Now that I’ve amassed a war chest of CLBO (had to get set first before alerting the rest of the market due to the illiquidity of this stock), I thought I’d share my thesis as to why I think CLB/CLBO is a good buy.
Since the COVID-19 crash in March, my two best trades have been MMM (meal kit delivery business) and RBL (online marketplace / ecommerce). I have found success historically in following my winners. CLB/CLBO shares many of the same attributes as MMM and RBL, hence why it piqued my interest.
Pros - Relatively low SOI with approximately ~235m shares on issue. I like looking at the SOI to market cap ratio of a stock as it says a lot about management’s track record and the likelihood of further dilution. As an eg, if you find a $5m market cap company with $1bn+ plus shares it generally means they have been forced to raise a material amount of money from investors $ at a low valuation. This can mean many things, but is generally a red flag as it means management has failed to execute or made poor decisions leading to shareholder value destruction. The other reason I like low SOI (and free float - more on this below) is the share price can move very quickly upwards on good news due to simple supply/demand dynamics. Capital structure - tick.
- At the current SP of $0.11, this represents a market cap of approximately $25m. For a company that did $2.3m in gross sales in the March 20 quarter and 100% growth on pcp flagged in April (source: March 20 4c), this is an undemanding valuation in my view relative to the potential reward. I expect that sales trend to continue (more on this below). Valuation and sales growth - tick.
- Insider ownership / “alignment” of key management personnel and the Board. James Baillieu the Chairman owns approximately 27% of the undiluted share capital. If you believe him, it’s his one listed investment (source: Australian article - see a few threads below). Self interest is a powerful motivator. I am always looking for the controllers of a company I invested in (board and management) to have skin in the game. They have this in spades. Based on James Baillieu’s latest change in director notice and the FY19 annul report, management and the board hold at least 89m shares between them or approximately 38% of the company’s SOI before accounting for performance rights, options etc. Insider ownership - tick.
- Despite being in the consumer discretionary sector, chocolate and candy sales are known to be resilient in times of crisis, such as we currently find ourselves. Personally I am not a big candy eater - more a health food guy myself - but I like the macro set up here. For he same reasons I and many others are investing in gold, I think Clb will do well as it is positively levered to a recessionary environment/ negative macro economic outlook. Candy doesn’t cost a lot (small basket size) so it’s not a big purchasing decision and should be less effected by negative consumer sentiment than other consumer discretionary. I also expect CLB to benefit (in its direct to consumer unit) from the acceleration in shift to online purchases. All e-commerce businesses (and more old school retailers with an online presence) have exceed market expectations on sales in recent times. Structural tailwinds - tick.
- James Baillieu. I’ve never met him but I’ve followed him from afar and he’s clearly a smart guy - and a fighter. He also owns 27% of the business. I never invest solely on the back of a share register but I like like investing alongside smart people who are willing to roll their sleeves up.
Cons - Limited share liquidity. I’ve included this as both a pro and con as it can work both ways. On bad news there are no / minimal buyers which can mean having your pants pulled down.
- Niche market. Unlike MMM which sells meal kits for every day meals, the candy category is smaller = the size of the prize is smaller. Unless you eat candy for breakfast, lunch and dinner.
- Weak balance sheet. The company doesn’t have a lot of free cash - only $0.5m at 31 March 20 (source: March 20 4c) while they burnt $1.6m in the recent quarter. This is obviously a concern, however I am comforted by the fact that they have $3m in debt (con notes)/govt funding available for working capital, and have flagged expense reductions and a pathway to profitability to this year. MMM was in a similar position. I am also comforted that the company hasn’t deep pocketed backers (eg James Baillieu) so I consider a worst case VAH type equity wipe out scenario to be very unlikely.
Theres more i could right but my attention span is wavering so I’ll leave it there for now.
Of course this is not financial advice and you should DYOR. I have written this post to create some awareness about CLB, out of self interest, as I stand to benefit from a rising share price. Naturally I have focussed more on the positives than the negatives. You should always question the motives of any poster on SP - there is always an angle.
This post is not intended to be exhaustive and I apologies in advance if I have made any mistakes - they were not intentional. I have done all of this on my mobile and this analysis isn’t intended to be exhaustive but a desktop review.
(20min delay)