Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
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With respect, I do not think the “trend” is the really key point here. What other company do you know that produces more than 100% return every year for 5 consecutive years? Ever ?
Even the very finest private equity investors deliver 25% on an annualised basis.
Yeah this is interesting.
Of course this period spans COVID. Presumably the MM was affected by the same factors that caused the fair-value writedown (related to your first comment on this thread). So maybe the MM will stay suppressed in the current conditions?
They have been transparent about cases taking longer during COVID, due to lockdowns, important people being ill etc. This explains why the RoI (which has a time component) has been hit by a greater proportion than the MM in your data. That should be on the way back up now that case durations are back down to their historical average.
A possible factor is the lower average case size. I'm not entirely sure about this one, but presumably there is an element of fixed cost as well as variable, and lower case sizes will mean a higher proportion of these fixed costs. Mano has explained that they are expecting to see the larger cases returning en-masse.
Another factor is inflation - inflation is already affecting their costs, fees and wages, but hasn't yet trickled down into the headline size of the claims being brought to them. Again this is another frustrating consequence of their business model (similar to paying tax on "income" long before they see any corresponding cash, etc), but there should be another reversion to the mean as the size of claims start rising.
So there are multiple factors, but yes, I agree that this is not a positive trend, and an important thing to keep an eye on.
Re Peel Hunt - who knows where they get their numbers from!
Fair comment. Also it should be reflected in the price they pay to invest in a case, so it only affects ongoing cases for which higher prices were paid.
As I've said, I'm only interested in MANO because I think it could be a good investment. One fo the problems is that it is fundamentally unforecastable. I plugged the first half numbers into my model and with a few positive tweaks I pushed FY24 EBIT up to £5m, still way short of Peel Hunt's £8m.
I also noticed, looking back on old vintage charts that the RoI and MoM returns have been coming steadily down:
2019 180% 2.8x
2020 174% 2.7x
2021 169% 2.7x
2022 153% 2.5x
2023 121% 2.2x
This is a bit concerning.
There’s possibly some truth in this, but I disagree that the issue is flying under the radar. Mano employs a “Net Worth” team - which they recent expanded - to ask and answer exactly this question, ie “will the defendant actually be able to pay us if/when we win”. So they are well aware of the issue and are doing what they can to mitigate it.
That’s not to say there won’t be some haircut that Mano has to accept if things get severely worse than they are now. But this should be offset by both the greater volume and higher headline sizes of the cases that come Mano’s way in such circumstances. Mano will still cherry pick the best cases as it does now, but from a larger pool. I expect they would be able to make hay.
And if things get so bad that Mano’s receipts all but dry up, I suspect we’ll all have bigger problems too!
There is one aspect to this business that is seldom mentioned. There is some economic momentum to it. If, for example, the economy takes a downturn and, probably more importantly, house prices fall and housing transactions dry up, then recoveries are going to be lower which obviously lowers returns. Because MANO's cases are generally quite short duration this should have only a short term effect but I definitely think it's a drag that hasn't really been talked about.
I think my last post was too flippant re. debt. Yes each incremental bit of borrowing that is then invested into cases can be justified by my argument, but it was a mistake to ignore the large amount of existing debt that was required to a) bootstrap the business and b) keep the lights on during covid.
Covenants aside, the debt pile really is going to be a drag on their bottom line because of the interest expense.
Hopefully the cash flows will keep increasing and they will be able to start meaningfully paying down this debt, as well as investing in new cases.
Of course the game changer here would be the cartel case windfall. Converting that “investment” into reduced debt will be a huge win. Keep on eye on the news around 19 Dec - the day of the appeal; hopefully there will be some positive news on this early next year. Quite a bit riding on this I feel! But again, all the recent updates re the cartel cases have been very positive, so I still feel optimism is warranted.
Again I think there is more room for optimism here.
Yeah the accounting model means taxation up front. That’s just a fact of the model, a cost of doing business. They’re borrowing at 8% and making 120%; they should be ok.
The margins are low now, but staff costs aren’t expected to increase again; the additional staff required for the higher caseload is already “priced in”. So margins should improve.
I know what you mean about the overly-optimistic updates. Personally I’m not a big fan of how the KPIs seem to change oh every update, in order to highlight the best-performing aspects of the business (ie note that eps wasn’t a KPI this time!) but then again their business has been through the wringer, and the bbl stuff is all new to them - it’s not crazy that they adjust the KPIs to match the new reality.
I get the impression that it wasn’t obvious to them that the larger administrations would take longer to pick up after covid than the smaller CVLs. This strikes me as fair enough - no-one had been through anything like covid before!
Similarly, the continuing extensions of govt anti-liquidation measures clearly came as unwelcome surprises. Not sure what else they were supposed to do here?
Plus, it’s only to be expected that he’s a bit of a salesman. Would we have been happy if he’d said “it will take us years to recover from this”? Of course not, we’d be outraged he didn’t put a more positive spin on it for the markets.
Agreed that the CFO seems a bit of a deadweight. He didn’t impress on the call.
Just noticed your well informed note here, StreetsJ. Thank you very much!
I have averaged down at least once on my holding and still they fall. I am fortunate enough to have cash coming from a recent takeover stock but do not to announce the bottom here yet, even if I miss it! So will just wait for the cash to arrive and if these drop further I may be tempted to go in again. MANO seems a hard one to read accurately. It did not look that way 3-4 years back!
My experience of MANO is that they are far too optimistic. I published a research report on them in August 2021 (so after COVID disruption was well known.) Cooklin said my numbers were far too low. I forecast, for FY22, 17.5m of revenue, 7p of EPS. And for FY23 £26m of revenue and 21p of EPS. They made £10m and 4p in FY 22 and £15m and 3p in FY23.
The tone of the statements is always bullish. The covenant breach was almost certainly due to this overoptimism
I wouldn't bother with the company if I didn't think it was interesting, but I'm far from convinced that it's out of the woods yet.
I have access to Refintiv (Reuters as was) and only peel Hunt's forecasts are there. No mention of Canaccord. According to Refintiv the Peel Hunt numbers were "reviewed" yesterday but not one of them changed. Including Revenue for FY24 of 13.8m - which is clearly nonsense as they reported £11m for the first half. And EBIT of £8m, EPS of 11.8p which both also look completely wrong in the other direction after £1.6m and 1.4p in the first half.
My guess is that Peel Hunt have lost interest (at £75m and with little or no trading it's too small for them) and Canaccord have pitched for the brokership with a very bullish report. I may be wrong, and often am.
If I was HSBC I would be taking a cautious view on value ascribed to Cartel cases when that number is put into the Loan/NA covenant ratios. That must be restricting the amount of loan that can be dran at the moment.
Perhaps selling off the o/s receivables from last year's "big case" might be an idea.
The problem with all these valuations for asset/profit purposes is that Tax has to be paid upfront. Add the o/s big case and Cartel monies and its got to be £5m on the more than £20m total. All of which has increased the bank loan and is costing 8.7%p.a.
Theborn:
Agree on the HSBC - that has gone on far too long. I saw frustration there - the CFO should have obviously nailed this ages ago. Poor.
BBLs - you are not right on the timings. They only started with Barclays in January of this year. Clearly the pilot needed to run and show results before anyone else stepped forward. It obviously has as now (and tbf very quickly). They made the point that they didnt get all the cases in January, they have been drip fed over the months it seems. Barclays are expanding it and new bank on board. I have no doubt that the "politics" in this area are very complex as there are so many stakeholders: Govnt, Banks, British Business Bank, Insolvency Service and then the banks' customers (with all the regulation that surrounds that). Treacherous but the opportunity is big and it sounds like they are working at it as hard as we could hope.
I have read comments that the managment team are too quick to announce any bad news. So now things have turned in the favour who can blame them for a brighter tone. And lets face it (as many have said here) they were dealt a truly awful hand with a 2 year shut down of insolvencies during covid. It obviously takes time to build that back up. Business is never a flick of the switch. For me this is a medium term play but i can see the environment for them being positive for quite some time. DYOR as ever and GLA.
Do you have any more info on the Cannacord note?
I'm a long-term holder in Mano and often view on the side of the positive and always dial in for the updates. I think its good management engage in this way. However, I must admit I was left frustrated after the presentation yesterday, mainly because feels like I've heard the same narrative for almost 2 years now and I'm concerned that a couple of the key themes haven't been delivered - by this I mean specifically BBL loan opportunity and the HSBC covenant breach.
BBLs we've been told a second bank is imminently signing for well over a year and its yet to happen. I'd like to think it will happen but at present the 'imminent' timing at least has been overpromised and underdelivered. Referencing positive conversations 'the Treasury' yesterday are also slightly unhelpful unless there is a genuine view Mano will be announcing a partnership with HMRC in the coming days - when clearly they won't. It just gets hopes up unnecessarily.
HSBC covenant we were told was a none issue and would be resolved months ago, yet here we are in November being told it'll be sorted before Xmas (and I'd put money on that not happening).
Someone made a valid point below the reference in the trading update to being 'marginally' below the previous 6 months and rightly questioned if 27% profit miss is 'marginal'.
To summarise, my gripe is a constant theme implied overpromising. This is even more frustrating with a small company that only really issues updates 3 or 4 times a year. It will likely be April now before another update.
On the plus side, and the reason I stay invested, the underlying business is clearly back up to and above covid levels, which is positive, albeit on a higher cost base (both operational costs and interest cost on HSBC facility given current SONIA rate vs 2019). So the business will need higher levels of cases just to tread EBIT water vs 2019 given the higher costs. I have no reason to doubt they aren't already doing this its just the time lag for P&L to be 'realised' on the new cases. It's also a positive to gear up operations in advance of the expected case jump, which they have done.
Finally, a 1.4p EPS for a 'positive' 6 months on a 170p valuation isn't really knocking the lights out. Even if that becomes 4 or 5p by year end, it needs to get up to minimum 20p before we can expect any proper valuation uplift.
Again - time to forget about this share until April and hope the usual slow decline in the meantime doesn't take us below the historic lows of a few weeks ago.
For all these reasons I'm interested to know what Canaccord are assuming for revenue and EBIT over the coming 12-24 months as ultimately that's what will drive shareholder value. As I struggle to see how a positive 6 months only delivering 1.4p of return on my share satisfies that. I do accept that of the current share price, around half of the value is sat as retained earning on the Balance Sheet.
My summary:
1. Core business going like a train
2. Bigger Administration cases now picking up to pre-pandemic level
3. Fascinating BBL opportunity. Dont think any other company can unlock the value here and it is huge ! (£1.3 billion - £6.9 billion and growing everyday as others default). But will they get a fair run at it ? Government seems to want it to just be forgotten about ! But its the biggest (£50 Billion) bank robbery ever, and designed when Rishi Sunak was the Chancellor...
4. Cartel cases - going well. Will be a nice windfall when it comes, whatever the level.
5. Bank covenants being sorted but we need clarity on that once it is completed
6. Avg case completion size: they missed a trick (or maybe they'll do it at the year end): if you recalculate excl the BBLs it is not down 18% as they said in their Trading Update. It is almost exactly the same as last year. That is very important for my valuation (which is fundamentally number of cases x avg gross profit per case less overheads). That formula is simple but is works really well. Dont know why their broker makes it so complicated and with nonsense numbers (eg think they have Rev forecast for this year of £13-4m....Mano are already at £11m. Mad).
7. Cannacord yesterday repeated their statement that this could be one of best financial services sector recovery stocks on the market
Great post, nice to see some positivity in amongst all of that doom and gloom from yesterday. Hopefully all the dementors sold their stakes yesterday....I'm confident that 2024 is Manolete's year
Watched the presentation and I do feel more positive about the update.
The extra context around the covenant breach was helpful - the fact that the covenants haven’t changed over the last 7 years while Mano has grown significantly and has different requirements does sound off; the fact that HSBC waived the breach indicates that they agree.
I didn’t think he was too cagey answering questions about it - he’s in the middle of negotiations so obviously can’t make any promises. It was clear that the market can expect an update within the next couple of months.
The tone of the presentation made it clearer that the bbl pilot with another bank was “about to start” - ie it’s fully in the bag. This is great news, and I expect another announcement with clarification shortly.
I also felt better about the disappointing net margins. Part of it is interest expense, but another large part is additional staff costs; of course, those extra staff are required to work the higher caseload that has only recently been taken on, _and hasn’t worked it’s way into the top or bottom lines yet_. So it’s impact should be transitory.
Finally, there does seem to be some genuinely light at the end of the cartel case tunnel.
So overall very positive I feel.
FoMo: haven't had a chance to watch yet, I'll look out for your question.
StreetsJ: agree re it being a bad sign generally. Particularly given the nature of the business itself, and the expertise of the people running it!
Does the fact that the breach was "waived" imply that there was no penalty?
Given that they are renegotiating the contract, I guess it makes sense that they've hired specialists. Sounds expensive though :-/
I'm no expert on bank covenants but typically if you breach them the bank will take its pound of flesh: extra charges, higher rates. I don't think it's that serious but it's always bad sign when a company breaches its covenants unless there is a completely unexpected event. It suggests that things are not going as planned or the planning has been poor.
Tommy.
Comment at min 36.53 that MANO have retained a "debt advisory firm (name is rather indistinct" to advise.." on bank covenants.
My question at 42.20 as to whether undrawn bank faciliites are adversely affected (ie restricted and not available) by covenants on present net assets was, I thought, "sidestepped".
Quartely data on covenants.
I can't see things getting significantly better until Truck claims resolved as it's more than 1/3rd total current assets. MANO wouold love to run faster but is probably paying the price of the long "puff" on the value of the Cartel cases.
Yeah it’s been quiet!
Agree that the breach of bank covenants was a nasty surprise - but then if Mano has a relationship with the bank such that they’ll sign a waiver and renegotiate the terms, surely that’s a positive thing? I’m not at all familiar with the details of how these things go though.
I guess ultimately the results were as expected, with more surprises on the downside than the upside:
- breach of covenant, as mentioned above
- lower profit (as you mentioned in your other post) despite all the KPIs tracking well
- no meaningful updates on what’s coming with the BBLs (we’ve been hearing about Barclays expanding their pilot, and this mysterious second bank, for months now)
- no dividend (as discussed in an earlier thread I wasn’t expecting one and didn’t think it would be a good idea, but still forms part of an unexciting update)
Why no comments on the day of the results?
Did you see that they breached their banking covenants in the half year. or was that already news? I wonder if that was what was driving the share price down?
So EBIT was £1.560m down from £2.136m in H2 23. In the trading statement this was described as "marginal". I don't call 27% "marginal". Maybe it's the £600k which is marginal. Peel Hunt still haven't changed their numbers: they have EBIT for FY24 of £8m. I can't see that happening from here.
Meant to provide this link to tomorrow's presentation: https://presentations.investormeetcompany.com/investor-meet-company/MANOLETE-PARTNERS-PLC-Investor-Presentation?bmid=cbf352de78fd
Indeed Forensic. Mr Market has been in a europhic mood the past couple of days due to the unforecasted drop in inflation, but the UK economy is far from recovery. Analysts, including the BoE do not foresee a reduction in interest rates any time soon and they suggest we are just approaching the half-way point of this period of pain.
Alstom, imo, is just a taste of things to come...
https://www.bbc.co.uk/news/uk-england-derbyshire-67425330
Make sure all your other stocks have solid balance sheets and keep buying the dips.
With the carnage that is only just starting to hit the UK economy (which I think many commentators are materially underestimating quite how bad it will be), I think this company has got a very good flight path ahead for the next 3-5 years of very good growth. Their recent Trading Update covered quite a lot in a short space. So I am looking for reinforcement of those messages and the foundation of a solid platform to launch from here. Certainly not expecting any dividend. Completely the wrong time for that - their job is to get their full resources to work now.