15.6.2019 Investment journal: Glaston sub-rights special situation

This is more backward looking historical trading report as the juicy situation has already ended although some upside is still left. Short real time commentary can be found on my Twitter feed.

Anyway, I have about 9 % position on Glaston’s common stock that I bought through share subscription rights in last Wednesday and Thursday.

The implied average purchase price for the common stock became 1,15 eur / share which implies 6,6x 2021E earnings for what seems to be a growth company based on analyst’s hockey stick revenue model for smart glass making machines product line for coming years.

The first reason for the purchase was that through the subscription rights you could buy the common stock with significant discount relative to the stock price (most of the time the common was trading at 1,22-1,27 or at 5-10%+ premium).

The second reason was that the (subscription right adjusted) stock price had dropped all the way down to about -20 % after the ex-sub-right date, seemingly without change in fundamentals.

The gradual stock price decline was probably caused by self reinforcing loop of declining share price and declining sub-right. A panic of some sort.

At least that’s my theory on a premise that Glaston is relatively illiquid small cap, old shareholders probably didn’t want or couldn’t afford to increase significantly their stake, thus needing to sell the stock or the subscription rights indiscriminately, fueled further by the demoralizing effect of the constant stock price / sub-right decline.

If the stock price decline indeed was caused by the temporary “self reinforcing sub-right panic”, instead of change in fundamentals, I think the stock price should reverse quite quickly at least to the price before the ex-subscription right date after the subscription right period is over (30 % upside re my implied 1,15 eur purchase price).

The third reason was that the implied stock price through the subs was significantly lower than what Inderes, a Finnish analyst house, thinks the stock is worth (1,7 eur).

Glaston makes machines for glass making industry, which is very cyclical as it serves construction and car making industries. Still, the pro forma trailing multiples were quite high (14-15xEBITA-pro-forma).

So, during the analysis at the time of the purchases I wondered the reason for the seemingly high multiple in the market where most cyclicals are getting killed.

Then I saw that Inderes follows the stock and is very bullish on it. The reason for their bullishness is some new smart glass innovation to which Glaston has rights to manufacture and sell the machines.

They have hockey stick revenue model for the smart glass innovation and thus for Glaston’s smart glass machines. Per their model, revenues will be 35% higher in two years and EBIT about a double.

I have only skimmed their research and don’t know anything about it. I assume it’s reasonable as Inderes makes generally good quality (paid) research.

If the stock goes to their target value 1,7 eur/share the upside from my implied 1,15 eur purchase price is 48 %.

Conclusion

All in all the price probability distribution during time of the purchase looked quite attractive;

  1. 5-10 % “arbitrage” upside from the difference between the subs and the stock price,
  2. 30 % upside from potential reversion to the stock price before the ex-sub-right date from ending of the “sub-right panic”,
  3. 48 % upside from returning to Inderes fundamental value and
  4. Short time period of realization of the returns if the second assumption of temporary selling panic is correct

The downside protection came from the difference between the stock price and the purchase price through the subs. The second downside protection came from that the sudden stock price decline during the sub-right trading period seemed to be temporary panic, not change in fundamentals.

The sub-right trading ended in last Thursday. The stock (and the sub-right) already started to recover significantly toward end of Thursday’s trading day (ended @1,315 eur) and further in Friday (ended @1,335) so so far my thesis seems to be holding up well.

Glaston stock price

I have to wait some time to get the subscribed shares so we’ll see how this ends. There’s still nice upside to the Inderes valuation (27 %) and to the “before the ex-sub-right” date price (12 %).

My target is the 1,5-1,7 eur levels in relatively short period (say few months) and I’m not considering long term hold if the momentum ends or the fundamentals change.

I have used about 30 min research on this and know nothing about the business so I have, for first time, put (mental) stop-loss levels in case the stock price or the fundamentals starts to go against me.

Disclosure: Long Glaston with 9% position 

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