Kollect on Demand (KOLL)

For this edition of ValueTeddys Snap Judgements we are taking a look at Kollect on Demand, a waste collection company active in the Irish and English market, listed on First North Sweden. This is a case that I have been made aware of by my favourite source of cases, Twitter, in this case @_RobinD.

Kollect on Demand

KOLL has a market cap of 140 m SEK, so this is easily what you would label as a nano cap company. Regarding what they do, this snippet is cut from the annual report 2020:

The Company services two types of customers: those who arrange to have waste collected (bins, skips and skip bags or junk removal) via the online Kollect booking engine; and those who use BIGbin smart compactor bins for waste drop-off.

The services include domestic door-to-door bin collection, commercial bin collection, skip (container) hire, skip bags and junk removal such as furniture and other large objects.

In other words, two segments; garbage collection, and larger bins for waste drop off. Something very notable is that they are founded and have the vast majority of their business in Ireland, but are listed in Sweden. Being listed in a country other than the “logical” choice is something I dislike in the absolute vast majority of cases, and this is no different. Anyway, moving to the financials. First we are taking a look at the Income statement and cash flow statement for the full year 2020 from the Q4 for 2020. Then we are looking at the Q1 for 2021. Figures in SEK.

As you can see, for 2020 KOLL had about 46 m in sales and 18 m in gross profit, up from 29 m and 11 m. The gross margins increased from less than 30% to almost 50%. The operating expenses were about 29 m, up from 22 m, leading to an operating loss.

The growth rates year on year were approximately 60% in sales and gross profits, and 30% in operating costs. Unfortunately, the number of shares outstanding after dilution doubled, leading to actual per share figures to decline. Assuming no more external equity funding needed, Kollect on Demand will be operationally profitable in three years of continued growth at this pace. I’m not so sure I believe this is the most likely scenario, but I will leave that for the concluding discussion.

For 2020, the operating cash flow turned positive to just under 3 m, compared to a burn of 16 m in 2019. Here I note that their receivables fluctuate very significantly from 2019 to 2020, which might be something to examine further.

We see that KOLL used close to 9 m in investing in property, plant, or equipment, which was mostly funded by issuing shares. I note that significant amounts of equity capital were raised in both years. Other than that, nothing seems to be out of the ordinary regarding the financing cash flows. Moving on the the most recent quarter, Q1 2021.

For the first quarter, KOLL had 13 m in revenues, which turned into about 5 m of gross profit. Operating expenses were just above 9 m, which means an operating loss of about 4 m. Fully diluted share count was the same as in the fourth quarter. The operating cash flow was negative 3 m, no big investment was made, and bank loans increased by about 8.5 m. Sales increased about 40% and gross income about 60% y-o-y. Operating expenses increased by about 30%.

Looking at the balance sheet, there is no split of intangible assets, but the fixed assets are about 12 m, 7 m in cash and about 6 m of receivables. in total about 25 m of assets. this is funded by 30 m of short term debt and 2 m of long term debt, which leaves a negative equity position.

Summary

Okay, that was a lot of numbers, and as a summary I have to say that I don’t really see the case. The gross income has to double without operating costs increasing in order for them to make an operating profit. I think that that will require a lot of time, and because of the nature of unprofitable businesses it will require more financing. I also see a lot of debt on the balance sheet in relation to their receivables plus cash, further increasing the cause for more equity financing.

Secondly, I don’t see any kind of competitive advantage on the side of Kollect, and I don’t understand where such an advantage would come from. Without any positive cash flow, no competitive advantage, and as far as I can tell, no undervalued asset on the balance sheet, I don’t see where the upside will come from.

In defence of Kollect, they are growing at a high pace. As I touched upon earlier, continuing growth at this pace would lead to profitability in about 3 years. If we Believe this is what will happen, how many times will Kollect need to take in additional equity financing?

All this talk of further financing, leads us to the next section.

Warrants

Note that there are currently about 3.7 million warrants (TO1) outstanding, with the subscription period 9 – 20 August 2021. The warrants were issued in September 2020 and each warrant give the right to subscribe to one new share at a price settled at 70% of the volume weighted share price during July-August, but no more than 15 sek per share. This should put a roof on the price at 15 sek until the new shares are issued, and if fully subscribed should add about 55 m of equity capital.

Conclusion

Obviously, I’m not the only one to think they might need more external capital, I think Kollect also suspected it when going public and thus issued the warrants above. I think that the share price absolutely should not exceed 15 sek while the warrants are still outstanding, and the balance sheet is significantly improved given full subscription. I think the case should be re-evaluated after the summer, closer to the exercise of the warrants.

In other words, I don’t like the case currently, but I will keep an eye on it closer to the exercise of the warrants. Looking forward, even assuming full subscription of the warrants, Kollect still need to have very impressive growth numbers without operating costs skyrocketing. Can it be done? Yeah maybe, but what multiple should it be worth? Since I don’t see the competitive advantage for Kollect, I think it should not earn a high multiple if they become profitable. Lets say something like 6 times operating profit. What that might be, and WHEN and IF that will be, I’ll leave up to you.

I hope you liked this edition of ValueTeddys Snap Judgements! Remember that none of this is financial advice and I’m not your financial adviser. If you want to suggest stocks for me to look at, you can tweet @ValueTeddy, and do check out valueteddy.com.

Facebook (FB)

For this weeks edition of ValueTeddys Snap Judgements we are taking a look at Facebook. The F in FAANMG (or whichever acronym you prefer), and the BY FAR absolute dominating player in social media, of all time. Facebook seems to be a consensus buy on FinTwit, and some really smart money managers (eg. Li Lu, Tepper, Terry Smith, Sequoia, Oakmark, Klarman, Bill Miller, and Loeb.) seem to hold the stock.

I assume Facebook needs no introduction, but here’s a line anyway. Facebook delivers social media and communications apps, such as Facebook, Instagram, Messenger, WhatsApp, and VR through Occulus. They make their revenues mainly from selling Ads.

Looking at the latest 10-k (FY 2020, figures in USD), Facebook is very impressive. Total revenues were close to 86 B, and net income was 29 B. That’s a net income margins of over 33%. They also shows incredible growth each year, both in revenues and earnings. Revenue per share has grown by between 20% and 50% per year since 2012, and net earnings have grown by over 20% per year except for 2012 and 2019, which both showed negative growth in earnings per share.

Looking further, we see amazing cash conversion, where operating cash flow and free cash flow follow the development in the income statement. For 2020, 86 B of revenue turned into 38.7 B of operating cash flow and 23 B of free cash flow. In other words, Facebook had operating cash flow margins of 45% and free cash flow margins of over 26%. Even though the margins are very high, the operating cash flow margin is lower than each of the years in the above comparison, where the operating cash flow margin was between 50% and 60%. The free cash flow margin is in line with 2019 and 2018, but was much higher in 2017 and 2016.

Now looking at 2021 Q1 figures, we see that Facebook had a massive quarter. Revenue grew about 50% and operating income and net earnings grew an impressive 90% and 80%. Interesting that sales and administrative costs both stayed about the same, only R&D increased compared to the first quarter last year. The net income margin was over 30% for the quarter, a bit higher than last year. Moving to the latest balance sheet and cash flow statement.

First of all, Facebook has a huge cash position at close to 20 B plus the almost 45 B in marketable securities (33 B in government securities, 11 B in corporate bonds). A surprisingly small part of the assets are made up of intangibles and goodwill, at less than 20 B, and Facebook carries almost no debt on the balance sheet, totalling less than 30 B. With over 130 B of equity, a huge cash position and very little debt, FB has an incredibly strong balance sheet.

Finally, taking a look at the latest cash flow statement, we see a large portion of revenue turning into operating cash flow. 12 B of operating cash flow from 26 B of revenue gives us an operating margin of 33%, which is very high, but lower than Q1 2020 which had an impressive 64% operating margin. I also note that investment in property plant and equipment is a bit higher than last year, and that repurchases have increased significantly.

Facebook is a very interesting case, and from looking through the financials I really do see the appeal. Incredibly enough, Facebook isn’t trading at an insane valuation, at a trailing P/E of 28, EV/EBITDA 19, EV/EBIT of 23, and EV/Operating Cash-flow of 22. For the sake of brevity, I will not go in depth on all the things to consider regarding Facebook, but I will mention some things that speak against the case. In summary, these are legal risks, the fact that I dislike their products, and Mark Zuckerberg as CEO.

Now starting with the fact that most of these caveats are very personal opinions, and nothing more, here is a short discussion on the topics. First, there has been ongoing “war on big tech” from lawmakers, who have been threatening to break up the largest tech companies with claims of monopoly positions and monopolistic business practices. I don’t think there is a high chance of any of the big tech companies being split up, and therefore disregard this point entirely. Most of the FAANMG businesses are the best at what they do, and I don’t think they are negatively affecting the end customer because of their size.

Segueing from this point, I spent quite some time listening to the hearings of the CEOs of “big tech”, and Mark unfortunately strikes me as a highly unsympathetic person. I must admit, Bezos came across as quite scary, but I can’t explain it… Nadella and Cook both struck me as absolutely fantastic CEOs. I do recognise the amazing business Zuckerberg has built, but I honestly don’t think he is that good for Facebook’s image, and their reputation. I don’t know if this is at all in the cards, but I think news of Mark stepping down to chairman and letting somebody more… charismatic… take the reins as CEO. Letting someone else be the face, of Facebook, but still having the power to steer the company, would be good news. (but this is of course very loosely based on my personal thoughts, and I have no insights that are actually valuable on this point. However, I do recognise that Mr Zucc is incredibly intelligent, innovative, a visionary, and what amazingly profitable business he has built).

Now moving to the final point, I absolutely hate Facebook (now called the blue app, I think), and I also very much dislike Instagram. I only use messenger because of the insane network effects, and same with WhatsApp. Now, am I the average consumer, absolutely not. Does my opinion of the products matter, I don’t know, but I would like the case a lot more if I also liked the products. From the other side, I think it has been thoroughly proven that if you are a business and want to spend ad dollars that make you visible, you have two choices: Facebook, and Google (also Amazon, but I’m leaving that out for now). In other words, Facebook (and Google) have incredible network effects, and thus both have an incredible moat.

Buffett has an interesting quote regarding Coca-Cola, and their moat. Which goes something along the lines of “If you’d give me a billion dollars and tell me to take on Coca-Cola, I’d give you the money back and tell you it cant be done.” This is something I like to use when thinking about businesses and their moats, and in ALL of the FAANMG businesses I think you can fairly confidently say “it can’t be done”.

That went a bit on the rambling side, but I think the message is clear: Facebook seems to be an amazing business, showing incredible growth and margins with very little capital required, even tho they are so big. There are some things I’m not sure I like about the business, but I do recognise its strengths, which I think far outweigh the negatives. Disclaimer: I own Facebook in my “Cloning Portfolio”, and I am looking to add it to my main portfolio as well.

That was this weeks edition of ValueTeddys Snap Judgements. I hope you liked it, and remember that none of this is financial advice and I’m not your financial adviser. If you want to suggest stocks for me to look at, you can tweet @ValueTeddy, and do check out valueteddy.com.

Nekkar (NKR)

For this weeks edition of ValueTeddy’s Snap judgement, I am not making a snap judgement, but instead writing up one of my portfolio holdings. It goes without saying that since I own the stock I am biased, and that you should always do your own research. This is not any recommendation, and it is not a solicitation to buy anything. I’m not your financial adviser and I won’t take any responsibility for your actions.

That aside, we are looking at Nekkar, a Norwegian company who makes and sells ship lifts for shipyards and similar. Figures are in NOK from the 2020 annual report. Nekkar was previously named TTS Group, and have a history dating back to the 60’s. TTS was listed in 96 and after many transactions, the company was renamed to Nekkar in 2019 after selling the majority of what was left of the conglomerate. The business that is left today is vastly different from the business they had earlier, which can be likened to a shipping conglomerate. The business remaining is Shipyard Solutions, namely Syncrolift and Digital Solutions via Intellilift. Nekkar states that they are the market leader in ship lifts and ship transport solutions with a ~75% market share. They have about 200 installed systems and are also selling service and after market services.

For the second half of 2020, revenues were about 230 m, up from about 160 m in H2 2019. Full year revenues are up from 270 in 2019 to about 360 in 2020, and revenues have been increasing since 2016. EBITDA margins were about 22% in 2020 which is a slight decline from 2019 margins of about 25%, but an increase from all years previously. Another measure that Nekkar presents is the order intake and backlog, for the full year 2020 order intake is up to 700 m from 2019 levels of 400 m. The order backlog exiting 2020 was higher at 1160 m than exiting 2019 at 780 m. The majority of the increase in backlog was seen moving from H2 2019 to H1 2020.

Moving past the presentation numbers into the earnings report, for the full year 2020 we see 360 m in revenue, 200 m of COGS, and say 95 m in other operational costs. This leaves 77 m of operating profit, or 21% operating margin. Remove 2.7 m of depreciation and 3 m in net financial cost, leaves us with about 71 m of pretax operating profit. for 2020 Nekkar paid less than 1 m in tax, but there is a one-time loss from discontinued operations of 104 m related to a settlement with Cargotec who bought a part of Nekkars business during 2018.

Moving to the balance sheet, Nekkar carries about 350 m of debt against 200 m of equity. Most of the debt is 190 m in pre-payments from customers, and 128 m in other current liabilities. Most (94 m) of the “other current liabilities stem from the Cargotec settlement. Nekkar have 6 m of property, plant & equipment, and they hold 460 m in current assets, of which 367 m is cash. Note that about 90 m of the current assets are pledged as collateral, which leaves Nekkar with about 28 m of cash available to shareholders.

Moving on to the cash flow statement, Nekkar has 134 m in operating cash flow, of which 56 m is changes in working capital. of this, 12 m was used in acquiring fixed or intangible assets, and 14 m cash outflow related to a sale of discontinued operations. Nekkar does not pay a dividend, and total net financial items paid was about 3.5 m.

In summary, Nekkar has what I would call a good business with great cash flow margins, and a solid balance sheet. 360 m of revenue resulting in 77 m of operating profit and 130 m of operating cash flow, low debt level, and a backlog of over 1 b.

At a market cap of 950 m and net current assets of 118 m, we get an EV of about 830 m, which gives us EV/S of 2.3 and EV/Operating profit of about 11.

This is what I call a good base to build from, and what are they doing with the cash? Nekkar announced that they are currently pursuing two new avenues for growth, first a solution called Starfish, aimed at the aquaculture industry, and one towards renewable energy solutions. The first is an automated cage for fish farming, supposed to significantly reduce operating costs for the aquaculture industry, and improve harvesting by reducing risk for stuff like sea lice and escapes. This is currently in testing with Lerøy, and is partially funded by Innovation Norway. Regarding the renewables solution nothing much is announced other than that there is a pre-study completed with an unnamed partners, and patent undergoing approval.

Since they just started a pilot with Starfish together with Lerøy in H1 2021 I assume there is still quite some time before real rolling out, but I hope to see some updates regarding this in each report. The renewables leg seem to be much further out, and I don’t expect any revenues from renewables in at least three years. For Starfish, I would hope to see the first real revenues in early 2022, but this is just pure guesswork. These two legs of Nekkar should probably be seen as two options for possible growth, and I believe there is good possibility for Nekkar to make one of these into a good business.

Finally, the largest owners are Skeiegruppen with a total ownership of more than 30% and Rasmussengruppen with about 10%. Skeiegruppen is represented by the Chairman of the Board Trym Skeie, and Rasmussengruppen is controlled by Gisle Rike who is on the board of directors.

That’s it, I think Nekkar is a great case, and it is one of the largest positions in my portfolio. To me, Nekkar looks like a growing business with good potential for reinvestment of cash flows, and have a great balance sheet. Large holdings by insiders, and the wet blanket regarding the Cargotec deal from 2018 has been lifted. I like the stock at the current valuation, even though it has had a massive run up during the last year.

I hope you liked this weeks edition of ValueTeddys Snap Judgements, and remember that none of this is financial advice and I’m not your financial adviser. I want to remind you that I own this stock and am therefore of course biased. I would love to hear your remarks on this, and remember to do your own research and don’t buy or sell anything based on what you read here. If you want to suggest stocks for me to look at, you can tweet @ValueTeddy, and do check out valueteddy.com.

Edit* I had originally overestimated the cash position when this was originally posted and have since corrected the balance sheet and EV section of this analysis.

Plejd (PLEJD)

For this weeks edition of ValueTeddys Snap Judgements we are taking a look at Plejd. A small but interesting business that has been massively popular on the Swedish part of my tweetmachine.

I want to start by recommending that you read two pieces of analysis if you find this much shorter write-up interesting.

1. @Aktiehesten (June 2020)
2. @AktieEntreprenören (April 2021)

Those two are MUCH longer and way more in-depth. They are both in Swedish so I hope Google translate can help.

Lastly before I begin, I want to remind you that the kind of write ups I do here are mainly on a “first-look” basis. They are supposed to conclude if the idea is at all worth reading up on further. It is not supposed to be as in depth as the two pieces mentioned earlier.

Plejd

Plejd is a small swedish company, with a market cap just north of 3.5 Bn SEK, and sales of about 270 m SEK. It trades under the ticker PLEJD, on one of my least favourite stock lists Spotlight (formerly AktieTorget). As for product description, I’ll leave that to this short description on their product website: “With our comprehensive range of lighting control, we offer products for most purposes. Starting with the first product installed, you will benefit from straightforward settings and light design. As you add more Plejd products, you will experience additional advantages compared to a traditional installation. With our wireless and robust mesh technology, it’s as easy to start small and expand your system over time as it is to install a large system in your entire home or business from the start.”

Moving on to the number, I want to point out that Plejd has been a 10 bagger in just a few years. It has been almost a 10 bagger since march 2020, and it has made a massive run up since I passed on this stock after reading Aktiehestens write up in June 2020.

Looking at just the returns might be off-putting, but it seems to have been coinciding with Plejd reaching a positive net result, which is not common for growth companies in an early stage. As for financial, I’m going to look at the most recent Q1 2021 and the 2020 full year report. Figures in SEK.

It seems Plejd had a massive Q1, net revenues grew 71% from 43,5 m to 74 m with an increasing gross margin from 52% to 55% AND increasing EBIT margins from 7% to 15%. It seems easy to attribute such a massive quarter to “easy comps”, but the Q1 2020 seems to also have been a massive improvement over Q1 2019.

Looking at the income statement, Plejd does capitalise some costs, presumably development costs. This is something I generally dislike, but in this case it is not seemingly egregious, nor is it the majority of the growth. In addition to the 74 m in sales, there are 7 m of capitalised costs, and 1.7 m of other income. The reported COGS are 33 m, which leaves 41 m of gross profit. The personnel costs were 21 m and they report other external costs of about 10 m. This gives us a rough overhead of 31 m, and cash operating profit of about 10 m, or about 13% operating margins. The comparable operating profit for Q1 2020 was about 1.5 m on 43.5 m of sales. Note that this excludes capitalised costs and depreciation. Financial expenses and tax costs are low and nothing that I’d raise an eyebrow over.

This is also supported by the cash flow statement, which comes to 12.8 m in operating cf for Q1 2021 compared to 6.2 m in Q1 2020. During the quarter, 7 m was reinvested in immaterial assets, and 2 m in material assets. Another 3 m was used in paying down leasing debt. This seems reasonable, and there is nothing here that looks off.

Looking at the full year 2020, Plejd reported 209 m in sales, 93 m in cogs, ~70 m in personnel costs, and ~33 m in other overhead. In other words gross margin was 55% (116 m), and cash operating margins of about 6% (13 m). Again excluding capitalised costs and depreciation. The reported cash flow for the full year 2020 was 34 m on operations, of which 31 m was reinvested in the business (27 m in intangibles, 4 m in tangible assets). There was a capital raise of 77.7 m and about 6 m was used to pay down leasing debts.

Moving to the latest balance sheet, there is 261 m of equity and 104 m of total debt. The debt level is covered by the cash on hand of 131 m, and the company has a huge net cash position when also taking the inventory and receivables of 40 and 43 m respectively. This is a very solid balance sheet in my eyes, which is incredibly rare for such a fast growing company.

Lets get a hold of ourselves and look at the valuation. The current market cap is about 3500 m sek, and subtracting the net cash position of 112 m sek we get an EV of about 3400 m sek. This gives us the following multiples on a rolling four quarters basis: EV/S 14, EV to cash operating profit close to 160, and EV to reported cash flow from operations 88. (using the following figures rolling 4 quarters sales: 238 m, cash operating profits: 21.5 m, reported operating cash flow: 38.6 m).

On a trailing basis, this is not cheap, at all. But that does not take into account the insanely high growth rate combined with the insane feat of expanding margins, remaining cash flow positive, AND having a rock solid balance sheet with net cash. I think Plejd can keep funding their future growth without need for more external capital, and I must say that I am very impressed by their financials. I am going to exercise self restraint and not give any lofty projections based on this short analysis, but I will say that it looks like an incredibly interesting case.

This is a stock that I unfortunately have dismissed before, and thereby missing it the first time (which would have been a 10 bagger) and the second time (which would have been 6x). I won’t repeat that mistake, and I am going to read up on Plejd and it will be added to my watch list. Out of all analyses I have done in the form of these Snap Judgements, this is easily one of the most interesting cases. If you found this as interesting as I did, I must urge you to read Aktiehestens and AktieEntreprenörens write ups. And then I must strongly recommend that you do your own analysis.

That was this weeks edition of ValueTeddys Snap Judgements. I hope you liked it, and remember that none of this is financial advice and I’m not your financial adviser. If you want to suggest stocks for me to look at, you can tweet @ValueTeddy, and do check out valueteddy.com.

Naked Wines (WINE)

For this weeks edition of ValueTeddys Snap Judgements we are taking a look at Naked Wines. A seemingly interesting business, that has been popping up here and there in my Twitter feed.

Naked Wines

Naked Wines sell a very wide selection of wines online, and they offer membership for some premium services. Overall the wine selection seems very good, and they claim to be able to service the smaller independent winemakers, which are too small to be serviced by larger players. Naked Wines also aim to offer lower prices than traditional players, because they cut out the middlemen such as importers and retailers.

The membership program, offers what seems like good value for those who regularly want to try out new wines. Members (Angels) get access to some exclusive wines, they get discounts on many of the wines. As an Angel, the customer supports the winemakers by putting at least 25 GBP per month towards their next order. This minimum deposit is 40 bucks for the US offer.

Furthermore, I note that something happened in 2015 that lowered the profitability significantly, and that recent years have been unprofitable. This seems to with some of the business’ history. In 2015 Majestic Wines acquired Naked Wines, and took the new name and ticker. Majestic Wines is the largest wine retailer in the UK, and in December 2019 Naked Wines divested this part of the business.

Moving on to the financials, all figures in GBP for the full year 2020 sales increased from 178 m to 203 m, and gross profit from 68 m to 77 m. This looks like good growth rates with intact gross margins. Unfortunately, Naked Wines are a couple of million short of operational profitability. Administrative expenses are unchanged at 47 m, and distribution costs have increased at the same rate as sales, from 30 m to 34 m. On the bright side, the operational loss is almost half of what it was in 2019. -5.3 m in 2020 compared to – 9.9 m in 2019. After tax and interest the loss totals -6.6 m in 2020 compared to -9.6 m in 2019. Note that these figures are on a continued business basis. Since the announced divestment, Majestic is accounted for as discontinued operations. Adding the total profit of Majestic of 14,8 m, the net result totals a little bit more than 8 m for 2020.

This is a good place to talk a little bit about how I go about analyzing businesses that are currently unprofitable on an operational basis. The first question I like to ask is “How much sales are needed to break even”. In this case, looking at 2019-2020, I note that the gross margin and the distribution cost increase at the same rate as sales while administration costs are unchanged. This is very good because it makes it possible to break even without any major change except for increased sales. Deducting the distribution costs from the gross profit, we get roughly 20% margins. Given that these presuppositions hold, Naked Wines need about 240 m of sales to cover fixed administrative costs of 48 m. Give a bit of rounding error, and I end up with a rough estimate that Naked Wines need to increase sales by 20% in order to break even. Note that this is on continued operations, assuming that the margins 2019-2020 are not decreased. To me, this looks quite possible. The second question is: “Can the growth be funded by the business or will additional external capital be required”. To answer this we need to take a peek at the balance sheet and cash flows.

First of all, the total debt is close to 80 m, which is more than well covered by the current assets alone of 130 m. Of which 70 m is in inventory and 54 m in cash. There is also 113 m of equity on the balance sheet. I would categorize this as a very solid balance sheet, and there are no red flags or question marks that arise on my first pass through.

In the cash flow statements, I note that the operations burned less than 1 m, and discontinued operations added 22 m. Looking at continued operations, I think it looks like the growth can be self funded easily. Even looking at the much worse 2019 cash burn of 9 m, this can easily be covered by the cash on hand. Moving on, there are lots of events that I deem one offs, for example a cash addition of 63 m from disposal of operations, and 22 m used to repay debt. There was also 3.7 m of cash used to pay a dividend, which I question in a company that should be focused on growing. At least the dividend for 2020 was lower than the 5 m used in 2019.

So using the assumptions regarding growth and margins, and extrapolating the 13% growth rate from 2019 to 2020, it should take about 2 years to break even. Given the current cash position and cash flows, this can easily be self funded. Now it is up to you, or whomever is considering this investment to asses if these assumptions are likely. The first assumption I would question is the growth rate, which I can only imagine being positively influenced by the pandemic.

No analysis is complete without a look at the valuation. Given a market cap of 650 m GBP, we get P/S 3.2, and P/Gross profit 8.4. P/Gross profit less distribution costs is roughly 15. Given a conservative figure of a net cash position of 50 m, the enterprise value is about 600 m. This gives EV/S 3 and EV to gross profit less distribution costs of about 14.

To me this looks like a very interesting case for several reasons. First, the business is interesting, both the market it serves and the connection between wine makers and wine enthusiasts, as well as the business model. Secondly, its not very expensive on first pass. And thirdly, lots of smart people on the Tweetmachine seem to like the case. However, it is traded on the LSE, which makes it a slight hassle to trade. Also, it has had a huge run in the last year, and i mean huge. It has run from below 3 GBP to well above 8 GBP, which causes some mental headwind in buying. All in all, I like the case, and I will be adding WINE to the top of my watchlist.

That was this weeks edition of ValueTeddys Snap Judgements. I hope you liked it, and remember that none of this is financial advice and I’m not your financial adviser. If you want to suggest stocks for me to look at, you can tweet @ValueTeddy, and do check out valueteddy.com.

Discovery (DISCA)

For this fourth edition of ValueTeddys Snap Judgements we are taking a look at Discovery, which has been suggested to me by a twitter follower. It is also a 5% position in Michael Burry’s portfolio according to Dataroma when I’m writing this.

Discovery

Ticker: DISCA
Market Cap: 20.4 b SUSD
Revenue: 10.6 b USD

Discovery is probably most known for Discovery Channel and Animal Planet, but the more general description is something along the lines of: Discovery provides paid television, free-to-air TV, broadcast TV, content licencing, and direct to consumer subscription services. In other words, they own and create content, and they also own several large networks. I won’t go deeper into all the IP and networks they own, but I suggest you give it a quick glance in the annual report.

Heading straight into the financials, we see that revenues are split between advertising and distribution. Other revenues are relatively insignificant. For FY 2020 total revenues were roughly 10.6 b USD, of which 5.5 b came from advertising and 4.8 b came from distribution. Total revenues are down from 2019 and roughly on par with 2018. The reason seems to be that the advertising revenues bounce around a fair bit, whereas the distribution revenue is relatively flat. Total costs for 2020 were just north of 8 b, which left operational income of 2.5 b. Nothing odd sticks out regarding the costs. All the costs seem to be quite stable during 2018-2020. Interest expenses have decreased from 700 m in 2018 to 650 m in 2020, and after tax earnings land on 1.2 b. I note that net income changes a lot from year to year (600 m in 2018, 2 b in 2019).

Moving on to the balance sheet, there is 12 b of equity, and 21 b in liabilities, of which 3 b is short term. The asset side contains 2 b of cash, and another 4 b in other current assets. What I don’t like seeing here is over 20 b of goodwill and intangibles. To me this looks like a rather thin balance sheet. There is lots of debt and lots of intangible assets, which I generally dislike. The total debt is 1.75 times the equity, and close to 10 times the operational profits.

Looking at the cash flow the first thing I examine in this case is how much of the operational cash flow is used to service the debt. The total operational cash flow was 2.7 b in 2020, and the total interest expense was 648 m. As far as I can tell from this brief overview of the financial statements, it seems like Discovery is revolving a lot of its debt. This is far too brief an analysis for me to evaluate if this is, or could be, problematic. It is however the first thing I would look at if I were considering buying the stock. Stuff like maturities and contingencies is probably the first thing, in order to gauge how bad a theoretical worst case could be. I’m not saying they are in trouble right now, and as long as they can keep refinancing the short term debt it seems fine. But I want to say it again, to me this looks like a stretched balance sheet. Lots of debt, and lots of intangible assets.

With that said, lets look at the valuation. According to Börsdata, Discovery is trading at 5x EV/EBITDA, 12x EV/Operating Cash-flow, and a P/S of 1.9. Ok so yeah, it’s looking kinda cheap. But it is actually close to its 5 year average EV/EBITDA of 4.6. Even looking back to 2011 the highest EV/EBITDA was 5.9 and lowest was 3.6. It actually traded at 4x in 2019. So it has been cheap for quite some time.

So to end this snap judgement, its not that clear cut. I don’t love the business personally, I see lots of competition to linear TV, and most of those options are better in my opinion. However, they are still earning lots of cash, and its not that expensive. They are however operating with what I deem a stretched balance sheet. Also, Dr Burry who happens to be a much smarter investor than me seems to like the stock… So do with that information what you like. I am adding Discovery to my watchlist, and I will take a harder look if they should fall to “distressed” valuation levels. I do see how many of the scenarios you can come up with seem likely. Both the doomy scenario where they simply shrink due to failure to compete with on-demand streaming services, and I see how it could be possible that they manage to keep generating cash and trade at a low multiple for some time. To summarise this case, it seems tricky, far from clear cut. Probably a good learning opportunity to try and take a good look at it, but I will put that off for now.

So that was the fourth edition of ValueTeddys Snap Judgements. I hope you liked it, and remember that none of this is financial advice and I’m not your financial adviser. If you want to suggest stocks for me to look at, you can tweet @ValueTeddy, and do check out valueteddy.com.

GomSpace (GOMX)

It’s Easter and thus this third edition of ValueTeddys Snap Judgements is slightly delayed. I hope you have had a nice holiday, and that you find this letter interesting.

GomSpace

Ticker: GOM
Market cap: 911 m SEK
Revenue: 194 m SEK

I remember a few years ago where space and micro-satellites was the big thing on Swedish FinTwit. GomSpace is one of those very hot stocks at that time, and it has seemingly come back to earth since.

First of all, this is a Denmark based company, but its listed in Sweden. It’s not dual listed in DK as well but its only listed in Sweden. This always raises an eyebrow, and I generally feel suspicious of companies listed in countries other than where their HQ is. Of course there might be cases where this makes sense, but I always feel it should be examined.

GomSpace is provide parts and subsystems for small satellites, as well as whole satellites and control software etc. This is not an entirely uninteresting sector, and its one where I think I could get a feel for the business and its competitors.

Moving to the finances from the full year as reported in the Q4 for 2020, we see a significant increase in revenues and gross profit. Revenues grew 42% from 136 m to 194 m and gross profit grew ~160% from 18 m to 47.6 m. However they are till making an operating loss of 30 m, which is an improvement compared to last years loss of 113 m. Looking at the operating costs, I note something interesting. Nearly every line item has decreased. This causes me to suspect something tricky regarding the sales cycle in this industry, but I might be wrong. In my experience it is challenging to increase revenues while at the same time decreasing SG&A costs. This should be something to look into before investing in this stock, since the decreased SG&A could be foreshadowing an upcoming decrease in sales.

So this is a company I would pass on simply since it is not operationally profitable. As far as I can tell, GomSpace need to double gross profit while not increasing overhead by anything in order to reach operating profitability. For the sake of the letter we are still moving on to the balance sheet and the cash flows, even though this is where I would pass.

GomSpace carries 102 m in short term debt and 53 m in long term debt, against 247 m of equity. On the asset side they have 65 m of pp&e and 214 m of current assets (of which 135 m is cash). The debt seems to be well matched against the assets. In other words there are short term assets to match the short term debt, and the long term debt seem to have funded long term assets.

Moving to the cash flows we see a net positive cash flow from operations of 43 m compared to a cash burn of 92 m the year before. When a company is like this, it is really important to look at what adjustments cause the operating loss to still provide positive operating cash flow. In this case, the largest adjustments are 1. depreciation and amortisation, 2. change in working capital, and 3. changes in financial items and tax received. If this were a deeper analysis, this is a point where I would put significant time and effort, especially in this case where the operating profits are negative and the operating cash flow is positive.

The D&A change is about same as last year nothing odd here, and the change in financial items and tax is roughly same as last year also. Being a net receiver of tax is not something one should rely on, and if the company turns profitable this is something that will change. Also, reversing financial items only makes sense when looking purely at operations, it is a very real cost. That leaves the changes in working capital, in this statement labelled as change in inventories, trade receivables, other receivables, and change in trade and other payables. It is normal for these line items to fluctuate, but in GomSpaces case the final line (trade and other payables) is a net cash contribution of 33 m, compared to a net cash deduction of 49 m last year. This is something we also can see in the balance sheet as a decrease of receivables and an increase in payables. This causes me to think that the net positive cash flow from operations might be temporary, and it is something one should take a close look at in this case.

With all that said, lets look at the valuation. GomSpace trades at about 250 times EV/EBITDA and a P/S of 4.7. Maybe I’m missing something here, but it looks to me like there is a lot priced in here. There are two big questions in these sorts of cases, 1. when will they be profitable, and 2. how much capital needs to be raised before that happens. In this short and brief analysis I have way too little information to answer either question, but to me it looks to be far out. However, they have cash on hand so they wont need cash immediately, and if they can keep operational cash flow positive it not impossible for them to reach real operational profitability. This does not look like a screaming buy to me, but its nonetheless an interesting case.

Parting words

So that was the third edition of this little experiment. I hope you liked it, and remember that none of this is financial advice and I’m not your financial adviser. If you want to suggest stocks for me to look at, you can tweet @ValueTeddy, and do check out valueteddy.com.

Dividends and Dividend Yield

In this post I am going to tackle dividends, and dividend yield. First I am going to focus on the capital allocation aspect of dividends, and then there will be a brief discussion about dividend yield.

Paying high dividends means that the company uses a lot of the cash it generates to pay dividends to the holders of common equity. Why I dislike this as an investment thesis might become clearer after we take a look at the five ways a company can allocate its capital. These five capital allocation decisions are:

  1. Reinvest in the operations
  2. Acquire businesses
  3. Repay debt
  4. Repurchase shares
  5. Pay dividends

A company with a large market up ahead, or a company in earlier stages will have no choice but to reinvest in the operations, such as developing new products or expanding geographically. An alternative to investing directly into the operations is acquiring another company. This is another topic, but there are both good and bad reasons for acquisitions. This is similar to reinvesting in the operations, since it requires that company thinks there is potential for greater profits if they scale up the business.

The company can also decide to lower the debt burden by repaying loans, or repurchasing bonds. This is equal to distributing cash to debt-holders. This alternative signals that the company thinks the level of debt is impairing the business, either because of bankruptcy risk, or because it hinders the business from taking action. This could also indicate that the business can’t find better investment opportunities than lowering the financial expenses. This is because a net cost reduction of 1$ is the same as a net gain of 1$.

The company can also buy back their own shares. This can either be done in a clever way, where the management believe their company is being undervalued by the market, or in less clever ways. It is quite common for companies to have predetermined buyback programmes, usually to offset the dilutionary effect of options or incentive programmes. There are also companies that use buyback as a part of their dividend programme, usually for tax purposes. Finally, there are buybacks where the company is buying back shares at a price which they determine is below fair value. It is this last option that can add value to the firm, since it is favourable for the company to buy their shares back from shareholders who are willing to sell, at a price that is below intrinsic value. This can also signal that the company is undervalued, given that the management has a history of good capital allocation. The others cases of share buybacks simply redistribute value from the company to the shareholders, and can possibly be destroying value for the company if it’s buying an overvalued asset.

Finally, the company can give the money to the shareholders. There are two downsides to this. First of all, it signals that the company cannot invest the funds at an attractive return within the business. The marginal return on capital within the business it less than the return the company assumes the shareholders can get on their own. Secondly, dividends also trigger double taxation, since the company has already paid corporate tax on the funds, and then the investor has to pay tax on the dividend received.

In other words, companies that pay high dividends in relation to their earnings, indicate that they have no good investment opportunities within the business. They cannot earn a higher return on their money than the investor can. A dividend is simply the company giving you money that you already own. If it is possible, it is better to reinvest it in the business, given that it is high quality, than to give it to the shareholders. In some cases you even see such inefficient behaviour as companies both issuing shares and paying dividends. In other words, taking money from shareholders AND paying out money to the shareholders. It is also not unheard of companies increasing their level of debt while paying a dividend.

Moving to dividend yield. To start, what information does the key ratio “dividend yield” carry? It is the cash dividend divided by the share price. Therefore, a higher dividend yield means that the dividend is larger in relation to the share price. This means that the price of the business is lower in relation to the dividend they pay. This makes it a measure of price, and not a measure of quality.

Buying companies solely because they have a high dividend yield is the same as buying it only because it looks cheap on a surface level. This disregards the quality of the company, and there are usually reasons why a company looks instantly cheap on a surface level. This approach is similar to picking stocks on the basis of a low price to earnings ratio. Low P/E stocks usually have a very good reason for trading at low multiples. Often along the lines of very low expected future earnings. This should lead to the conclusion that only looking at a stocks dividend yield is insufficient analysis of the business.

There are of however some merit to dividends. For example, there is nothing wrong with a business that has inherent lack of scalability or growth opportunities, but that still produces large amounts of cash. In such a case, paying the majority of cash flow as dividends is very wise.

The most important takeaways are the following:

  1. Dividends are not value adding in and of themselves, but they are not categorically bad. It is first and foremost one part of a deeper analysis of the managements capital allocation decisions. Bad allocation of capital can be devastating for a business, and it is one of the most important aspects to consider when determining the value of a business.
  2. Dividend Yield is a measure of PRICE, and nothing else. It is an inherently uninformative number by itself, and the analysis should start on the cash flow statement.
  3. The question to ask yourself should be “How much money is being paid out in relation to free cash flow, is it sustainable, and is there something more profitable they should put the money towards”.

To summarize this post, investing in a business that has an abnormally large focus on paying a dividend is equal to investing in a business that is not correctly evaluating all possible capital allocation decisions. In the long run this should lead to lower return on invested capital, and thus the overall return of the business. Now as I previously stated, paying a dividend is sometimes the correct allocation of capital, but promising a monthly dividend, or an ever increasing dividend can lead to poor decisions in the short term that weighs down the long term returns. The same issue also arises in the cases where companies blindly decide to follow one route of capital allocation without assessing the alternatives. Such as investing too heavily in a declining business, or pursuing acquisitions while disregarding the prospective returns on the target company.

Photocure (PHO), 11 Bit Studios (11B)

For the second edition of ValueTeddy’s Snap Judgements we have Norwegian pharma and Polish computer games.

Photocure

Ticker: PHO
Market cap: 3300 m NOK
Revenue: 250 m NOK

For Photocure we have continuously growing revenues, relatively constant losses, and steadily declining book value of equity per share.

Since this is some sort of pharmaceutical company, I have absolutely no way of understanding the business. Looking at the latest financial statements we see a moderate decrease in sales from 280 m to 256 m, and a high gross margin. Furthermore, there has been a significant increase in sales and marketing costs, which turned a profit of 42 m in 2019 into a loss of 23 m 2020. There are also a very significant increase in both financial income and expenses which should warrant a deeper analysis. Only seeing the decreasing revenues even though sales and marketing spend is up causes me to pass on this stock, but for the sake of this analysis we will take a look at the financial position and the cash flows.

Almost all of the non current assets are intangible, but there is a large amount of cash in the balance sheet. Equity is 508 m, cash is 334 m, and total debt is 267 m. Looks to me like there was recently a new share issue to raise capital.

Moving to the cash flow statement we see a net positive cash flow from operations of 15 m, but a huge cash outlay of 166 m listed as “Payment return of market rights Europe”. I have no idea what this means but it should be top priority if you are looking to dive deeper into this stock. We also see that the capital raise was due to a private placement of 301 m. This is also cause for concern, IF this was done on less than market terms, because then they might be favouring some investors over others. I have no idea if this is the case, but you should look it up if you are interested in this stock.

If you know me, you should know why I am hard passing on this, but I’ll say it for the record. Pharma stocks and any kind of biotech/med-tech stuff is almost always a hard pass for me.

11 Bit Studios

Ticker: 11B
Market cap: 1300 m PLN
Revenue: 90 m PLN

Here we have something way more into my wheelhouse. I love computer games, and I know 11 Bit have created some critically acclaimed story driven games such as This War of Mine, and Frostpunk.

Looking at the numbers we see high growth in book value per share, and a significant jump in revenue per share a few years ago.

The following is all from the latest 10Q which concerns the nine months ended 30 september 2020. First thing I check when looking at video game companies are the revenues. In this case there are no capitalised costs and very little other income. Total revenue for the period is 68 m compared to 49 m same period 2019.

Total operating expenses are 33 m , and the largest line item is “services” at 19 m . This sticks out but these are detailed in the notes as costs related to sales of third party games and royalty payments, which makes sense. Furthermore, both financial income and financial expenses increased significantly, which should require some examination if you are interested in this stock.

Moving to the balance sheet, 11 Bit are well capitalised with about 160 m in equity versus 28 m in total debt. Most of the assets are constitutes 80 m in cash and 32 m of intangibles. The balance sheet looks good on first pass.

The cash flow statement also looks good with cash from operations of 47 m, up from 44 m. However, for the 9 month period regarding 2019 there are significant adjustments, which should be examined. Furthermore, there are highly unusual items in the cash from investing activities, such as loans to employees (~2 m), and some 7 m interest expense, as well as deposits and proceeds of bank deposits. There are also ~22 m of purchase of pp&e and intangibles that are not explained further. Finally, there seems to have been a share issue of about 7 m.

So, to sum up 11 Bit Studios: they make great games, and I’m sure there are more to come. However, there are lots of footnotes that need careful reading in the reporting regarding this case.

Parting words

So that was the second edition of this little experiment. I hope you liked it, and remember that none of this is financial advice and I’m not your financial adviser. If you want to suggest stocks for me to look at, you can tweet @ValueTeddy, and do check out valueteddy.com.

Inari Medical (NARI) and JOYY (YY)

I recently started a new little project on Substack, where I do short snap judgements on stocks selected by you, the reader. Below is the first edititon of ValueTeddy’s Snap Judgements.

For the first edition of this little project I’m taking a look at Inari Medical and JOYY.

Inari Medical

Ticker: NARI
Market Cap 5333 m USD
Revenue 139 m USD

First of all I note that they have Medical in the name, which is way outside my circle of competence. I also note that it seems like they IPOd in May 2020.

Next step is to try and figure out what they do. This is cut from the lates 10Q: “Inari Medical, Inc. (the “Company”) was incorporated in Delaware in July 2011 and is headquartered in Irvine, California. The Company develops, manufactures, markets and sells devices for the interventional treatment of venous diseases. The Company received initial 510(k) clearance from the U.S. Food and Drug Administration (the “FDA”) in February 2015 for its FlowTriever system, used primarily to treat pulmonary emboli, and in February 2017 for its ClotTriever system, used for the treatment of deep vein thrombosis.”. In other words, medical stuff. I have no idea regarding this so we are moving on to the financials.

First of all I note that the balance sheet is in VERY good shape, and they are loaded with cash on hand. The liabilities totals 14m and the total assets are 205m, of which 168m is cash.

Moving to the income statement (all figures are for the nine months 2020 and 2019) I note that revenues tripled, from about 31m to 91m. I also note that they crossed the line from a operational loss of less than 1m to operational profits of 11m. Net profit is just shy of 7m.

This is very impressive. growing revenues by 3x while operational costs only doubled is a very good sign, and I do not see any oddities that would cause me to be suspicious.

Moving on to the cash flows, about half of the net income seems to end up as cash (3.5m) which is an improvement from a net cash burn of -4m. Almost all of this cash is used to purchase pp&e. We also get an explanation of the huge cash pile, which seems to be from the sale of shares related to the IPO. Some of those proceeds seem to have gone to repaying 30m of debt. I fail to see anything odd or questionable here.

So with that aside, lets move to valuation. EV/EBITDA seems to be 270, P/S 38, and a P/E of not so shy 405. Assuming revenue per share triples again, we land on a forward multiple of 12x sales. This is a pass for me, 90% because its in medical stuff, and 10% because of valuation. It is however incredibly interesting and worth a look if you feel confident investing in medicals. Note that this is priced for incredible growth in the years to come, in my humble opinion.

JOYY

Ticker: YY
Market Cap 186B USD
Revenue 3.9B USD

This looks to be a Chinese entity listed in the US, which is categorically a hard pass for me personally. The main reason is that I am not comfortable investing in companies where I don’t feel that I can understand the financial reports very well. However, I note steady increase in revenue per share, and in earnings per share. This company description cut from Börsdata makes me wanna think about this as ZOOM in China: “JOYY Inc., formerly YY Inc. (YY), is a social platform that engages users in real-time online group activities through voice, video and text on personal computers and mobile devices.“. I am in no way familiar with the services they offer, listed on Börsdata as: “It owns the domain names of YY.com, Duowan.com, 100.com, Huya.com, Edu24ol.com and Zhiniu8.com. The Company’s YY platform, including YY.com “. This is too far out for me to be able to understand the company in any good sense. The company does however seem to have incredible growth during the last 10 years, and they are priced for continued great growth. According to Börsdata the 10yr cagr in revenue per share is a whooping 50%, and with a P/S ratio of 47 this growth is expected to continue. This is not a stock for me, but if you have some insight into China then maybe this is for you.

*EDIT* Apparently the data I used is not accurate for JOYY, the market cap is significantly lower, roughly 8 B, and the company description has apparently changed. The Chinese parts of the business are divested and they are now mainly providing streaming apps in the south eastern parts of Asia.

Final words

That’s it for now. I hope you found this interesting and maybe there is some takeaway from me sharing a little bit of my process. Note that nothing here is investment advice, and I am not your financial adviser. If you liked this and want to suggest stocks for the next edition, please tweet @ValueTeddy.

Have a great weekend!
-ValueTeddy