Questor share tip: CSR bid delivers gains

CSR
855½p+197p
Questor says HOLD

THE Cambridge-based microchip manufacturer CSR [LON:CSR] was picked as a Questor tip of the year because of its cutting edge technology and solid balance sheet.

The recommended offer at 900p per share has repaid the faith in the shares after a difficult year.

The microchip manufacturer has technology that could benefit if the coming wave of wearable devices such as Google Glass, Nike+ Fuelband and Samsung watches takes off.

The company’s Bluetooth Smart technology is used in these new devices and offers substantial growth potential. The attractive opportunity from the growth in new technology was the starting point for looking at the shares, but as always it was the strong balance sheet and cash generation that made it possible to pick them as a tip of the year.

CSR started the year with a cash pile of about $300m (£186m) on the balance sheet. The company was also generating plenty of cash from trading. In 2013, CSR generated $82.3m cash from day-to-day operating activities, up from $73.9m the year before.

That made the company attractive from an investor’s perspective because it funded its investment in new facilities and acquisitions from its own cash.

What’s more, the company had enough spare cash to return it regularly to investors. During 2013, the company returned $92m in cash to shareholders through purchases of shares and payment of dividends. In 2012, the company returned $315.1m to shareholders through dividends and a tender offer.

The company regularly stated that at every quarter it would review the amount of cash the company needed and return any spare to shareholders. The dividend income wasn’t great at the time of the tip with a forecast yield of 1.6pc, but it had an excellent track record of growth, having more than doubled in the past four years.

The balance sheet also provided some support to the shares with net assets, or shareholders’ equity of $629.8m (£391m), or 237p per share. More than a third of those assets were cash or treasury deposits.

Everything wasn’t going that well at CSR at the start of the year. The company was trying to exit the digital camera market that was being hit hard by smartphones; also chip makers are highly exposed to the underlying demand for the devices they manufacture chips for. If consumer demand falls sharply, then chip makers can be left with a lot of unwanted stock in warehouses that needs writing down. As a pointer, microchip designer ARM Holdings has suffered from falling demand for smartphones, sending the shares down by 24pc so far this year.

That said, CSR commanded a strong market position. It is dominant in the Bluetooth market which is well placed for the next generation of wearable technology devices. This was always going to prove attractive to a tech company that wants to expand into this market.

The takeover offer for CSR looks like a done deal. The CSR board has accepted an offer from Qualcomm and not Microchip. The deal value is about $2.5bn all-cash, and UK retail investors will receive about 900p per share, representing a 57pc premium to the share price before the Microchip “offer” back in August. Regular readers of the Questor column who followed our tip of the year have made 42pc gains (Buy, 632p, January 1) plus there was the bonus of the 3.2p interim dividend.

There is a slim possibility that Microchip could come back with a counter offer, but the chances of that look extremely remote. Investors are being asked to vote on the deal before December 31 and, given the all-cash offer, we would vote in favour. The cash will be returned at some point during the first quarter of 2015.

We remained confident that our value picks would deliver this year, and if the deal closes at 900p it has delivered total returns of 43pc in just over 10 months. We see no need to rush out and redeploy the cash, given the turbulent state of the markets.