Ann: November Trading Update, page-20

Silsol,


I think NPBT of $6.72mm is overly optimistic, because we don't really know how much of this earnings momentum in Oct/Nov is iphone 12 specific and a temporary boost due to pre-christmas sales.. They have never made more than $3.167mm back in 2018 (on sales of 87.5mm only)..
I've been using an estimate of $120mm sales for 2021.. and a gross margin of 25.5% ( it was 23.3% last year, and 27% the year before)..
i assume their other costs don't really change and their freight costs go up with revenue.. and I end up with a NPBT of $3.93mm
I believe they would have some tax loss carry fwd so income taxes would be reduced.
And I estimate EBITDA of $5.5mm and pre tax cashflow fo $4.8mm...

In terms of valuation, I adjust enterprise value for working capital, and net debt.. again guessing a bit here but assuming they have generated $2.0mm in cash since june 2020. That is $16.8mm.. (vs a book value of 25.4mm) .

So enterprise value at 7.5c is .075*236mm share (look at the options vesting schedule)=$17.7-16.8= .9mm..
So basically at 7.5 cents you can buy the company for Working Capital.. pretty much net tangible assets...
so it is super cheap if you believe in the business model.

If you assume a $5.5mm ebitda run rate is doable and apply a 5x multiple that gives and enterprise value of $27.5mm, or market cap of $44.3mm, and share price of 44.3/236=.187 cents..

Cleary very cheap indeed...

Certainly if they can pull off $5mm of ebitda, i would expect them to pay out $2mm in divs ( not withstanding acquisitions)..so that would be 0.8c/share.. which at 7.5 cents is still a 10.6% yield...If you are right they are worth even more.

Some uncertainties to consider:

Things are complicated due to Wentronics controlling shareholding.. ie will they ever buy out minority shareholders or sell their holding to someone else?? if not, maybe the EV/EBITDA multiple should be only 3x.. which gives a share price of .14 cents..

Ultimately, i think they need to have a solid year under their belt and pay a dividend to get a re-rating in price...
and I don't know what gets some institutional names on the shareholder list...

Of course there are lots of other risks commensurate with any electronics wholesaler (inventory valuation, and supply contracts to name a few), but at least the entry point provides a very reasonable margin of safety.

So i am long.. from the 3 cent entitlement offer up to 8 cents...and target 12-14c.. before I would consider letting some go.
As always.. to all .. my opinions only, and I may have made some errors.. and DYOR...