the cmi story

I have come to Hot Copper to tell the story of CMI Limited in the hope that it will help to lead to a resolution of the conflict between the Board and minority shareholders. There are two classes of shares on issue - 33.7 million ordinary shares (CMI) and 28 million Class A shares (CMIPC). The Market capitalisation at current prices is $30.5 million.

The managing director, Ray Catelan, holds some 36.8 percent of the ordinary voting shares and the Company has twice now tried to buy back the whole class of Class A shares. From the time Catelan arrived on the Board there have been massive write downs wiping out both the annual profits and the accumulated profits of past years. The Class A dividend of 3.5c a quarter fully franked has been cancelled and not paid for the last ten quarters and we have been told that the next one wont be paid either. Because the Class A dividend is not cumulative any unpaid dividends accrue to the benefit of the ordinary shareholders of which the managing director, Ray Catelan is of course the major one. The Class A shares have collapsed from around $1.40 when the dividends were being paid regularly, to a low of 27c and the latest sale price is 36.8c.

The Class A shares are non-voting. The largest shareholder of the Class A shares tested in the Federal Court last year, our right to vote during periods when the dividend was not being paid. The constitution says that Class A shareholders are entitled to vote when the dividend is in arrears. The case was lost including costs. The judge found that since the dividend is non-cumulative it is not in arrears when unpaid except in the most unusual case where Directors declared the dividend as payable and then did not pay it.

The company offered a dollar to buy back the Class A shares in November 2008 but subsequently withdrew the offer when the economic situation deteriorated. It came back with an offer of 63 cents last year. The buyback resolution required 75 percent support to take effect and become compulsory. They had an expert's report saying that the Class A shares were worth 60 to 70c. This same expert has now done three valuations of the same stock and his first valuation some three years ago arrived at a value of $1.48 to $1.52 using the same method each time. Three large Class A shareholders accounting for 25 percent of the Class A shares had agreed up front to accept the bid. One was a company controlled by Catelan's brother and the other two were listed entities which had both announced publicly that they were getting out of all of their listed investments.

Several of the Class A shareholders actively opposed the offer and managed to elicit enough support to vote down the Class A buyback resolution in November 2009. So at the moment there is a stalemate. The ordinary shareholders cannot be paid a dividend until the Class A shareholders have received at least four quarterly dividends at a rate no lower than 3.5c fully franked. The constitution says Class A shareholders are entitled to an annual dividend of at least 14c fully franked but elsewhere in the constitution it says that the dividend is at the director's discretion.

At the AGM last year after the buyback resolution had been lost, shareholders asked the Board to introduce a voluntary buyback of the CMIPC so that those who wanted to go at the price being offered could go without trying to impose it on the rest of us. Members of the Board indicated at that time that they were not prepared to do a voluntary buyback; they wanted the whole class bought back.

There is the possibility that the Board may sit back now, not pay any dividends and watch the profits accrue to the ordinary shareholders. In any windup, the Class A shareholders are entitled to the first $1.20 but the ordinary shareholders get the rest. If the stand off continues, one of the defences for the Class A shareholders is to take the Company to Court on the grounds of oppression but it will be costly, time consuming and not guaranteed of success. Class A shareholders put some $35 million into the company's equity and the Company was trying to buy them out for $17.6 million. With the non-payment of the August quarterly dividend we will also have missed out on some $10.78 million in dividends over the last three years. If we have to put in another $1m or so to fight for a fair deal then my share of the money will be in there. The company needs to know that Class A shareholders are prepared to fight for a fair go. It is my hope that the Board either buys us out at a fair price or resumes the dividend.

If you look at the balance sheet of this company you will see that it is bursting with strength. Even though it has reported dismal bottom line results over the last three years due mainly to massive right downs of intangibles and businesses no longer owned by the Company, it has been cash flow positive every year to the tune of $15.8 million in 07/08 and $8.5 million in 08/09. It has just announced a forecast profit (before write-downs) of some $8 million for 09/10 suggesting another cash flow of around $13 million say. The cash flow for the last three years assuming my estimate for 09/10 is reasonably accurate is $36 million which far exceeds the whole market capitalisation of the company yet no dividends have been paid now for almost all of that time. If the Class A dividend were paid at the full 14c rate it would require an annual payment of $3.92 million so it has been easily covered by the company's cash flows in each of the last three years. The fact that the Company has seen this cash accumulate within the company and yet paid no dividends has only added to the strength of its balance sheet. In the December half year, the total debt of the Company was $1.1 million and the cash was $5.7 million. This strong position will have only improved in the latest six months given the companys recent update. Also included in the balance sheet is a vendor loan to the previous Chairman of $16.5 million which is repayable in April 2011. I will talk more about that in coming posts. I believe that it is getting to a point where the company can't keep wiping out the profits with write-downs and its chance of a cheap buyback of the Class A shareholders has passed.

I am pretty sure that the company would be aware that any offer below a dollar is unlikely to be successful and I am aware of shareholders who would actively oppose it. I personally prefer to hold out until the dividend is restored. At the current price of 38.5 cents, a fully franked dividend of 14 cent if restored represents a yield of 36 percent ignoring the franking. It is clear that the share price would be several times the current price if this happens.

I hope you will join me here as I write this story and that you will contribute to make this an active thread. Because of the conflict between the Board and the Class A shareholders, it is my view that both classes of CMI stock are enormously under-priced. Hopefully a reasonable resolution of this conflict will restore value to both classes of the stock.

GPASAS
Why take the easy way when you can jump the canyon instead.