Another Questor stock pick has been bid for – here’s how we work out whether to stick or sell

The bid from private equity giant KKR for ContourGlobal looks likely to generate a plump portfolio return for us from the emerging markets power utility. The FTSE 250 company’s board is recommending the cash offer of 263.6p a share, which will be adjusted by the 4p a share dividend due for payment on June 10 to those shareholders who are on the register on May 27.

The deal should close in the fourth quarter of this year, but the bid adds to this column’s growing list of selections that subsequently attracted a predator. The roll of honour includes Sky, Gamesys, Cobham, St Modwen Properties, Clinigen and William Hill and – less rewardingly, since we had gormlessly given up on them before the suitor’s arrival – Aggreko, Morrisons and Manx Telecom.

Investors who bought at the time of ContourGlobal’s flotation in November 2017 at the listing price of 250p may feel a little less enthused. But this column first cast its eye over the stock during the post-pandemic panic some two years ago, by which time the price had slumped to 162p. The result, assuming the deal goes through as planned, will be a capital gain of almost 60pc with a further 26.1p a share in dividends.

It seems to Questor three valuable lessons can be drawn from the KKR bid.

First, valuation always matters in the end. It is the ultimate arbiter of investment return and the best value is often on offer when the news looks blackest. A wider market slide, owing to the outbreak of coronavirus, had dragged ContourGlobal’s shares down to the point that it presented seekers of value (or income) with a golden contrarian opportunity.

Anyone who followed the herd, piled into perceived pandemic winners such as Netflix irrespective of valuation and held on may now be sitting less comfortably. A takeover bid is just a bonus, but it at least supports the case for a value‑driven approach.

Second, cash flow is king. ContourGlobal’s stated earnings per share figures for 2020 and 2021 of $0.02 and $0.12 did not cover the dividend. But, like any utility, the firm has a heavy depreciation charge, thanks to its substantial assets. As a result, actual cash flow was robust and more than sufficient to cover the total cash dividends by a factor of at least two. ContourGlobal’s cash flow easily covered its interest bills too, even if its $3.8bn (£3bn) net debt pile looked daunting at face value.

Finally, index-linked profits and cash flows are going to look increasingly valuable if inflation proves sticky. The combination of copious cash flow and the index‑linked nature of the contracts that generate four fifths of ContourGlobal’s earnings before interest, taxes, depreciation and amortisation (Ebitda) is surely an attraction for KKR.

Any investor of a nervous disposition could choose to bank the dividend in June and then sell, rather than wait for the final pennies to come. For the moment, however, the share price is trading close to the (dividend-adjusted) offer price, to suggest that the market is confident the recommended bid will go through on the nod.

Investors can now wait for the deal to close in the fourth quarter. Hold.

Questor says: hold

Ticker: GLO

Share price at close: 256p

Update: Zytronic

Rugged screen maker Zytronic’s first‑half results last week showed that the Tyneside company was back in profit, cash positive and still nurturing a healthy balance sheet.

Covid-related travel restrictions continue to limit the scope for marketing at important global trade shows and disrupted supply chains and rising input costs represent fresh challenges for the company, but its £7.5m cash pile allows management and investors alike to be patient.

That liquidity helps to underpin a market value of £17.5m. Investors are in effect paying £10m for a business that still produced £12m of sales in the difficult year that was 2021.

At its peak Zytronic generated annual sales of £20m, net income of £4.6m and a dividend of 22.8p a share. Any hint of a return to anything like those levels over time and the shares will look terribly cheap. The near‑term outlook remains unclear but the valuation is attractive. Hold.

Questor says: hold

Ticker: ZYT

Share price at close: 165p

Russ Mould is investment director at AJ Bell, the stockbroker

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