It is the dream of every investor to be able to see a positive coming for a particular company before other people have woken up to it.
The team at Wilsons pride themselves on doing exactly that.
“One way of looking for value is looking at the underlying assets of the business and identifying discrepancies between the cumulative value of the operating units versus the market value of the stock,” they said in a memo to clients.
“These hidden value stocks rely on management action to highlight value to the market, such as an asset sale or a demerger.”
“We find this subset of the portfolio can provide above-market returns that are less correlated to the rest of the market.”
But what we all want to know is: what’s the next “hidden value” ASX stock?
Massive catalyst coming this month
Wilsons analysts have identified Tabcorp Holdings Limited (ASX: TAH) as one with a current disconnect between its actual worth and share price.
The big catalyst will be that the lotteries and betting divisions will soon be demerged, to form two separated listed businesses over late this month to early June.
The Wilsons team thinks this will have multiple benefits:
Allowing each business to adopt a more focused operating profile and capital structure more aligned to its core operations2 executive teams that can focus on each business more effectivelyM&A opportunities
But the really exciting outcome could be a potential “market re-rating” of the lotteries business.
There is much to like about lotteries, which Wilsons considers “a defensive, infrastructure-like business with long-dated licences”.
“Lotteries is growing its online presence which could lead to margin expansion,” its memo read.
“Lotteries is highly cash generative and capital-light.”
This business has so much going for it during a period of potential economic slowdown that a private owner could come in with a Godfather acquisition offer after the demerger.
“We believe a bid could also be made for the lotteries business after the demerger. Private equity firms typically like annuity-like, defensive companies, just like the lotteries business.”
Professional investors gaga over Tabcorp
Wilsons is far from the only mob who loves the look of Tabcorp.
“We estimate that Tabcorp’s lotteries division generates a return on invested capital north of 50%!” said Airlie investment analyst Will Granger.
“The market continues to undervalue the infrastructure-like qualities of this lotteries division.”
Investors Mutual analysts are also licking their lips at Tabcorp’s potential.
“We continue to see long-term value in the lotteries business and believe that post demerger, M&A interest in both the lotteries and wagering businesses could resurface,” their memo to clients read.
Shareholders will vote on the Tabcorp demerger on 12 May.
Tabcorp shares are up less than 0.5% for the year so far.
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