We keep saying that besides long-term investment, one should also look at Special situation opportunities like delistings, buybacks, demergers, etc because in a lot of such cases the correlation with the markets is much lower and therefore such opportunities add stability to the portfolio and deliver additional gains.
In line with the same philosophy, we would like to share with you details on Ineos Styrosolution’s delisting opportunity. We shared the same with Alpha + members.
Ineos Styrosolution delisting opportunity was initiated on 24th Aug’19 around 590-595 odd levels and closed at 832-833 with gains of ~40%.
Compared to the same, the benchmark indices are down 1-10% since then.
The company has announced the bidding window from 16th Jul’20 to 22nd Jul’20; however, considering substantial increase in the volatility during the bidding period and the fact that we were getting decent premium on the indicative offer price and our initiation price, we have closed the opportunity with gains of ~40% in 11 months.
Below, we have produced the detailed initiation note on Ineos Stryrosolution for the purpose of understanding and participation in such opportunities.
A few days back we initiated another delisting opportunity with seemingly lower downside and possibility of strong upside like Ineos. Currently, we have 2 active delisting opportunities.
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Ineos Styrosolution – Aug’19 Special situation
(24th Aug’19 note on the stock)
We have released 24th Aug’19: Special situation opportunity on the proposed de-listing of Ineos Styrosolution India Ltd (NSE Code – INEOSSTYRO). The same has also been produced below. For details and other updates, please log into the website at the following link – https://katalystwealth.com/index.php/my-account/
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Date: 24th Aug’19
CMP – 591.65 (BSE); 595.00 (NSE)
Rating – Positive – 3% weightage; this is not an investment advice (refer rating interpretation)
Ineos Styrosolution India Ltd (NSE – INEOSSTYRO) – Basic details
INEOS Styrosolution India Limited (ISS) is the leader and number one producer of ABSOLAC (ABS) and ABSOLAN (SAN) in India. ABS is a plastic resin produced from Acrylonitrile, Butadiene & Styrene, used for manufacturing of home appliances, automobiles, consumer durables and business machines.
The company is owned by Ineos group [through 75% stake of Ineos Styrolution APAC Pte Ltd. (SSG), Singapore]
ISS has modern manufacturing facilities and a state-of-the-art R&D center located in Gujarat. It has an installed capacity of 80,000 MTPA of ABS, 100,000 MTPA of SAN and 78,000 MTPA of Polystyrene.
It also has an ongoing project to expand its ABS compounding capacity by 34,000 MTPA at its Moxi plant at a tentative cost of Rs 130 crore.
As far as parent company of ISS is concerned, SSG is part of the Ineos group and is a global leader with focus on Styrene Monomer, Polystyrene, ABS Standard and Styrenic Specialties. The company employs more than 3,500 people worldwide, has 20 manufacturing sites in 10 countries, serves customers in 106 countries and reported sales of 5.4 billion Euro (~ Rs 43,200 crore) in CY 2018.
De-listing offer from the Promoters
On 16th Aug’19 the company received a letter from the Promoter group expressing their intention to make a voluntary delisting offer to acquire 43,96,407 equity shares representing 25% of the share capital of the Company held by the public shareholders and accordingly delist the equity shares of the Company from BSE and NSE.
Currently the Promoter group holds 75% equity stake in the company and intends to acquire the remaining 25% through the de-listing offer.
Further, the promoters have also expressed their willingness to accept the equity shares at a price of Rs 480/- per share.
The above is just an indicative offer price and the shareholders are free to tender shares at a price of their choice; though at the same time the promoters are under no obligation/restriction to accept the equity shares at, above or below the indicative offer price.
Important points with respect to de-listing offer
ISS’s performance over the years has been consistent with around Rs 70-100 crore PBT for the last few years and the stock is currently quoting at market cap of Rs 1000 crore i.e. ~13.5 times PBT. Thus, both fundamentally and from the viewpoint of valuations the stock is much better in comparison to several other de-listing opportunities of the past.
FY 19 was poor in terms of profitability and it could be on account of several business-related factors like: fall in prices of ABS, increased competition from imports, etc; however, it’s been observed in the past that just before the promoters announce their intention of de-listing, the financial performance deteriorates significantly.
As a result of both deterioration in performance and general market conditions, the stock had corrected from the highs of 1100 to around 390 odd levels before Promoters announced their intention to de-list the stock.
As already mentioned above, Promoters have suggested an indicative offer price of Rs 480 per share and that will more likely act as a floor price against the actual floor price of Rs 419 per share.
Rationale behind this opportunity
The market cap of ISS is ~1000 crore and for acquiring 25% equity shares from the public shareholders the promoters will have to spend somewhere in the range of 200-400 crore (depending on the delisting price).
From the above sections we know that Promoter group is a multi-national entity with sales in excess of Rs 40,000 crore. We also know that promoters have taken a major leap in terms of their decision to go for delisting offer.
They have also timed it well i.e. during extremely bad market conditions with the stock quoting near 2011-2013 levels.
Lastly, in the past many de-listing cases, especially involving foreign promoters, shareholders have tendered shares at 100-200% premium to floor prices and in a lot of such cases promoters have accepted such prices.
To us, ISS looks like a case where the shareholders may again tender shares at substantially higher prices than floor price; though like most of the previous cases we would not like to participate in reverse book building (RBB) and rather take advantage of appreciation in stock price (if at all) in the run up to RBB.
The floor price for the offer is Rs 419 per share and the indicative offer price is Rs 480 per share and the stock is already trading at a premium of 24% to the indicative offer price and 42% to the floor price.
We are still some steps away from reverse book building, if the promoters backtrack on the de-listing proposal there would be a rush to exit from the stock and one may not be able to exit before the stock has corrected by 20-30%.
Secondly, if public shareholders do not approve the de-listing proposal with requisite majority the above-mentioned scenario of 20-30% correction will pan out.
Disclosure: I do not have any holding in Ineos Styrosolution India Ltd.
Positive – Expected return of ~15% + on annualized basis in medium to long term for investment recommendations and in short term for Special situations
Neutral – Expected Absolute return in the range of +/- 15%
Negative – Expected Absolute return of over -15%
Coverage closure – No further update on the stock
% weightage – allocation in the subject stock with respect to equity investments
Short term – Less than 1 year
Medium term – Greater than 1 year and less than 3 years
Long term – Greater than 3 years
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