UK stocks are dirt cheap. Why won't the boards act? $ZIG $CRW | Undervalued-Shares

Episode Summary

Executive Summary: Andrew Walker and Sven Larson argue the UK stock market is structurally undervalued, with weak capital allocation, low board accountability, and outsized takeover activity creating a fertile setting for activism and buybacks. They discuss how culture, governance, and fund-manager behavior reinforce the problem, then apply the framework to ZigUp and Craneware as examples of companies where board action could unlock value or prevent cheap takeouts.

Main Topics: UK market undervaluation and takeover wave (Priority: 5/5): The conversation frames the UK market as extremely cheap, with many companies trading below intrinsic or private-market value and being bought out at large premiums, raising concerns that London’s listed market is shrinking through takeouts. Boards, shareholders, and capital allocation failure (Priority: 5/5): A major theme is that UK boards are too passive on buybacks, dividends, and capital structure, often treating board service as a box-ticking exercise rather than actively maximizing shareholder value. Role of fund managers, activists, and culture (Priority: 4/5): Larson argues that large UK fund managers, retail investors, and foreign activists all have roles to play, but UK investment culture is less activist than the US and more inclined toward passivity and dividend preference. ZigUp as a case study in cheap quality and incentive alignment (Priority: 5/5): ZigUp is presented as a high-quality, under-levered, market-leading commercial vehicle rental business that remains too cheap despite a strong management incentive plan and clear buyback potential. Craneware and the post-bid valuation reset (Priority: 4/5): Craneware is used to show how a rejected premium bid can still leave a company undervalued, especially when growth fears and SaaS/AI concerns temporarily depress sentiment. Activist playbook for the UK (Priority: 4/5): Larson outlines a practical activism screen: mid-cap size, no dominant shareholder, low valuation, cash generation, room for buybacks, weak governance, and boards that own little or no stock.

Key Arguments: The UK market is so undervalued that private equity and strategic buyers can consistently extract easy gains, often at 40-50% or even higher premiums. UK boards often fail to act on obvious capital allocation levers such as share buybacks, dividend cuts, tender offers, and leverage optimization. The problem is not only boards; large UK fund managers have also contributed by prioritizing dividends and not forcing change, often due to outflows and cultural conservatism. UK market culture is less shareholder-activist than the US, making foreign activists more important in pushing for change. Many UK companies should be viewed as event-driven opportunities because valuation gaps can close quickly if management or boards act decisively. ZigUp exemplifies a business that is operationally strong but structurally mispriced, with management incentives and potential buybacks offering a path to rerating. Craneware shows how a rejected premium bid can become a missed opportunity if the market later reprices the company downward on growth or AI fears. Relisting in the US may help some companies, but it is not a universal fix and should be considered selectively. The most practical solution is not broad macro reform alone, but company-specific action by boards and shareholders to unlock value. Because many UK boards do not own meaningful stock, their incentives are misaligned with shareholders and they can become complacent.

Data Points: UK main board listed companies lost to takeouts since 2022: 25% - Larson says a quarter of London Stock Exchange main-board companies have disappeared through takeovers or going private since 2022. Typical takeover premium in UK: 40-50%+ - He argues UK bids often come at much larger premiums than the usual 20-30% seen in other markets. Premiums seen in some deals: Triple-digit premiums - Larson notes some UK takeouts have reportedly involved premiums above 100%. ZigUp valuation at time of article: ~3x EBITDA - Walker and Larson discuss ZigUp trading at roughly three times EBITDA when Larson first wrote about it. ZigUp current valuation: Below 4x EBITDA - The stock had moved up somewhat but remained under four times EBITDA during the discussion. ZigUp share price level mentioned: 430 pence - Current approximate share price during the discussion. ZigUp VCP hurdle price: 521 pence - Management only participates in the value creation plan above this share price. ZigUp VCP cap price: 800 pence - The management incentive plan caps payouts above this level. ZigUp management bonus pool: £69 million - Total potential bonus shares for seven senior managers under the VCP. ZigUp CEO potential payout: £19 million - Estimated maximum value for the CEO under the incentive plan. ZigUp free cash flow: £17 million to £96 million - Larson cites free cash flow rising from last year to the current period. ZigUp targeted free cash flow: Above £200 million by 2028 - Management’s longer-term cash flow ambition under the current plan. Craneware revenue exposure to US: 95% - Craneware is UK-listed and Edinburgh-based, but almost all revenue comes from the United States. Craneware hospital penetration: 40% of US hospitals - The company is installed in a large portion of the US hospital market. Craneware bid price from Bain: £26.5 per share - The proposed bid that was rejected as too low. Craneware current trading level: ~£13 per share - Walker says the stock later fell to about half the prior bid level. Craneware share price peak after bid: £22-23 per share - The market temporarily repriced the stock higher after the initial bid interest. UK fund manager reference: M&G; $500 billion AUM - Larson cites M&G as an example of an establishment player publicly saying too many UK companies are sold too cheaply.

Pivotal Quotes: "The UK market is dirt cheap." — Sven Larson: Used to summarize why activism and takeovers are proliferating in London-listed equities. "If your share is trading at four times earnings, and you have a relatively low debt leverage, the obvious thing is to start buyback shares." — Sven Larson: Illustrates his view that capital allocation decisions should be straightforward at such low valuations. "The dam is about to break for M&A and activism in the UK." — Sven Larson: He describes rising attention and a likely increase in takeover and activist activity.

Implications: UK boards and shareholders face a narrow window to act: buybacks, balance-sheet optimization, and governance reforms could unlock value quickly, while inertia risks more cheap takeouts and further erosion of London’s public markets.