Smartlink and the huge dividend announcement

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I don’t usually post on investment ideas these days. But I found this one pretty interesting.

A company called Smartlink (demerged from D-Link) caught my eye last month after reading a comment on Prof. Bakshi’s article on Piramal Healthcare. While I am a huge fan of the Professor and found Piramal healthcare idea interesting for the long term, it did sound a bit promotional.

The comment on Smartlink was about how similar it was to Piramal healthcare.

• most of the main business was sold off at pretty good prices
• huge cash on the books
• management looking at new opportunities
• market de-valuing ‘cash’ held in these companies due to fear of uncertainty (what would these guys do with the cash?)

In case of Piramal healthcare, Ajay has a pretty good track record over the last 25 years creating wealth. But market doesn’t treat K.R. Naik on the same grounds. Also, Smartlink with a total outstanding of 3 Cr shares  and a market cap of 300 Crores at today’s price is much smaller to get enough attention.

While Piramal Healthcare has around Rs 517 cash per share (refer to prof’s post), the stock was trading at 460 odd last month (it has since fallen to 360 today). In the case of Smartlink, the cash is around Rs 160 odd after capital gains and including the cash they already had on their books. The stock was trading at 78 when I reviewed it last month.

Usually market discounts the cash in these Graham styled investment options and there have been quite a few in the last few years. Many of them turn into value traps that never manage to unlock the value.

However, I did find the Smartlink idea interesting.

• Rs 500 Cr on books translating to 160 odd per share
• they sold the passive n/w division that accounted for roughly 90% of revenues ,  155 Cr for 503 Cr. Pretty decent sale valuation at 3x revenue.
• want to focus on the more promising active n/w division called Digisol
• promoter had been buying stock himself frequently

The market thought it was a very bad idea to sell 90% of the business to focus on 10%. Instead, they preferred that the 10% of business be spun-off and the company be sold entirely so that the stock holder would have gotten the benefits of the high valuation sale. Also, fears over what the promoter would do with the 500Cr cash were widespread. Hence the stock was trading at 210Cr market cap when the company had cash of around 500Cr.

It is common to discount the cash on books because you never know what the promoter will do with it. And fears of money laundering hasn’t helped either.

After mulling over Smartlink, I lost track of it, courtesy my Sikkim trip.

In the meanwhile, Piramal healthcare announced what it would do with a bit of its cash.

• form 2 NBFC’s to fund infrastructure and real estate projects
• buy into Piramal life using stock swap
• buy India REIT and its parent for Rs 225 Cr

The market didn’t like it and pushed the stock down to Rs 360.

Today, I was checking a few announcements and was surprised by one particular announcement. Smartlink had announced a special dividend of Rs 30 along with the regular dividend of Rs 2 per share. And the stock was trading at Rs 84 yesterday. That’s 38+% yield if you hold it till June 1 at yesterday’s price.

Promptly, the market was overjoyed by the announcement and the stock closed at upper circuit at Rs 100.6.

Now, I am not ruing myself for not having invested in it. But… I am wondering if its still a good stock to enter.

• valued at 300 Cr as per today’s price ( Rs 100 * 3 Cr shares)
• after ex-dividend date, the stock will fall by an amount more or less similar to the dividend announced
• cash on books drops by around 90 Cr + dividend distribution tax, ie) to around 400 Cr on June 1
• assuming the stock drops to around 65 on June 1, the stock will then be valued at ~200 Crores against a cash balance of 400 Cr, still attractive (but remember, markets always discount cash held in books due to fear of uncertainty)
• Mr. Naik sounds to be a pretty decent promoter. The company has done reasonably well after demerger from D-Link and they even sold the business at good valuations. So, can we expect them to do it again? That’s the million dollar question. Can he steer the rest of the business (unsold active n/w products) properly?

While I certainly think it looks interesting and attractive, I do believe there’s no saying to what price it will fall post the dividend distribution. If I were to buy it tomorrow at around 100-110 levels (assuming it goes up tomorrow too), I get to pocket the 32 Rs dividend on June 1.

The stock will fall after dividends are distributed, to which level.. no one can predict. Though I think it will fall to anywhere from 65 to 85. Taking an even pessimistic view of it dropping to 60, the market cap becomes 180 cr.

If you manage to keep your purchase closer to 100

• you are effectively buying at Rs 68 (considering dividend)
• will get 32 Rs on June 1 as dividend
• will have Rs 130 odd per share as cash
• a not so fraudulent promoter (well, you never know and I am not sure )
• a supposedly promising (?) business of active networking products and decent enough short term past record.

Sounds like a decent enough contra bet to me. I think that if one has the risk appetite, this is a decent idea to bet a very small amount on for the long term, provided things turn out even somewhat okay. In the short term, however, it could fall more than you can predict. Since it’s a small company with only 3 Cr shares valued at 100 today, small changes could have bigger impact than on large companies. So, there are risks… but the risk-reward does sound favorable in the long term.

Now, if you know anything that I don’t… would love to know.

DISCLAIMER: I am not an analyst. This is just my view. I could be wrong. I assume no responsibility for correctness of information here.

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