Is Enero a trading stock?
I wouldn’t call myself a trader, but if I were to trade regularly for a profit I would choose a stock like Enero. Why? Technically you could trade any shares that have high volatility, but it would be much safer to trade a stock which is both volatile and has deep value. That way if you get stuck holding it there is still value there which should materialise in time while you collect a nice fully franked dividend.
If you are looking for deep value I don’t think you can go past Enero. It sits at the top of my deep value watch list. Yet, I’ve been accumulating it lately for under $1.64, yesterday as low as $1.63. Today it is trading at $1.79, up 10%. I can’t bring myself to sell it though because it’s too cheap! It has been doing this quite a bit lately. I don’t understand it, but there could be money to be made out of these trades.
As I said, I’m not really a trader and I can’t bring myself to sell at $1.79 even though the share price is likely to fall again.
It’s not my style, but for the traders out there this could be one to look at.
Continuing this wee investigation .., coz I'm curious now,
I was just looking through its last balance sheet, which looks pretty healthy.
Assets
$38m Cash and equivalents
$99m Receivables, which were bloated because of the two large late payments, now made. Based on the information given at the results, the late payments amounted to about $17m, so the receivables are still really high.(Adjusted to be $82m vs. $64m at FY22.) If payments get made and there is reversion to a normal level, that would point to a strong cashflow report at the next result.
Liabilities
$26m debt drawn from a $50m facility. So, not bad at < 0.3 x EBITDA (FC).
+
$50m contingent consideration, which when you look in the notes is payments due to the acquisitions MBA (2021), Hotwire DNA (2022) and GetIT (2022).
Of these, GetIt looks like the biggest as the initial payment was US$26m cash and US$6.6m Enero shares with a series of future performance payments to be capped at US$90m. So, on the assumptions that payments are made only if business is good, then they look very do-able.
Conclusion - the balance sheet looks pretty strong.
Sector comparisons
I can't find anything in the newsflow to indicate anything obvious.
So, I had a look at some of the sector peers: OOh Media, HT&E and IVE. You can see that Enero got smashed at the HY report and has continued to track down. Ooh Media got smashed at their AGM, when they gave a soft trading update. So, perhaps the Ooh Media update provided further negative sentiment into the sector?
HT&E has been on steady decline over 12 months. IVE is the exception - it has been giving positive updates on acquisitions and a good trading outlook at its last results.
In making these comparisons I want to highlight that I know NOTHING about this sector!
So, on a 12m view, Enero is the clear SP under-performer, even if this level of underperformance doesn't leap out form the financial results. Perhaps it is being punished because it is relatively small AND its trading update was vague and negative?
Looking at the broker vals, Enero has been on a pretty steep downgrade cycle. since middle 2022. But maybe that was just the brokers waking up that the market wasn't following their lofty valuations, as the brokers didn't adjust unitl the SP had already been in decline for 9 months! They clearly got over-excited in Oct/Nov 2021.
Shareholding
Insiders only hold 4.7% of shares, and over the last 12 months, according to Simply Wall Street, there have been no Director sales and 5 modest purchases.
Conclusion
Reiterating that I know nothing about this company or its sector, I think the low SP is a combination of:
a) Established broker down-grade cycle
b) Questions over cash flow, due to late payments at last report and a high receivebles level
c) Other bad news in the sector, linked to macro conditions
d) Market being forward looking - if a recession is expected, corporate marketing budgets get cut, and the advertising and media sector gets smashed
e) They are small, so these fears are amplified - could a downturn be an existential risk?
If there is a good business here, then Enero would potentially be a very strong recovery play. The next report would indicate if these minor wobbles get righted.
Apologies - I don't usually write straws on companies and sectors about which I know nothing! But @Rick piqued my curiosity.
Disc: Not Held
@Rick I've been pondering your well written and thoughtful straw regarding the buy back. Completely agree about preference for a buy back as opposed to a special dividend, and agree with your rationale for the expected benefits that should flow from a buy back assuming the share price remains depressed below $2 for an extended period of time while the buy back is in motion.
What gives me pause though (and was the unwritten basis for my comment that I was "Personally unconvinced its the best use of their cash") is essentially captured in your potential uses for their cash option 2 i.e. "Aquire a businesses that is immediately earnings accretive with ROIC higher than 20%".
I've read plenty of commentary that Enero have not been very disciplined with the valuations paid for their acquisitions - something reasonable minds can differ on to be sure - but given the uncertain times over the coming 1-2 years, it feels like retaining/building up a war chest for the optionality to acquire any worthwhile businesses which can be nabbed at an attractive valuation is a solid "use" of cash as opposed to having to fund acquisitions with shares (bad at low SP) or with debt (likely ok given their strong earnings and ability to repay quickly but debt on the balance sheet turns people off in the current environment).
It's of course possible for them to both do a buy back and keep a cash buffer for acquisitions, but given the board has indicated they think anything below $3 is undervalued, the question I ask myself is would I prefer them to keep blindly buying back shares in the $2-$3 range or hunt for solid acquisitions? If they could nab another OBMedia but pay more up front for something that has proven itself that would obviously be a win but may cost a big chunk of change to acquire (Enero bought their 51% share of the unproven OBMedia back in 2007 and it has taken this long for it to grow/morph into the valuable business it is today).
Worth noting also that they've sold some businesses in recent years that weren't kicking significant enough goals or seen as providing sufficiently differentiated professional service offerings across the group as a whole, so they're definitely working on moulding a stable of great, complementary businesses.
Anyhoo, I'm not strongly arguing against the buy back, but wanted to flesh out my reservations a bit more and see if they prompted any further discussion.
Thanks @loshell for expanding your thoughts. I agree with you. Anero has a huge potential for organic and inorganic growth as the TAM increases from US$500 billion to US$1.2 trillion as the business moves into digital transformation and analytics (Strategy Webinar, Slide 11). They should continue to invest in strategic growth opportunities as opportunities arise.
Management said they are aiming to “strike the right balance of investment in opportunities for future value creation and prudent return on excess cash” while limiting debt to 1.25 x EBITDA (Slide 84). I think that having a well thought out capital management strategy helps to keep management on track and focused on the best outcomes for shareholders.
Cheers,
Rick
As a previous holder (for a short period of time) I was surprised to see how hard this has been dumped by the market. The amount of profit attributable to non-controlling interests was of concern when I initially looked at half yearly results. After seeing the Tweet below on my feed, it pointed out to me that OB Media is making all the profit for Enero. The rest of the business' owned by Enero are only breaking even. However, having a think about it, even if you value everything at zero besides OB Media.
OB Media is making an annualised profit somewhere in the range of $50-60m based on the half year results (don't know if this is seasonal?). Putting an ultra-conservative 10xPE on OB Media (remembering this business has growing rapidly over the past few years) that would put the value of OB Media for Enero at a minimum of $250mil with the current market cap sitting at around $173m ($1.87 share price). Looks like the market may have overshoot to the downside, I am thinking about retaking a small position, initially as a bit of value trade.
@Rick reference your conviction post, is there anything I am missing?
https://twitter.com/ForagerSteve/status/1625985966405218305
Yes, Forager Funds have been into EGG for years, pretty much since Steve Johnson started the company.
https://foragerfunds.com/news/enero-lays-a-golden-egg-for-foragers-australian-shares-fund/
Enero Lays a Golden EGG for Forager's Australian Shares Fund - Forager Funds
I would doubt that FOR is selling. FOR are not substantial holders of EGG, as they hold less than 5% of EGG's shares on issue, so we won't know if they do sell down unless Forager tells us.
Wilson's (WAM Funds) have sold down or out, however, and much of that appears to have been bought by Perpetual, Regal and Perennial, as indicated by their respective notices dated Feb 20th. Interestingly, Perennial sold down from 10.69% to 9.52% (notice dated 15 Feb 2023) and then lodged a notice 5 days later to say they had increased their EGG position to 12.76%. Plenty going on. And quite a bit of insto ownership (Subs) on the register.
Disclosure: I do not currently hold EGG shares.