This week we discuss the ultimate outcome for any share market investment - a takeover. In the last twelve months, the TAMIM Australian All Cap and Small Cap Income portfolios received a total of six takeover offers between them. As we head into the new year, we highlight three stocks that might be acquired in 2020. Find out which ones below.
Over the last twelve months we received six takeover offers for companies in our two Australian equity portfolios. These include Legend Corp (LGD.ASX), QMS Media (QMS.ASX), TradeMe (TME.ASX), Netcomm Wireless (NTC.ASX), Dreamscape (DN8.ASX) and CML Group (CGR.ASX).
When we research a company, we will never invest based purely on the hope of a takeover. Our analysis is focussed on the fundamentals of the business, the industry they operate in, and, most importantly, the management team behind it. Any takeover appeal is just an added bonus.
That being said, we have noticed some common traits of takeover targets over the years. These include:
So, with that in mind, we highlight three stocks that are possible targets for takeovers in 2020.
We wrote about ISD extensively this year. ISD is the clear leader in the Asia Pacific media monitoring industry. The company is in the midst of a turnaround under a new management team and are being disrupted by new entrants and competition after years of neglect. Although we are yet to see the business return to growth, we believe FY20 is the trough in earnings. Trading on an EV/EBITDA of 3.5x or a PE of about 5x for FY20, we believe that any global players who wish to own this region will give serious thought to acquiring ISD. A clear sitting duck in our mind - quack quack!
SMP is a merchant payments business with a market leading position in New Zealand (30% share of merchant terminals). They also have a fast growing Australian merchant acquiring business that is currently annualising $12m of recurring revenues and is estimated to grow between 50-70% p.a. over the next three years. The company recently received an offer of $70m for its NZ assets which, at the time, was double the market valuation.
We view this asset in NZ as one of extreme strategic importance and we expect market dynamics and structure to (eventually) force a bidding war. Even at the current market price, we think investors are still not ascribing much value to the high growth Australian division. We see SMP’s Australian business as a takeover target for the soon to be listed Tyro or private equity. We value the stock at almost 70 cents.
Mosaic Brands (MOZ.ASX)
The old Noni B, they changed their name recently and have a history of buying broken businesses and fixing them through cost outs and margin uplift. The management team has a clear and well-articulated strategy to return the group brands to top line growth in FY21. The market, in our mind, is too short term focussed and is significantly undervaluing the earnings power and free cash generation of this company. With no net debt and the ability to pay all profits as dividends, we think the stock is too cheap at 3x EV/EBITDA or a PE of 7x.
Mosaic’s major shareholder, Alceon, is a potential seller of their holding and we think that, unless the market is willing to re-rate the stock, the board will instigate a possible sale of the company. In the meantime, we are getting paid a grossed up dividend yield of an estimated 15% in 2020. With such a juicy dividend yield, and an enticing valuation, we think something has to give. We value MOZ at $4.00+.
To wind up, I would personally like to take this opportunity to wish our readers and investors a safe and relaxing holiday season. We are very excited about what 2020 and the new decade will bring!
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.