Sapan Gai, CCO at Sovereign Metals, discusses their superior graphite test results. Watch the video here.
FYI, KPMGs resignation letter as auditor in 2022, and the company's response to it is below. Relates to the accounting treatment of the CMA fine, ie the £8m provision made in 2021 accounts, and KPMGs view of the process by which the Board signed off on this treatment. Despite these concerns they still signed off on the 2021 accounts, as Deloitte did on the 2022 accounts. FWIW I don't really care about accounting treatment of the CMA fine, my base case is they eventually have to pay the £8m in full plus some CMA costs of £1-2m. Anything less is upside. Again me saying this doesn't preclude some other issues, technical or otherwise, with the delayed 2023 accounts...
https://www.alliancepharmaceuticals.com/media/gdgnqciv/circular-080822.pdf
For me the main risk is weak trading and more downgrades, but I hope them pointing to Jan trading update as recently as yesterday means this is not the case currently. I don't think the board / Numis Deutsche / Investec (blue chips in small cap world) would let them mislead on this point.
I should say - those EBIT multiples I gave are EV/adj EBIT multiples.
Even if no profit growth for next three years (v unlikely in my view), and if it only rerates to 8x EV/EBIT (v conservative in my view vs peers), I see c.80% upside at least from here simply as the business should reduce net debt to about £30m by 2026 even after paying the fine as interest costs will come down as debt reduces.
£41.5m EBIT x8 = £330m EV, less £30m net debt in 2026 = £300m mcap vs £165m today, ie 80% upside over 2-3 years. Excellent risk vs reward imho.
In reality (assuming nothing more nefarious in the accounts - which is a known risk) I think they will return to growth in 2025, reinstate divi and rerate to something more in line with historic rating of c.10x, so think my target above is pretty conservative in terms of both timing and share price. Also opportunity for further M&A which I think on the balance will lead to upgrades and be positive for the story.
Good post. A few additional points:
+ve. They've repeatedly pointed to their Jan trading update saying everything in it remains valid, ie: 2023 inline with cons ie £183m rev, £45m adj EBITDA, £41.5m adj EBIT, and net debt £92.4m, so leverage 2.05x EBITDA . AND importantly for 2024, revenue growth (ie £185-190m?) and flat profit ie £45m EBITDA and £41.5m EBIT.
-ve. CMA investigation. They've been found guilty (in 2022) and have provided for £8m fine but not paid it as they appealed, which was heard Aug 2023, no decision yet. I've looked at the CMA decision document (CMA website) and seems more likely than not that the appeal will not succeed so they will have to pay the fine. Personally I think this is already 'in the price'.
+ve. Balance sheet looks fine. Net debt £92.4m at y/e, should be lower now. Business is v cash generative, capex c.£2m, interest £9-10m so post tax should generate about £25m FCF (ie 45m EBITDA - 2m capex -10 interest) less 25% tax. Maybe a bit less due to working capital investment for growth (£2-3m?) and a few exceptionals (£2m?), it should generate £20m FCF. Even if they have to pay the fine plus costs (say £10m) net debt should reduce by about £10m this year to £80-85m. Note covenants are 3x leverage vs adj EBITDA (2x currently) and 4x net interest vs adj EBITDA (4.5x to 5.0x currently).
-ve. CEO has left. My take is it was related to the above - he was likely to be disqualified from being a director if the appeal failed. Think its probably on balance positive that the Board (which has been refreshed and looks high quality) is being proactive to have a new CEO in place before the appeal ruling.
??. Accounts delayed. Don't know why, seems many companies have had this happen this year. But delayed 4 times is very poor, especially with no reasons given. We know though that Deliotte was appointed 2022 and signed off 2022 accounts when all the CMA issues already existed and when debt was higher and profit lower. I think uncertainty the delayed results have caused is main reason for SP being where it is.
+ve. DBAY biggest shareholder at 20%. Good track record, and potentially could take it private. I also note Apax were sniffing around with a rumoured 70p bid early last year. No TR1s yet to see if any changes.
Overall I'm bullish at this price, I think this is a decent business that has built up a portfolio of quality global consumer healthcare brands, has demonstrated a consistent / predictable revenue profile and good cash generation. Consumer health businesses should trade on 10-15x EBIT (Reckitt on about 11.5x, Haleon on about 14.5x); Alliance can be had for c.6x EBIT, and after the fine has been paid it will throw off cash, degear rapidly and reinstate divis.
Obvious risk is that something more nefarious is going on with the accounts so understand those who want to sit it out. For me the main risk is weak trading and more downgrades, but I hope them pointing to Jan trading update
I'm sticking with it till results next week at least, as I think the fundamentals / valuation outweighs my concerns re governance (for now). The board changes to me suggest either Harwood is in the driving seat - good news in my books - or that the changes are more innocent. Hopefully we will see some new, high quality and INDEPENDENT NEDs appointed in advance of the AGM in May. Time will tell and very conscious I could be wrong here! Surprised shares have continued to be so strong in the interim...
Any other holders on here? I've done OK on this one, but thought there was quite a lot more to go for given the balance sheet is now sorted, the valuation / cash generation and with the upcoming PSTN switch off over the next couple of years which *should* be a tailwind (at least to the better parts of the business).
Current mcap at £37m give or take with £18m net debt and £9m EBITDA in FY23, so about 6x EV/EBITDA. But this falls to about 4.5x by end FY24, and 3.4x (!) by end FY25 based on Cavendish's forecasts which I would hope are conservative given the recent history... I also note the recent acquisition of 4Com by Daisy Group for £215m which shows there is still appetite for M&A in the sector. Daisy bid 450p for Maintel back in 2021 but for some absurd reason was rebuffed by the Board back then.
BUT I must say I am concerned following today's news. Exec Chair stepping down IMMEDIATELY which is strange in of itself with no explanation, Deputy Chair (and 24% shareholder, and I believe who is an NED of Herald IM who own a further 5%) stepping down at AGM. So at that point will only be one NED and two Exec Directors on the Board. No permanent CEO and not clear who is leading the search for one, let alone more NEDs. Then you've got the delay to results which in of itself would be innocent, but in conjunction with the above....
Outside in, it looks like there has been a bust up. Harwood own 18% which gives some reassurance, but not 100% clear they have the votes to push through changes here given the shareholder register, and its a tiny holding in the scheme of things for them...
Penny for your thoughts!!
Continuing small bolt ons in TIC likely I would suggest given the £60m ish war chest. Although I agree a period of organic growth, clean financials and cash generation would probably help with the rating, accretive bolt ons should generate value long term. I think there is quite a bit of margin upside on the TIC side also - which they also call out in HY results. Operating margins should be comfortably double digit in that business and were only 9% in H1.
PTSG did 20%+ EBIT margins, and ultimately was bought for c.16x EBITDA back in 2019. Different market now though!
Having said that I do think there is a more than reasonable chance the TIC and OH bits get sold now that Dacre is moving on. Possible there is fire where there is smoke re the earlier rumoured c.£300m TIC disposal...
Felt compelled to post (first time!) as quite a few different figures flying around for the remaining biz, including from their house broker. My take below. All figures are co adjusted and public:
1) The sold biz did £31.4m EBITDA in FY23 as per the RNS. As others have pointed out this means the £430m consideration is c.13.7x trailing multiple, and lower on current year numbers - it probably did £16-17m most recent HY, and a recent £20m bolt on IMSM, so FY24 probably £34-35m. An OK price in these markets, but not knock out. Note the £31.4m was 38% of FY23 Group EBITDA (£82.7m) which tallies with the c.40% that the RNS states.
2) This means the remaining OH biz did £20.1m EBITDA in FY23, because the total GRC division did £51.5m (ie 51.5-31.4). Commentary in the HY results suggest some margin pressure in H1, but they grew single digits organically, noted a strong pipeline and expect margins to increase through 'significant' synergies going forward. Seems a business in decent health, excuse the pun. For more info on it, there is a pres on their website from 2022 when they acquired Optima Health (£11m EBITDA for £135m). Total OH EBITDA for Marlowe at this point expected to be £19m post synergies. They subsequently acquired TP Health for c.£15m for £1m pre-tax profit. So the £19m + £1m triangulates well with the £20m EBITDA I think OH did last year, although it seems they are behind in terms of getting further synergies from integrating the various bits.
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3) Which leaves the TIC business, which did £36.8m EBITDA last year, £19.3m in the most recent HY, and they are growing organically (6% pa) and completed 4 bolt ons , which suggests H2 will be better than H1, ie for this year TIC probably does about £40m EBITDA.
4) Central costs running at £6.5-£7.0m pa assuming no cost out post divestment. Means Group EBITDA this year at least £53m. Although CEO is moving across and business 30-40% smaller so there should be cost out here.
5) House broker (Cavendish) up until recently had forecast of £92.5m EBITDA for this year. If you ex out a rough £35m for the sold biz you get £57.5m EBITDA for this year. I wonder if this has been trimmed a little, but this suggests my £53m is conservative mainly due to growth / M&A / margin improvement to come in H2. I think £55m for this year (y/e March( is about right. Cav had £97m for next year (FY25) which we are almost in, and I'd suggest this is a better basis for valuation; ex the sold business I think this would be roughly £57-60m for TIC & OH.
Putting it together I agree £700-750m total value is well underpinned by the remaining businesses and the cash on the balance sheet post deal. Cash c.£205m, OH at 10x is £200m+, TIC at 8x is £320m+ = £725m+. I'm long obviously, and considering adding as I think 40-50% upside should be realised in short term once market cottons on, or if previo