|Shares Out. (in M):||255||P/E||0.0x||0.0x|
|Market Cap (in $M):||556||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-105||EBIT||0||0|
Sign up for free guest access to view investment idea with a 45 days delay.
SRL is currently undergoing (i) a de-merger; and (ii) an agreed takeover offer for some of its assets. Post the completion of the de-merger and takeover offer (late Feb'11/early Mar'11) SRL shareholders will be left with shares in an entity that (based on current market prices for SRL) is trading at approximately the value of cash on balance sheet plus shares it owns in other listed entities (i.e. almost zero implied enterprise value) despite having two producing operating assets that generate >$50m of EBITDA. In my opinion, these operating assets do have value creating upside potential with limited downside risk due to the cash and listed equity net asset backing of MetalCo.
I believe the complexity of this situation and SRL's current organizational structure has led to this mispricing and this will correct as the value of MetalCo becomes clear upon completion of the de-merger (or shortly thereafter) (i.e. within 3-4 months from today).
Very briefly, SRL has two groups of assets: (i) coal assets, which are held in a JV with PTT Group, a large Thai energy company ("Coal Assets") and (ii) a collection of Mining and Other Assets (see below for a more detailed description of these assets) ("MetalCo"). The largest single asset in the Coal Assets is a shareholding in another publicly listed company, Straits Asia Resources. For over 12 months the value of SRL traded at a significant discount to the value of its shareholding in Straits Asia Resources plus SRL's cash on balance sheet. The chart on the final slide of this presentation illustrates this very well: http://asx.com.au/asxpdf/20101115/pdf/31tw5ggx2kk8zq.pdf
On 2 November 2010, SRL announced a de-merger of the Coal Assets and MetalCo (i.e. post de-merger, shareholders in SRL would own 1 share in a company that owned the Coal Assets and 1 share in MetalCo for each share they held in SRL pre de-merger). The purpose of this transaction was to address the significant discount described above by simplifying the corporate structure (and making it easier for a corporate transaction to take place).
On 11 November 2010, SRL announced that it had agreed to sell the Coal Assets for $1.72 per SRL share in cash to PTT (its joint venture partner in the JV). This sale transaction will take place shortly after the de-merger described above is completed.
Additional information on the structure of the transaction:
1) This presentation provides a good overview, including pre and post organizational structure diagrams: http://asx.com.au/asxpdf/20101115/pdf/31tw5ggx2kk8zq.pdf
2) Coal Assets sale transaction announcement (which includes the complete agreement with PTT): http://asx.com.au/asxpdf/20101111/pdf/31ttmpb88dhgzm.pdf
Economics / Valuation
(Please note all per share amounts referenced below are based on fully diluted shares including conversion of the convertible bond)
At Friday's closing SRL share price of $2.18/share the implied value of MetalCo was $0.46/share (i.e. $2.18/share less the $1.72/share to be received from PTT for the Coal Assets). So what do SRL shareholders get for $0.46/share?
The other important thing to note is that SRL should be debt free at de-merger date. At 30-Jun-10 SRL's debt was comprised (i) Convertible Bond with face value of $80m and (ii) other debt of approximately $30m. As part of the de-merger the Convertible bond holders have agreed to convert all bonds outstanding into ordinary shares (the per share amounts above include the impact of this dilution). Additionally, the very large majority of the remaining debt was non-recourse trade financing for a business called Gfe. Gfe has been sold (announced in Nov'11) and as part of the sale the debt relating to this business has been transferred to the new owner (see here for more detail: http://www.straits.com.au/files/News/2010/11_10/Straits%20Divests%20GfE%20Trading%20Business.pdf)
As the math above illustrates you are 'creating' the assets listed in (3) above for nominal value only, which raises the question of what are these assets worth?
What Are the 'Other Assets' and What Are They Worth?
ConclusionIn summary, you are 'creating' these Other Assets in MetalCo for around $0.05/share and they are probably worth >$0.80 per share (with some upside). Given the net asset backing provided to MetalCo by the cash and listed equities, perhaps the other way to think about this that you are buying a very cheap call option on the value of these assets. Regardless, the upside / downside is very good at current prices, especially as the $1.72/share for the Coal Assets and the value of the cash and equities in MetalCo should provide a valuation floor.
|show sort by|
Are you sure you want to close this position Straits Resources?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Are you sure you want to Flag this idea Straits Resources for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You currently do not have message posting privilages, there are 1 way you can get the privilage.
Apply for or reactivate your full membership
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.
What is wrong with message, "".