Salmat: A Quick Freebie

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When I revived my blog last December, I was full of good intentions to blog more often, and most of all, shorter. Use my blog to do less time-intensive write-ups on special situations I had done only superficial research on to quickly summarize my thoughts and perhaps when needed get some valuable feedback from readers on my thought process.

It hasn’t fully worked out that way yet: I haven’t written that much, and mostly longer articles. It also feels sort of embarrassing to do short write-ups on stuff you haven’t really done the proper work on. Having to admit you don’t really know what the company you’re buying shares in actually does for example.

On the other hand, I quite often invest this way. I much more enjoy (and I believe I’m better at) finding the special situation itself than digging deep into some company’s fundamentals.

So, with that in mind, here’s a quick post on Australian listed Salmat Limited (ASX:SLM). Not only quick because I’ll keep the article short; also because it will be actionable for only two days yet.

I don’t exactly know what Salmat does (or better: did). Something with marketing I guess. But anyway, the company no longer has any operations and its shareholders will vote on the 1st of August on a Proposed Capital Return of AUD 0.665 per share, or a 133 million dollar capital return in total. In anticipation of the vote going through (simple majority needed, no signs of any opposition), Salmat believes its shares will be suspended from trading after the close on the 30th of July, so that leaves two trading sessions. The payment date for the capital return is pretty soon as well: the 12th of August.

Salmat stock has been consistently trading 0.66 bid, 0.665 ask, with millions of shares waiting to be matched at the bid (and also plenty of shares on the ask), so unless a very large seller comes in last-minute you will have to buy at ask.

So, where’s the freebie? After the capital return Salmat will organize another shareholder meeting for the company to be wound up. And more importantly, it is retaining five million dollars in cash to pay for the winding-up process.

Of this five million dollar only four million is classified by Salmat to be assets, so I’m going to assume one million goes straight to creditors. But the four million left equals another two cents per share. Four million seems greatly excessive to me in what looks like a straightforward wind-up. After everybody has been paid (creditors, liquidators) any surplus funds left will be returned to shareholders at a later undisclosed date.

I like these set-ups as they tend to generate high Internal Rates of Return with little apparent overall risk. In a nutshell, if all goes well, at AUD 0.665 you are investing an amount you’ll get fully refunded to you in two weeks’ time (excluding some transaction costs of course, which shouldn’t be much if you use the right broker). Anything left after the company is wound up will be a bonus. For example, if you assume only an additional one cent per share payout in twelve months’ time, your IRR will be slightly over 25%.

So why does this situation exist in the first place? Who knows for sure, but I think it’s because larger institutions don’t want (or are not allowed to) hold assets that are delisted, especially with a very small residual value like in this case. Here, for example, asset manager Allan Gray sold off its 9.68% stake in Salmat at 66 cents per share in the open market earlier this month. It’s one of those times when it seems it’s good to be small.