"My only concern lies with the Barro Family involvement and how this uncertainty plays out in the market. I feel that they are a slight shadow hanging over the company but can’t quite foresee how their involvement plays out. So I guess my questions are as follows:
- What are their intentions exactly?
- Is there a quantifiable way to price the potential risk they pose?"
@RGGinvest,
After having considered the Barro situation at some length, I share your perception of uncertainty in relation to the potential risk the value of the company (or, for that matter, the potential opportunity).
The way I see it, there are a number of ways that the value of my investment could be impaired by the actions of the Barros. They could:
1. make bad capital allocation decisions.
2. enter into transactions in which they are related parties, which could result in value transfer from ABC to the counter-party entity(ies).
3. utilise commercially-sensitive information to benefit their business that compete with ABC
4. end up taking control of the company by continuing to creep up the register, thereby ultimately acquiring the company without paying a takeover premium.
In terms of Risk # 1, that is the perennial issue that warrants monitoring with any company in which one invests. Besides, with the Barro family having significant of its own value on the line, one assumes that the scope of poor capital allocation decisions would be diminished. So that aspect does not cause me any more concern than is usually the case.
In terms of Risk #2, I think scope for this is low; the 7-person board is comprised of majority independent directors and, in response to the concerns about the Barro's influence on the company, a definitive board governance framework has recently been adopted, which provides for specific protocols concerning potential conflicts of interest, and including independent adjudicators being invoked to make determinations on conflicts of interest in the event that directors are not in unanimous agreement. (This would also apply in the instance of any proposed merger between ABC and Barro family interests, ex-ABC,)
https://www.asx.com.au/asxpdf/20190326/pdf/443rytngldqj00.pdf
Ditto for Risk #3. I presume that day-to-day operational matters do not form part of the remit of ABC's non-executive directors, so for the Barro-related directors to be able to influence such as contract tendering, procurement, maintenance practices, maintenance capital expenditure, plant upgrades, HR issues, technology development, etc., is limited.
Of course, when it comes to the board signing off on major strategic decisions, such as capacity expansions, acquisitions, new business development etc., in that respect I am not convinced there are sufficient safeguards. (But then again, I've not become a shareholder in ABC because of any great belief in the company's acquisition or capacity expansion opportunities.)
Risk #4 is the concern for which I have no real answer. I think there is a real possibility that the Barro's could just keep buying 3% pa more of ABC each year for the next decade or more. But I don't get too fussed about that because I think that the stock will have re-rated to less undervalued levels well before then and the company's earnings will have recovered from the current year's cyclical low (and, in fact, knowing markets, both will have happened in tandem).
Some followers of the stock might have interpreted the suspension of the dividend (for the first time in almost 2 decades) as a tactical way for the Barro's to influence the market value of the company to the end of being able to take it private cheaply. But I'm not so about that;I think that the balance sheet was looking a bit stretched, especially for a business as deeply cyclical as this one
So, sure, as a minority shareholder I can foresee a scenario where I don't end up getting full value for my shares, but it's not as of this is some sort of tin pot, $25m micro-cap company run by some colourful racing identities from the Gold Coast; it is a large, grown-up company with well-established governance practices (which have just been tightened in the light of the sorts of concerns discussed herein) and is in the constant glare of public scrutiny for these very reasons.
So, sure, it is not a 100% ideal situation, but as I have tried to demonstrate with this post, I feel that my interests as a minority shareholder are reasonably well protected.
Given the attractive valuation of the stock, I feel that any potential governance issues that might arise, are factored into the share price.
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