Saw this and it struck me as a good opportunity…
Ecofin Water and Power is an investment trust. It has just gone to a continuation vote and to get the vote through management has proposed the trust is split into:
- A liquid vehicle with liquid investments.
- An illiquid realisation vehicle to be wound up within two years -14.1% April 2016 NAV.
- A cash option – of up to 50% of NAV.
Details are here.
The trust is currently trading at a discount of 16% to a NAV including realisation costs. I suspect post realisation this discount will have narrowed – I would anticipate a c10% profit on this within a month or two, should the vote go through…
I should add below is based on a NAV of 163p – since then it has fallen to 157p… Some may be due to dividend payment / changes in calculation methodology but makes opportunity slightly less attractive than outlined below….
One point to notice is that the current NAV statements are prepared on a liquidation basis assuming that all assets are liquidated. The annual report says this is worth 3p a share vs a continuation basis. As under the proposals only at most 33% of the portfolio needs to be liquidated to get to the 50% cash which is needed,this is an overestimate. It may also include additional costs for liquidating the illiquid portion. This means when the vehicles come out of liquidation there should be a bit of an uplift in NAV. (P3 30/6 HY report).
I haven’t accounted for this below, or income which will accrue but it provides a bit of a cherry on top !
So of the 163p NAV it goes to:
81.5p cash (at 50% – see my note below on this)
27.9p illiquid vehicle (17.1% of the current NAV)
Less 1.81p dividend (Not entirely sure on the accounting of this – I have subtracted it to be conservative….)
On the valuation…
The 81.5p cash should be valued at 81.5p.
The illiquid vehicle will trade at a discount – I would guess 30% – fees are high, particularly performance fees but offsetting this it will realise in two years, possibly sooner. I have increased the percentage of NAV vs the 14.1% as Lodestar, the biggest illiquid investment has increased as a proportion of the NAV since April so I should take account of this. There is opacity here as what exactly is in here is not disclosed…. At a 30% discount this gives a value of 19.5p.
Conversely I would estimate the liquid vehicle should trade at a much smaller discount -say 5%-10%. This gives a 49p- 47p valuation.
Totalling we get to a value of 148-150 – a 9% premium to the current offer price of 136.
We may be able to get a bigger share of the cash. Some zero dividend preference shares may have rolled into the company. If they want cash they have to opt to receive it – due to tax, lazyness, illiquidity or other reasons they may choose not to. If any of them don’t the share of the cash which goes to those who want it increases. At the last figures I have available the ZDP liability divided by number of shares comes to 45p per ordinary share. I dont have any reliable figures on this and no way to make any sort of guess…
I screwed up the trading of this on my own account and bought at 143.9 earlier in the week. I really shouldnt have as that isnt enough upside for the risk. I bought some more just now at 132.5. Average cost is now 142.25. 14% portfolio weight. Trading mistake from me really. Still think I can get out at a profit, my assumptions above are quite conservative… I might average down though this is something I tend to avoid doing…
Learn from my mistake dont overpay if you are going to do this try to buy at bid.
The share has since fallen back a lot today. I don’t know why. There may be concerns about getting the vote through as it needs 75% of votes to approve. Quite a bit of institutional ownership so this should get through… Hasnt been huge volume so could just be noise, it is pretty illiquid.