8IP Emerging Companies (8EC.AX) – Liquidation – 8.5% Upside

Current price: A$0.78

Liquidation Value: A$0.846

Upside: 10%

Expiration Date: Sep 2019

Liquidation Proxy

This case was shared by Paul.

 

8IP Emerging Companies Limited is Australian listed closed end fund. The fund has been under pressure after receiving an unsolicited bid by Aurora (15% shareholder). As a counter-offer, management proposed to liquidate the fund and distribute proceeds to shareholders causing Aurora to withdraw its bid and support management's proposal. Spread to liquidation value estimate stands at 8.5%.

Fund's portfolio is made of cash (A$0.49/share), listed securities (A$0.34/share) and unlisted securities (A$0.024). Listed securities are small cap names on Australian stock exchange and 8IP position is less than 1% of their market cap (at least for the indicated top holdings).

Shareholder meeting to vote on liquidation is set for the 1st of August and approval seems to be guaranteed. Initial distribution of A$0.47 will follow shortly after the approval and the remaining portfolio is expected to be liquidated by the 30th of Sep 2019 Brought forward from the initial timeline of Dec'19)

Management owns 8% of stock.

Company presented the following liquidation estimates:

Liquidtion estimates

 

The main risks here are:

  • Price of listed securities in portfolio might change till liquidation - this can be partially hedged by shorting Australian small cap ETFs, albeit historical correlation is far from perfect as 8EC only holds limited number (20-30) of positions.
  • Existing some of the positions in portfolio might prove difficult, especially some of the illiquid exploration stocks as well as unlisted securities. On a positive note, the fund does not own more than 1% of the companies it invested in (at least for the named largest positions).
  • Liquidation and operating expenses might exceed management's projections - their track record is not great having consistently under-performed Australian small cap indices. However, at least estimates of the operating costs seem to be in line with historical figures.
  • Bid/ask spread on 8EC is wide.

Also worth noting that Aurora has reduced its position from 17.2% to 14.8% in Jun'19 after withdrawing the bid. Aurora is a small fund with net assets of only A$4.5m. There might have been issues with their mandate to keep a large position in liquidating security but that’s just a speculation on my part. Maybe it was a matter of opportunity cost to them.

11 COMMENTS

  1. AG

    Thanks Paul and dt.
    Do you know if there are any witholding taxes for non residents?

  2. paulum

    As per page 12 of the proxy: “For Shareholders who are not tax residents of Australia and hold their Shares on capital account, no Australian tax implications should arise due to the return of capital as the Shares should not be considered taxable Australian property.”

    Since they expect to liquidate at a net loss to initial capital – hence the tax asset can’t be realized – this should be a plain capital return situation.

    1. Alex Rackwitz

      We are way past the ex date and the portals are still quoting a price in the 0.80s. Is that a huge inefficiency or just no trading volume to update the price? Any holders see a bid-ask?

      1. work 22

        No trading volume. The bid/ask in Australia is around 30 cents AUD. It just hasn’t traded, so the last trade is in the 80’s.

  3. Writser

    Hah, I was under the assumption that shares were halted for a few days. Doesn’t really matter either way. Today decent volume again so either way there’s a new last traded price now.

  4. dt

    Counting in the already distributed A$0.52 8EC currently trades at A$0.835 – which is just one cent below the initially estimated liquidation value. I intend to close my position at the levels rather than wait for the completion of liquidation.

  5. Writser

    New filing today. Current NAV is ~$0.325 depending on how you value the tax assets. Factor in some liquidation costs (company estimate was $500k but some of these costs have already been borne) and I end up with a ~$0.317 NAV.

    Essentially this means that you buy the unlisted stuff at a ~50% discount. They own $400k of Novonix convertibles which should be relatively easy to get rid of. Not sure if they have the $0.40 or $0.60 convertibles but worst case they lose $100k on that, best case they actually make a profit on them. That leaves the $1m stake in Fremontle Octopus, bought in H2 2017 as part of a pre-IPO capital raising and valued at cost, as far as I can see.

    https://www.afr.com/companies/retail/fremantle-octopus-aims-to-expand-tentacles-to-asx-20170612-gwp50d

    Might be a total dud. Hard to find any financials. But in general I’d say that if you own a pre-IPO capital raising from 2017 valued at cost, it might be worth more rather than less. And we can buy it at 50 cents per dollar. Question is whether the company can monetize it in a liquidation though.

    Still, if you managed to sell around $0.315 that’s probably a good deal. At $0.30, I’m not so sure.

    1. work 22

      thanks Writser. Still seems like a decent gamble around $.30 – $.31 with not much downside. I bought a little more.

      1. Writser

        Well I wouldn’t say there is no downside .. They have to liquidate $6m of microcap stock and sell two unlisted holdings. On top of that the asset base is so small that even $100k in extra costs implies an 1% change in NAV. And you buy it at a tiny spread to NAV. I’d say plenty of things can go wrong.

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