ASX takeover targets: 4 stocks we think have a good chance to be snapped up!

Nick Sundich Nick Sundich, May 14, 2024

Let’s take a stab at which companies could be the next ASX takeover targets. It can seem like an easy exit for investors of a struggling company, even if some investors need to take a loss or miss out on even greater gains in the future. There’s nothing like the certainty sweet cold cash right now than the mere prospect of potentially more later on. So could your investment become a takeover target?

In this article we’ll name 4 stocks we think could be next. But first, we what could cause a stock to be a takeover target and what might cause a company to say no to the offer?

 

Characteristics of takeover targets

A company may be considered a takeover target if it is performing well and is attractive to potential buyers. It should have a strong presence in the market, with a diversified portfolio of products and services, as well as steady growth in revenue. Often it can offer complimentary goods and services to the acquiring business. Look no further than BHP’s attempts to buy Anglo American’s copper assets – BHP wanted to do this deal because it wanted even more exposure to copper, Anglo America’s assets were ideal.

However, the opportunity takeover targets may be perceived to offer, is the potential to buy the company for less than what it is worth. A suitor inevitably hopes to derive shareholder value for their own company, both immediately and into the future. They may be capitalising on a temporary dip in the share price, or long-term underperformance in spite of strong financials.

This was why there were so many takeover targets in the tech sector during the Tech Wreck of 2022-23, ranging from Nearmap (ASX:NEA) to Infomedia (ASX:IFM). The fact that tech stocks were indiscriminately sold off by retail investors (even companies which had strong, profitable businesses), gave the opportunity to make bids at discounted prices. But not all takeover targets accept a bid.

 

Why a takeover target might say no

There are a variety of reasons why a company might reject a takeover offer. It could be that the board of directors believes the offer undervalues their company, or there could be strategic interests that would not be served by accepting an offer. In some instances, the company may say something along the lines of ‘the board is open to considering offers that appropriately value the company’. Essentially, this means they would be willing to accept a slightly higher price.

Other potential reasons include financial uncertainty, difficulty in integrating with another business model, potential negative impacts on personnel, or concerns about losing control over important decisions.

 

Some companies walk away from a deal

In the case of some takeover targets, such as Infomedia (ASX:IFM), they may walk away from the offer if it is taking too long to complete. Infomedia’s suitors spent five months doing due diligence of the company in its dealroom, but the company terminated the talks given it was costing the company a lot of money before you even consider the lack of certainty that the deal. And most importantly, the company’s management may think they can create further value themselves and do not want to give up that opportunity.

Ultimately, it is up to board first to determine if rejecting an offer is in the best interest of the company and its stakeholders, because it is their legal duty to act in the best interests of shareholders. Then, it is up to shareholders to either accept or reject the deal.

 

4 potential ASX takeover targets

 

Infomedia (ASX:IFM) 

Yes, we think this stock could be a takeover target again, and at the right price it may accept. Although of course, without the right price, it won’t even think about letting any potential suitors into the deal room.

Infomedia, provides cloud-based parts and service software to the global automobile industry. It has over 250,000 active users in 186 countries and it has a healthy geographical mix of revenue (37% from the Americas, 32% from the Asia-Pacific and 31% from Europe). We think the company can capitalise on several trends being adopted in the automotive industry including electric vehicles, the dealer agency business model and data-driven marketing.

All of these trends are transforming vehicle innovation, dealer efficiency and customer expectations. OEMs, dealers, suppliers and industry stakeholders are evolving to pursue total brand experiences by capturing the abundance of information available in an increasingly connected world. Infomedia can help its customers capture data, provide more personalised service to existing and would-be customers and monitor supply chains.

Notwithstanding its rally, it is still off all time highs and would be a good company for.a would be suitor to target.

 

Judo Bank (ASX:JDO)

This is another company that has seen a rally in its shares but is still off its all time highs, and would be attractive to any potential buyer. Judo is Australia’s first ‘challenger’ bank for Small and Medium-sized Enterprises (SMEs)

It is not just a digital fintech app for milennials, it is a full-on bank for SMEs. By full-on, we mean it has relationship managers and a full banking license. The bank has been rapidly growing its loan book that reached ~A$9.7bn in December 2023. Judo Capital believes the book can ultimately get to A$15-20bn in the medium term. 

We have liked the company because of its niche focus on SMEs, is growing loan book and financially stable position. It is profitable and has a massive 16.2% Tier 1 capital ratio (more than double APRA’s requirements). It has been hit by perceptions that SME customers are struggling with repayments, but this is far from the case.

In 1HY24:

  • Its PBT for was $67m, up 24%
  • Net lending grew $800m, 3 times system business credit growth
  • The average gross lending margin was 464bps, up 398 from 3 months ago, and
  • Its NIM was 3.02%, a moderation but ahead of the big banks

The bank told investors it anticipated $40-45m profit for the second half, representing in $107-112m for the full FY24.

 

Iress (ASX:IRE)

Iress is a company that actually has been struggling, but is gradually putting its past behind it. Iress provides software to the financial services industry, including investment management and trading tools. This includes services to analysts like ourselves, it has software competing with Bloomberg enabling live data on stocks. There is also software for superannuation, mortgages, life insurance and pensions.

For several years, beginning with the pandemic, it witnessed continuing decline in profitability due to poor performances in certain divisions, some of which it acquired in an attempt to be ‘all things to all people’. It ultimately ended up being ‘the Jack of all trades, but the Master of none’, or in the Chairman’s words ‘collecting too many businesses doing too many things in too many locations to scale effectively. You get the idea. It could have bitten the dust and accepted a takeover from EQT in late 2021, but the talks failed.

The company has made progress, improving its earnings and parting ways with non-core non-profitable businesses. It told investors to expect $122-132m EBITA for FY24 and ‘the strongest cash result ever’ in FY25.

 

Chalice Mining (ASX:CHN)

Chalice Mining (ASX:CHN) owns the Julimar PGE-nickel deposit that lies an hour out of Perth. The company has never looked back since it first discovered the deposit and scratched the surface of its potential, given its resources, convenient location and the perfect timing of the discovery amidst the push for decarbonisation.

As of July 2023, Julimar has a resource of 560Mt @ 0.54% nickel or ~1.7g/t palladium equivalent. 55% of this is Measured and Indicated with the balance Inferred. This equates to 16Moz of 3E (Palladium, Platinum and Gold combined), 860kt nickel, 520kt copper and 83kt of cobalt. This is equivalent to 3Mt of nickel equivalent or 30Moz of palladium equivalent.

The buying opportunity lies in the sell off that has come due to the fall in battery metals prices, as well as the timeline for a Final Investment Decision and production – these will occur in 2026 and 2029 respectively. This is not to mention the potential capex that could be up to $2.3bn. For a major miner, that figure could be penny change and Julimar would be a great asset when it gets into production.

 

Conclusion: It is good to look for takeover targets, but it shouldn’t be you your first priority

If your company is a takeover target, it is a sign that you have a good company and that other investors really are underestimating it. However, you should buy a company with the hope that it will be able to grow without receiving a takeover offer.

 

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips

 

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