UK Edition
Rapidly rising interest rates should theoretically prompt a fall in merger and acquisition activity.
After all, debt is far more expensive following eight interest rate rises over the past year that have increased Bank Rate by 3.25 percentage points. When combined with a relatively uncertain economic outlook, would-be suitors may ultimately be dissuaded from pulling the acquisition “trigger”.
At the same time, though, a wide range of listed companies now trade on extremely attractive valuations following a dire year for the stock market.
Businesses with healthy cash positions may be tempted to capitalise on temporarily weak market sentiment to strengthen their long-term financial prospects before the British economy almost inevitably returns to a higher growth rate.
Indeed, this situation has presented itself with one of our Inheritance Tax (IHT) Portfolio holdings.
Power reliability equipment specialist Crestchic, which was previously called Northbridge Industrial Services, received an all-cash offer of 401p per share from Aggreko last month.
This represents a 44pc premium to the company’s share price on the business day before the date the offer was received by its directors. It means that the stock’s price has risen by about 153pc since it was added to Questor’s IHT Portfolio in April 2019. Over the same period, the FTSE Aim All-Share index has fallen by roughly 13pc.
The deal is very likely to go ahead. Crestchic’s directors will vote in favour of the offer and are encouraging other shareholders to do likewise.
Aggreko has also received irrevocable undertakings to vote in favour of the deal from investors who together hold 31pc of voting shares, as well as letters of intent to do likewise from investors who hold 7pc of voting shares.
The offer values the company on an exceptionally high earnings multiple. Using 2021’s earnings per share from continuing operations figure of 6.6p, it equates to a multiple of 61.
Even though the company’s performance in the first half of the 2022 financial year has significantly improved, the offer still represents a premium to its intrinsic value in this column’s view.
Since the stock currently trades at 398p, Questor can see little benefit in waiting for the offer to play out. This is especially true at a time when many other companies trade on significantly lower valuations and offer highly favourable risk/reward opportunities for long-term investors. As a result, now is the right time to sell Crestchic and reinvest the proceeds elsewhere.
Questor says: sell
Ticker: LOAD
Share price at close: 398p
Update: RWS
Another IHT Portfolio holding, RWS, was rumoured to be a takeover target last year. The patent translation specialist’s shares had fallen sharply following Russia’s invasion of Ukraine. However, no bid was ultimately made.
Since then, the company’s share price has risen about 17pc. And while it still trades down 5pc since being added to our IHT portfolio in December 2017, full-year results released last month highlight its improving performance and long-term capital return potential.
Crucially, it has made faster-than-expected progress in transitioning towards a subscription-based business model that offers greater stability during a period of economic uncertainty.
It also delivered a 160 basis point increase in gross margin at a time when many companies have struggled to maintain profitability amid extreme levels of inflation.
Profitability was aided by a renewed focus on higher-margin contracts, cost control and the increasing use of a recently launched in-house production platform.
This contributed to a 51pc rise in pre-tax profit for the year. The company’s strong cash flow and £72m net cash position mean that it is well placed to pivot from being a potential acquiree to capitalising on undervalued peers while stock market valuations are depressed.
Trading on an adjusted price-to-earnings ratio of about 15, RWS offers good value for money. It is yet to fulfil its potential but has the financial standing, business model and market position to generate improving share price performance as the global economy gradually recovers. Hold.
Questor says: hold
Ticker: RWS
Share price at close: 400p
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