True, the tender offer price is less than I was expecting in my article as Aurora’s unaudited net asset value per share was 27.5454p at the end of March this year, down from 40.7p at the end of September 2013, and well shy of my prediction of a figure around 34p. The difference reflects a larger than expected write-down in the value of the company’s two remaining investments in DIY retailer Superstoy and Unistream Bank. I had expected the carrying values to be written down from a combined value of £17m at the end of September to £14.4m at the end of March 2013. However, the board have taken a very cautious view and are valuing these assets at £9m.
It would appear that most of the write-down has been on Aurora’s 24.3 per cent stake in Superstoy, a leading DIY retailer in Russia. The holding was last valued at £6.3m at the end of September 2013 and after factoring in a 15 per cent slide in the sterling-Russian ruble exchange rate since then the sterling value of the holding would have to be marked down to £5.4m in the March year-end accounts, assuming no impairment cost on the investment. However, with Superstoy’s underlying cash profits falling 12 per cent from £4.8m to £4.2m on flat sales, then a far greater impairment charge has been taken.
It is also clear that there has been a larger than expected impairment charge on the carrying value of the 26 per cent stake in Unistream. This was valued at £10.7m at the end of September 2013 which equates to a valuation of £9m at the end of March 2014 after taking into account the depreciation of the Ruble. In a trading update, Aurora revealed that Unistream’s operating income and pre-tax profits both fell by 3 per cent last year to £25.6m and £2.6m, respectively, but in the first two months of 2014 both volumes and commissions have held steady against the comparable period last year. We will have to wait for the year-end accounts to be published to ascertain the scale of the write-down on the Unistream stake.
However, what is clear is that of the £8m difference between the carrying value of the holdings in Superstoy and Unistream at the end of September 2013 and at the end of March 2014, around £2.6m is due to currency moves and £5.4m is down to asset impairments. Of this, I would expect most to be down to the deterioration in trading at Superstoy.
Plan of action
That said there is still some value in Aurora’s shares which have moved up from a bid-offer spread of 19.5p to 20.5p in my last article to the current bid offer spread of 23p to 24.5p. That’s because following last month’s sale of its subsidiary Kreditmart Finance Limited (KFL) a further £1.97m of cash will have been added to Aurora’s £9.1m of net funds at the end of March 2014. Therefore, post the return of £8.25m to shareholders through the tender offer process at the end of this month, Aurora’s pro-forma net funds will be £2.85m less its operating expenses of around £100,000 for the past couple of months. Net asset value will be £12.3m based on 44.3m shares in issue (after factoring in the buy back of 29.65m shares in the tender offer) and the company’s market value will be £10.9m assuming the share price holds at the current level post the tender.
My advice here is pretty clear: I would recommend tendering all of your basic entitlement (39.9 per cent of your holdings) at 27.5454p a share. I would also take advantage of the excess tender facility to try and tender more of your shares at 27.5454p. You have nothing to lose because if not all shareholders tender their basic entitlement, then you will hit lucky and lower your average buy-in price even further. I would then continue to hold Aurora shares for the next trading update from the company which will be released with the full-year results in mid-July. True, the current situation in Russia and the Ukraine is making it far more difficult to sell assets, but following such hefty asset write-downs it would appear the board could be taking an overly cautious view.
Please note the closing date for submitting your tender offer forms is 1pm on Friday, 30 May, the results of the tender offer will be published on Tuesday, 3 June, and cheques and CREST accounts will be credited with the proceeds on Wednesday, 11 June. The tender offer is open for all shareholders on the register on Friday, 30 May.
Finally, I have published six other articles so far this week all of which can be viewed on my home page. I am also working my way through a list of companies on my watchlist including: Inland (INL), API (API), Taylor Wimpey (TW.), Barratt Developments (BDEV) and Bovis (BVS).
■ Finally as a special offer to IC readers purchasing my book Stock Picking for Profit before Friday 16 May, and subject to limited availability, online orders placed with YPD Books and quoting offer code 'ICOFFER' will receive complimentary postage and packaging. The book can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Telephone orders will continue to incur the £2.75 charge. I have published an article outlining the content: 'Secrets to successful stock picking'
