Value Roundup

Notes from the market's dusty corners

Happy July, readers. I hope everyone is enjoying their summer, despite the occasional smoky conditions for those of us in the Northeast and Midwest. Connoisseur of the strange that I am, I thought I would pop in with a few observations on some of the more unusual situations and developments I am seeing.

Going Nuclear Again

Back in March I wrote about a special situation in a Nuveen closed-end fund involving illiquid shares in a nuclear power generator. Funny enough, there’s another nuclear power company that just emerged from bankruptcy: Talen Energy. the company’s crown jewel is the Susquehanna Steam Electric Station, a nuclear power plant with gross capacity of 2,495 megawatts that can power 2 million homes. Talen owns 90% of this facility, plus a collection of interests in natural gas and coal-powered generation assets in the Northeast and Texas. All of the coal-fired plants are in the process of being retired or converted. (One of them, the Conemaugh Generating Station, is just a few miles from my childhood home.) New Talen is a complicated situation, but there seems to be good strategic interest from other operators looking to acquire Susquehanna or combine with Talen. Talen intends to uplist its shares in the near term, and to return excess capital to shareholders. Nuclear power generation is a major beneficiary of the Inflation Reduction Act, granted a medium-term price floor. Here’s a recent presentation that the company released. I will leave it to readers to evaluate Talen’s investment prospects, but I wanted to remark on the company as it is one of the most significant situations in post-reorg equities in public markets.

A Takeover in Jersey?

First Real Estate Trust of New Jersey Inc. “FREIT” is an OTC-traded real estate trust with interests in multi-family and commercial properties. The firm has been in semi-liquidation mode for a few years, slowly selling off its commercial properties and attempting to sell multi-family assets. The would-be buyers of some of the apartment complexes were the rather high-profile Kushner family. Unfortunately, the deal devolved into litigation that is still ongoing. Now the Kushners have made public an offer to acquire FREIT for $22/share. The Kushners framed the offer as a friendly approach, but indicated they may go hostile with a public tender offer if they are rebuffed by the board of directors. I have looked fairly closely at FREIT’s multi-family assets, and less closely at their commercial properties. In my view, $22 is a fair offer if you assume that commercial property in general has a tough road ahead. The market seems to be skeptical of the Kushners’ offer, as shares continue to trade around $19, a 14% discount to the offer value.

Shareholder Meetings: More Than a Formality

I mentioned on Twitter the other day that I am seeing small companies struggle to achieve a quorum for shareholder meetings, even when failing to do so has dire consequences for shareholders. My example was Calithera Biosciences. Calithera is one of a host of unsuccessful biotech companies that made the correct (if belated) decision to liquidate and return whatever cash can be salvaged to shareholders. In this case, it first looked as if little-to-nothing would be available for distribution. But Calithera struck an exceptionally good deal with the owner of its preferred shares under which common shareholders would receive $0.40 per share in return for the transfer of a contingent value right and all other net assets to the preferred shareholder. Incredible! $2 million in value created for common shareholders. However, the deal was subject to approval at a special shareholder meeting to be held before June 30. Last week Calithera announced the cancelation of its special shareholder meeting for lack of a quorum and little hope of achieving one. Instead of getting $0.40 per share, shareholders will almost definitely get zero, all because not enough of them could be bothered to vote! Many of us are accustomed to thinking of shareholder votes as a foregone conclusion in these liquidation scenarios, but this is a good reminder that they are a legal requirement and if they cannot be held in accordance with a company’s bylaws, any remaining shareholder value can be lost. Examine that shareholder list and be sure the vote will actually take place!

Gloom And Doom

I am always amazed at how badly investors will punish even the best quality companies for disappointing near-term guidance. The effect seems most severe with smaller companies with high retail investor participation. Take Somero Enterprises. Somero is an odd company, traded in London but headquartered in Florida. But it’s also an exceptional company with world-beating returns on capital, solid long-term revenue growth, zero debt, and a generous capital return policy. Somero sells concrete leveling systems. Basically, if the huge concrete slab at your local Costco looks nice and flat, there’s a good chance a Somero product was involved. There is some cyclicality to the business, with demand depending on commercial construction activity. But time and time again, investors show themselves completely unable to anticipate the turns in Somero’s results. They bid Somero shares way up, even as revenue growth slows and profits show signs of reaching a short-term peak. Then they trash the shares when the downturn arrives and don’t buy them again until the upswing is back. It’s just silly.

Well, shares have been trashed again. A few weeks back the company confirmed that 2023 revenue would be down about 10% year-over-year. Investors responded by sending shares down 20% to a multi-year low. Somero’s enterprise value is now £121 million, or $154 million in USD. The company’s 5-year average EBIT is $33.6 million. Somero shares now change hands at 4.6x 5-year average EBIT. I’m not saying Somero shares won’t go lower, but buying quality companies at this kind of valuation has a way of working out. But who knows? Maybe this time is different? That’s what the marginal Somero shareholder seems to believe. There are returns to be had in fading peak euphoria and peak fear in fundamentally sound companies, and we may be seeing that here.

As always, thanks for reading! I am always happy to discuss little-known securities, so please reach out if you’d like to chat.