Contrary to popular belief, markets aren’t necessarily the most efficient arbiters of value. Even our blue-chips have the potential to surprise – usually on the downside.
Market efficiency requires two elements: perfect information and liquidity.
On London’s alternative bourse, both are in short supply, which throws up anomalies.
The investment company has undergone and is still undergoing something of a transformation – one designed to help unlock significant latent value.
Under Harmony Capital, which has been managing ADAM’s portfolio since May 2017, historic investments in China have been restructured and will hopefully be monetised in short order.
This will enable Suresh Withana, managing partner of Harmony Capital, and his team to focus on their real goal of unearthing investable gems from among Asia’s small- and medium-sized companies (SMEs).
ADAM under Harmony Capital’s management is probably the only listed investment company of its type in London focusing on Asia’s SME sector.
Withana and his team have considerable experience in this regard, having managed the successful US$270mln Harmony Investment Fund I which had a similar mandate to that of ADAM today.
You can see why Harmony has focused on the region. There are 270mln SMEs and an estimated US$2.7trn funding gap present in Asia.
So far, ADAM has invested in a virtual doctors’ network, a luxury ski resort in Japan and a high-end food and beverage business. There’s also a proposed investment in a maker of needle-free injections.
The deals have been financed via traditional debt and convertible loans. Its proposed PharmaJet investment allows it to convert debt into equity on favourable terms at a “liquidity event” such as an initial public offering.
The returns are high (coupons on the debt can be double-digit), but then ADAM is operating at the riskier end of the investment market. That being said, Harmony Capital ensures that transactions are structured with strong downside protection in place to protect ADAM’s interests.
It should also be stressed, these are not throw-of-the-dice opportunities. Harmony’s team can spend as long as six months on due diligence. “Independent valuations are carried out at arms’ length,” Withana adds.
Harmony’s contacts around Asia mean there are plenty of deals to be done.
“We have a very significant pipeline of opportunities; a number at the term sheet stage,” Withana explains.
So with a unique approach – and the intention of paying a dividend along with capital growth – why is the company’s share price trading at a 47% discount to its last available net asset value (NAV)?
Well, ADAM has a number of Chinese legacy assets that are perhaps viewed (possibly wrongly) as a drag on performance.
Harmony Capital inherited these investments, which includes a majority-ownership and control of the largest magnesium dolomite mine in Shanxi Province, China. This is also ADAM’s largest single holding.
“We are looking to exit from them all,” says Withana. “What could I foresee in the next 12 months? That the majority are either monetised or close to being monetised.”
Exiting these positions would free up cash that could then be ploughed into pan-Asian (rather than solely Chinese) opportunities.
So how to address that gaping discount to NAV?
In a bid to kick-start the share price, ADAM’s board could opt to go in one of two directions: either issuing new stock at a premium to the current price or launching a buyback programme.
Withana isn’t privy to the board’s plans.
Practically, the lack of information and liquidity that has hobbled ADAM’s share price is being addressed by Harmony Capital via an investor outreach programme.
So, Withana has been out conducting a non-deal roadshow, designed to introduce the ADAM story to the institutions. He also recently presented to private investors.
The message is a simple one, says Withana. “We are somewhat unique in London given our pan-Asian investment mandate. We are targeting income and capital growth and we offer what I think is an attractive opportunity in trading at a discount to our NAV,” he explains.
“I don’t know of a company that’s so below the radar nobody knows about it but that’s ADAM at the moment.”