In the summer I made the case that investors were being overly harsh in their valuation of Marwyn Value Investors (MVI:122p), a closed-end investment company listed on the Specialist Fund Market of the London Stock Exchange (‘Marwyn’s buying opportunity’, 4 Jun 2018).
The company makes its investments through an open-ended Master Fund domiciled in the Cayman Islands, which was launched in early 2006, with backing from more than 60 leading institutions and alternative funds including Marwyn Value Investors. In 2017, the board declared and paid out total cash dividends of 8.3p a share, and produced a total return of 5.8 per cent, but the shares were trading on a six-year low of 132p by the summer of 2018, representing a thumping 35 per cent share price discount to net asset value (NAV) of 203p at the time. This meant that cash on the balance sheet and Marywn’s shareholding in Europe's largest car auction operator, BCA Marketplace (BCA:210p), effectively backed up its share price.
As a result some of Marwyn’s valuable holdings, including Zegona Communications (ZEG:122p), an investor in the European telecoms sector that owns high-yielding shares in Spanish telecoms group Euskaltel (MCE:EKT), were in the price for free. Subsequent to my article, BCA Marketplace attracted conditional bid interest from private equity group Apax, albeit a formal bid never materialised given that BCA’s management believed the shares were worth significantly more than the 200p a share cash offer Apax made.
Marwyn’s share price has since pulled back from its summer highs around the 150p level, when BCA was being courted (‘Marwyn in the money’, 12 Jun 2018), which partly reflects the exit of investors who had been looking to play the bid situation. It also reflects the fact that Marwyn amended its distribution policy on 5 September 2018, permitting distributions to ordinary shareholders to be made by the repurchase of ordinary shares.
Under the amended policy, returns may now be made by the repurchase of shares, dividend payments, or a combination of both. Since October 2018, the board has been making the minimum annual distribution (previously 2.064p per ordinary share in cash) via share repurchases each quarter. The directors believe that the principal benefit of the change in the distribution policy is to provide a mechanism which should narrow the discount to NAV at which the ordinary shares trade at, which in turn will increase liquidity in the shares. It also enhances NAV per share by making open market purchases when the shares are trading at a discount to NAV. Clearly this may not suit everyone and some investors holding the shares for the cash dividend may have sold out, thus acerbating the share price weakness.
It hasn’t helped sentiment, either, that Marywn’s investment in Le Chameau, the French premium rubber boot and luxury goods company, has performed badly. At the end of last year, Marywn wrote down the value of the investment from £24.5m to £14.6m, the effect of which was to cut its pro-forma NAV per share from 199.3p to 187.2p on 14 December 2018. It has since recovered some of the lost ground as the directors estimate that NAV per share was 192.2p a share on 28 December. That’s still 5 per cent below the level at the end of June last year, but actually represents a decent result in comparison to the double-digit falls seen in all the UK stock market indices since last summer’s highs. The 5 per cent NAV per share reversal since the summer certainly doesn’t warrant Marwyn’s ongoing deep share price discount.
However, depriving retail investors of the opportunity to hold the shares will clearly not help liquidity in the shares, nor narrow the share price discount to NAV. That could be an issue as at the end of last year I was contacted by a reader who holds the shares who informs me that in response to MiFID II regulations "the issuer of Marwyn Value Investors Ordinary Shares has decided that this investment is only intended to be sold to professional investors". As a result you may have to be approved by your broker to buy the shares as a professional investor. If this requirement is widespread then making it difficult for retail investors to hold the shares is clearly not helpful.
That said, the directors are fully aware that the shares, at 122p, continue to languish at a massive 36 per cent discount to spot book value and are addressing this issue by making a £5m cash return to shareholders through a partial offer for the shares. Shareholders are being invited to contact house broker Liberum Capital by 15 January 2019 to make offers to sell their shares in a reverse book-build process. Marwyn will then select the lowest clearing price submitted that will allow it to buy such number of ordinary shares as is equal to the partial offer consideration of £5m. All ordinary shares accepted in the partial offer will be purchased at the partial offer price. If the number of ordinary shares tendered by shareholders is greater than the number sought by Marwyn, purchases will be made on a pro-rata basis from ordinary shareholders tendering at or below the partial offer price.
Based on the current market price of 122p, the £5m cash return would buy 4.1m of the 69.5m shares in issue, or 5.8 per cent of the total. Clearly, if some sellers would like to exit at this depressed price then they are fully entitled to do so. However, I see little point in pitching your offer so low and suggest that an offer to sell 10 per cent of your holding at between 135p and 140p a share is a far more sensible strategy as you could always buy the shares back in the open market at 10 per cent below this level. There is nothing to be lost in submitting an offer to Liberum to sell your shares at a level you are happy to sell out at and that is what I suggest you do.
Also, even if the partial offer price ends up at 122p, the benefit for shareholders holding onto their shares is that redeeming 5.8 per cent of the share capital at a 38 per cent discount to NAV will boost NAV per share from 192.2p to 196.6p. It will also clear out unwilling holders of the stock. Either way, I see far more potential for upside than downside at the current level, which is why I continue to view Marwyn’s shares in a positive light.
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