This is a lot more 'micro' and company specific that you suggest. Chrysillis discount not as pronounced? Market wants to see what is really under the covers. Market knows some investments will suffer large write-downs - Revolut and Graphcore prime examples, I haven't studied the others closely enough, but it's about how much we also invested at the top. Those two alone comprise a material amount of the NAV here. There will be others. This isn't all about the macro, partly yes, but it's about what is actually in the portfolio - that's why our discount to NAV is so pronounced.
My overall view is as follows. Grow is a lot riskier than you think - substantial risk given very little financial headroom in reality, with some debt. Little opportunity for realisations. Therefore very constrained, which either results in dilution in some of the portfolio holdings or worse. Ultimately Grow would have liked to come into this period with substantial cash on the balance sheet - it didn't and therefore won't be the one picking up the bargains that are likely to emerge.
I still have significant doubts about Graphcore - should be written off to zero for the moment, that would be the prudent treatment. Revolut also in the books at way more than it is worth (likely multiples of what it is worth). We have had those discussions before though. Time will tell. Be interested to see the next NAV, but I would expect this to reduce. My take, rather than the large upfront reduction in NAV that likely should have been applied, we will see an attritional NAV reduction over a number of periods, barring any event that cannot be ignored - i.e. failure or sale at a significantly reduced price. This buys management time in the hope they can turn things around before some of those valuations become reality.
Grow looks somewhat over-extended. The estimated 20m cash requirement of the portfolio companies during the current year looks very low given prior year requirements. Grow basically doesn't have much left in the pot so portfolio companies will be getting what is there, not what is required. That shortage of cash may lead to failures or dilutive alternative funding on poor terms. Grow is not in a position to negotiate if they can't fund it themselves as such. Depends whether they have had any major asset sales recently. The market won't like the risk associated with Grow taking on more debt. Think they had around 90m due for repayment in September 2025? Increasing the debt level would be a big gamble indeed. If Grow realise cash from portfolio companies, this might involve significant price reductions.
I think the price currently reflects the risk associated with the company. More chance of this going to zero than returning to £12 anytime soon in my opinion.
There will be an announcement one way or the other at some point soon. That will clear things up. Ultimately Aviva is well run, throws off an awful lot of cash, has great Solvency ratios and an excellent UK franchise that is very valuable to many International players. It could well be a takeover target - RSA has long since gone - I believe it went for roughly a 49% premium. £6 doesn't look over the top at all here. Might even have to go a little higher potentially.
Ps I don't short - but as a PI - have you actually tried shorting? I have looked into it - the costs are very large indeed. None of the companies allowing PIs to short want to make a loss, so they make damn sure they charge you accordingly. It's only normally the big boys that made money shorting. You have to be very sure to short given costs, its normally the spread betting companies that make the profit, not the PI shorter!!
There aren't any reasons for the SP fall - no of course not, apart from the fact that the CFO has left almost immediately, the debt levels have increased on the short-term revolving credit facility recently - this requires repayment at some point, in the meantime just the payment of a very high rate of interest. At present the dividend on this however is way in excess of any debt coupon. The primary reason is that the only realistic scenario if DEC is to clear it's debt (I recall it stated by 2030?) on the assets (that will decline in productivity as time progresses) is a big cut in the dividend eventually. That would potentially have happened (earlier) had the borrowing facility not been enlarged. That won't go on forever and unless free cashflow increases significantly (remember the last results had some non-core disposal receipts in there) and debt actually starts to reduce overall then the dividend will end up getting cut. It's only going to take a couple of things to move against this company for it to go very wrong. But that can't be news to anyone on here - this is a highly leveraged play, overall the ratio of debt to equity is colossal. This isn't a widows and orphans stock. High risk high return, certainly not a BP, Shell or Exxon etc.
You can't pay debts out of gross profit - you can only really pay debt down out of actual free cashflow.
The point is that the banks shouldn't have needed to increase the level of the RCF with so much 'free' cashflow. Market capital is very relevant - well shareholder equity is, slightly different. At present the level of debt to shareholder equity is excessive on any measure. You can argue that this is a utility type company, but there are many more moving parts in this. It only takes a 'higher' for longer scenario, production to be out by a slightly higher margin etc. There isn't much margin for safety here.
$80m of free cash flow in last results obviously wasn't enough that it could afford to repay some of the RCF - in fact they needed to increase the level soon after the half-yearly results!! Surely it would make sense to pay off some debt with all of that free cash-flow rather than borrow more?
As of 30 June 2023 and 2022, total borrowings were $1,555 million and $1,381 million, respectively. For the period ended 30 June 2023, the weighted average interest rate on our borrowings was 6.19% as compared to 5.38% as of 30 June 2022. This increase resulted from a change in the mix of our financing year-over-year as well as the rising interest rate environment. As of 30 June 2023, 82% of our borrowings were in fixed-rate, hedge-protected, amortising ABS structures as compared to 30 June 2022 when 99% of our borrowings were in fixed-rate structures.
The use of the RCF will be expensive - the bigger it gets on the same ABS base, the higher the weighted average interest rate.
The debt levels at DEC are excessively high compared to the market capital of the company. That makes shareholders very susceptible to a complete wipe out at some point. A serious reduction in leverage is required and the dividend is unlikely to be sustainable. Fine with lower rates etc, providing all targets are hit etc. Much less room for manoeuvre now. This is either the best yield out there or a huge flashiing 20% warning sign. Time will tell.
So DEC increased its borrowing base under the RCF to $425 million from $375 million, resulting in liquidity of approximately $120 million at the time. That meant liquidity was $70m prior to the increase. $70m of liquidity is nothing for a company of this size, dealing in the numbers it deals in. The CFO stepped down suddenly - I have no idea why, but it's clear that debt has moved in the wrong direction, this company requires a strong CFO and I don't mean someone who understands the numbers, but someone who is willing to stand up for what they believe is right - there could well have been a disagreement - who knows. Anyone expecting serious levels of buybacks are going to be very disappointed. Without an equity raise (which becomes less likely everyday given declining share price), the company are left with a yield in excess of 20%. Something will have to give very soon. The market is clearly expecting trouble - it's possible that trouble would have come along much sooner without the RCF increase, but this has bought sometime. I see a discounted equity raise at some point - if they can get it away. The market cap is $630m versus $300m of (growing) RCF borrowing alone. That excludes the collateralised debt..........this isn't a pretty picture.
I don't think increasing the tax allowance on dividends makes that much difference - maybe I am in the minority, but I have most of what I hold in SIPPS and ISAs and pay no tax on dividends. I am not super rich, but not poor either, I have just made very good use of the full allowances every year, along with my wife's allowances. That's around £40k-£100k plus a year that can be shielded, depending on income levels. Sure if you have way more dividends are taxed, but most are at least partially exempt....
I don't think people are concerned about a 'less steady hand', likely much more concerned about the 'why' - possibly because they couldn't agree on accounting treatment, how aggressive to account for something etc. I have no idea why but the market doesn't like a CFO leaving at short notice.
Very strange that the new Chief Financial Officer has resigned from the Board - surely his COO responsibilities would transition to his new CFO responsibilities - that's a new contract of employment / job description and role on the Board - I don't see the need for Brad to resign from the Board? Strange?
They don't currently have the funds for buybacks or debt repayment from what I can see - simply borrowing on the RCF if they do. That's too high for comfort to do buybacks at present.
PIKEMAN - how do you calculate that the share price is at a 50% discount to NAV? I make it the other way around? As at the end of June 2023 NA are $560m, with 844m shares in issue - the share price looks like it's at a premium to NAV - market cap at £850m - that's a 90% premium to NAV? Happy to be wrong, but you have presumably excluded something on the balance sheet in terms of the listed liabilities?
There is no point in adding more producing assets unless they are going to add more than 14/15% to the overall return - reducing the share base guarantees that as there is no dividend payable. Paying debt back is a good idea - the idea was the debt would be paid off in circa 7yrs with the ABLs. That doesn't look likely now, without a significant reduction in the dividend.
In all honesty it doesn't look like they have been putting much 'cash aside' for buy backs. I have to say I am somewhat surprised a how close to the limit DEC is on the RCF. The ABLs are amortising, but debt has increased significantly here, primarily due to the increased utilisation of the RCF. That's not great. Debt here currently at circa $1.5bn - dwarfs the current market cap somewhat at present. I get the model, but surely it wasn't intended to run the RCF quite so high in a period of 'higher rates' which seems unlikely to reverse anytime soon.
Allplants slashed its valuation. £1.61 a share, versus previous level of £25.89 set in Feb 2022. Valuation 94% lower at £9.5m compared to prior valuation of £82.2m. Allplants disagreed however with those numbers on seeders and said real figure was a valuation down 68% - neither are particularly great.
The buy position holding rate on CMC for this is currently 7.928% - that's high. Along with a 20% margin - reasonable. With inflation where it is you need upwards of 15% per annum just to break even on this.
What's the point in buying and showing patience - at the moment you're missing out on circa risk free 5% elsewhere - along with the chance of this going below £2. That could easily happen short term.