the cmi story, page-2

This is going to take me several months I suspect and I will post once or twice a week depending on how enthusiastic I feel at the time. It is not a stock for day traders and I am sure I have plenty of time to tell the story.

In today's posting I want to try and give readers (if any) an idea of how much I believe this stock is undervalued. As to whether the value resides in the ordinary shares or the Class A shares that is a much harder question.

Just consider for the time being what would be the situation if the Class A shareholders had accepted the 63c buyback last November. It would have cost the company $17.64 million and there would then be only the one class of 33.7 million ordinary shares. The market cap at the current 60c and without the Class A shares would be $20.22 million. As I mentioned in the first post the company has a vendor loan of $16.5 million owing to it and due to be paid in April next year. I will discuss that loan a lot more in coming posts but for the moment, lets assume the ideal situation that it were to get paid back in full on time. Then CMI would be left again debt free since the vendor loan is almost the same size as the buyback would have been. So the current underlying profit of $8m would give the company a price earning ratio of 2.52 in those circumstances. Can you name another stock debt free with a very stable record of profits (ignoring the current one off write-downs) with such a low PE? This latest underlying profit too is only about half the historic profit for the two remaining divisions in this company.

This is a Board which certainly could not be accused of blowing its trumpet and this has lead to a long period of both classes of shares being undervalued in my view. If you read the report that the directors put out on 21 May 2009 you will see that they dont exactly ramp this stock up. I dont think I have ever seen such a negative internally produced report. That report had the effect of driving down the Class A share price and one could question whether that was its purpose. A couple of months after that announcement the company announced the 63c Class A buyback proposal.

So if the dissenting CMIPC shareholders were to get together even now and agree to accept 63 cents which is 72 percent higher than the current price, then the ordinary shares would, I believe, go through the roof as well. And don't tell me that the Board wouldn't race to accept it if we did. But it is not going to happen because the CMIPC shareholders believe their shares are worth a lot more than that.

Now if we consider that the CMIPC shareholders hold out and the Board denies them a dividend for years and gets away with it what is the situation if we consider the CMIPC to be worthless. The company would be awash with cash, the ordinary shares would presumably be worth $16.5 million (plus interest over time) more than in the above scenario of buying out the other class. The company essentially gets the loan of all the CMIPC equity (originally put in at a cost of around $35 million) for nothing saving on a payout of $3.92 million a year - 14c (plus franking) which is what the prospectus says is the minimum dividend that Class A shareholders are entitled to.

What one class loses, the other class gains.

The Managing Director Ray Catelan paid $1.90 per share for a large portion of his shares which he bought off the previous Chairman Max Hofmeister. That is a lot more than the current price of 60 cents.

Looking to the other extreme if the CMIPC shareholders eventually get their 14c fully franked dividend back, history tells us that the CMIPC shares would be priced at around $1.50 or so which is where they were when the dividend was regularly paid. In fact at that time competing interest rates were higher than they are now so the share price might be higher still. The yield at $1.50 would be more than 9 percent. A price of $1.50 would represent a more than three fold gain for anyone who buys in at the current price.

Whatever way this pans out, I believe there are likely to be large gains on the current prices for both classes when it is resolved. The safest approach to an investment here is perhaps not to bet on which class does best but to have a balanced holding of both classes. I must confess that that is basically where my holding stands.

GPASAS