10foot Scuttlebutt – November 2017 edition
Back with another version of scuttlebutt, and a few things I’ve seen or thought about recently. As usual, you are agreeing to my disclaimer, and the following represents some idle thoughts I’ve had about various businesses in recent times:
Oliver’s Real Foods (ASX: OLI)
Oliver’s is working smart financially. The company is selling and leasing back properties for 10-15 years with 2 x 5 year lease extension options . This has excellent implied value over the long term (if the business itself is a success), because they can recycle the cash to keep expanding. Recent transactions suggest a new site could be acquired for as little as ~$200k net or so (before fitout, inventory, startup costs etc). This has alleviated some of my concerns about how capital intensive their growth is, and I think the target of 60 restaurants (~23 currently) is looking more feasible. Execution remains a key risk and cash flows were weak at the recent quarter.
Getswift (ASX: GSW)
Getswift is a high risk proposition at today’s prices in my opinion. Hockey-stick implied revenue growth, minimal staff, minimal R&D expense, several competitors in adjacent fields with no barriers to entry, and indeterminate locked-in revenues or switching costs. Additionally, the company appears limited to small-scale customers in my opinion – anyone with serious software needs could develop an in-house solution that is cheaper and tailored to their specific requirements. Getswift has:
- Fully diluted market cap of over ~$400m (more than 400x annualised revenue)
- Management implying potentially 1.15bn transactions in North America due to one deal with NA Williams (UPS delivered 4.9bn parcels globally in 2016)
- Getswift spent $0.92m annualised on staff based on recent quarterly. ~$600k of this goes to exec remuneration. (apparent limited development capability – implies only a handful of non-exec employees doing R&D, sales, support, IR etc, for a $400m company).
- Getswift is growing deliveries aggressively but $ per delivery is declining precipitously with recent deals like NA Williams (has negative implications for lifetime value of deals + new customers)
- Almost zero development/marketing/advertising budget (look at what comparative – or even smaller – companies spend on these things in the USA…millions of dollars every year)
I also note this quote from the recent announcement from the company (14 Nov):
“The Company is taking a measured approach in ensuring that only quantifiable and impactful announcements are delivered to the market. With that in mind it has chosen to announce 9 of these integrations once they have all been completed rather than individually.”
To me that implies either a) uncertainty regarding the likely amount of deliveries conveyed by recent deals (given the implied 2.5 million stores integrated), and/or b) an awareness that the company is quite hyped and a reluctance to contribute to any further hyping. Either interpretation speaks volumes to the company’s current situation.
Lastly, a Dun & Bradstreet credit report from 3 November 2017 suggests that N.A. Williams has $21m in annual sales, $5.5m in assets, and 130 employees. I do not understand the means by which a deal with a company with 130 employees could convey up to 1.15bn transactions to Getswift when ‘fully captured’. I think this is an area to watch and it is important to keep the sceptical part of your brain engaged, especially in light of Getswift’s ~500% price rise YTD.
Myob Group Ltd is in trouble (ASX: MYO)
I have had an eye on Myob as a turnaround ever since it listed (it hasn’t gone anywhere since it listed, but it should have gone one way – down) but I think there is a lot of pain to pass under the bridge between now and then. In my opinion, Myob is sowing the seeds of its own destruction. Rather than investing in its product to draw customers from their old (free) desktop solutions to paid, modern solutions with greater functionality and scalable revenues, the company is a) focusing on paying dividends and b) levering up further to buy things that it doesn’t need. There are low hanging fruit that both it and Reckon (ASX: RKN) could pluck by reinvesting in the software business over the next few years, but both companies are over-indebted (well, Reckon won’t be after this transaction) and in my opinion without serious reinvestment, Myob will be consigned to mediocrity and eventually, irrelevance. Could be a cigar butt in a few years, once Bain gets off the register and if it pays down its debt .
Crowd Mobile (ASX: CM8)
After the rumours of a share price pump I see that the Crowd CEO has sold 5.6m shares to extinguish a personal liability. Cause and effect or fooled by randomness? This is probably pretty close to the 3-month VWAP, i.e., a fair sale price. Still, I don’t understand why Crowd shares would suddenly go to $0.24 (up 70% in a few months) right before the CEO sells. Fundamentally, if the company can maintain this level of cash generation, it should prove quite cheap. Even so, I will be looking critically at Crowd over the next couple of months especially in light of what the upcoming half year might look like.
An interesting pairs trade in gold?
I think there may be an interesting pairs trade in gold miners, for those interested in that sort of thing. It looks as though you could short Newcrest Mining Limited (ASX: NCM) at ~35x earnings with some debt, and go long something like Resolute Mining Limited (ASX: RSG) at 5x earnings with minimal debt and a fantastic CEO. I reckon a Resolute long and a Newcrest short are interesting on their individual merits, with commodity price (+ interest rates, etc) and its correlation with the share price the obvious risk. By shorting one and going long the other, theoretically you would be closer to gold price neutral and could look for the value of both companies to converge. I haven’t done a lot of work on NCM but I had a very good look at Resolute a few months ago for 10foot. (I was going to post about it but it got trapped in writer’s purgatory). Just an idea that occurred to me.
If you know stuff about gold miners, get in touch. I quite like Resolute but can’t get a grip on its likely value through the cycle.
Wesfarmers Ltd as a sum of the parts (ASX: WES)
I have jumped on the Wesfarmers-breakup story bandwagon. With seemingly every fund manager in Oz looking at the company from a sum of the parts perspective, given the rumoured sale of Kmart, Officeworks, and/or Target, I spent a couple of hours looking at it over the weekend. If you assume that every business could be stripped down and sold off at a top price; 16-18x P/E for Officeworks, 22-24x for Bunnings, etc (or equivalent high multiple in EBITDA) then you could probably squeeze a few extra billion out of Wesfarmers.
If, however, the businesses sold for what I would be willing to pay for them, which is more like 12x for Officeworks/Coles, then really Wesfarmers’ needs to be 30% cheaper to even get a look in. It would be pretty interesting as a levered buyout target, especially if you could rip some capital out of the company. However, right now, a breakup story looks like a ‘greater fool’ investment to a mug punter like myself.
Until next time.
I own shares in Crowd Mobile and Oliver’s Real Foods. I have no financial interest in any of the other companies mentioned. This is a disclosure and not a recommendation.
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