Nine of the fifteen companies that I currently hold shares in have high insider ownership, many to the point of control. It sounds beneficial to have management holding a high ownership stake – skin in the game and all that. However, it occurs to me that I’ve never rejected a company I was researching due to a lack of insider ownership – on the contrary, I’ve rejected some because insiders owned a high percentage of the float and paid low or no dividends relative to cash flow, balance sheet strength and alternative investment opportunities. This sort of behaviour often leads to the remainder of the float being be compulsorily acquired, potentially at a very low price (e.g. TMM), which in turn discourages outside investment, even if the business is good quality.
For me, insider ownership is not universally a good thing and it may not even be a significant indicator of future performance. It just means that there is a higher chance that management will try to maintain the value of the shares. The options open to non-owner, “professional” management for shareholder value destruction such as excessive salaries and capital mis-allocation are also available to owner-managers along with a few new ones – conflicted related party transactions, compulsory acquisition and dilution of minor shareholders. Skin-in-the-game is useful as a way of ensuring good behaviour only if managers have no way other than shareholder value maximisation to extract a payout. This is not the case in most situations.
I think past behaviour is a better indication of management’s future intent than degree of ownership. But it’s a lot harder to find useful data on behaviour. Two indicators of intent that I think are useful are:
- Accumulation of stock over a long period at low prices in situations where ownership is not close to the 90% threshold for compulsory acquisition. To me this indicates intent to gain a return to management through maximisation of shareholder value combined with a kind of rational frugality.
- Return of funds to shareholders when the balance sheet is strong and no better use for capital can be found. Again, this suggests intent to maximise shareholder returns and a sense of modesty on behalf of management.
With that in mind, two stocks I have been buying recently are Tribune Resources Ltd (ASX:TBR, discussed below) and Axiom Properties Ltd (ASX:AXI). These are both asset plays with high insider ownership, similar to Ariadne (written up previously). These are both small holdings for me – not because of risk but rather because they are likely to take a long time to pay out and I doubt my ability to patiently sit on a large holding for that long.
Tribune is a junior mining company whose main asset is a large minority holding in the East Kundana gold mining JV. It has a large shareholder (who held >50% until recently), has previously been criticised for lack of management transparency by some shareholders and was recently ordered by the Takeovers Panel to remedy several ownership disclosure breaches and to unwind a cross-shareholding with sister company Rand Mining. It also owns a couple of small prospecting operations in places I’d rather not go such as Mindanao in the Philippines and somewhere in Africa that I’ve forgotten the name of.
At the time of writing Tribune was trading for slightly less than its book value of $4.09. Tribune’s gold holdings and its stake in the East Kundana JV are carried at cost. If we back out items held at cost and try to calculate the market value of the assets we get:
|From June 2018 accounts.||Original||Modification||Output||Justification|
|MM AUD||MM AUD||MM AUD|
|Cash & equivalents||13||130||143||
Amend for dividend payments and gold sales Sept 2018.
|Other current assets needed||0||0|
Delete and revalue below.
|Total Current Assets||145|
|Property, plant & equipment||50||-50||0||
Delete. Assume worthless to a control buyer.
|Gold inventory & reserves||300||300||
Revalue at AUD 1500/Oz gold price, 700 AUD/Oz AISC, 99% recovery.
|Other long term||51||-42||9||
Delete development and construction costs.
|Total Non-Current Assets||309|
|Prospecting JV commitments||14||14|
|Shares out (mill)||55.5|
|Value per Share||7.39||per share|
So at around a 45% discount to what the business is likely worth to a control buyer without further exploration, most of life’s vicissitudes are already priced in. Tribune has also grown book value (mostly through exploration as the existing mines deepen) at around 16% in recent years. This could stop at any time but it does provide the possibility for further upside. So the biggest worry with Tribune was whether shareholders would ever see a return. However after accumulating a large hoard of gold over many years a special dividend of $3.50 per share was paid in 2018. Therefore I think that management intend to reward shareholders whilst maintaining a balance sheet which will allow the company to finance further exploration. Exploration is such a hit-and-miss business that this is the only sustainable way to run such a company without constantly raising new capital.
So whilst I don’t like the behaviour revealed by the Takeovers Panel if I was given the choice between buying Tribune and buying shares in Northern Star (ASX:NST, the 51% East Kundana JV partner) with a more promotional management team and a P/B of 7, I’ll take Tribune any day.
If you have questions or comments please write to me, Warwick, at email@example.com.
Disclosure: I hold TBR and AXI at the time of writing. This is not a recommendation to buy or sell any securities, nor is it financial advice. All information presented is believed to be reliable and is for information purposes only. Do heaps of your own research before purchasing any security, especially any that I have discussed. If you invest for the short-term then my opinions could be considered a contrary indicator – see how ASX:WPP is performing lately.