Great pitch ! Agree - this looks very interesting. Have you gathered any incremental information good / bad since posting this that you think is worth mentioning? Have your views on the stock changed at all?
Hi Amadeus, thank you so much for your kind words and my big apologies for replying late. My view has not changed much. If you look at their investor day earlier, you can sense they trying to make better disclosure and explanation on the adjustments, which I give them more credit. This kind of business is very hard to follow, so not much news. The 2023FY data were much in-line with my forecasts. They are ahead of their run-rate targets. So let's keep our fingers crossed.
I would suggest that you don't take the numbers that the management put out in its financial literature and run some of your own analysis. Adjusted Net Income and Adjusted EBITDA are simply ways for the management to say "We don't want you to look at this and we don't want you to look at that. Ignore the ugly numbers and everything looks just rosy!"
The share count is increasing at a rate of over 30% CAGR. That means that shareholders are being diluted by approximately 25% every year. So the value of the business needs to increase by that amount merely to keep your head above water as an investor (very few companies grow at that rate sustainably).
Top line revenue is growing, but it is all acquired sales. Anyone can buy another company and bolt on its sales. The trick is getting it at the right price so that it is accretive for shareholders. Return on invested capital in real terms is negative and getting worse. Asset turnover is in decline. Leverage is increasing. Net CAPEX is running at well over 150% of gross profit. Stock based compensation is more than 7x net income (so the management are taking out more than the business is producing).
Am I missing something here?
You say in your article "Alex Dacre... manages capital allocation and M&As with a bunch of youngsters"
I think that sums it up nicely. Perhaps its time to hand the management over to the adults!
Hi James, my apologies for the late reply. I understand your concerns and I'm not 100% sure they are innocent of them, so it's not the highest conviction or position of mine. But I believe they have addressed those issues, for example they explained the adjustments more in detail in the last investor day, which I think is a nice try. I entered in a relatively low price, and they keep delivering their 'make-up' metrics. So I'm still willing to wait a bit longer. Thanks!
I've studied several serial acquirers before. I saw someone mentioned the name on Twitter, so I took a look and found it has some of the good characteristics of serial acquirers.
Interesting story. Why is the group not generating cash-flow? (cash from operations represents only a fraction of EBITDA over the last 3 years, and is almost fully offset by costs capitalised) On paper the assets they have been assembling should be very cash generative?
Thanks for the question! Yes, they should be. They blame it to the restructions and acquisitions costs and claim those outflows are one-time in nature and will go away if they stop rolling up. And some former employees confirm that. If you add them back, the adj OCF as a % of adj EBITDA in FY21&22 mounted to 80% (I use the FY21&22 combined due to Covid impact), improving from 45-65% in the past years. So it's improving. Also those adjustments as a % of profit is declining over the years, which is a good sign. Marlowe targets a 90% cash generation ratio in the mid-term, but I only assume 80% going forward and it could generate enough cash for future bolt-ons. Though this is my assumption and it's important for the thesis. We need to watch how it delivers over time.
Great pitch ! Agree - this looks very interesting. Have you gathered any incremental information good / bad since posting this that you think is worth mentioning? Have your views on the stock changed at all?
Hi Amadeus, thank you so much for your kind words and my big apologies for replying late. My view has not changed much. If you look at their investor day earlier, you can sense they trying to make better disclosure and explanation on the adjustments, which I give them more credit. This kind of business is very hard to follow, so not much news. The 2023FY data were much in-line with my forecasts. They are ahead of their run-rate targets. So let's keep our fingers crossed.
I would suggest that you don't take the numbers that the management put out in its financial literature and run some of your own analysis. Adjusted Net Income and Adjusted EBITDA are simply ways for the management to say "We don't want you to look at this and we don't want you to look at that. Ignore the ugly numbers and everything looks just rosy!"
The share count is increasing at a rate of over 30% CAGR. That means that shareholders are being diluted by approximately 25% every year. So the value of the business needs to increase by that amount merely to keep your head above water as an investor (very few companies grow at that rate sustainably).
Top line revenue is growing, but it is all acquired sales. Anyone can buy another company and bolt on its sales. The trick is getting it at the right price so that it is accretive for shareholders. Return on invested capital in real terms is negative and getting worse. Asset turnover is in decline. Leverage is increasing. Net CAPEX is running at well over 150% of gross profit. Stock based compensation is more than 7x net income (so the management are taking out more than the business is producing).
Am I missing something here?
You say in your article "Alex Dacre... manages capital allocation and M&As with a bunch of youngsters"
I think that sums it up nicely. Perhaps its time to hand the management over to the adults!
Hi James, my apologies for the late reply. I understand your concerns and I'm not 100% sure they are innocent of them, so it's not the highest conviction or position of mine. But I believe they have addressed those issues, for example they explained the adjustments more in detail in the last investor day, which I think is a nice try. I entered in a relatively low price, and they keep delivering their 'make-up' metrics. So I'm still willing to wait a bit longer. Thanks!
Just out of curiosity, how did you find this stock?
I've studied several serial acquirers before. I saw someone mentioned the name on Twitter, so I took a look and found it has some of the good characteristics of serial acquirers.
Interesting story. Why is the group not generating cash-flow? (cash from operations represents only a fraction of EBITDA over the last 3 years, and is almost fully offset by costs capitalised) On paper the assets they have been assembling should be very cash generative?
Thanks for the question! Yes, they should be. They blame it to the restructions and acquisitions costs and claim those outflows are one-time in nature and will go away if they stop rolling up. And some former employees confirm that. If you add them back, the adj OCF as a % of adj EBITDA in FY21&22 mounted to 80% (I use the FY21&22 combined due to Covid impact), improving from 45-65% in the past years. So it's improving. Also those adjustments as a % of profit is declining over the years, which is a good sign. Marlowe targets a 90% cash generation ratio in the mid-term, but I only assume 80% going forward and it could generate enough cash for future bolt-ons. Though this is my assumption and it's important for the thesis. We need to watch how it delivers over time.