Taking a shine to Stellar Capital
The upcoming release of interim results by small investment counter Stellar Capital Partners (SCP) will be keenly awaited by deep-value investors.
SCP is a curious mix of investments and, at this moment, it’s difficult to glean any strategic motive — other than an unlocking of the deeply discounted value of the portfolio.
SCP is mainly centred on a 48.8% stake in fund manager Prescient, 100% of security technology manufacturer Amecor and 56.8% of JSE-listed Torre Industries.
There is also a 48.9% stake in electronics manufacturer Tellumat, 100% ownership of small asset manager Cadiz, a 60% holding in Praxis Financial Services, full ownership of Stellar Specialised Lending and Stellar Credit, as well as small positions in health technology ventures LifeQ and Tictrac.
According to SCP’s website, the updated sum-of-the-parts valuation — taking into account the latest Torre share price — is estimated at about 113c/share.
That means the SCP share price is offering a discount of more than 50% on the sum-of-the-parts valuation.
Looked at another way, the ruling share price — inferring a market value of about R570m — is considerably less than the R697m paid to snag an influential stake in Prescient.
The problem for SCP is that it is fully invested with a preference share liability, owed mostly to significant shareholder (and much diminished retail tycoon) Christo Wiese, of R569m. There is also a bridging facility of R100m.
The preference shares mature at the end of May next year and bridge funding arrangements matured at the end of last year. Understandably the SCP board has been "actively engaging its shareholders, funders and other stakeholders to secure a sustainable capital structure".
There are a few options available. SCP could veer strategically towards financial services, building a hub around the perennially profitable Prescient and broadening the other financial services interests.
A focus on financial services might also offer Wiese a solution in restructuring his property company, Tradehold. Tradehold recently opted not to reverse its small financial services assets — Reward in the UK and Mettle in SA — into suspended listing VestIN. Reward and Mettle could be ushered towards SCP, adding some scale and diversity to the financial services hub.
However, such a move may be premised on SCP selling off its "industrial" interests. Amecor, which appears to be as profitable as ever, probably won’t be short of suitors.
But selling the controlling stake in Torre, which is still in the throes of recovery, and the large stake in the underwhelming Tellumat for a decent price could be an arduous task in the prevailing economic climate.
Another option is selling the jewel. Depending on how desperate shareholders and backers are about the settlement of preference share and loan liabilities, there might well be a friendly reception to parties keen on buying Prescient.
There are a number of ambitious fund management outfits that might be keen to snatch a well-managed, midsized operation like Prescient.
How happily the company sits in the Stellar stable is not clear.
Prescient management may even be tempted to buy out Stellar’s stake.
Of course, one might also note that Bidvest Bank’s recent surprise acquisition of boutique asset manager Cannon from financial services group Peregrine. If Bidvest is serious about building a meaningful niche in fund management, then perhaps Prescient (with R83bn assets under management at last count) might be of interest too?