I have written on takeovers for this Report for many years. Some stocks screaming takeover never got a bid, yet rewarded long-term investors because they were quality companies. Some taken over leapt after the bid, after years of losses.
Caveats aside, identifying takeover targets is useful because it forces you to think about company quality, management, sustainable competitive advantage and why the business would be worth more to another company. And, mostly, valuation.
Larger companies, direct rivals and private-equity firms do broadly similar analysis in identifying targets. They, too, want to find undervalued companies worth more if bolted onto a larger business, split up, recapitalised, improved or with new management.
All investors have their own style and performance metrics they look at with takeover targets. But as I have said before, never buy a stock based on takeover alone. Speculating on who might buy what and when, and for what price, is risky. Own high-quality companies run by high-quality people and buy them when they trade below fair value.
Here are three more stocks to add to the takeover-target ideas list:
1. Webjet (WEB)
The online-travel group has been touted as a takeover target since 2015. Its share price leapt 10% in early December 2019 amid speculation that a private-equity group was hovering.
It was another example of “buy the rumour, sell the fact”. Webjet quickly announced no offer had been made. Webjet traded around $9 during that bout of takeover speculation; now it trades at $3.24.
Like other travel stocks, Webjet has been smashed by Coronavirus (COVID-19) and its staggering impact on domestic and international travel.
Webjet raised $346 million in April 2020 to strengthen its balance sheet, such has been the impact of COVID-19. Like several other emergency capital raisings during this crisis, Webjet’s offer was heavily discounted at $1.70 a share for institutions.
Private-equity bidders were rumoured to be willing to stump up $2 billion to buy Webjet last year; the company’s current market capitalisation is $1.1 billion after a 68% fall in its total return (including dividends) over one year, Morningstar data shows.
Webjet, and all travel companies for that matter, are a different proposition after COVID-19. The virus has fundamentally changed the travel industry and some people, particularly those older or with health conditions, might never travel in the same way again.
For all the short-term challenges, Webjet has an excellent market position and brand recognition, and the future of travel bookings is clearly online.
Forget about this year’s full-year earnings; COVID-19 has stopped Webjet in its tracks. Focus on the next two years: the company is well funded after its capital raising, will benefit as younger consumers starved of travel book holidays next year, and must appeal to a private-equity firm or multinational online travel group at the current price.
Chart 1: Webjet
2. Monash IVF Group (MVF)
Like Webjet, Monash IVF Group was thumped by COVID-19. The Fertility Society of Australia in March 2020 recommended that patients planning to start fertility treatment consider postponing it, putting the IVF sector in limbo.
A few weeks later, the Federal Government announced that IVF clinics could reopen, helping new and existing IVF patients, some of whom were distressed at having to put their treatment on hold. Depending on the State, certain IVF restrictions are still in place, but the industry is at least starting to resume.
Social-distancing requirements almost certainty mean fewer patient visits to IVF clinics, reduced demand for fertility services and lower sector profitability this year and probably next.
Longer term, economic recession could affect IVF demand if more people cannot afford fertility services or out-of-pocket expenses after health insurance.
Monash IVF Group raised $80 million from institutions in April 2020 to strengthen its balance sheet, at 52 cents a share (its retail offer is still open). That compares to its 52-week high of $1.43 and its IPO offer price of $1.85 a share when the stock listed on ASX in 2014.
In 2016, Monash IVF traded above $2.60. The market could get not enough of the stock then because the trend of more women delaying childbirth and seeking fertility services was compelling for investors. The pitch was fertility services were a highly defensive, long-term growth industry as more couples and singles needed help to have babies later in life.
Monash IVF shares slumped between 2017 and 2019 as the market fretted about rising competition in IVF, lower profit margins and ructions within the company. The loss of some key Monash IVF doctors, some of whom left to start their own independent IVF clinic – and grumblings about the business in the media – spooked investors.
But every stock has its price. The long-term thematic of IVF growth remains: business forecaster IBISWorld expects annualised industry revenue growth of 1.9% over five years to FY25 as a rising maternal age, growth in ancillary fertility services and higher success rates drive demand.
IBISWorld’s 1.9% forecast compares to 0.2% annualised growth over 2015-2020, in a subdued period for the sector.
Despite recent challenges, Monash IVF is that market’s second-largest player after Virtus Health. It has a prominent brand and an excellent record (it is a global pioneer in IVF treatment). The loss of key fertility specialists hurts, but Monash IVF still has long-term growth ahead as it buys smaller clinics, expands into related health services and develops in Asia.
To my thinking, Monash IVF always looked like it should have remained in private ownership. Corporatisation of medical services is hard at the best of times, let alone in sector that helps make babies and has all the ethical and regulatory issues coming with that.
At its current price, Monash IVF must appeal to a private-equity firm that could buy the business and help turn around its fortunes under private ownership. Monash IVF was a great company when privately owned and could be again with the right investors.
Chart 2: Monash IVF Group
3. Super Retail Group (SUL)
The discretionary retailer last month made Macquarie Wealth Management’s much-discussed list of 38 potential takeover targets for Wesfarmers, along with several other retailers.
Although Super Retail has supply-chain synergies with Wesfarmers through the latter’s K-Mart, Officeworks and Target operations, a friendly acquisition is unlikely. Wesfarmers has enough retail exposure and its work cut out fixing the underperforming Target chain.
Wesfarmers aside, the well-run Super Retail has appeal for other suitors. The stock is down 23% on a total-return basis over one year (including dividends), Morningstar data shows. Its $6.65 share price compares to $10.40 in late 2019.
I rate Super Retail on a few fronts for potential acquirers. First, the owner of Supercheap Auto, BCF (Boating, Camping, Fishing), Macpac and Rebel Sport has some of this market’s best retail franchises.
Second, COVID-19 should be an ongoing tailwind for some of its brands. BCF and Macpac are obvious beneficiaries as more people holiday domestically rather than internationally and show greater interest in hiking, camping and other “back-to-nature” family holidays.
I cannot recall seeing as many people walking, bike-riding, or wearing “athleisurewear” or “adventurewear” that Macpac, Kathmandu and similar chains sell.
A resurgence in domestic driving holidays, caravanning, camping and fishing post COVID-19 should boost BCF and, to a lesser extent, the Supercheap Auto brand, in the next few years.
Rebel Sport is well positioned for life after COVID-19. One can imagine fewer people exercising at gyms for cost or social-distancing reasons, or because they developed new habits such as walking, running and cycling during COVID-19. Some will make use of their new home gym constructed during COVID-19 (using gym gear bought at Rebel) rather than a commercial gym.
A predator could break Super Retail up and sell off some pieces. Supercheap Auto has been a good long-term performer but arguably has lower synergies with Macpac, Rebel and BCF (I am sure the company would dispute that statement.)
Divesting Supercheap Auto might unlock value in that business and enable greater focus on the adventurewear, goods and sporting brands. Some foreign auto-parts companies could be interested in Supercheap and there are obvious synergies with Bapcor, given the combination of the latter’s trade-focused parts business with Supercheap’s retail focus (assuming such a deal passed the competition regulator).
I have heard some fund managers argue that Super Retail has strayed too far from its auto-parts roots, allocating capital inefficiently to new ventures, particularly Macpac. I do not agree but get the logic of Supercheap as a standalone auto-focused business.
Either way, Supercheap looks moderately undervalued at $6.65 and is a quality company that is well run and governed. Morningstar’s fair value is $7.50. Having avoided an equity capital raising so far is another good sign for Super Retail.
No doubt some private-equity firms have run their ruler over Super Retail and considered whether the sum of the parts is worth more than the whole.
Chart 3: Super Retail Group
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis 13 May 2020.