Paul Scott on Avesco & how to spot potential bid targets - Mello Meeting

[MrContrarian]

A chance to see a valuable presentation I saw by Paul Scott at Mello Monday last night.

http://www.piworld.co.uk/mello/2016/11/ ... esentation

http://mellomeeting.co.uk

Mello - "Dinner on a plate, presentation on a tablecloth".

MrC

[dickscovered]

Interesting as Paul's presentation was for the period which he covered when AVS should have been obvious value, for me the more interesting period was following the large decline from 2007/8 (when the existing company was effectively created) to 2009/10. Trading was poor, losses reached more than 50p per share, the share price got to around 20p or so.

Taya got interested, but had an indicative offer of 28-35p turned down. 'The Board considered the approach to be inadequate and not to reflect the true potential of the Company on the grounds of the audited net asset value as at 30/9/09 of £1.48 per share and management expectations for the current financial year.' Not long after, a positive trading update and the SP went from c. 20p at the beginning of 2010 to over £2 by end 2014 - after that an enormous payout caused the SP to drop back to the £1-1.20 level where Paul starts his narrative.

Now that was an opportunity missed, though of course not at all as visible as the later period, at least at at he beginning.

I personally don't look for companies that may or may not get taken over, which, to give Paul his due, was the subject of his presentation. I do try to look for companies that have fallen from favour and have turned the corner. Incidentally, it seems to have been easier to amass a large percentage holding when the market cap was £5 million than later on at £25-40 million. Also, Paul's comment about fear of having missed the boat being the cause of poor investment performance is particularly valid.

[dickscovered]

A little further information.

Paul mentioned that directors' purchases in six figure amounts were positive, and that, in AVS's case at least, he approved of the use of company funds to repurchase shares.

What actually happened was that AVS agreed to repurchase the entire 29.9% holding of Taya (bought at 20-30p) at 124p, excluding a 110p special dividend that they got on top (as of course did all the other shareholders). Given that prior to that repurchase Mr Murray had 20% or so, or effective control once Taya were off the register, that was in practice a very large director purchase, signalling perhaps that he saw great value in the business. Equally, it could have meant that he wanted to get rid of them as shareholders who had two appointees on the board.

[simoan]

I think you need to be careful of getting caught in the headlights of hindsight bias here. I'm not sure there were any obvious signs that Avesco was likely to be worth > 2x the market cap given to it by the market. It was a good cheap GARP share, but not obviously that cheap! I've had many companies I've held taken over down the years, but never at such a high premium.

All the best, Si

[PeterGray]

It's certainly interesting stuff, and well worth watching.

Where I'm a little sceptical is on the emphasis on looking for takeover prospects. Of course it's great when it happens, and I've had the joy of a taking a fairly large holding in a company that got taken over at 3 times the SP the following week - my best ever day in the markets. However, I certainly wasn't expecting it. But what that company and Avesco clearly had in common was that they were undervalued. If you buy in that case then, if you are right, the market will catch up and you will be make a profit. You may, of course be lucky, and see a takeover happen which crystalises the value overnight rather than over months or years. That's great when it happens, but it's a rare event, and it's not one I'd base an investment strategy on.

Avesco was clearly a good investment when Paul spotted it, for all the reasons the suggests, but it would have been a good investment regardless of any offer on the company - it might just have taken a bit longer to get there.

Peter