Hi Atethe,
Appreciate the insights, although I do think there may be some errors in your analysis.
I don’t have anything against former principals/employees like yourself posting on HC about their previous employers as it can usually offer some good insight, so long as its not too bias in one direction!
I might post something a bit more extensive another time but some quick responses for now:
-You can’t simply use reported after tax profit to value the business. Acquirers will use EBITA/cashflows.
- You mentioned “you’re dreaming” for CUP to generate $6.5m of EBITA needed to justify the current price. But if you look at the accounts closely the business actually generated $4.8m of EBITA in the first half alone. Lets call it $9m EBITA for the full year. So using your assumptions, all else equal, the stock is actually worth 84c today.
- Then you have to factor in that firm level margins are improving and have a long way to go before hitting best practice. If the firms are at 17% today, and best practice is 25%, thats ~$5m additional EBITA even assuming no revenue growth.
- What about the $50m+ of acquisition capacity the business has over the next three years? That could double current run-rate EBITA once fully deployed. How do you factor that in?
- Due to the two points above you have a potential $15m of additional EBITA over 3 years without any dilution to shareholders. You then have to account for sale of equity to principals. It starts to look very cheap. Call it $20m EBITA on just a 8x multiple and the stock would be $1.50.
- CBA are highly unlikely to sell their CUP stake. More likely they will go to CUP to strike a deal to keep them as a customer, as it makes it easier to sell Count for a reasonable price (perhaps resumptions of the multi-million dollar loyalty fees?). Why would they sell CUP before Count? Count is the larger business, and if they sell Count they also sell CUP at the same time, where as if they sell CUP first they make it much harder to sell Count. There is a reason they have not yet sold CUP..
But if they made the mistake of selling their CUP stake at 40c as you say, I have no doubt it would be swamped by fund managers and PE firms alike. I hope they do as I’ll be buying, but I just don’t think they will. As for asking who is going to buy CUP, the better question is who is going to buy Count - the answer/s are probably the same.
- TFSA *was* the largest profit generator. It no longer is. Its likely that it hardly contributed in the first half. Yet underlying PBT was up 22% due to the accounting firms improving their margins - evidence the new model is working. When TFSA resumes growth (which is possible now ASIC have lifted their conditions) it will eventually be a material contributor once again.
- I know there are two sides to the story, and appreciate your insights. It is to be expected that there are ex principals who have to leave, either by choice or force. Some of them will be ‘deadwood’ as jamwolf referenced, and others might well be solid contributors who just don’t agree with the new strategy. That is fine. Could there be more impairments? Of course. Would a million dollar impairment derail the buy thesis? Definitely not, so long as the recovery at the group level continues.
- You previously mentioned CUP has had 4 CEOs since listing. At one point or another I’ve met 3 of those 4. Matthew is the first one where I’ve thought he has a legitimate shot at turning this around. Signs so far are good. The upside is substantial if they get it right, and its positive they have put a lot of their own money on the line in buying stock on market.
Always keen to hear the other side of the thesis so keep it coming, though I probably will jump in to clarify any inaccuracies!
Lets check back in 6-12 months on the share price. If it is lower than today I will eat my hat, but my view is it will be closer to $1, perhaps with takeover talk surrounding it.
Expand
