Holders Technology: a Graham net-net on AIM

Holders Technology (company website) is a supplier of special laminates and materials for printed circuit boards and is also a LED solutions provider to lighting and industrial markets.

Holders Technology is a Graham net-net:

Share price: 48.50p
Shares outstanding: 3,939,551
Market cap: £1.91 million
NCAV 05-31-2014: £4.08m
Cash and cash equivalents 05-31-2014: £0.73m
Total liabilities 05-31-2014: £1.31m

The company is trading at 0.47x net-current asset value. As you can expect, a company trading at such a depressed valuation will have some problems. If you look at a summary of the last 5 years you’ll see a mixed picture of losses and profits in this period.

Currently Holders is on one of their downswings. In the latest half yearly results ended 31 May 2014 the company lost £0.2m. This was mainly due to the LED division, which lost £247k. The PCB division showed a profit of £112k.

There is some hope that things will improve in the second half of the year though. The sales and management team of the LED division was strengthened which led to increased costs. Since the lead times for securing work can be lengthy, the results of the LED division have suffered, but management expects better results for the LED division in the second half.

Last year the company lost £196k, but this result was impacted by losses from Holders’ Chinese subsidiary (£269k). This subsidiary has since been sold. The non-cash impairment in 2013 for the Chinese operations was £213k and in 2012 it totaled £287k. The company was free cash flow positive in 2013 and 2012 despite the headline losses.

Holders has a very clean balance sheet with around £690k in cash (cash adjusted for a 1p dividend) and no debt. It looks like the company has some time to ride out the current lean times.

The company is currently paying a 2p dividend. The dividend has been cut in 2012. In 2011 Holders paid a 5.35p dividend.

Insider ownership & risk of delisting

The CEO, Rudi Weinreich, owns 47% of the outstanding shares. It is obviously nice to see a CEO with considerable ownership in his business, but with a company that is struggling it is also a risk factor for me, because it makes it easier to gain approval for a delisting. I have followed a couple of examples of delistings from AIM over the past year and think that it is sometimes used by management to take advantage of minority shareholders. When a business is suffering a temporary setback it can offer a time window where management can try to delist before operations recover and as a result be freed from AIM regulations and protections for minority shareholders. The delisting notice usually causes a large sell-off, because shareholders are left without a public market for their shares after the delisting.

A delisting proposal on AIM must be approved by 75% of the shareholders present at the meeting. A recent delisting by Casdon estimated the cost savings of the elimination of their AIM listing to be around £40,000. When a company is truly suffering from prolonged losses it can be necessary to eliminate these costs. A delisting can make good sense in those cases. Casdon’s delisting was approved. The directors owned 51% of the shares and voted in favor of the proposal.

I would probably be forced to sell if Holders Technology delists. I have no idea how shares in a delisted company would be handled tax-wise in my country. They still have value, but how do you determine the value when there is no trading market for the shares and you might not even be able to get financial statements? It could cause more trouble than it is worth, so I think I would probably sell if a delisting is announced.

Conclusion

Holders is struggling currently, but the company has a pretty strong balance sheet and can survive for a while. With a money losing net-net it is important to remember that operations could improve as well. With shares currently trading at levels below those prevailing during the depths of the financial crisis, it is fair to say there is no investor optimism to be found here.

Recently I read some interesting research by Tobias Carlisle that showed that money losing net-nets actually outperformed profitable net-nets. It is pretty tough to own money losing net-nets like Holders, because you feel you’re getting poorer every day.

This is a cigar-butt investment for me. It is a small position in my portfolio. I have had some good experiences with these type of investments (MTI Wireless is one on AIM) and every once in a while one blows up in my face (Stephan Company). Overall I expect a good result from net-nets like this.

Disclosure: long Holders Technology

Posted in European Stocks and tagged .

NeverLoseMoney

Author of ValueInvestingBlog.net. Private investor.

8 Comments

    • Most of my favorite blogs are listed on the right side of the page under “Value investing links”. I consider all of those must reads. There are some other people I follow but most of them post irregularly.

  1. Thanks for bringing this to my attention – great write-up.

    I’m curious about your highlighting the delisting risk. My guess is that net-nets, as a class, are probably more prone to delisting than the average stock, and that it goes with the territory. If I recall correctly, the study by Tobias Carlisle did not exclude net-nets that were delisted.

    Therefore, given your knowledge of the recent delisting of Casdon, is it possible that the “availability heuristic bias” (as the behavioral economists would say), was operating in your mind? Or have AIM-listed net-nets shown a higher than expected frequency of delisting compared to other markets? Or is there some other objective reason?

    • Thank you for the comment.

      The study by Calisle focused on net-nets listed in the US. A delisting from AIM is different from a delisting from a US exchange. When a company is delisted from a US exchange like Nasdaq there will usually still be a trading market for the shares over the counter (OTC). The OTC-market is accessible to me and does not cause any problems.

      There is no trading market for shareholders after a delisting from AIM. There might be a “matched bargain arrangement” set up with a broker for the shareholders (see the Casdon delisting), but it is not a traditional exchange.

      Casdon is a recent example, but I have seen a few more on AIM. I highlighted Casdon because it seemed like a relevant example. The insider ownership levels were very similar to Holders and both companies were tiny (market cap below £5m). I would have preferred Holders to have lower insider ownership (perhaps 25%) and more smaller shareholders. That would make it harder to gain approval for a delisting if it ever comes to that.

      I don’t know about the frequency of AIM-listed companies delisting. The consequences are different though from a typical delisting in the US. I think I should account for that when considering an investment in a AIM-listed company. I still think Holders deserves a small position in my portfolio, given the large discount to NCAV, but I would have been happier to invest if this was a US company listed OTC.

      • Yes, Carlisle’s study was on NYSE/Amex/NASDAQ listed stocks. If I interpreted his methodology correctly, companies that dropped off these lists are not included in his study, so I would presume that de-listed stocks got excluded. But it’s not clear from my reading how bankrupted and de-listed stocks were treated in the research. There’s also some ambiguity in how people talk: NASDAQ is technically an organized exchange, but some consider it OTC.

        De-listing is an interesting risk to think about. Thanks for bringing it up.

  2. Hello, which Broker do you use for buying stocks on the AIM? I can´t find a Broker in Germany. Maybe Interactive-Broker?
    Kind regards

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