News

Fifteen Years of Forager and that Fifty Basis Point US Rate Cut

Quality Compounders that Keep On Giving

Quality compounders are companies that consistently achieve earnings growth and generate high returns on invested capital across different economic cycles. Approximately one-third of the Forager International Shares Fund consists of these businesses, which continue to execute, but still trade at attractive valuations.

One of the quality compounders to do well in the last financial year was building materials company CRH (NYSE:CRH). Its portfolio of “heavyside” materials, including aggregates and cement, is benefiting from increased funding in the US to restore the country’s deteriorating infrastructure. CRH also has significant pricing power from the very localised nature of heavy quarried materials, where expensive transport costs limit the shipping radius. Another part of our thesis was that following the company’s move to a US primary listing (from Ireland) last September, investors would start to close the discount that CRH has historically traded at versus North American peers. Whilst the discount has slightly narrowed, CRH still trades at around a 40% discount. There is still value to be realised. CRH added 1.4% to Fund returns last financial year.

Installed Building Products (NYSE:IBP), a market-leading insulation installation and distribution company, contributed 1.3% to the Forager International Shares Fund returns during the last financial year, despite a tough housing environment in the US. The company increased revenue by 5% in 2024, a year where broker estimates suggested the company would struggle to grow at all. Management’s strategy of buying small competitors and rolling hem into the group, improving buying power and removing overhead costs along the way, continues to add value for shareholders. While our investment thesis is playing out exactly as we’d hoped, very substantial share price appreciation means the value on offer is not what it once was. Wild fluctuations in Installed Building Products’ share price have given us plenty of opportunity to add to Fund returns over the past few years. We have reduced our weighting to this high-quality but cyclical business significantly over the past year as the share price more than doubled, and would look to add again on any weakness.

APi Group (NYSE:APG) continued its strong contribution for the second year running, adding 1.4% to Fund returns. The business was founded in 1926 as a small insulation distribution company and has grown organically and through acquisitions to become a market leader in safety and specialty services. APi Group continues to acquire smaller competitors and benefit from various secular tailwinds. Management has also proven its ability to integrate and turn around larger acquisitions such as Chubb, which has increased its scale and boosted returns since the company acquired it in 2022.

The Biggest Contributor - An Emerging Quality Compounder

Zeta Global (NASDAQ:ZETA) was the top contributor to the Forager International Share Fund during the last financial year, adding 2.1% to portfolio returns. With a limited public company track record, it took some time for the market to appreciate the growth potential and execution of this data-driven marketing technology company. The company’s ‘one-stop-shop’ marketing platform combines client data with proprietary data to generate customer insights used in multi-media marketing campaigns across SMS, email, display ads and social media.

Despite the challenging macroeconomic environment, Zeta has grown about 25% annually due to the usefulness of its proprietary data. Perhaps counterintuitively, its larger customers often view depressed business conditions as an opportunity to increase spending on the platform while their competitors are in a weakened state. Whilst the share price has appreciated more than 100% over the past year and we have reduced the Fund’s holding, it is still valued at a discount to peers and offers plenty of upside should management continue to execute.
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This is an excerpt from the Forager International Shares Fund section of the June Annual Report

Australian Shares

Macmahon's Bold Takeover: An Investment Insight Amidst Mixed Opinions

Riding the Small-Cap Wave: Opportunities Amidst Market Volatility

Breakfast Burritos and Boom Time Stocks

Let Your Winners Run: AI, Commodities, and Emerging Markets

The Fiserv Story: A Clover Thesis

During the March quarter, the Forager International Shares Fund invested in Fiserv (NYSE:FI). Fiserv is a global payments company offering an array of transaction processing solutions to various clients, from big global banks to your local coffee shop. It owns the third-largest debit network in the world, trailing only Visa (NYSE:V) and Mastercard (NYSE:MA). It also owns and operates Clover, a digital Point of Sale (POS) and payments system for small and medium businesses.

Clover is a key part of the thesis, having grown from nothing to more than US$270 billion of annualised Gross Payment Volume in a few years. Clover has been taking share from other merchant processors over recent quarters, including Square (ASX:SQ2) and Global Payments (NYSE:GPN), with Clover customers benefiting from a wide selection of value added services. Clover products don’t just facilitate payments but also allow merchants to track inventory, manage employees, process online sales and manage customer loyalty programs.

In 2023, Clover accounted for 10% of group revenues and the division is expected to grow 30% annually over the coming years. E-commerce growth has been an important source of growth in digital payments, with global transaction volumes rising significantly over recent years and likely to continue growing more than 10% annually over the remainder of this decade.

In addition, outsourcing amongst banks and credit unions has also contributed to the payments processing sector’s growth. The majority of Fiserv’s revenue comes from long-term, recurring contracts that generate predictable and strong free cash flow.

Fiserv Inc Share Price Premium (Discount) to S&P 500

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Despite impressive earnings growth over the past few years, the company is trading near a 10-year low price-to-earnings ratio. For most of the past decade, Fiserv has traded at a 20-40% premium to the broader S&P 500 index. However, along with industry giants like Visa and Mastercard, Fiserv faced challenges during Covid, which persisted into 2022 and 2023 due to concerns regarding consumer spending, the US banking crisis and, more recently, competitive threats.

Even though the company has consistently surpassed market expectations, its valuation has struggled to catch up relative to its peers. Investors currently seem overly focused on threats, overlooking strong execution and valuation fundamentals. For a business with a footprint of over six million merchant locations, serving ten thousand financial institutional clients and overseeing 1.4 billion accounts, there seems to be a current disconnect between price and value. The company’s earnings per share should grow faster than 10% annually, and perhaps faster than 15% over the coming years.

This is an excerpt from the Forager International Shares Fund March Quarterly Report

Australian Shares

Revitalizing Paragon: A Strategic Merger with CH2

We have meaningfully increased the Forager Australian Shares Fund’s investment in Paragon Care (PGC) during March. Cobbled together through acquisitions over the past decade, Paragon is one of Australia’s largest health care suppliers. Most acquisitions didn’t live up to expectations and the share price was languishing at a level that suggested the whole was worth substantially less than the shareholder capital spent putting it together.

The inevitable fix-it job was already underway. In early 2022, John Walstab merged his business, Quantum Health, with Paragon and ended up owning 19% of the combined company. Since the merger Paragon has been a small investment in the Fund. By the end of 2023, frustrated with its performance, Walstab had taken over management of the whole business. His efforts over the past six months were showing signs of progress in Paragon’s half-year result.

That was completely overshadowed by an announcement that Paragon would be merging with another distribution company, CH2. This is a deal that we like. A lot. CH2 is a privately owned company that has become one of Australia’s largest distributors of medicine and medical consumables. You might be familiar with the big players in this market: Sigma Healthcare (SIG), Wesfarmers’s (WES) API and Symbion, owned by New Zealand’s EBOS (EBO). They deliver everything from drugs to bandages and vitamin pills to the country’s pharmacies and hospitals every day.

These companies, including CH2, have been around a long time — replicating their distribution networks is almost impossible. CH2 was owned by Spotless in the early 2000s and part of a private equity/API joint venture until 2015, when it was sold to prior management.

That’s when everything changed for the company. API’s ownership of CH2 meant CH2 was unable to compete with API in retail pharmacy distribution — a market several times larger than the hospital market. Freed from those shackles, CH2 was granted a license to distribute drugs to pharmacies from 2017. From a standing start, it has picked up 7% of Australia’s $18 billion pharmacy wholesaling market and, in total, is expected to generate almost $3 billion in revenue this financial year.

CH2 Revenue and Earnings Before Tax

This is a low-margin business with relatively fixed overhead costs. As it has grown, CH2 has become increasingly profitable. It made $12.8 million of net profit in the 2023 financial year and is on track to make $16.8 million this year. We are confident that trajectory can continue.

Its three giant competitors all own or are aligned with retail brands. Sigma owns Amcal and intends to merge with Chemist Warehouse. API owns Priceline and Symbion owns TerryWhite Chemmart. CH2 is the only independent distributor and wants to stay that way, leaving it ideally placed to service a significant number of “non-aligned” pharmacies. Management estimates those non-aligned pharmacies represent some 44% of Australia’s total retail pharmacy sales.

That share probably falls over time — Chemist Warehouse looks like a genuine category killer. But we think CH2 can keep growing its share of a growing market for many years to come.

Profitability in its hospital distribution business should be helped by its acquisition of Sigma’s hospital business in mid 2023, leaving CH2 as one of only two players in that market. And, perhaps most importantly, the opportunities within Paragon’s existing business look significant. If the deal is approved by Paragon shareholders, CH2’s two shareholders will end up owning 57% of the combined entity. David Collins, CH2’s managing director, will take over management of the company and he and his co-owner will both take seats on the board. Walstab will keep his board seat and two independent directors will be appointed.

The ParagonCare Board, including Walstab, is supportive of the deal. Unless something significant changes, we are too, making it highly likely to proceed. At the stroke of a pen, Paragon will be transformed from a sub-scale distribution business with a patchy record of capital allocation to a profitable owner-manager company taking market share in a growing industry. And there should be significant synergies between the two companies.

Healthcare distribution is not an easy sector in which to operate. Sigma’s return on capital has been sub-par for a long time and API hasn’t been much better, even under the stewardship of Wesfarmers. There are risks associated with being a minority shareholder in a company controlled by management, including the inability to replace them if necessary. It might take several years for the benefits to become obvious and, given the insider ownership, the stock will remain illiquid for a long time to come.

On balance, though, this is a significant change for the better for Paragon shareholders. Collins is not taking a cent in cash as part of the transaction and will have his life’s work tied up in Paragon, making him heavily incentivised to make a lot of wealth for all shareholders.

We think we have finally found the right jockey for a horse that has been particularly difficult to ride, and have added meaningfully to the investment over the past month.

This is an excerpt from the Forager Australian Shares Fund March Quarterly Report

Timeless Tactics: Preparing Your Portfolio for Market Downturns

CIO Letters

A Simple Forager

Assuming the Australian Fund does get delisted, it will be the last element of a two-year project to simplify the Forager business.

By July 2024, we could be back to two simple open-ended funds with the same Responsible Entity and registry, both accepting daily applications and redemptions.

We are often critical of listed company managers for not focusing on their core strategy. I run a business with just 10 employees and I can inform you that it is easier said than done. It is very easy to add new ideas, products and technologies to your business. They all come with logic and rationale that makes sense. It is much harder to take them away. Consultants and strategy experts love to talk about “mission, vision and values”. I’ve found it mostly a waste of time. Boxer Mike Tyson once said “everyone has a plan until they get punched in the face”. In a business as dependent on financial markets as ours, you get punched in the face often enough to know there’s no point planning too far ahead.

That only makes it all the more important to understand the principles on which we operate, though. I have a similar conversation with a lot of young people about their careers. Many seem stressed about not knowing exactly what they want to do and ask me how I knew I wanted to be a fund manager. The answer is, I didn’t.

I knew I wanted to be challenged intellectually. I knew I wanted to do something I was interested in. I knew I wanted to work hard with people I liked and I knew I wanted to be financially independent. Within those parameters, I was open to wherever life took me. Each decision I had to make, I asked those four questions and made my choice. It could have led to an equally happy alternate life, but those principles led me here to founding Forager.

Rather than a destination, our business needs its own decision making principles. At Forager, we want to create wealth for our clients. We want to give Forager staff fulfilling careers. In recent years, we’ve learned that we want to keep it simple. By the end of this financial year, we hope to have taken some big steps forward on all three fronts.

This is an excerpt from the Forager Chief Investment Office Letter March Quarterly Report

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CIO Letters

Time for small cap investors to stop whinging

The 2024 year began the way 2023 ended. Globally, the MSCI World IMI Index (in AUD) rose 12.7% in the first quarter of the year while the ASX All Ordinaries Accumulation Index (including dividends) rose 5.5% over the same period. The composition of the rally changed meaningfully, though, with the Magnificent Seven becoming a magnificent five (Apple and Tesla both experienced share price declines over the quarter) and a significantly higher percentage of the market participating in the rally. More than half of the S&P 500 constituents traded at 52-week highs during the quarter.

Plenty of smaller companies have seen significant share price rises. There are reflections of the 2021 meme bubble in some Artificial Intelligence related stocks (I use the word “related” loosely). But, for the most part, I would argue there are often logical reasons for those that have risen to rise and those stocks that haven’t participated in the rally to be left behind. Companies that are delivering good results are seeing it reflected in share prices. Those that aren’t, aren’t.

Take a couple of examples from our own portfolios.

Utilities software company Gentrack (listed on the ASX and NZX) has experienced a fivefold share-price increase in the past 18 months. Its market capitalisation — less than NZ$150 million not long ago — is approaching NZ$1 billion. That’s all thanks to a dramatic turnaround in profitability and growth prospects. Gentrack went from losing NZ$3 million before tax in 2022 to making NZ$15 million in 2023. We expect that to at least double again over the next three years.

Over in the US, insulation company Installed Building Products has seen its share price more than double since October 2023. Our original thesis was that, despite facing a difficult housing construction backdrop in the short-term, this company had great long-term prospects. The weak housing backdrop hasn’t proven an impediment at all. Rather than a 2024 year of no revenue growth, as implied in prior broker estimates, the company’s recent guidance suggests 8% growth in 2024.

They have historically given conservative guidance. In the chart below, you can see the impact that has had on expectations for 2024 profitability.

Installed Building Products Share Price vs Earnings Per Share Expectations

On the flip side, two years ago antipodean tourism operator Experience Co was expected (by the broker community) to make more than $0.02 in earnings per share this financial year. It will be lucky to break even. And US outdoor brand Yeti has seen expectations for its 2024 profits slashed by 40% and its share price hammered as a result.

Yeti Share Price vs Earnings Per Share Expectations

The message for investors and companies is clear. There are plenty of smaller companies trading at appropriate or even optimistic share prices. If your company isn’t one of them, it’s time to stop whinging about small cap malaise and start focusing on what the business needs to do to be recognised. Deliver profits, cashflow and growth, and there are plenty of investors who want to own your shares.

Deliver broken promises and your share price will remain in the dumps.

You can quibble about the magnitude in both directions. We sold a meaningful percentage of our investment in both IBP and Gentrack due to valuation. We think the long-term story for both Experience Co and Yeti is delayed rather than destroyed (the investment in the latter was made after most of the downgrades). And there are exceptions where good progress is not reflected in share prices.

But, overall, the market mood for small caps has changed from outright pessimism to selective optimism. The opportunity for share price appreciation is significant for those companies that can give investors a good reason to invest. It is up to us to find the right stocks and companies to deliver results.

This is an excerpt from the Forager Chief Investment Office Letter March Quarterly Report

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Price gouging in Australia:  Is it happening, what can be done about it, and do investors need to worry?

The Deceptive Allure of Cash

This article was originally produced for Livewire Markets

In Homer’s epic poem The Odyssey, beautiful Sirens attempt to lure sailors off course by hypnotising them with their song and causing them to crash into rocks and land.

Is the allure of cash currently having a similar effect on investors?

With some banks now offering north of 5% on savings, cash and cash products have re-entered the thoughts of investors, after being absent for so many years of ultra-low interest rates. That’s good news for investors. It’s also good news for markets. The “hunt for yield” when interest rates were zero caused harmful distortions in the market for capital.

Yet higher rates on cash brings risks of its own. Five percent might be better than zero percent, but cash is still a horrible long-term investment. And that’s a lesson many investors are learning the hard way.

The Illusion of Current Cash Returns

In a financial world where there has been over a decade of low interest rates, it’s easy to get excited about the opportunity to earn what appears to be a decent return on cash. High-yield savings accounts, certificates of deposit (CDs), and money market accounts are currently offering annual percentage returns in the range of 5-6%, and in some cases even higher. These returns appear competitive when compared with the last decade of low-rates, leading some investors to favour cash as a safe and accessible means to grow their wealth or as a less risky alternative to equities.

Comparing Cash Returns Over Time

While the immediate returns on cash seem appealing, a closer examination reveals a different story. Cash rates are higher at the moment because inflation has been higher – this means the real rate of return on a cash investment, after accounting for inflation, is close to zero. As you can see in the table below, that’s always been the case with cash. At best you will retain your purchasing power. If inflation falls, interest rates will fall too, and your 5% return will become 3% or 4% before you know it.

Stocks offer much better real rates of return than cash and cash products over long periods. Stocks have generated an average real rate of return ranging from 6% to 7% annually over the past 100 years. You have been able to earn those returns plus inflation by owning these real assets.

Big differences over the long term

Four to six percent might not sound like a massive difference. But when the power of compounding works its magic, the differences become stark over time.

Let’s imagine two hypothetical investors: one who places $10,000 in a high-yield savings account at 5% annual return, and another who invests the same amount in stocks in an Exchange Traded Fund (ETF) with a 10% annual return (assume inflation of 5% plus 5% real return). After one year, the cash investor earns $500 in interest, while the ETF investor’s investment grows to $11,000. Not a huge difference over a year, so you might as well favour the safe haven of cash?

Fast forward ten years though, and the cash investor’s $10,000 has grown to $16,386. That’s not buying any more than it was. The ETF investor’s investment has ballooned to $25,937 – a much greater difference to the cash return – showcasing the true advantage of higher returns over time, and in turn providing a real rate of return after accounting for inflation.

The Compounding Conundrum

Now, let’s take this comparison to a more extended time frame, say 25 years. The cash investor’s $10,000 has grown to $33,864, a seemingly impressive feat. However, the ETF investor’s initial $10,000 has now grown into a huge $108,347. The gap between the two investors’ returns is now strikingly wide. At 30 years, the cash investor would have $43,219 versus the ETF investors $174,494.

This phenomenon is the essence of compounding. While cash investments may provide an appealing yield in the short term, their low real rates of return limit the potential for long-term growth.

The Cost of Safety

Many investors understand the maths above. Their strategy is not to be invested in cash for the long term, but to park their money in cash until the outlook for equities improves. That’s perfectly understandable. When bank interest rates first hit 5% in mid 2023, equity markets were in a tizz. With recession looming and inflation running riot, who wouldn’t be attracted to the safety of a government guaranteed bank account?

Well, me for one. The “wait till the coast is clear” approach is the most pervasive, wealth destroying, unshakeable investor mindset I see. And there is no better example than the past 12 months.

Feeling a bit better about the world? Inflation seems to be subsiding. The economy seems to be holding up ok. The RBA is talking about the potential for rate cuts.

Well, I’ve got bad news for you. Stock prices have since surged, making it 20% more expensive to buy back into the market than when you were feeling worried. In the US and Australia, equity markets are at all-time highs.

Combine this with the prospect of lower rates on cash and the investor is hit with a double whammy that could potentially cost years worth of returns.

The Allure of Cash may be Enticing Today, but..

Cash, of course, plays an increasingly important role in most investors’ portfolios. Their priority should be an asset allocation plan (this may change as an investor reaches different stages in their life, and should include a growing allocation to liquid assets like cash over time).

Once you have a plan, though, it needs to be stuck with, through thick and thin. Odysseus (from our famous poem) went to the lengths of strapping himself to the mast of his ship and getting the sailors to plug their ears with beeswax so they wouldn’t be distracted by the song of the sirens. By doing this, Odysseus managed to sail unscathed through the notorious straits between Sicily and Italy. Whilst we don’t suggest strapping yourself to a mast any time soon, it’s worth remembering this story if you ever consider wavering from your investment strategy during future times of market panic. The allure of cash in times of distress is nothing more than that, an allure that should be avoided.

References: Sirens in the Odyssey

Fear and FOMO: How to go against the crowd by understanding investing psychology

A Rollercoaster Year: The Flutter Case Study

In Forager’s December 2023 CIO letter, Steve Johnson talked about increasing volatility and reduced focus on intrinsic value:

“I don’t think any rational person is changing their valuation of the market by 20% based on one month of inflation data. Rather, financial markets are being dominated (more than ever, in my opinion) by money that doesn’t care what stocks are worth, only where they are going to trade in the short term. The computer says rates up equals sell. The computer says rates down equals buy.”

It’s a tale evident in both markets and individual stocks. Global online gambling giant Flutter Entertainment (LES:FLTR), held in the Forager International Shares Fund (the Fund), is a topical case study.

While Flutter owns market-leading positions in the UK and Australia via the Sportsbet brand, its most valuable segment is its number one position in the growing US market. The Fund first invested in late 2021 on the thesis that it was establishing a leadership position in the US market and would grow immensely over the coming years.

That thesis quickly became mainstream and the stock price rose significantly over the second half of 2022 and the first half of 2023. The Fund sold many of its shares by the first half of 2023, although it remained an important investment. Then, in the second half, Flutter shares commenced a gradual but persistent decline, down almost 30% by November.

There were genuine concerns to ponder. After a period where Flutter’s FanDuel brand had it perhaps too easy, competitor DraftKings (NASDAQ:DKNG) has proven a resilient number two player. FanDuel’s brand grew revenues significantly quicker than DraftKings over 2022 and the first quarter of 2023. But DraftKings grew faster during the 2023 northern hemisphere summer, coinciding with the legalisation of online gambling in Massachusetts, DraftKings’ home state.

Draftkings’ improved performance might have nudged our valuation of Flutter down a couple of percent. It’s mostly been a case of both companies winning market share at the expense of smaller players. Consolidation is going to prove good for the bottom line.

Flutter’s mid-January trading update put many concerns to bed. The company claimed a fourth quarter sports-betting market share of 51% (based on net revenue). Perhaps more impressive has been its growth in iGaming. As a sports-led brand, FanDuel has been a laggard in iGaming behind casino-focused BetMGM and DraftKings. But over the past 18 months, it’s grown iGaming market share from 19% to 26% and has now claimed the number two mantle for the first time.

FanDuel achieved scale and profitability before anyone else in the American market, and we expect Flutter overall to continue growing rapidly.

The stock, formerly listed in both London and Ireland, abandoned its Irish listing and listed on the New York Stock Exchange in late January. New York will likely become its primary listing in short order. The stock is grabbing a lot more US attention than it used to.

We added to the investment in late 2023, although less aggressively than we ought to have. Flutter’s share price is up 35% since the recent lows in November, bringing to mind another quote from Forager’s CIO’s December missive:

“All of this focus on the next data point, however, makes the job somewhat easier for the investor with a longer investment horizon. The more the weight of money is focussed on the short-term, the more opportunity there is for those with a longer-term view.”

This is an excerpt from the Forager International Shares Fund January Monthly Report

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Six years, six baggers and four important investment lessons: The Blancco investing story

In late 2017, there weren’t many buyers of Blancco Technology Group. The CEO had just been fired, the company had overstated its revenue figures, its financial reports were delayed, and the share price had fallen over 80% in a matter of months. It’s understandable why most investors were running for the exits. The International Share Fund team at Forager, however, were willing to take a look.

Forager’s investment in Blancco was ultimately one of the Fund’s most successful in its 11-year history, ending with a tense fight for the company’s future where it was eventually taken private.

So what attracted the investment team to Blancco? And what lessons are there to help identify the quality turnaround stories from the duds?

History of Blancco

The company’s roots are in Finland, where in the 1990s two business partners developed software to permanently delete the contents of a hard drive at the end of a computer’s life. Over time, the process was tweaked to deal with different types of hardware – computers, laptops, tablets and mobile phones – and different types of drives.

Specialised IT Asset Disposal firms (ITADs) and large corporate clients deal with mountains of used hardware each week. If data security means anything to them, they’ll want to clear all those hard drives before recycling or re-selling their old hardware.

That can be done in one of three ways: by physically destroying the hard drive; by ‘scrubbing’ or overwriting the device (often multiple times); or by using software to methodically clear the drive in a process that is irreversible by hackers. Some such software is available online for free. But if you want a reliable audit trail and a guarantee it’s been properly cleared, you’ll use a piece of paid erasure software. Overwhelmingly, Blancco is the global leader in paid erasure. Its customers buy licences typically linked to usage, and repeat business is extremely high.

Only scrubbing and erasure software leave a hard drive intact for reuse or recycling, a growing tailwind for the business.

The Opportunity

Up until March 2017, the business had been trading well. It had exited some of its other business operations to become a pure-play software company and its share price rose to 300p. In the following months, however, Blancco’s board began dropping clues that their reported revenue figures may not be entirely accurate.

April 2017 trading update

In April, commentary from management was that everything was going swimmingly. Sales were up 48% year on year and 34% for the 9 months to 31 March. Then they slipped in this paragraph:

“Since the interim results on 14 March 2017, the Company has undertaken a review of its cash flow forecasts. The Company has identified that costs associated with past acquisition activity, including earn‐outs and advisors’ fees, the later arrival of a large government contract and the slipping of larger contract deals to later in this current quarter will all build pressure on the forecasted cash available to the Company during Q4.”

Odd. Not great, but not the end of the world.

July 2017 trading update

Revenues were up 40% for the year, and 30% on constant currency. A slowdown on the previous quarter but still robust. Then the big gremlins started to come out:

“However, cash flow and net cash are below market expectations due to the non‐payment of £3.5m of receivables, the majority undertaken in the prior year. Taking a prudent approach to these receivables we have decided to provide against them by taking a charge of £2.2m, resulting in Adjusted Operating Profits of not less than £5.5m and Adjusted EBITDA of not less than £7.0m (subject to fully closing the accounts and audit). This reflects the Group’s intention to apply a more prudent approach to revenue and income recognition on this type of contract in the future.”

They seemed to be suggesting the previous year’s revenue was overstated. Yet the worst was still to come.

September 2017 trading update

“Blancco Technology Group Plc announces that, following matters that have recently come to the Board’s attention, the Board has decided to reverse £2.9m of revenues represented in two contracts that had previously been booked during the financial year ended 30 June 2017. As a consequence we now expect revenues for the financial year ended 30 June 2017 to have increased by approximately 29% over the prior year, approximately 15% in constant currency. This correction means that Adjusted Operating Profits will be not less than £2.6m and Adjusted EBITDA not less than £4.1m for the financial year ended 30 June 2017 (subject to fully closing the accounts and audit). Cash flow for the financial year is not impacted.

Pat Clawson, Chief Executive Officer, has decided that it is in the best interests of the Company that he should step down from the Board with immediate effect. Accordingly, he will be leaving the Company and Simon Herrick, our interim Chief Financial Officer, has agreed to become our Chief Executive Officer on an interim basis.“

Subsequently, the company’s full-year results were deferred to an unspecified date while they tried to work out exactly what the revenue was. By October that same year, the company was trading at 48p a share, down 84% and trading at one times revenue.

Inflated revenue figures, a delayed full-year report, no CEO and a share price down 84%. It was understandable why there were few buyers of the company at the time. Many were selling due to fear, others were no longer permitted to own it due to the accounting issues. The stock price fall might have been entirely justified, but it was also fertile ground for overreaction. Our analytical focus sharpened. We talked with one of the founders, with sales executives and with customers.

Sure, the problems were real but obvious. But we developed confidence that Blancco remained a growing business with significant tailwinds, happy customers and strong profitability. We laid out the following reasons in our internal 2017 research note:

Despite overly aggressive revenue recognition, the business is clearly growing.
Most of the revenue is recurring. In the 2016 financial year Blancco retained 91% of its clients and increases in revenue from the remaining clients more than offset the 9% lost. Once this software is embedded in a company or government department it is likely to be very sticky
With a significant R&D budget and existing patents, it could outspend and stay ahead of the competition.
The business was and should be high margin. Most of the cost increases in recent years have been people and that should be relatively easy to reverse.
One times revenue is a very low multiple for a business that has been growing quickly and should be high margin (20-30%+). It could easily be worth four to six times revenue.
Blancco and its customer base make for a very logical acquisition target

At this point, we made an initial investment in the company right into the teeth of the market panic. On several days, we were the only buyer, buying 100% of the shares traded on the exchange. It’s quite likely the share price nadir would have been lower without our buying, but when it’s bargain basement time, you take the liquidity you can get.

Increase weightings with increased confidence

A new CEO, Matt Jones, joined the business in March 2018 and released his first set of results a few months later. This also included an updated strategy for the company. These results confirmed that Blancco’s problems were temporary. And the updated strategy was simple: focus on what the company already did well. These developments helped confirm the team’s initial thesis.

At this stage, six months after the share price nadir, the stock was already up 50% or so. We not only held on tight but bought more shares. The risk had fallen a lot, and the risk-adjusted potential returns had improved.

During the next couple of years, by June 2019, Blancco moved firmly out of recovery mode and into growth mode. Sales and profit expectations for the financial year 2019 were upgraded and, more importantly, the company began investing sensibly in both new product capabilities and improved sales channels. By June 2019, Blancco was a 10.3% weighting in the Fund, having risen 73% during that financial year.

“Let your winners run” is one of those trite sayings that is wrong as often as it is right. But business valuation is an inexact science and risk is a variable. Forager’s “upside” valuation didn’t change dramatically through this period, but the probability of that case unfolding increased dramatically alongside Blancco’s growth, profitability and cash flow. Conversely, the likelihood of our downside case arising kept getting smaller. This reduced the risk of the investment and increased our team’s confidence, justifying a much higher weighting despite the higher share price.

In the latter stages of 2019 and into 2020, we sold a lot of shares, pushing down the weighting despite continued strong share price growth.

Portfolio management matters

By June 2021, Blancco had increased meaningfully for the fourth year in a row, with its share price rising in line with Forager’s investment team’s estimate of its value. Things were looking good for the business.

In the middle of a tech bubble, though, enthusiasm was running high. While still liking Blancco’s prospects, it no longer justified a maximum weighting. By number of shares held, we’d already sold more than 70% of our peak holding from 2 years earlier.

That proved fortuitous. In both financial years ended June 2022 and 2023, Blancco’s share price fell. Prior selling meant that, in the latter months of 2022, we were able to start adding to the investment again. We should have bought more aggressively.

A Frustrating Ending

Unfortunately, it wasn’t just the investment team at Forager who were optimistic about the future of Blancco. These “good years ahead” came to a rapid conclusion.

In mid 2023, Francisco Partners put in a bid for the shares of 223p in order to take the company private. Although this was an uplift on the share price at the time, the team at Forager believed it massively undervalued the company.

The team worked hard to convince other shareholders and the Board at Blancco not to accept the bid, as there was still a huge opportunity for years to come. The fact that shareholders collectively couldn’t see that opportunity as a listed entity cost us all dearly.

There were a few factors going against us. Firstly, UK stock markets are depressed. The bulk of Blancco’s revenue came from elsewhere, but UK institutions were an important part of the shareholder base, and they’ve had a rough few years. They also have lots of cheap investment opportunities to redeploy capital into.

And while we didn’t know it at the time, Blancco’s second largest shareholder was contemplating winding up its operation and returning proceeds to investors. Immediate liquidity was more important to it than absolute price.

Ultimately, the bid went through in October and the battle was lost. Although, arguably, we won the war.

Lessons from Blancco

They say you learn the most from mistakes but successes can be instructive too. This investment contained both. We give ourselves an 8 out of 10 in this stock. We should have sold the lot in mid 2021 and we should have bought a lot more in late 2022 and early 2023. We were also never entirely happy with the makeup of the board, and should have worked on that more aggressively over our years of ownership. But we got a lot right too. Blancco has been a great success for Forager investors and a treasure trove of lessons for all of us.

General lessons? Developing a thesis that is both contrary and, ultimately, correct is everything when it comes to stock market outperformance. It’s periods and locations of immense pessimism where such opportunities are most likely to be found. Just because a stock is down 80% doesn’t mean the market has it wrong. But it’s a very good place to concentrate one’s analytical efforts.

Due diligence is crucial here, it can enable you to confidently turn a loose theory into a firm thesis. And you’re going to want a firm thesis if you’re buying what everyone else is selling.

Don’t forget risk management, but also rework your odds as new information arrives. Just because a stock has doubled since you bought it, doesn’t mean that the risk/reward equation has deteriorated. Sometimes, often even, that’s exactly the time to be max sizing your position. The real money is made by having the biggest weighting at the right time.

Managing position size as your perceived edge grows or shrinks, that’s a key lesson for both profit maximisation and risk management.

*For more information on the takeover offer see: Open Letter to all shareholders in Blancco Technology Group

**The takeover was also discussed in this podcast episode and in our Fund Update Webinar.

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Wild 2023 market swings: Uranium prices surge to nuclear highs and small caps start to recover

From the Australian Institute of Sport to the NBA: How this Aussie small cap is making a name for itself

What our trip to the US and Japan is telling us about the economy: Insights from the road

Why higher rates are good for the world (and which stocks can do well)

Running with the Uranium Bulls

Open Letter to all shareholders in Blancco Technology Group

⁷https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/mandiant-multiple-sets-pace-for-cybersecurity-m-a-in-2022-69478262

Dear Shareholder,

Francisco Partners board approved offer for Blancco is undervaluing your shares

Private equity firm Francisco Partners has made a cash offer to take Blancco private for 223p per share. The bid has been endorsed by Blancco’s board of directors. Two large shareholders have offered irrevocable undertakings to accept the deal unless another bidder offers at least a 10% higher price. A third has given a non-binding letter suggesting it intends to accept the offer¹.

A fund managed by our firm, Forager Funds Management, owns 2,365,271 shares in Blancco, representing more than 3% of the company’s equity. Forager is a top 10 shareholder and has owned stock in the company since 2017.

It’s our opinion that the 223p offer price significantly undervalues the potential in Blancco’s business.

Our base case valuation is more than 30% higher than the bid price. Our top end valuation is significantly higher again, and doesn’t lean on any heroic assumptions.

Blancco is a quality tech company

You can make your own discounted cash flow model. But we wanted to share some thoughts relevant to valuing this company, in case you find it useful in forming your own opinion about the proposed takeover. Consider this:

1. Revenue growth is inflecting higher. Blancco has grown revenue at a compound annual growth rate of 12%² over the past five years. But that’s while carrying a Mobile segment that has disappointed – barely growing revenue over that period. With each passing year, the Mobile segment is becoming a smaller part of the pie, from 36% of company revenue in 2018 to an estimated 23%³ in 2023. The much faster growth coming from the Enterprise and ITAD segments will accelerate overall company growth.

2. Profit margins should rise from here. Blancco’s adjusted EBITDA margins have increased from 20.4% in 2018 to an estimated 29.5%⁴ in 2023. Those margins should and will continue to rise. The gross margin on Blancco’s products is more than 95%. Much of its remaining cost base is relatively fixed in nature. The incremental margin on sales over that same five-year period was above 40%. It’s not unreasonable to expect this margin to trend towards that level over time, relying on no change in current trajectory. And there’s an immense amount management could do proactively to further improve margin from there. You can bet Francisco Partners have a list of such actions ready to go after settlement.

3. Untapped pricing power. Related to points 1 and 2 above, Blancco has significant pricing power that has historically been untapped. Software-as-a-Service (SaaS) customers are becoming increasingly accustomed to annual price rises. Blancco has rarely pulled that trigger in the past, with revenue growth closely linked to volume growth. That might be changing. Enterprise and ITAD customers have both experienced price rises over the past year. Blancco’s dominant global share in paid erasure software and extreme customer loyalty provide the foundation for modest annual price increases going forward. Even a 5% annual price adjustment will meaningfully add value for shareholders – the drop through to profit should be almost 100%.

4. Strengthening ESG tailwind. Blancco helps customers secure their data, and the increasing importance of data security barely needs mentioning. The environmental pitch to customers is also growing more relevant with each passing year. Blancco already counts some of the largest technology firms globally as customers. Among those tech giants, an unsustainable proportion of their used hardware is still shredded rather than cleared then recycled or resold. See the Financial Times article Why Big Tech shreds millions of storage devices it could reuse from 6 October 2022 for more insights. Blancco’s revenue from its existing customer base alone will likely grow at an impressive rate, based entirely on volume increases.

Undervalued on historical multiples

In addition to the fine business attributes outlined above, which you may want to incorporate into your own thoughts on value, here are some other metrics that make the case that the current bid is substantially too low.

Francisco Partner’s bid is pitched at an Enterprise Value to current year (2023/24) estimated EBITDA multiple of just 11 times⁵. Despite the board’s rightful concerns about the lack of investor appetite on the AIM market, Blancco shares have traded well above that multiple for most of the past five years.

Also note that versus the broader software index⁶, Blancco has traded at a premium for much of the past five years. But it’s not currently, despite the 25% deal premium. It is hard to imagine that disconnect wasn’t a factor in the timing of Francisco’s bid.

Transaction data

Other takeovers are even more telling. There have been plenty of transactions done for relatively similar businesses in the software and cybersecurity markets globally over the past few years.

The cybersecurity market in particular has been hot. Where deals are being struck, it’s typically at mid-to-high single digit multiples of the last 12 months’ revenue⁷. Broader software multiples are a little lower but still well above the 3.4 times revenue implied in Fransico’s offer price⁸.

Businesses of Blancco’s strong and improving revenue growth, mature margin potential and customer loyalty (recurring revenue) don’t tend to get sold for 3.4 times expected revenue or 11 times expected EBITDA⁹, as the Board is proposing to do here.

We’ve collected details of a few transactions that offer some degree of relevance. To avoid any accusations of cherry-picking, we’ve ignored any deals greater than US$1.5bn, focused mainly on targets outside the US where the spotlight shines less brightly and have only considered deals inked in the past 9 months.

In comparison with Blancco, the following list includes a fair helping of businesses that are lower quality, with a lesser growth outlook and lower to non-existing profitability. And yet they point to solidly higher valuations. Four times revenue would still be cheap. Five times would be closer to fair.

Frustration is not a reason to sell too cheap

Over the past two years to 30 June 2023, Blancco has grown revenue by 30%, while its share price fell more than 40%.

Forager acknowledges the board’s concerns about liquidity and the wider pool of investors and potential investors not properly recognising Blancco’s value. We share their frustration and other large shareholders clearly feel likewise. But accepting a miserly 25% premium over the pre-bid share price is not the way to correct it. The bid price doesn’t properly bridge that undervaluation, and indeed solidifies it.

If the right time to sell the business is now, shareholders must get an appropriate valuation for their shares.

Best and highest offers

It is in our individual and collective interest for a sale process to be allowed to play out in a way that ensures maximum value for all shareholders. That doesn’t mean blindly accepting this first bid.

There are surely other private equity and trade buyers who would have interest in a business of this quality. If the board is convinced a sale is the best way for shareholders to maximise value, we have concerns that this asset hasn’t been thoroughly shopped to a sufficiently long list of potential buyers. We want a fuller, more detailed process to explore that on behalf of all existing shareholders, incorporating the use of additional third-party advisors to guide it through this process. That’s an issue Forager will take up with the Board directly, and you may consider doing likewise.

If, after a full and complete sale process, Francisco is the only bidder currently interested and 223p is all they are willing to offer, then the board should focus on growing the business and selling it for significantly more in a few years’ time.

The board of directors will need to buckle down and ensure Blancco has the right management team and indeed board composition to take it forward. The business needs to grow revenue above that seemingly magical US$100m mark where markets and bidders start to pay real attention. At that point, if the stock is still being ignored on the AIM market, the board can move the listing to a more discerning market like the NASDAQ or seek a bid then. Blancco could top US$100m annual sales within 4-5 years via organic growth alone. This is an area where patience should pay. It would not be unreasonable to expect to crystallise multiples of this bid price should that growth occur.

If large shareholders have had enough

Forager is also perfectly happy continuing on as a minority shareholder with a large talented private equity firm as the major shareholder, be that Francisco Partners or someone similar. In the offer documentation, Ravi Bhatt of Francisco Partners said:

“Sustainability and e-waste reduction are increasing strategic priorities for customers of all sizes globally, and we see tremendous organic and inorganic growth opportunities for Blancco worldwide.”

We couldn’t agree more.

We’ve long thought that more can be done at Blancco to drive the business faster. If today’s large shareholders disagree, let them move on and bring in someone with vision and a plan. Forager would certainly appreciate a like-minded larger shareholder on board, and are more than happy to swap notes if anyone cares for our thoughts.

But our initial thoughts on this bid price is that it’s inadequate. There’s no obvious premium for control. And our opinion is that shareholders will do better continuing to own their shares than to sell out for 223p today.

If any shareholders, media or potential bidders want to get in contact with us to discuss further, please do. You can reach Gareth at gareth.brown@foragerfunds.com and we’re happy to set up a call.

Footnotes

¹See Blancco release Francisco Partners II – Recommended Cash Offer of 2/8/23

²Uses market estimate revenue for the year to 30 June 2023 of £47.5m

³Forager internal estimate

⁴Uses market estimate EBITDA for the year to 30 June 2023 of £14.0m

⁵Uses market estimate EBITDA for the year to 30 June 2023 of £14.0m

⁶S&P500 Software Industry Index

https://momentumcyber.com/docs/Quarterly/Cybersecurity_Market_Review_Q1_2023.pdf

http://cdn.hl.com/pdf/2023/cybersecurity-market-update-first-quarter-2023.pdf

⁸Uses market estimate revenue for the year to 30 June 2023 of £47.5m

⁹Uses market estimate EBITDA for the year to 30 June 2023 of £14.0m

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The Revolving Door of the Aussie Share Market

It’s been a busy, record-breaking year for the Australian share market. Not only did the S&P/ASX 200 close out its best financial year in two decades, but initial public offerings (IPOs) and mergers and acquisition (M&A) activity also reached new highs.

So, where might opportunities lie in this avalanche of prospectuses and scheme deeds?

On the way out

M&A activity in 2021 has eclipsed the 2007 record, with corporate acquirers driven by cheap interest rates, low leverage at many listed companies, and an imperative to grow earnings. Meanwhile, private equity firms are sitting on a mountain of cash and super funds have entered the fray in a bigger way, seeking a home for accumulating retirement savings.

A $23.6 billion bid for Sydney Airport (SYD) was announced recently and, if complete, will represent one of Australia’s biggest ever buyouts. A $2.8 billion takeover bid was also proposed for fund administrator Link (LNK) – a rehash of last year’s offer for the business. In another replay, Blackstone is back bidding for Crown (CWN).

Premiums have also been higher than usual this year, averaging roughly 30%. Class Super (CL1) was bid for by HUB24 (HUB), with a staggering 72% premium. The Mainstream Group (MAI) takeover saga, which we chronicled in our June Monthly Report, finished with Apex Group paying $2.80 per share – 153% higher than where the business was trading before the initial bid. The $14 million for our remaining Mainstream shares landed in the Forager Australian Shares Fund’s bank account at the end of October.

A more recent example is Seven West Media (SWM), which made a bid for Prime (PRT) in October and handed Prime shareholders a 74% payday. By spending $72 million to fully own Prime, Seven West has paid just under three times earnings before interest, tax, depreciation and amortisation. Coupled with news that the company gained access to flexible new lending arrangements, its share price was more than 67% higher at the November peak.

Breaking in

While there were several businesses leaving the market this year, there were also plenty of new listings. Australia’s IPO market has been back in full swing – rebounding from last year’s COVID slump and overtaking the 2017 record to raise about $3 billion in the first six months alone. And so it should; macroeconomic conditions are favourable, equity valuations are healthy, and investors are opening their wallets in search of the next success story.

Small-cap IPOs have been landing on fund managers’ desks quicker than they can be chucked in the bin. Many of these small, and largely unproven, businesses have been dressed up for sale and offered at hefty prices. There have been plenty of well-timed exits from private equity sellers.

We haven’t found a lot to participate in so far, but we are sifting through the rubble. The post-IPO blues can send good businesses far below their listing prices as the market’s attention wanes and the reality of listed life sets in.

For example, the Forager Australian Shares Fund invested in online beauty retailer Adore Beauty (ABY) after its well-timed October 2020 IPO, but at a discount of about one-third to its IPO price. The Fund also invested in fintech lender Plenti (PLT), purchased a quarter below its IPO price. These are unlikely to be the last blown-up IPOs offering opportunities to patient investors.

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Insights Behind the Wheel of Carsales

ThinkSmart Torpedoes Efficient Markets

Efficient Market Theory is the idea that asset prices accurately reflect all available information and thus it’s impossible to beat the market on a risk-adjusted basis without luck, and lots of it.

This is not another pointless rant against a theory nobody believes in literally, at least in its hard form.

But anyone who has ever invested in the sharemarket recognises the usefulness of the idea. Markets are mostly efficient, most of the time. When it’s time to make any investment, we better have a good theory as to why we’re right and “the market” is wrong.

Seamless information flow, more analysts, more computer power. These are but a few reasons why markets are also getting more efficient over time. Although their periodical insanities may also be getting more extreme too.

Still, markets can be surprisingly ignorant from time to time. Especially at the smaller end of the market.

Afterpay’s little cousin

Afterpay (ASX:APT) and ThinkSmart (AIM:TSL) are joined at the hip. Afterpay needs no introduction for Australian investors. The Buy Now, Pay Later (BNPL) giant took the Antipodes by storm. It is now doing the same in the US and UK. Early investors have made 20 times their money and it is now one of Australia’s largest companies by market capitalisation.

Thinksmart won’t be so familiar, unless you are an investor in our Forager International Shares Fund (which has made a lot of money out of the stock over the past few years).

A few years ago when Afterpay was focused on Australia, tiddler ThinkSmart started a copycat business in the UK called Clearpay. When Afterpay decided to take on the UK, they deemed it wiser to acquire the fledgling Clearpay than start from scratch.

That’s how ThinkSmart ended up with a 6.5% stake in Afterpay’s UK operation, which is overwhelmingly ThinkSmart’s main asset. Afterpay has the option to buy this 6.5% stake in Clearpay from mid-2023, and ThinkSmart has the right to force Afterpay to buy it from mid-2024. The sale price will be based on “agreed valuation principles” which link to Afterpay’s market capitalisation at the time of purchase and the size of the UK business relative to Afterpay’s other markets come that date.

For a few years now, it’s been pretty easy to calculate fair value for Thinksmart shares. The two stocks should walk largely in lockstep (adjusted for any moves in the UK pound against the Australian dollar). Even if you think ThinkSmart should trade at a large discount to fair value, which it has, the shares should still dance in tandem.

And yet, here’s what happened over the first 6 months of 2020.

Afterpay shares rose 99%. And ThinkSmart shares fell 11%.

It was enough to perplex some folk:

Pretty stark contrast in recent share price performance between Afterpay ($APT) and ThinkSmart ($TSL), which owns 6.5% of Clearpay in the UK.

+100% vs nada. pic.twitter.com/WRY8mIs2KX
— Gareth Brown (@forager_gareth) July 2, 2020

Buy Now, Rally Later

And what about the almost 9 months since 1 July 2020?

Afterpay rose a further 73%, ThinkSmart 271%.

Efficient markets?

As you might have guessed, we’ve been selling ThinkSmart shares aggressively over the past few months and have been putting the proceeds into more certain bargains. We sold the last of our shares a few weeks ago. The stock is still cheap enough to make sense to a long/short fund. But for us, the Afterpay exposure is unhedgeable, and we don’t want to own it at anything other than a gaping discount.

What about that all-seeing, all-knowing market? Well there’s still plenty a diligent investor can do to gain an edge over it. Look hard and think smart.

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Big Short Interest: Should You Be Worried?

Chief Investment Officer, Steve Johnson, discusses what can take place when short interest arises in a stock and raises the question of whether this should be a cause for concern.

Watch this video to gain an insight into the upside of knowing both the bear and bull case for a stock.

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Transcript:

Hi everyone, and welcome. It’s Steve Johnson here, Chief Investment Officer at Forager Funds Management. Today we’re going to talk about shorting stocks. Not us shorting stocks, but when others are shorting a stock that you’re invested in.

Chloe walked in this morning, swearing her head off. That’s not true, she wasn’t actually swearing, but she was very unimpressed that the share price of Stitch Fix was up 30% in the aftermarket. This is an online retail stock that she’s been researching. They put out some pretty good results yesterday, and the share price jumped 30%. The thing that was really surprising was she said there is a 37% short interest in the stock. Now this means that of the company’s total register, 37% of its shares have been sold short by hedge funds, who are betting that the share price is going to go down. Those people are probably going to be losing a lot of money when the stock starts trading tomorrow, and they’re probably going to have to buy it to cover their positions.

This brought up a really interesting issue. We’ve actually had a stock in our international fund, Celsius, which has had a big short interest in it for most of the past year and the share price has gone up sevenfold. The question is, when you see a big short interest in your stock should you be worried that a lot of people want to sell it? Or should you see it as a reason why the share price might react very strongly if they can produce good results? The answer is obviously a bit of both. We’re always concerned when a short interest arises in our stock, particularly when one of those big shorting reports comes out.

The good news about that is we always want to know what the bear case is on a stock if we’ve got a strong bull case, and understand why people on the other side are selling it. Usually with the shorters, they’re pretty public about their concerns. You can go and get the report, you can read it, do your own research and work out whether you think they are right or not. We’ve been willing to overlook their concerns in a few situations. I think the big upside in these stocks is that when they are wrong, it can cause a surge in the share price in a very short period of time as they’re all rushing to get out of their positions. You can see the short interest in all of the ASX listed stocks on the ASX website. It’s a really good idea if you are researching something on the long side, go and have a quick look at how big the short interest is. Then you can usually Google a short interest report about the company that you’re looking at. It’s an interesting way of seeing the bear case.

That’s it for today. We’re coming up to Christmas over the next few weeks, but we’ll keep producing a few videos to keep you up to date with what we’re doing. Thanks for tuning in.

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Volatility: Only a Risk for the Unprepared

“Risk adjusted returns”. That’s one of the more common phrases you will see on fund manager websites. It is, after all, what we are all trying to do: maximise returns and minimise risk.

The return part of that equation is a straight forward number. But how do we measure risk? And who am I minimising risk for? They are not easy questions to answer. Certainly not as easy as the industry would have you believe.

As the sole measure of risk, share price volatility has been a bugbear of mine since I studied economics at university. It simply made no sense to me that a company whose share price was volatile was necessarily riskier than one with a stable share price.

Volatility is not risk for everyone

One, your time horizon is crucial. If you need to sell your shares next week, then stock price variability is a significant risk for you. If you have the capacity to hold an investment for 5 or 10 years, what happens next week doesn’t matter.

Second, volatility is itself a variable. A stock that has historically shown very little volatility can become highly volatile, and vice versa. Look no further than March’s meltdown, where shares in airports went from trading like infrastructure safe havens to highly volatile tourism stocks.

Most importantly, though, for an investor with a long time horizon, volatility can be more friend than foe.

Volatility is risk for someone who needs to sell. For someone who wants to buy, it can be an appealing feature of an investment.

Low prices equal lower risk

We want to buy shares at highly attractive prices. Almost by definition, the more a share price bounces around, the more chance that, at some point in time, it trades well below its fair value.

Further, the smaller the gap between your purchase price and fair value, the higher the risk that fair value is less than your purchase price over the long term.

When used to invest at low purchase prices, higher volatility can actually reduce investment risk.

Market volatility can be stomach churning. It’s hard to enjoy your breakfast when reading about the billions of dollars “lost” on global sharemarkets. But, if you’re a Forager client, you should welcome it. With volatility come the genuine opportunities for risk-adjusted returns.

The Value Case for Uber Technologies

“I have no way to value it and neither does Steve because they need to increase prices to have a sustainable (presumably smaller) business … I just see that y’all are long garbage like that and [Forager is] plainly uninvestable for me unless you get your act together.”

That’s one investor’s feedback on our recent investment in Uber. He isn’t alone. We’ve never had a more visceral response to a new portfolio addition.

Uber is not the first unprofitable company we’ve invested in. In fact, some of our International Fund’s most successful stocks, Lotto24, Bonheur, Blancco Technologies and Betfair were loss-making at the time of investment. But Uber seems to be the most controversial.

Perhaps that is part of the opportunity. But I’ll come to that at the end.

The aim of this blog is to raise and address some of the key questions. And get some considered feedback (I’m guessing there will be plenty of feedback, considered or not).

Here are my answers to the main issues people have with the investment.

Issue 1: This business shouldn’t even exist. People only use it because it is cheap. The service is only cheap because Uber subsidises it.

Forget about all the economic rationale Uber puts forward for its existence. There might be some benefits to utilising a car fleet that is mostly idle. There are definitely benefits to a workforce that can flex depending on demand, as anyone who has tried to get a cab home on New Year’s Eve can attest. But these are not the main reasons ridesharing has a place in the world.

The ridesharing segment exists for two reasons.

One is regulatory arbitrage. Prior to the arrival of Uber in Sydney, a set of taxi plates cost as much as $400,000 to buy. That’s a lot of money for two small pieces of aluminium. They were worth so much because their supply was constrained by the NSW government and the pricing of taxi rides artificially inflated.

For a driver who wanted to lease some taxi plates, the going rate was $300 a week (roughly a 4% annual return for the plate owner). So before worrying about fuel, depreciation, Cabcharge’s take, insurance and the like, a driver had to earn $300 in fares just to cover the economic rent.

Along comes ridesharing and says “how about we split this $300 between customers (lower prices), drivers and the booking platform?” Wherever supply of taxi plates is constrained (everywhere, basically), you can offer lower fares and still make a profit.

The second is because it is a better service. I’m guessing you’ve had the same taxi experiences as me. Bookings that don’t turn up. Drivers that don’t know the way. Drivers that do know the way but intentionally take you the long way around. Drivers that won’t take you at all because it’s a busy night and the fare isn’t long enough. Cars that stink and rattle.

I’ve had the odd bad experience with Uber, too. But they are few and far between. For the most part, from booking to leaving the car, the experience is seamless.

According to a recent UBS survey, only half of users cite cost as the main reason for using a ridesharing service:

Convenience matters, a lot. With the recent addition of government charges, it is hardly cheaper for me to use Uber relative to a cab. I do it because I prefer it.

More than 100 million different people used an Uber service in the last quarter of 2019, suggesting I’m not the only one who values it.

Issue 2: There are no barriers to entry. A constant stream of new competitors means Uber is always losing money.

It’s true. Pay a driver enough and they will put your app on their phone and a sign in the back window. Offer free rides and you will undoubtedly get a few users to try your new ridesharing service. That bit is not difficult. But this is a scale game.

"Very small differences in UI and UX (user interface and user experience) matter immensely … if you are 0.5% better, that can be the foundation of hundreds of billions of dollars in market value." – Gavin Baker on the Invest Like the Best Podcast

To offer a competing service, you need the same infrastructure as the large, established player. You need an app that is at least as good. Useability is hugely underrated, difficult and only noticed when it is bad. You need the same number of drivers, so that there is always availability. You need marketing, distribution and customer services teams.

If one participant can reach a dominant market share, they are almost impossible to dislodge. With roughly similar overheads, the largest player makes more money (or loses less) at every single pricing level.

'if you build it, they will come' pretty much only works in the movies. Demand aggregation is really, really hard @bgurley https://t.co/9TAneHm5j5
— christian dahlen (@mercurygod) April 21, 2020

That’s why every city ended up with one highly profitable newspaper in the twentieth century. It’s why Virgin Australia could never make a profit. And it’s why Uber’s competitor Lyft, with roughly one third of the ridesharing market, is struggling in the US.

It’s also why the competition is so ferocious in the early years. Everyone knows that only the largest player is going to make money at maturity, so they are willing to spend a fortune trying to get there.

It’s a fight that Uber has won in most of the western world.

Having withdrawn from expensive forays into Asia, Uber is now number one in every market that it operates in, with market shares higher than 65%. Trying to dislodge them now is pointless, and that’s why you are seeing a lot fewer companies try.

Issue 3: They are just going to waste money on hare-brained schemes like driverless cars.

This is going to surprise quite a few people. Uber’s ridesharing business (Rides) is already profitable. And not just a little bit. It contributed $742m of EBITDA (earnings before interest, tax, depreciation and amortisation) in the December 2019 quarter, almost four times the $195m it made in the same period the previous year.

Yes, there is $644m in corporate expense. And there’s another $350m of operating expenses that come underneath the EBITDA line. But the profitability of Rides was growing fast prior to COVID-19. It will resume growing fast once the world economy starts to recover. The business as a whole was expected to break even at the EBITDA level in 2020, thanks to significantly reduced losses in its Eats business (see below).

This is not the Uber of old. It is not the Uber most people think it is.

Uber was founded by, Travis Kalanick. Uber would not be what it is without him. First mover advantage was crucial and his single-minded vision of global domination meant that it was Uber, not one of its many copycats, that ended up dominating most Western markets.

Backed by seemingly unlimited funds from Softbank’s Masayoshi Son, Kalanick’s ego became a significant liability from 2016 on. His attempts to dominate eastern markets and build driverless cars were costing a fortune. His disrespect for drivers, customers and anyone else who crossed him was a giant public relations disaster.

"It was the middle of winter of 2017, and Jeff Jones, the man responsible for Uber’s public perception, was trying to shake everyone in the top ranks of the company awake. Uber didn’t have an image problem. Uber had a Travis problem." – Super Pumped: The Battle for Uber by Mike Isaac

You might not have read much about Uber lately. I doubt many would be able to cite its CEO’s first name, let alone his surname. That’s a good thing.

Kalanick has been out the door since August 2017. Masayoshi has his tail between his legs after the meltdown of his futuristic Vision Fund.

Uber’s other shareholders were fed up with the damage Kalanick was doing to their investment and appointed Dara Khosrowshahi to point the company on a path to profitability and respectability.

Dara has been delivering. Uber has exited markets where it doesn’t see a clear path to being the number one player. In most cases, that has been in exchange for a significant percentage of the remaining dominant player. Today the company owns stakes in market leading regional players such as Didi (China), Grab (South East Asia), Zomato (India) and Yandex (Russia). Uber recently announced a COVID-19 related writedown of these investments, but still pegs their collective value at more than $10bn.

He has worked tirelessly to improve the company’s public reputation and relationship with drivers, introducing tips for drivers (something Kalanick refused to budge on) and working on new legislation to provide drivers and passengers more protection. The more this industry is regulated, the higher the barriers to entry.

The path to profitability and beyond has been clearly, transparently and consistently presented to investors.

The last remaining significant impediment to profitability is its food delivery business, UberEats. Progress has been highly encouraging.

The South Korean and Indian food delivery landscapes have already rationalised over recent months, thanks to Uber’s sale to Zomato. The Indian business alone was costing Uber $350m of annual losses. Its sale was the reason for EBITDA breakeven being brought forward by one year to the end of 2020 (prior to the impact of COVID-19).

UberEats’ key market is the US where there are four large players and consolidation is likely, perhaps even accelerated by the current environment. Two of the four (Postmates and DoorDash) are private. Postmates has attempted to IPO twice, unsuccessfully, and there is a clear urgency to sell or merge given it is a sub-scale player in a highly competitive, cash-burning market.

DoorDash has been aggressively using discounting to drive growth, all funded by cheap venture capital money. The company had raised a total of $2bn through December 2019 and lost $450m of EBITDA in 2019. Estimates suggest that Doordash is likely to have at most $550-650m of cash as of the start of 2020 and, given the COVID-19 situation, they are likely to be forced to merge or raise further capital at a discount and attempt to become more price rational.

Provocative question Roman! Which company (@Grubhub , @UberEats , @Doordash, @Postmates) will need to bend first/fastest to profitability? We know that 3/4 of the players in US food wars are heavy cash burners. That makes the analysis calculable... https://t.co/zvXS8VUqxT
— Bill Gurley (@bgurley) January 17, 2020

In January 2020 GrubHub said they are considering alternative strategies including a possible sale of the business amid increasing competition and continued share loss to the likes of Uber.

This theme is unfolding the same way in other key markets around the world. And when the war ends, industry profitability changes dramatically. China’s Meituan went from losing $200m per quarter to making $300m per quarter following industry consolidation (it took just 12 months). Uber’s CFO recently said that Eats is already profitable in more than 100 cities, and that just 15% of bookings contribute half of its EBITDA losses in that segment.

Rationalisation is well under way and, in a few years’ time, this market will be no different to ridesharing. There will be one or two profitable players in each geographic market, and Uber will own more than a few of them.

I’d argue the permanently loss-making question was still open for debate at the time of Uber’s IPO in May 2019. But the steps taken in the 12 months since leave no room for doubt. Shareholders and management are committed to making money. They are on a very clear path to doing so.

Issue 4: How can you possibly buy Uber and call yourselves value investors?

This question perplexes me somewhat. It’s ok to buy Facebook at $190 a share now that it is profitable, but it wasn’t ok to buy it at $25 when it was losing money?

Uber is no different to any other investment we have made. We estimate how much it is worth, based on future cashflows the business is expected to generate, and compare that to the current share price.

The IPO price was $45 a share. At that price (and at that time), you needed a lot of growth and/or optimistic profit margins in the near future. You also had a lot of unanswered questions, particularly whether management’s focus on profitability was genuine.

We missed the bottom by a couple of days, but our entry price into Uber is approximately $23 a share. We have had a year of disposals, exits and improving margins. Governance and capital allocation gets a tick. And at half the price, the assumptions are a lot less heroic.

Here’s our base case. That $23 share price equates to a market capitalisation of about $40bn. Those minority shareholdings in Didi, Grab, Yandex and Zomato are worth $10bn, leaving us with a $30bn purchase price for the core Uber business.

Our expectation is that revenue will double over the next five years to more than $30bn. EBITDA margins will continue rising to 15% or more. That’s $4.8bn of EBITDA, from which we subtract $1.8bn of share based compensation and depreciation. We’re expecting at least $3bn of EBIT by 2025, flowing into the coffers as cash.

There is clearly a wide range of potential future outcomes. That’s why Uber is 3% of our portfolio, a relatively small weighting. But those are numbers you can hold us to. I expect the business to do better. And, if it is making $3bn of EBIT and still growing, it is going to be worth a lot more than $30bn in 2025.

A stock that people love to hate

None of this is wildly different to analyst expectations on the stock. Almost all investment banks have valuations of $40 or more. Which makes you wonder why it was selling for $23.

We’re about to experience a gigantic global recession and Uber’s Rides business will suffer accordingly. There’s one good reason. But I think it’s more than that.

The views of our critics are widely held. The perception is that Uber is an uneconomic business run by a nutter who is happy to lose money forever. I’ve engaged with a few of our clients who feel this way, and haven’t yet come across one who has read last year’s annual report.

It’s a view that was accurate three years ago. The fact that Uber has changed so much is where the opportunity lies.

If we’re wrong, we’re going to get crucified. That’s a risk I’m happy to take.

*All currency is USD unless otherwise stated

Fortnite is Changing the Game

My little brother is one of millions of crazed Fortnite fans. His current routine involves playing the online game in his toy room with headphones in, while simultaneously watching someone else play on his iPad.

For context, he’s in primary school (it’s complicated) and he’s clearly not alone. It’s allegedly injuring elite sportspeople, being cited as a cause of divorce and doctors are saying it’s as addictive as heroin. I hear middle-aged men in suits discussing Fortnite strategy on my commute to work.

For those of you who aren’t familiar with the game, it starts with one hundred competitors dropping from a virtual flying bus onto a colourful cartoon island. The aim is to be the last one standing at the end of the “Battle Royale”. There is killing involved, but it’s not visual. There is no gory detail, which has almost certainly contributed to the game’s mass adoption.

I’m not a gamer. But as an analyst, if people are obsessing over something, then I want to know more about it.

Scale is important, but it isn’t everything

Gaming is already a big business. Generating more than $120bn in annual revenue, the global games market dwarfs the takings of Hollywood. The industry has grown more than 10% annually for the last five years and doesn’t look like it will slow down any time soon.

Shareholders of the three industry giants, Take-Two Interactive Software (Nasdaq:TTWO), Electronic Arts (Nasdaq:EA) and Activision Blizzard (Nasdaq:ATVI) have done exceptionally well. Even with the recent price falls, a five-year investment in these stocks would have returned more than 300%, 200% and 100% respectively.

And for good reason. Video games can cost upwards of $200 million to develop. They require large teams and lots of experience. This creates significant barriers to entering the industry.

Fortnite’s new business model

Fortnite is both a threat and an opportunity to the existing cabal. Epic Games created it. They’ve been around for some time, but aren’t one of the big three. That, presumably, means the barriers to entry aren’t insurmountable.

But I still think big budgets and experienced teams are likely to win the day. And the economics of these new free-to-play games are mouthwatering. Distribution is online, cutting out the margin to distributors like Gamestop (NYSE:GME), which is currently trading almost 80% lower than its 2013 highs.

And, despite being “free”, they generate bucketloads of revenue. Fortnite generated US$2.4 billion in revenue in 2018—the highest yearly takings of any video game ever. Last reported player numbers stood at 200 million, and there is speculation that there were 10 million concurrent players during a recent online concert. Revenue is generated through in-game purchases—largely costumes, which are referred to as ‘skins’.

The ability to continue updating the game with new seasons (approximately every 10 weeks) means that revenue should keep flowing for years.

Big boys enter the fray

Electronic Arts recently released their own free-to-play, ‘Battle Royale’ title, Apex Legends.

The marketing strategy for Apex Legends was very different to EA’s historical releases. For one, it was only announced within a few days of the official release date. There were no teasers or heavy public relations campaigns—the company relied on “influencers” to market the game. EA reported ten million registered users and one million concurrent players within the first 72 hours.

At the one week mark, 25 million players and two million concurrent players were announced. These numbers are significantly higher than the Fortnite launch. It’s too early to tell whether Apex Legends will be more popular than Fortnite. Or whether EA will be successful in monetising the game. What is clear, though, is that these new releases are gaining traction much faster than their predecessors.

Creating games with addictive gameplay and high skill curves, like shoot-em-up hit Halo, should continue to be a profitable business. The new free-to-play model has the potential to be even bigger. Entrenched industry players with large budgets are in a good position if they can work out how to best capitalise on current trends.

We don’t own any of the stocks mentioned, yet.

How to Retire Happy, Comfortable and Property Free

My parents, some investors, politicians and a large number of journalists seem very concerned about me. I’m one of the renter generation, and everyone seems worried about us because they think we are going to retire without a roof over our heads.

Please don’t concern yourself. Yes, it’s true. My wife and I don’t own a house. But we do have a very clear plan for living a happy and secure retirement. For any of my fellow renters out there, here is a simple three step plan for you to do the same.

Let’s begin with a few assumptions.

Rent versus own

I am going to use an example of a 30-year-old renter in Sydney or Melbourne considering buying a home to live in. The assumption is you are 30 years old and are currently renting a home for $700 per week, or $36,400 per year. You and your partner have saved $200,000 thanks to financial discipline and some good investing and now have enough for a deposit to buy the home you live in, or something equivalent.

The market price is $1.3m, equating to a 2.8% rental yield, roughly in line with average rental yields in Australia’s two largest cities at the moment. Adding stamp duty you will need a $1.16m mortgage. To pay it off by the time you are 60, assuming a 4.5% interest rate, you will need annual repayments of $71,291 to the bank, or slightly less than $1,400 per week. You’ll also have council rates and maintenance on the house, which I have pencilled in at $8,000 per annum, so a total cost of home ownership of $79,291 per year.

Your alternative is to rent for the rest of your life. Assuming 3% annual rental escalation, by the time you are 60 your rent will have more than doubled to $88k per annum. Follow my simple three steps, though, and you will have enough investment income to cover the rent for the rest of your life, and more than $73k^[1] per annum of additional spending money. Here’s what you need to do:

1. Save what the homeowners save

The one irrefutable benefit of taking out a mortgage is that you are forced to save. If you want to do better than your homeowning friends, you have to be at least as disciplined. The most important element of our savings plan to is put away the difference between your rent and the cost of owning the same home. In year one that’s going to be almost $43,000 and the early years are particularly important. The rent is going to increase while the mortgage repayments stay the same (see the chart below). In fact, by the end of the 30-year period, our rent is going to be more than a homeowner’s cost of owning a home^[2], but by then we are going to have a big pot of money stashed away.

While you are looking at the chart above, let’s end some arguments before they start. This blog post is not about whether you will be better off renting than owning a house. That will depend on dozens of different variables that I don’t have the answers to.

The point I’m making is that, if you have the discipline to save those black bars and invest them sensibly, you are going to retire with a big pot of money. Whether it’s bigger than the value of the same house in 30 years’ time, I don’t know. But it will be more than enough to cover the rent.

2. Minimise tax on your investment returns

Homeowners get a few free kicks from the tax office but there are plenty of things you can do to keep your own tax low. Most beneficially, get your savings into a super fund where the tax rate on long term investment gains is only 10%. I have assumed you can contribute the initial $200,000 deposit you have saved as a non-concessional contribution and keep doing the same with your post-tax savings. You will do a bit better than this if you have room to make more concessional contributions up to your $25k annual limit, but we will keep it simple for the purposes of this exercise.

As you can see in the chart below, keeping your tax rate low makes a massive difference to your investment balance at 60. Even if your starting point is a 40% marginal tax rate, if you do your saving outside super, your growing investment returns are going to push you up into the top tax bracket fairly quickly. I have assumed a 10% tax rate but your average tax rate will be even lower if you build wealth in a super fund, avoid realising gains for longer periods of time and generate a good portion of your returns as fully-franked dividends^[3].

3. Maximise your investment returns

Cash in the bank isn’t going to cut it. You need your money working for you. Minimise costs, and make sure the portfolio is invested in a portfolio of real assets like shares, property and bonds.

You should target total portfolio administration and management costs of less than 0.5% per annum, either through a low cost industry fund or running your own self-managed super fund. And I have assumed a 6.5% gross annual investment return, leaving you with a net return of 6% per annum. This is below the historical returns from most aggressive or even balanced low-cost super funds, but we are starting with high asset prices across the board and I think this is a sensible long-term expectation^[4].

The difference between a 7% return and a 3% return is staggering, as you can see in the chart below. At 3% per annum our savings will be $1.7m in 30 years’ time and the annual investment returns won’t go anywhere near covering your rent. At 7%, you will have $4.0m of savings and $160k per annum of spending money over and above your rent. If you can get to an average return of 10% per annum, you’ll have a balance of more than $7m^[5]. That’s the power of compounding.

Our base case, however, is that you can earn 6% net on your money. This, combined with your annual saving, is going to build you an investment pool of roughly $3m over 30 years. By the time you retire, these savings will be earning you $180,000 per annum before tax, more than double your rent.

No need to live in fear

There are plenty of non-financial reasons to want to own a house: security and flexibility to renovate just a couple of them. And for all I know property prices might keep rising and rental yields falling, meaning the mortgage-free home owner could end up with something “worth” more than the renter’s pot of savings. More importantly, most people I know aren’t capable of saving $3,000 a year let alone $30,000. A mortgage is the financial discipline they need.

This post is not to criticize anyone who does buy a house. I simply want to point out that there are alternatives. A life of renting is perfectly feasible.

Be as financially disciplined as someone with a big mortgage, invest the money sensibly and you won’t have to worry about retirement^[6].

Footnotes
[1] $3m savings at a 6% return = $180k per annum of investment income. Less 10% tax, less $88k rent equals $73k. Worth noting that your rent is likely to keep increasing during retirement, so you should be stashing some of the extra away to cover future increases in rent.

[2] Conservatively assuming interest rates, rates and maintenance costs stay the same.

[3] There is a big downside to building your wealth inside super: there’s no changing course half way. If you get 15 years into this 30 year plan and decide you would actually prefer to own a house, you won’t be able to access the super until you retire.

[4] Obviously there are lots of moving parts here. Returns could clearly be lower. Interest rates could also be much higher than 4.5%.

[5] Note that this is all separate from whatever saving you need to do to fund your ordinary retirement expenses. A homeowner is going to need something other than the house they live in to retire on, so this pot of money is just the “roof over my head pot”.

[6] I’m not a very disciplined saver. Thanks to a few successful investments, we are well ahead of schedule.

What is Value Investing?

Will Ingham’s be the Next Dick Smith?

Just how similar are the Ingham’s and Dick Smith IPOs? Both are (or in Dick Smith’s case, were) iconic Australian businesses. Private equity firms bought both businesses from trade owners. They then floated them for healthy gains (Ingham’s lists this coming Monday). And in both cases, private equity sold a truckload of assets prior to listing, leaving incoming shareholders with hollow balance sheets.

But as far as one can tell based on the Ingham’s prospectus, that’s where the similarities end. Dick Smith’s main undoing was booking stock purchase rebates as revenue at time of purchase instead of at time of sale. No signs of that from Ingham’s.

So does that make Ingham’s a solid addition to your portfolio?

The first thing I did when I downloaded the prospectus was search for the word ‘Woolworths’. This took me straight to page 35. And there it was, powerful supermarket customers such as Woolworths, Coles, IGA and their Kiwi counterparts Countdown and PAK’nSAVE comprise over half of Ingham’s revenue. Throw in fast food giants like KFC and that total moves to 70%.

And therein lies a problem. The big risk for Ingham’s is not that it turns out to be another Dick Smith but rather another Goodman Fielder, Asaleo Care or Patties Foods. Or any other supplier to the supermarket channel, even Pacific Brands. When you have a commoditised product, dealing with powerful customers is not a recipe for earnings growth. It’s a recipe for wealth destruction.

Perhaps some investors will disagree with me because Ingham’s is an Australian icon. Tell that to the Woolworths and Coles buying departments. Make no mistake, iconic or well-known brands do not equal brand equity. Helgas, MeadowLea, Sorbent, Libra, Four’N Twenty and Bonds weren’t able to steer the fortunes of the above-mentioned companies towards growth. Pricing power is everything in domestic wholesaling and unless a product has true brand equity such as Coca-Cola, the supermarkets will dominate price negotiations.

Sure, maybe things will go ok for a year or two, while prices are locked in for the short-term and the vendor’s remaining shares are in escrow. But let’s look at what happened to the above-mentioned supermarket suppliers in the years following their IPOs.

After two or three years, their share prices started falling off a cliff. Why? They were dressed up for IPO as dependable staple goods manufacturers, paying a steady dividend stream from their stable profits. After a few years the reality set in. These companies would struggle to maintain profitability in the face of gruelling price negotiations with their powerful customers. Earnings were far more volatile than the inelastic demand for their products.

It’s hard not to see the same thing happening to Ingham’s. The business is expected to generate a return on equity of 76% in the 2017 financial year. How long will Woolies let that go on for?

And don’t get me started on valuation. The private equity vendors bought the business in 2013 for $869 million, sold $540 million of property in 2015 and are now floating it for an enterprise value of $1.6 billion. This implies a price to earnings multiple of 12 times based on forecast 2017 earnings, which are a whopping 91% higher than what the business earned two years earlier. For mine, this looks fairly valued at best, with little margin of safety given the risks.

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Dick Smith Takes A Bath, Comes Out Nice and Clean