The Secret Broker: Green shoots, or a tangled old Twiggy? Who’s laying bets?
The Secret Broker
The Secret Broker
After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.
I know this week I will get myself into trouble writing about what I am about to write, but I don’t care!
(Ed: Here we go.)
I am currently ‘Yes to No’ and ‘No to Yes’ and this is my current state of mind, if you get my drift.
So, to try and keep on the right side of all you righteous ‘Australian Tax Act’ know-it-alls, I have reached out to my AI chat bot to help me get it right.
Dr Google for medical advice and Mr AI for tax advice, is my latest mantra.
This way, if I do drop dead or get my tax return wrong, me or my estate will have someone to sue.
Capital returns and not capital punishment is what this week is all about.
I love studying market situations. Especially the reactions to certain actions that a company share price can be taken on, thanks to directors’ actions.
This week, the listed company PointsBet went ex a capital return of $1.00 per share, having sold a chunk of their US and other overseas businesses earlier this year.
The full return to shareholders will eventually be in the order of $1.45 per share, but the rest comes later as part of a second tranche.
Before Pointsbet went ex, it was trading at $1.66 a share. Post-ex, it had a range of 70c to 78.5c.
So we saw the market reacting to it being higher than before it returned a $1 a share back to shareholders.
And this is where it gets interesting.
If the directors had decided to keep all of the money instead of returning it and say, put it into a long term deposit account, then you would presume that PBH would have remained at the same valuation.
They currently have 313,174,471 shares on issue, as per their last announcement dated 4th September 2023.
This means that the company as a whole was valued at A$519,869,621. Now, after the return, it is valued at A$239,578,470. Take out the $1 returned and that actually a difference of plus A$32.8m, at their last price of 76.5c.
This means the company is valued higher by the market than if it did not return the capital.
Plus this capital return is the first tranche to be returned. As we mentioned, there is another one coming when they get another settlement of cash from the sale.
The total that they can return to shareholders is capped at A$458m, so potentially, there is another 45c a share to be returned.
This would bring their share price down to 31.5c and leave them with their technology plus gambling operations in Australia and Canada.
At that share price they will be valued at just under A$100m.
This means that to own 10% of the company will now cost you A$10m instead of A$51m pre return of capital and this is the main reason for their shares to trade at a premium.
You can outlay less money for a controlling stake in an ASX listed company, than when it was rolling around in all of that cash.
Now, some people could say this is a good thing, as shareholders have got some capital returned and now the potential uplift on a takeover offer.
No one pays a premium for cash held in the bank, as one dollar is only worth one dollar.
If I had been wearing my old broking hat, I would have gone to them with a totally different proposal.
‘Raising money is hard enough in this day and age and you are just handing it back,’ I would have said to them.
Why not seed a brand new company (with say A$100m), list it on the ASX, fully funded and with your technology in it?
Licence the technology back to yourselves for Australia and Canada and then distribute the shares that you own for seeding the company, to your shareholders.
With the right spin, I could get a 20c listing to A$1.00 and if we all got some 20c options, happy days.
The balance of the cash can sit on the balance sheet and be used to fund new ideas and inventions on a global scale. ‘You as a company could really become a global player in the gambling technology space,’ I would tell them.
Unfortunately though, unless the company has an entrepreneurial spirit in it, the directors will just take it down the easy path and return capital to shareholders.
I get really annoyed when I see that all companies just like CBA can do is buy back their own shares instead of investing in and seeding a brand new company.
If you look at Warren Buffett, you will see that he very rarely sells his unlisted investments because they give him free internal cash flow.
If you look at how Fortescue is now getting tangled up in having a green vision versus just being happy digging up iron ore, you can see why so many executives are leaving the company.
Its message is just too confusing.
Their solution, in my simple broking eyes, would be to seed a new green company and just leave the old company with the mining assets.
That way you have two simple stories to tell on two separate ASX listed companies and the new company can give out really good share packages to attract the right talent (20c options instead of FMG A$20 options).
Of course, selling alternative ideas as a broker will bring in ludicrous amounts of fees, but if it is a win-win for all involved, so be it.
Oh and what did Chat GPT tell me about the Australian tax situation for a capital return?
It said it is tax-free.
So who really gains out of that? Well, it’s the shareholder and not the broker, short-term.
Long-term it will be the broker!
Now, where’s Twiggy’s number? I might be just about to come out of retirement!
Feel free to contact him with your best stock tips and ideas.