I am always wary of buying stocks in anticipation of a takeover. A merger should be the cream, not the cake. Focusing on high-quality companies that trade below their true value makes more sense than speculating on whether a predator will swoop.
Picking takeover targets is hard work. Getting the timing right is harder again. The risk is investors hold poorly performing stocks they eventually sell years after they were bought and well below the original purchase price.
Buying undervalued, quality companies means you can profit with or without a takeover. And, of course, well-run companies that trade too far below their intrinsic value, or for too long, have a habit of being acquired by private-equity firms or corporate competitors.
Having covered takeovers for almost a decade, I’m aware of the pitfalls of trying to pick targets. The temptation is to pick companies that are well down on their peak share price, but often it’s the companies doing well that attract the predators.
There are exceptions. Australia’s telco sector has had several takeovers in the past five years as big players snap up mid-size players, and mid-size players join forces with or acquire the small fry. Telecommunications is about scale; sector consolidation makes sense.
One takeover bid I picked (plenty I haven’t) was Vocus, which last month received a takeover proposal from private equity. Vocus last year merged with the impressive M2 Group, and TPG Telecom’s acquisition of iiNet in 2015 was another key sector takeover.
Superloop’s acquisition last year of BigAir, a provider of wireless services to corporate customers, continued the sector-consolidation theme.
Investors seeking takeover action should keep a close eye on the telco sector. More consolidation is a given as big players bulk up to challenge Telstra Corporation and smaller players join forces to target niches.
Amaysim Australia is an interesting one on the telco sector-consolidation theme. The online-led mobile-services provider raised $207 million and listed on ASX in July 2015 through a float at $1.80 a share. Amaysim initially soared, then slumped to $1.50 in February 2015 after reporting disappointing revenue and customer growth. It has been trading at $1.54 after price falls this month.
Amaysim committed the great IPO sin: downgrading prospectus forecasts too soon after listing. That invariably rattles investors, who lose confidence in the company and the credibility of its prospectus.
On paper, Amaysim looked like an average business. As a reseller of Optus spectrum, it is in a low-margin business and faces cut-throat competition from a long list of competitors that includes telcos, supermarket giants and even energy-drink companies (Red Bull mobile plans). Few markets are as commoditised these days.
But there is more to Amaysim on closer inspection. The company’s online model allows it to acquire customers at a fraction of the cost to big telcos and it has a relatively capital-light business model compared to telcos that must invest in networks.
As Amaysim’s customer numbers grow, economies of scale improve, profit margins rise and it has potential to become quite a profitable business.
Amaysim’s million-plus customer base must look attractive to the likes of TPG, which will need more customers to make its $2-billion mobile network investment pay off.
Optus, Amaysim’s wholesale partner, also has good reason to gets its hands on the small telco. Optus would lose a chunk of subscribers if another telco acquired Amaysim and got hold of its customer base. Amaysim’s online model, which has lower acquisition costs, must look increasingly attractive to large telcos that are striving to grow customer numbers.
Share-valuation service Skaffold estimates Amaysim is 43 per cent undervalued at the current $1.60. Investment newsletter Intelligent Investor has a buy recommendation on Amaysim and has also highlighted its takeover appeal.
Amaysim is not the highest-quality small cap out there, based on its earnings record so far. But it looks a touch undervalued and is in a sector where corporate activity is rife.
The company’s key attributes – a large, growing customer base and lower acquisition costs – must look attractive to bigger players that can bolt-on the business.
Technical analysts will look for Amaysim to hold above $1.50, a point where it has previously had price support.
As a micro-cap stock, Amaysim suits experienced investors comfortable with higher risk.
Chart 1: Amaysim AustraliaSource: The Bull
• Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at June 28, 2017.