Merricks Capital Special Opportunity Fund Ltd (MEF)

I have been sitting on this post for a while, pondering the situation and hoping for some more liquidity in the stock before I personally bought. Neither have occurred. Regardless, the situation is incredibly interesting and informative. In this article I have used a share price of 45c, even though the last trade was 47c. The stock is bouncing around these levels. 

Enjoy.    

Background

MEF was previously called the Fat Prophets Australia Fund (FAT). After shareholder agitation over mediocre performance, Merricks Capital were appointed managers 1 August 2010. The portfolio moved away from a boring general portfolio of shares (holding the usual-index-suspects) to a concentrated, specialist stock-pickers portfolio.

At the time, Net Tangible Assets (NTA) were $1.13 pre-tax and $1.09 post-tax.

I had to re-read what comes next multiple times to make sure I had it right. The subsequent destruction of MEF shareholder wealth has been astonishing and even more disturbing given the otherwise decent returns Merricks other funds have produced. Post the manager change, the first major holdings included $6.3m (3m shares) in Straits Resources Ltd (SRQ) and $6m (52m shares) in ING Real Estate Entertainment Fund (since changed name - see later). Total MEF assets at the time were $31m. Note: that's an investment of 20% of available capital into one small resources stock. And to think the original FAT shareholders went in on an ASX200 style investment and had no choice or redemption opportunity other than to sell on-market at less than NTA. As at June 30 2011 SRQ accounted for 50% of the portfolio value. Even more in subsequent months. 

The subsequent performance of SRQ:

Not pretty. 

Fast forward to now. Merricks was replaced by Aurora Funds Management in March. Aurora appointed a sub-manager who has embarked on a new strategy focussing on financial services; i.e. yet another change in strategy. The sub-manager, Andrew Barnes has taken a 19.9% stake in MEF. 

Wilson Asset Management (see the previous post here) are also shareholders in MEF. 

It was at this point I was getting interested because MEF was trading at a big discount to NTA and the potential value-realisation catalyst was Wilson agitating for change. 

I've been disappointed so far. The share price has higher than what I would like (getting to 47c on very very light volume) and the new manager has allocated a very large part of MEF's assets to an unlisted purchase. All of a sudden, the investments have gone from tangible (other listed stocks) to intangible (an unlisted business). Nothing necessarily wrong with that, but just adds a layer of complexity. But complexity can equal opportunity. 

The new investment is a 49.6% stake in van Eyk Research for $13.3m. From my previous days in the industry, they seemed to have a good enough reputation. From the MEF news release: 

The NTA at 31 March was 55c including tax deferred assets and 53c excluding tax deferred assets. This is pre the van Eyk purchase. Anyway, using using the 53c NTA gives a total asset base of $15.1m. What I don't understand is that MEF still has sizeable investments in SRQ and Lantern Hotel Group (LTN). I guess the actual cash transaction is still to take place. 

As an aside, I've been doing some work on LTN which in itself quite interesting, especially now a receivables from the Panthers has now been collected. LTN share price could suffer in the short-term from stock overhang. It's on my to-do list to research. 

Regardless, the new manager is undertaking a new strategy and the existing investments will sooner or later get sold leaving ~$3m more to invest. 

Okay, so taking a share price of 45c, MEF has a market capitalisation of $12.8m. Investors can effectively buy van Eyk slightly cheaper than what the fund has paid and have exposure to a further ~$3m or 10.5c per share.

No dividends are currently being paid and we have no idea if and when dividends will be paid in the future. We are clearly in a market that has the hots for income, therefore non income paying stocks have tended to lag. This is where a contrarian might see opportunity, especially for stocks that could start paying dividends again. 

A meeting will be held 20 May and one of the resolutions is to change the name to Australasian Wealth Investments. 

Liquidity in this is stock border-line non existent. If something goes wrong, the downside could be large if there are no buyers to be found. 

Interesting. Still mulling this over. 

Kristian 

Disclosure: no position in MEF, SRQ or LTN