until you get some clarity of the situation? I know next to nothing about what is under the bonnet of a car, so I don’t go tinkering around too much there. It feels like many are happy to dive in with tens of thousands in the stock market only knowing the 3 letters of the stock code. Yet they would probably spend hours of research trying to shave a few bucks off their mobile bills. I get that sometimes you might hold a stock from years ago, put in the bottom draw, so see an event like this and check with others what is going on. In the cases here though in the forums it looks more like investors buying the stocks after huge falls on ex-date, then asking questions about what they have bought and what happens on ex-date.
From comments I read I got the impression a lot of investors just see the stocks in these cases are down circa 70-90% on the day so they buy thinking it is cheap? That maybe they have done zero research and got a rush of blood because they saw it flash up on some ASX biggest losers of the day filter? Or do they mistakenly believe they get the div/capital return payment even though they are buying on ex day? The last forum comment above seemed that might be the case. I would love it if I could buy a stock for 25 cents and get 70cents cash back within 6 months!
Would love to hear some comments from others who have noticed the situations on these 2 stocks. Have I missed something here?
If I have missed something obvious, and things are not as irrational as I am thinking, well maybe that can give me some comfort that the markets aren’t getting to that final crazy stage of the cycle you see on those sentiment charts described as “Euphoria”.
At least I might learn something about the mechanics behind accepting takeovers at the last minute, or residual value in wind ups that I am totally missing here.
I would also be interested if investors have observed similar price action in other stocks that are ex very large dividends / capital returns?
I am starting to wonder whether I should specifically be on the hunt for such situations. I was lucky to take advantage selling my last CVF shares at around 3.3 cents just before delisting, but unfortunately I wasn’t holding any AYS shares when it got to March 30th ex-date.
That is basically the end of this blog post. Below will just be some basic info on ex dates etc, in case some beginner investors stumble on this blog post looking for such information.
Buying shares before / or on or after ex-dividend date
I will leave a sharesights blog article further down with far more information on all the mechanics and terminology..
The ex-dividend date can be crucial though, here is a direct quote on that from them.
If you purchase and hold a security before its ex-dividend date, you will receive the next dividend. Reversely, if you purchase a security after the ex-dividend date, you will not receive the dividend.
Source: Ex-dividend dates and their impact on stock prices explained | Sharesight
Hi Steve,
I think you have hit it on the head when you talk about the euphoria and the market being very forgiving.
Suspect these speculators have some huge gains elsewhere that likely leave them well in front even after such mistakes.
Yes in the last year the market has probably generally rewarded any reckless gambling on stocks. The problem with gambling on these types of examples I mention in this post is you don’t have much upside optionality to benefit from the greater fool theory. Before you know it the stocks are taken off the ASX and you wait for half your money back in cash. All for not willing to spend a half hour on google looking at how ex dates work, or reading a few ASX announcements from the company about what is going on..
Nice one Steve.
With CVF the example you are giving was the second time it happened with the same stock in the space of 1 month – prior to that in December it went ex 9c fully franked dividend and 61c capital return. On the ex date shares were changing hands at 35c for a shell with NTA of 32-33 cents with 97% in aud cash. I couldn’t understand what it was and decided to sell, as the sell side was thin I put a 37c sell order and what do you know, it was filled while I went away to make a cup of tea. Then watched the price climb to 39c! For a cash NTA of 33c on a LIC that if I recall correctly never traded at a premium.
Looking at the graph it took 2 full trading days to settle at the NTA range.
Thanks for bringing that point up Solt. I was going to put all that in the blog post, then I skipped this example as didn’t want to spend too long writing it all up and thought I might jumble up the figures or confuse some readers. I think it is important to note though that yes it is another example of the same thing.
I think at the time I started doubting myself and was thinking I was missing something. I managed to sell half my shares at 38 from memory. Didn’t sell all at the time thinking maybe the buyers know something. I didn’t make that error the second time as I said in my blog post I just got rid of them all above 3 cents. It was also good for me because I bought some more shares at 32.5 before the last capital return, so effectively got back 34.8 in only a few weeks.
I have been wondering if some investors in these examples are looking at one component of the distribution. e.g. in your example here maybe they look up and understand the ex 61c return, but didn’t open up the ASX announcement on the 9c dividend? Same thing with AYS, did some look at the the ASX release info on the dividend and understood it was ex 26c, but missed the capital return announcement?
When I saw the trading in AYS on the 30th, I was flummoxed. My initial thought was that the buyers had inside information or had heard rumours about something that led them to believe that they could get more than $0.17-0.23 for the shares. I ended up dismissing this because short of the fanciful, it was hard to see how $0.30+ value could be derived from a cash box controlled by WAM Capital that was being wound up.
I ended up thinking that the apparently irrational buying was because of a misunderstanding about the entitlements attached to the shares re the dividend, return of capital and/or acceptance of the WAM bid. I wasn’t confident about this conclusion (and I’m still not confident about it), essentially because while I can see how a few people might trade on the basis of a misunderstanding of this kind, there was real depth to the buy orders on the 30th. I sold my AYS.
At least in theory, it’s possible to buy shares on market and accept an off-market takeover bid in relation to them on the same day. The ASX Settlement Procedure Guidelines cover this: see https://asxonline.com/content/dam/asxonline/public/documents/manuals/chess-asx-settlement-procedure-guidelines/asx015316.pdf at 13.3.2. I say in theory because I am not aware of any broker that facilitates this. Perhaps some full service brokers would do so?
In any case, it’s not obvious how a profit could be made by accepting the WAM bid for an AYS share had been bought ex-dividend ex-capital return for $0.30+. I appreciate that the terms of the bid indicated that there would be a $0.50 adjustment (but no adjustment for the franking credit) if the bid was extended beyond the record date for the dividend/capital return (see para 2.2 & 2.3 of Appendix 1 on p 66 of the Bidder’s and Target’s Statements). By way of example, those terms indicate that the scrip consideration would, in these circumstances, be worth $0.356 per AYS (based on a WAM price of $2.29).
As it transpired, the bid was not extended beyond the relevant record date. The terms of the bid seem to otherwise enable WAM to reduce the scrip consideration by the value of any benefits received in relation to AYS shares accepted into the bid even where the benefit was received by a previous holder (see para 8.5-8.6 of Appendix 1).
The announcement on 23 March about the closing of the WAM bid indicated that an adjustment would be made for the franking credit (among other things) where the timing of the processing of an acceptance meant that the person who accepted the bid ended up with the benefit of it. I expect that WAM would be taking the same approach in relation to a share that was purchased ex-dividend ex-capital return that somehow was accepted into the bid.
Using the numbers in the example, the adjusted scrip consideration would only be worth $0.245 per AYS (ignoring changes in the WAM price) if an adjustment was also made for the franking credit ($0.111 on my calculation).
By the way, many thanks for the opportunity to participate in a discussion on this.
Thanks Fei, that looks like a good summary of the situation to me. Like yourself, I wouldn’t say that I am very confident that the trading here is all necessarily about irrational buying, as you say the large volumes cast doubt in one’s mind about drawing conclusions. Good to get your opinion as you have probably read more about it than me. As I said I didn’t own AYS this late in the process. I was out of it a couple of months back so haven’t had the skin in the game to be bothered looking too deeply at a lot of these terms and potential adjusted scrip ratios etc..
My blog post implied that it might stack up buying at those high levels in the morning on the 30th if you could still convert to WAM shares. I didn’t make mention (but which you point out and I agree with) it would also rely on WAM not making an adjustment for the franking credit. The language used in the ASX announcement on March 23 suggested they would adjust though in such a circumstance. So for everything to stack up for AYS buyers at around 32 cents a share to do well seems like a huge amount of negotiations with brokers and WAM to make it work. Despite the language used in the March 23 announcement were WAM at the last minute perhaps happy to accommodate all this? I doubt it, if so that would be controversial I would have thought.
Other things that don’t make a lot of sense to me are the volatility over the course of the 30th. If you can weave some magic with settlement, accepting the bid and not getting the terms adjusted for the franking credit, then it is strange the share price drops substantially from 10.45 am to 11.30 and the rest of the session. i.e. 32 cents for nearly an hour then mid 20s the rest of the day.