I generally invest in medium- and large-sized companies with proven business models. But I own the odd penny share. One I am particularly excited about has soared 28% in the past month, although over five years it has fallen 90%.
But some recent developments led me to buy more shares in this company – here’s why.
A nice problem: lots of cash getting dusty
The company in question is Logistics Development Group (LSE: LDG).
With a market capitalisation of £75m, this is a fairly modest operation. It also has significant shareholders that have specific (and competing) visions of how the company ought to be run. I see that as a risk for a small shareholder like me, but it is also a potential opportunity.
Last year, an activist investor launched a campaign — ultimately unsuccessfully — seeking to wind down the company and distribute its assets to shareholders.
The reason for that is interesting in my view. LDG is basically sitting on a large pile of cash. The group’s cash position last month was about £44m, almost 60% of its entire current market capitalisation.
Unlocked value in investment portfolio
Not only that, but the company owns stakes in a number of other firms.
For example, it is a shareholder in Alliance Pharma. Last week, it was announced that Alliance had agreed to a takeover bid at a price 41% higher than its share price the day before the takeover was made public.
LDG indirectly owns 13% of Alliance. It will receive an equivalent stake in the new private company. Last month, LDG also announced that it had redeemed a £10m debt note it held in another company for £13.1m.
At that point, the company also laid out a plan I think is aimed at mollifying its activist shareholder, proposing a tender offer at 19p per share to return up to £21m to shareholders.
If that is approved by shareholders (which I expect it will be), LDG will buy back a certain amount of shares for 31% higher than they can be bought for on the open market right now.
Why I’ve been buying
That news led me to increase my stake in this penny share. The sizeable discount of the share price versus the proposed tender offer points to ongoing risks.
The tender offer may not complete, for example. Even if it does, its scale is capped, so there is no guarantee of how many shares I may be able to sell back to the company at the 19p price.
Even considering that though, I continue to see potential deep value here. LDG is sitting on a large cash pile it has explicitly set out to reduce by buying back some shares at well above their current price. It is also sitting on a number of investments that, as the debt note sale and Alliance takeover illustrate, could ultimately turn out to be worth more than their current carrying value on the company’s balance sheet.
They may not, of course. But on balance, I reckon LDG is a share that could ultimately be worth substantially more than its current price suggests.
