ThinkSmart – ASX.TSM – Off Market Buy Back

Interesting opportunity that we moved on a few weeks ago. ThinkSmart [ASX.TSM] made an announcement of off market buy back. Something that appears to have been in the wings for while, but (stupid) points need to go to the quantity of concurrent capital management initiatives that seem to be put in place, having had a Special Dividend, On Market BB, Off Market BB as well as major divestment in 12 months – it seems one investment banker must be on speed dial whenever the stock closes in the red.

Announcement here: TSM Buy Back

Record Date for participation was the 26th of November, giving everyone a window to get on the register for their seat at the table. We took the opportunity to purchase shares on open at 34.5 cents, but only up to 7,200 shares per account.

Why we like this:

  1. There is a good amount of franking credits on the balance sheet providing a good entry for the SMSFs providing price protection down to at near 32 cents at the market price of 34 cents
  2. A good target price range of 31 to 42 cents.
  3. The size of the buy back being proposed at up to 43% of issued capital, presumably this means the CEO is making a back door play for the stock.
  4. The commitment to buy back 100% of where people are holding 7,245 shares or less. (circa $2,500)
  5. The stock is at the bottom of the trading range, reducing the appetite for investors to participate (and crystallise a loss), increasing our chances of getting more franking credits.
  6. The stock is nearly cash backed.

Why we aren’t so sure:

  1. The track record of following through on promises is appalling. Promising a special dividend and then changing your mind is suicide in a stock market, at least without a good reason.  Biggest risk here is that it doesn’t proceed as announced
  2. The pay-off structure is OK but not ideal.

Our Conclusion.

Outside of this thing not happening, the worst payoff situation is that we sell at 31 cents and we get no franking credits.  This will result in a loss of about $250 per account, unlikely in our view. The best payoff is at 42 cents fully franked which would see us profiting by about $1,400 on our $2,500 investment.

Reality is somewhere in the middle. I don’t expect the buy back will be that popular, increasing the likely rate of franking and we have a CEO keen to increase control meaning they will probably run up the cost curve to participate.

Trades across two SMSFs mean we expect a profit of approximately $1000 on our $5,000 investment over 6 weeks.

Whether this will be a big profit spinner, we aren’t sure but we do like the pay off structure.

For the record anything more than an investment of 7,200 shares per account leaves you exposed to some pretty appalling share price history and even more questionable management, not one for the investment portfolio in our view.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s