Last year I wrote a blog post titled “PD-Rx Pharmaceuticals reports great FY2014 results“, but unfortunately, I can’t repeat that exercise this year. While it was likely that this year would be worse than the 2014 record year, 2015 was also worse than expected. Revenue dropped 33% from $29.1 million to $19.4 million while earnings dropped 72% from $2.0 million to $0.5 million. The company doesn’t go into a lot of details what’s the cause, except that they lost “significant sales in a single sector due to a loss of market demand for a single drug”.
I think that this is a risk that you just have to accept when you invest in smaller companies. They are often less diversified with regards the products they offer and the number of customers they have. The biggest product of PD-Rx now represents 16% of sales, so they should now be a bit less risky (it was 49% in 2014!). Another factor that reduces the risk investors in PD-Rx face is the large cash balance that the company owns. PD-Rx currently has a $9.8 million market cap while they also have a net cash balance of $6.2 million. Because of the large cash balance, I think the stock is still pretty cheap at the moment (and on the edge of becoming a net/net once again), although it remains unclear what plans the company has with it. It has slowly been building up for years now.
I have compiled an updated table of PD-Rx’s financials below. As visible historical results have been volatile – but consistently positive – in the past. Since the company only releases results once a year we have to be patient to see if they can recover next year.
Author is long PDRX
In October I wrote about Mota-Engil Africa as a potential interesting special situation because the company had launched a tender offer for all shares outstanding while the stock continued to trade at a relative big 5% discount. Today the company declared the self-tender unconditional and that payment for the shares is expected to occur on or before 9 December. This translates to a pretty awesome IRR of more than 50% while I thought that the transaction would be near riskless. Of course, the fact that the deal was completed without problems doesn’t prove that this was the case, but it does make it a bit more probable that I was right :).
Still long MEAFR.AS
I don’t think a lot of people in the Netherlands will have missed the fact that ABN Amro is going to relist on the Amsterdam stock exchange this month. It’s big news in the mainstream media because ABN Amro was nationalized in 2008 at a cost of €21.7 billion for the Dutch tax payer. The bank has currently a book value of €17 billion, and the Dutch state appears to be willing to take a small loss on the bailout. They intend to IPO certificates for a price between €16 and €20 which implies a valuation between €15.0 and €18.8 billion.
I’m not particularly interested in owning ABN Amro, but what is interesting is that Dutch private investors get a preferential treatment in the allocation of shares. Individual investors will get a full allocation for the first 250 shares unless more than 10% of the shares that are sold in the IPO are necessary to do this. To hit that number more than 75 thousand investors have to request the full 250 share allocation, and I think that that is unlikely to happen.
Participating in an IPO is on average profitable, but the problem for retail investors is that you run the risk that you only get an allocation when there is not a lot of interest in the deal. Because of how this deal is structured that’s not going to happen here. At the same time, we know in advance that this is not some hot web 2.0 stock that could make a huge jump on the first trading day. It’s just a boring bank. But I do think that it is highly likely that the IPO will be priced at a point where it is more likely than not that the stock will make a small jump on the first trading day. So I’m going to subscribe to some shares, and we’ll see what will happen :).
No position in ABN Amro at this moment
On Monday, ROI Acquisition Corp. II announced that the proposed merger with Ascend Telecom Holdings would not be completed. As a result, all shares of the company will be redeemed for approximately $10/share while the warrants will expire worthless. This means that I will realize a loss of 100% on my position in the warrants, and I agree with my loyal blog reader “pietje” that some reflection on what has happened isn’t a bad idea. At the same time, we have to be careful that we don’t try to extract information that isn’t there since we are talking about a sample size of just one. Expecting Value made the same point a few days ago when talking about the Globo situation, and I totally agree with him. Just because an investment didn’t work out it doesn’t mean that it is a failure that shouldn’t be repeated nor did you necessarily made the right call when you make money. Evaluating success and failure is hard when there is a lot of noise.
So far this probably sounds like I’m creating a narrative where I conclude that the ROIQ deal is just a case of bad variance and that it’s pointless to reflect on it. That’s not completely the case. I did screw up, and I learned a lot from it. I just didn’t do it this week. When I initially posted about the deal in Augustus I was pretty clueless with respect to the dynamics in a SPAC deal and I missed some of the most important factors. So while I now think that my initial thesis was total crap it happens to be the blog post that generated the highest number of page views since I started writing. I hope that those readers came for the high-quality comments on the post, and not the post itself. Because thanks to some knowledgeable readers who commented I quickly realized that I was wrong, and I exited my position (that was sized too big) with a nice gain. A nice example of how a bad thesis can generate a good result…
I continued following the deal and learning more about SPAC acquisitions (this is, for example, a paper worth reading). At some point, I decided to re-enter my position in ROIQW because I thought it more likely than not that a deal would be completed. Recognizing that it was far from certain that a deal would be completed I sized my position very conservative at approximately 30bps of my portfolio. Unfortunately the deal didn’t go through, but I still think that I made a decent bet with good odds. Besides the fact that the deal didn’t go through there is actually no new information, so it’s tough to argue that there is something that I should have known that I missed. The second part of the story is probably a case of a good thesis with a bad result.
If there is one thing we can learn from this it is how valuable it is to receive feedback from other investors on your ideas. Perhaps a blog is not the right idea for everyone, but I can highly recommend it. Sometimes it feels like you are giving great ideas away without getting anything in return, but one avoided disaster makes it worth it. And that’s not the only reason to blog.
Technically I’m still long ROIQ warrants…
Last year I did a small post on Mota-Engil Africa when it debuted on the Dutch stock exchange. While I never had any intention of investing in the stock I thought it was interesting because it is a good comparable to Conduril, (still) one of my biggest positions. Since getting a listing less than a year ago the stock price of Mota-Engil Africa has languished, hitting a low of €3.40 compared to an IPO opening price of €11.50.
The company has therefore decided that the listing in Amsterdam is a failed experiment and is offering to repurchase all shares at €6.1235. Mota-Engil SGPS SA (MESGPS), the largest shareholder slash parent company of Mota-Engil Africa is not going to tender their shares. With Mota-Engil Africa currently trading at €5.82 you can make a 5.2% absolute return when the transaction closes. The company will hold a shareholder meeting on 23 November and intends to complete the tender before the end of the year.
The €6.1235 offer is significantly above the €3.77 price the shares traded at the day before it was made public, and because MESGPS owns 82% of Mota-Engil Africa shareholder approval shouldn’t be a problem. In addition to this the deal is also supported by the second large shareholder with a 13% stake. This shareholder is going to exchange its stake for newly issued shares in MESGPS, so what remains is a float of just 5% that needs to be bought out. Effectively it’s a very small deal that shouldn’t hit any obstacles. The reason for the relative big spread is most likely the result of the low liquidity of Mota-Engil Africa. But who cares about liquidity when you can tender your shares in roughly two months time? I don’t.
Author is long Mota-Engil Africa