Bell Equipment: a company of few words

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Bell Equipment: a company of few words

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Published Date: 2021-06-17 | Source: INCE|Community | Author: The Finance Ghost

Bell Equipment: a company of few words

The flurry of recent trading statements on the JSE has given the relevant listed companies an opportunity to remind the market of why their strategies are appealing. Usually, a trading statement has been accompanied by an operational update that sets out divisional performance highlights and gives an indication of prospects.

Not so for Bell Equipment, which released a trading statement for the six months to June 2021 on Tuesday. The company expects headline earnings per share (HEPS) to be at least 350% higher than last year. The more useful information is the quantum of HEPS, which is expected to improve from a loss of 48 cents per share last year to a profit of at least 120 cents per share.

The announcement has precisely one sentence to explain the reasons behind this. I've included it in its entirety below:

"The expected increase in earnings is mainly due to stronger market conditions in 2021."

Less is more in this case, probably because the company is trading under a cautionary announcement. There is a potential offer coming from IA Bell to buy the minorities out of the business and delist it.

This comes after IA Bell bought John Deere's stake in the company at the end of 2020. That transaction creates the reference price for a potential buyout of the remaining shareholders in the company.

In this case, the indicative offer price (as per the announcement on 10 March 2021) is R10 per share. Shareholders like Shipyard Capital Management and Glacier Pass Partners have been quoted in the media this year with a view that the shares are worth more like R40 - R60 per share.

There's a potential price kicker or "agterskot" as it is known in South African business terminology. If IA Bell sells all or a majority of shares in Bell within two years of the proposed deal and achieves a price in excess of R10 per share, 50% off that excess will be paid to those who sold shares to IA Bell. The same deal applied to John Deere's stake.

However, the agterskot falls away if IA Bell decided to sell after more than two years, so this is not terribly comforting for the activist shareholders.

Using an over-simplified method of doubling the expected interim HEPS, we arrive at a full year HEPS of around 240 cents per share. The offer price of R10 would represent a P/E ratio of just over 4x which is low by usual South African standards. The share is currently trading at R9.45.

This potential deal still has a long way to go, with the JSE investigating accusations made by shareholders about lack of independence and other offers being concealed from shareholders. Then there's the small matter of proposing the scheme and getting the minorities to vote for it, which will require an independent expert to opine on the value.

We've seen in Adapt IT how quickly an independent expert report can change things. The problem is that a bidding war is unlikely here, with IA Bell controlling the company. Nobody is going to fight over a minority stake, unlike in Adapt IT where the fight is over control of the business.

If anything, the end result for activist shareholders could be a s164 appraisal rights process, which is an expensive route through the courts to force the company to pay fair value for the shares.

It's worth noting that the last time the company traded above R40 was before the global financial crisis. During 2013, it traded as high as R27 per share. Since 2015, Bell has not traded above R15 per share.

Unfortunately for its shareholders, Bell Equipment is hardly the darling of the market.





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