One of which is the proposed delisting of shares in Aim-traded environmental engineer Tinci (TNCI: 18p), a company with a market capitalisation of just £9.5m. What sparked my interest, and as some eagle-eyed readers rightly pointed out, is that the company's chief executive and 63.3 per cent shareholder, Mr Xu Jinfu, has agreed to buy out the minority interests at a price of 20p a share following the proposed delisting of the shares this month and re-registration as a private company.
Shareholders whose total interests amount to 80 per cent of the issued share capital have stated that they will vote in favour of the cancellation, so it is expected that the resolution to delist from the Alternative Investment Market will be passed at the general meeting on Thursday 15 January. This large shareholder group also exceeds the 75 per cent majority required for the company to re-register as a private company as this requires a change in its articles of association. As part of the process Mr Jinfu has agreed to deposit £600,000 into an escrow account managed by Computershare Investor Services to fund the purchase of the shares held outside Hong Kong and China for shareholders on the register with addresses outside of these two territories. This group of shareholders own 2.95m of the 52.95m ordinary shares in issue.
Admittedly, Tinci is not a company I have been interested in before and wisely so having seen its share price collapse from 70p at the time of admission to Aim in July 2006, to just 4.38p the day before the company announced the proposed cancellation of the listing and the offer from the major shareholder to buy out minority interests at 20p a share. However, with the risk of the deal falling through remote given that 80 per cent of shareholders have already consented to vote for the delisting, then there appears to be a relatively easy 11 per cent gain to be made here by simply buying Tinci's shares in the open market at 18p and then selling them back at 20p to Mr Jinfu. Other shareholders have had the same thought over the past few weeks, hence the valuation anomaly has been correcting itself. The 20p a share cash offer values the barely profitable company's equity at £10.6m, or a 27 per cent discount to Tinci's last reported book value of £14.5m.
A timetable for gains
Under Aim Rules, the cancellation can be effected 20 business days from the date (Monday 22 December 2014) on which notice of the cancellation is given to the London Stock Exchange provided that the cancellation has been approved by not less than 75 per cent of shareholders. It can then only become effective five business days after shareholder approval has been given. On this basis, trading in Tinci's shares is set to cease at the close of business on Thursday 22 January 2015 and the effective date of the cancellation will be 23 January 2015.
Tinci intends to retain the services of Computershare to administer this purchase of ordinary shares after the cancellation. Once this service has been arranged, details will be made available to shareholders on the company's website www.tinciholdings.com. Clearly, not everyone will be tempted by this potential arbitrage opportunity, but I see little reason why it will fail and an 11 per cent gain in little over a month seems worth taking advantage of.
The wider issue
In terms of the Aim market as a whole, the delisting of Tinci, which follows on from the proposed takeover and delisting of Hong Kong-based Fortune Oil (FTO: 9.6p), a deal I commented on at the time ('Unloved and undervalued', 18 December 2014), highlights the wider problems facing some foreign companies listed on the junior London market, and for those China-based companies in particular.
Namely, low liquidity in the trading of shares and the lack of interest in small-cap companies has resulted in share prices that fail to adequately reflect the true value of the equity; the inability to raise capital from institutional investors due to a lack of interest in small cap Aim companies, a situation that is unlikely to change in the near future; and due to the chronic undervaluation of some of these foreign Aim-traded companies, boards are being deterred from considering corporate activity as in many cases it would constitute a reverse takeover under Aim rules. This is an important factor for small-cap companies as entering such reverse takeover transactions would entail significant additional cost, time and uncertainty to execute, so holding back the development of the companies concerned.
Moreover, the administrative costs and management time spent on maintaining an Aim listing can be disproportionate when weighed up against the benefits. In many cases, this time could be far better spent on developing the business.
As a result the commercial disadvantages and costs of maintaining admission to trading on Aim far outweighs the potential benefits for some small cap Aim companies and it is clearly no longer in shareholders' best interests for them to remain traded on the junior market. Cost savings from delisting include professional fees associated with the admission of the shares to trading on Aim (including legal, accounting, broking, London Stock Exchange and nominated adviser costs); reduced internal administrative costs by removing the ongoing compliance obligations as a publicly quoted company; and a reduced burden on management time.
But as the examples of Tinci and Fortune Oil also highlight, there are investment opportunities to exploit if the gap between the intrinsic value in a company, and the low valuation placed on its equity, becomes too great. It's a theme I expect to become prominent this year as many foreign companies follow the lead of Tinci and Fortune Oil and head for the Aim exit. It's also one I will keep an eye on to try to capitalise on.
But clearly not all the boards of unloved small caps will take the drastic action of delisting. However, there are other ways of returning capital back to shareholders to enhance returns even if the market is unwilling to acknowledge the apparent value on offer.
Foreign cash returns
A prime example of this is Aim-traded Dragon Ukrainian Properties & Development (DUPD: 26p), an owner and developer of shopping centres and residential properties in Ukraine, which is returning 5.5 US cents of surplus funds, or about 3.6p a share, to investors through a dividend on 22 January.
The company had a cash pile of $20.7m at the end of June, which has subsequently been boosted by the final cash payment of $3.7m from the previously announced disposal of its interests in the Henryland shopping centres. Combined pro-forma net cash equates to £16m at current exchange rates, or the equivalent of 14p per share, before accounting for operating expenses over the past six months. Moreover, Dragon also owns a 12.5 per cent stake in London-listed and Aim-traded Arricano Real Estate (Aim: ARO - $2.42), a leading real-estate developer in Ukraine specialising in operating shopping centres. This holding is worth £20.5m. This means that ahead of this month's dividend, cash on the balance sheet and the stake in Arricano are worth £36.5m, or 29 per cent more than Dragon's market value of £28.3m. And with the board committed to disposing its assets and returning cash to shareholders, then the undoubted value in the company – Dragon also owns other assets with a carrying value of $100m, less total liabilities of $19.5m – should be unlocked in time.
True, the situation in Ukraine is unstable, a position that is unlikely to change any time soon. This has not helped sentiment and shares in Dragon are currently below the 31p price level when I last updated the investment case ('Cashed up for recovery', 1 October 2014). However, in my view the political risk, uncertainty around the timing of further asset disposals, and an inevitable asset write-down due to the 33 per cent appreciation of the dollar against the Hryvnia since the June half year-end, are already priced into a 70 per cent share price discount to historic book value of 90p. I would continue to hold Dragon's shares for recovery and news of further cash returns.
■ Simon Thompson's book Stock Picking for Profit 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. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
