Another Misunderstood Spin-Off

There are two corporate transactional situations that usually make for profitable investments:

1. When governments sell assets, and
2. When large companies spin-out smaller businesses.

In the latter category, CYB represents a typical situation wherein a company that is spun out finds its stock mispriced by the market due to the following factors:

1. Compared to its parent, it is small, so investors who receive the spun-out stock in specie, don't see it as being material to their holding in comparison with their stake in the parent, so they are unnatural holders of the spun-out stock, and they invariably sell on listing. This is especially the case because no broker research is published which would otherwise have provided some valuation guidance.  

2.  Invariably, the company being spun out has not enjoyed management focus and attention, and may have been starved of capital due to competition from other businesses, within the parent company. Once a dedicated board and access to capital are in place in the form of an independently-listed entity, the de-merged business is in a better position to restructure itself to pursue faster earnings growth.

And often, in order to get the de-merger away successfully, the parent company often sends the offshoot company on its way with a balance sheet that is in excellent condition.

I've seen this on a number of occasions in the past, where investing in the de-merged business turns out to be highly profitable over time (DLX ex-ORI, HGG out of AMP, ORA de-merged from AMC, REC out of BXB, SGR ex-TAH, etc.).


And in the case of CYB, given how cheap it appears today, even if the fully-dedicated execs are just remotely successful in achieving their Cost-to-Income targets (and given this significant systems expenditure currently underway there is every reason they will), the company's profits will come close to doubling over the next 5 years.

And that prospect, coupled with the fact that CYB starts its listed life at a Price-to-Book ratio of around a mere 0.5x, makes it highly likely that the share price will be a lot higher in the future.