Excelsior Capital Ltd (ASX:ECL) - THE CURIOUS CASE OF THE LAZY BALANCE SHEET WITH FRANKING CREDITS
One last post (rant) for 2023, with apologies for another Seinfeld reference like the previous one.
Excelsior Capital Ltd (ASX:ECL) on December 7th closed with a market cap of $84 million, or $2.88 a share.
On November 30th they announced the sale of their subsidiary CMI operations for $101 million. About $9 million is subject to conditions (but very likely IMO) and payable not until August next year, but the rest is due about the end of January.
The company therefore will consist of roughly this $100 million, and an investment portfolio worth about $25 million according to the October 31 NTA statement.
With 29 million shares on issue the that equates to about $4.30 a share.
The deal announcement did not comment of the tax implications of the above sale. Page 33 of the annual report mentions of $33 million of prior capital losses. These could not be recognized as a deferred ax asset, but I wonder whether it may assist any tax burden that could come about because of this transaction. There will be a net working capital and net debt adjustment at the completion date of January 31. I don’t claim to have a precise understanding of how taxes, adjustments etc here may wash out. However with the company receiving a large proportion of the cash early next year, by the time of August if the other performance conditions are met, that $4.30 a share might be an ok way to think of the value on offer here mid next year.
The shares on December 7th therefore, if you believe that approximate value mentioned above, traded at a 33% discount.
Perhaps that is not that surprising given the company remarked it wanted simply ““The Transaction is an important milestone for ECL. As a Listed Investment Company, completion of the Transaction will enable ECL to structure its investment portfolio in a manner which aligns with ECL’s broader long-term investment objectives.”
Previously the company had only being paying a dividend yield of about 2.3% fully franked, a very low dividend payout ratio.
Yet that 33% discount I discussed does not put any value on the franking credits listed in the annual report before this transaction. Page 44 of the annual report notes a franking credit balance of about $32 million, or $1.10 per share.
Whatever your view on the controlling shareholder is, I wonder whether it is in their own interest to somehow release a lot of this franking credit balance back to shareholders?
I wish I had a good feel for the answer to that question, but not sure whether I do.
What I would say, with such a discounted valuation as it appears, is that market participants seem to have a firm view. That is, the controlling shareholder will let the franking credits sit there wasting away, even at risk perhaps of future changes to taxation laws. That, and perhaps the market thinks the controlling shareholder will waste the cash on unwise investments. I don’t rule all this out as a possibility.
However I disagree that markets should be having a firm view that this wastage of hanging on to franking credits and blowing the cash will occur. If some half smart calls are made on these issues from management, the stock might end up looking cheap here.
Should management not return a decent part of this capital back to shareholders in fully franked dividends, to quote Frank Costanza noted in the Seinfeld episode "The Strike",
“Excelsior Capital Ltd (ASX:ECL) - Your company stinks”
Now let’s keep running with this Seinfeld episode, now that we are nearing Christmas time, or should I say Festivus time. Firstly, some direct lines from that episode..
Jerry: Happy Festivus.
Kramer: What's Festivus?
Jerry: When George was growing up his father...
George: Stop it. It's nothing. It's a stupid holiday my father invented. It doesn't exist.
Elaine: Happy Festivus, Georgie.
Kramer: Frank invented a holiday? He's so prolific.
Frank: Many Christmases ago, I went to buy a doll for my son. I reached for the last one they had, but so did another man. As I rained blows upon him, I realized there had to be another way.
Kramer: What happened to the doll?
Frank: It was destroyed. But out of that a new holiday was born. A Festivus for the rest of us.
Kramer: That must have been some kind of doll.
Frank: She was.
Frank: And at the Festivus dinner you gather your family around and tell them all the ways they have disappointed you over the past year.
Well so far, with the absence of massive fully franked dividends being returned to shareholders announced with this sale, Excelsior Capital Ltd (ASX:ECL) has very much disappointed on that front!
That is my Festivus story I’ll be telling my family this year.