This week we discuss a couple of stocks in the TAMIM All Cap portfolios that have under-performed yet, as our investment thesis still holds, potentially have huge upside.
Of all the stocks we decided to hold going into the February reporting season, all but two either met expectations or vastly exceeded them. So today we discuss the two laggards in the portfolio: Isentia (ISD.ASX) and Collection House (CLH.ASX).
Isentia provides media monitoring services to corporates and government agencies. The majority of revenues are subscription based (SaaS) and historically ISD has had strong cash flows and high margins.
Only three years ago ISD was valued at a billion dollar market cap but since then a lot has changed. The stock is down over 95% due to several successive downgrades, a disastrous acquisition, and a loss of focus on their core business by previous management. This allowed new entrants (Meltwater) to disrupt and capture market share, thereby creating margin compression.
So why do we like ISD?
Last year a new CEO and CFO have been appointed and a return to basics mentality was outlined in the recent half year result. This should lead to a reset earnings base in FY20 which from then on, if executed well, could deliver double digit earnings growth.
Part of the reason for ISD's loss of market share was a negotiated copyright fee agreement two years ago by the previous management that created a high fixed cost for the business. This cost base does not reflect the current commercial reality. A favourable interim tribunal decision on this agreement was announced recently which should deliver significant cost savings next year and the ability for ISD to compete better against its competitors.
Strategically ISD is potentially a “sitting duck” at the current ~$45M valuation. With a significant market leading share in the APAC region, it makes a lot of sense for global industry giants Cision and Kentar, and private equity firms to acquire ISD for a depressed valuation.
ISD provided guidance for revenue of $120-$125M and EBITDA in the range of $20-$25M. Cash capex is $9M and net debt will continue to be reduced from $40M. We estimate NPATA at approximately $7M compared to a current market cap of $42M. We value the stock at 40+ cents.
The bull case scenario for ISD is a return to growth and EBITDA margins of 20%+ which should deliver in excess of $10M NPATA. On a market multiple this implies a valuation of over 75 cents or 3.5x upside from here.
Collection House is the second largest debt collector in Australia. As with ISD, CLH was also mismanaged in the past. Fortunately a new management team and board were appointed almost 2 years ago and, with the help of a newly appointed data scientist and an in house legal team, CLH embarked on a complete overhaul of its business practices in order to increase and better acquire purchased debt ledgers (PDL) and, more importantly, to more efficiently extract higher repayment schedules from those customers.
An example of this is the recently launched debt repayment website portal that enables customers to set their repayment schedules for their overdue debts with no human intervention by CLH. The portal so far has been a huge success and is contributing 7% of all collections.
We see new management as being creative and entrepreneurial in what is typically a fairly non-innovative industry. At the half year result CLH delivered $66M revenues (+4%) and NPAT of $8.5M (+3%). This was slightly below market expectations from a full year run rate perspective. Management reaffirmed guidance of 15-15.5 cents EPS for full year and expects the collection services division to pick up delayed work from 1H in the second half of the year.
The key driver of a debt collection business’ future profit is its historical PDL purchasing levels. It is this metric that makes us quite excited for next year and beyond. Company guidance for total PDL purchases this year (including recent acquisitions) is $120M+. This compares favourably to previous years purchases of $60M on average.
Finally, the company has invested in Volt Bank, the latest APRA licensed retail Neo bank to launch here. The partnership is expected to deliver $3M+ EBIT next year from sharing customer data and providing clients to Volt.
Consensus estimates for CLH in FY20 are 17.5 cents EPS and with a consistent dividend of 8 cents and growing, we see the $1.30 current price as providing huge upside. As an example, Credit Corp (CCP) trades on over 15x PE multiple. We value CLH on a base case level in excess of $1.80.
The upside scenario for CLH is a multiple rerate to its peers after a couple of years of solid growth. In that case we see the stock trading in excess of $2.60 or 100% upside from current prices.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.