RE:RE:Q3 financials out - IGP swimming in cash I voted for the proposal, but I suspect that it will not be approved. Yesterday, I received a second phone call from their call center urging me to vote in favour. This suggests to me that they don’t have the required number of votes yet.
Nothing would make me happier if the rejection of the deal were to result in a higher share price, but I doubt that will be the result. We have had earnings and equity for a while now without any great benefit to the share price.
It is easier to predict the common share price if the deal is approved. Equity of about $24 million divided by outstanding common shares of about 7.5 million (assuming conversion of preferreds) gives a book value of about $2.50/sh. Let’s factor in a 50% skepticism discount, and we might see a near-term common share value of $1.25/sh based on equity.
Using an earnings approach gives a somewhat different figure. I believe that the trailing twelve months earnings is about $5 million. Dividing that by outstanding shares (assuming the plan is approved and the preferreds converted) gives about $0.66/sh earnings. For now, I would apply a skepticism P/E of about 3 or 4 (similar to that given to many North American traded Chinese companies). That would suggest a share price of about $2-2.50/sh.
If the company behaved itself for a two or three years, I believe that the skepticism discount would eventually disappear, and we would see more normal values. A price to book of 2 or 3 would suggest a share price of $5.00-7.50/sh. A P/E of 10-12 would give about $6.50-8.00/sh.
Personally, if this plan is approved (which now seems doubtful), I think the common shares would fairly quickly go up to around $1.25 (based on discounted book) and continue rising, over the next year, to about $2.50 (discounted earnings). Then, continue more gradually, as insiders hopefully demonstrates a more aligned interest with shareholders, to about $8.00. (This longer term price speculation is, of course, is all subject to fluctuating ginseng prices and any other unexpected events.)
Valuing the shares if the proposal is rejected is much more difficult, in my opinion. How much of the cash and other equity and how much of the earnings should be allocated to the preferred shares versus the common? I might suggest one figure; someone else, a very different one. So now we have an uncertainty discount in addition to a skepticism discount.
If this proposal is rejected, like rationalexuberance, I hope to get more $0.15-0.20 preferred shares, although it may take a while for them to sink back to that level.
As an aside, I want to make a comment about this idea that management might take this company private. I could see that as a possibility, but another possiblity is that some insiders want to cash out at fair price, and this proposal is an attempt to allow for that. Or the attempt to simplify the capital structure could be a prelude to the directors shopping IGP to potential purchasers. None of this is likely, though, with things as they are.