Pinned straw:
Share price
Safe to say today’s Downgrade blamed on PC implementation delays has underwhelmed the market.
CHL share price has been poleaxed - down nearly 25% today and more than 50% below this year’s highs and 75% below all time / boom time highs.
Essentially a 30 day integration plan for PaulCamper took closer to 90 resulting in up to $4m in lost revenue in FY24 (one off).
As @mushroompanda mentions, this seems like a lot of revenue to lose from a 3 month integration from a business only making about double that in a 6 month period...
Cost gains of up to $4m to come in FY25 (and going forward).
It's a jam tomorrow story that the market understandably doesn't like.
Anyone in it for a good time would be out by now.
Kiss the nuts?
I gave CHL the kiss of death with an optimistic overview a week ago and this morning reality caught up with it and me.
I’ve topped up today, so look out below - that’s a potential kick in the nuts while it’s down…
Mgmt have a couple of black eyes – one for the execution problems, and the other for how they have explained it / lack of transparency.
Mgmt Questions
Mgmt were not great on the call which was scheduled for 2 hours (weird?) but lasted just 15 mins with 4 of my questions either bundled, misinterpreted (possibly my fault) or ignored.
Mgmt weren’t overly transparent and seemed keen to get it out of the way as quickly as possible.
I asked about a post implementation review which I believe is common (but maybe only best) practice for projects of this size, especially when they blow out. That was ignored.
Why now
With announcements like this I always find myself asking “Why am I hearing this now?”
The ASX Announcement was marked material and rightly so but if the integration was completed in April it could / should have been released earlier than today.
@Rapstar mentioned the PaulCamper founder Dirk’s 10% CHL holding comes out of escrow in a few weeks, so this may explain the timing – so he gets to taste some of his own cooking?
I double checked this and @Rapstar is spot on – Dirk’s escrowed portion just dropped $2.4m in value from $9.7 to $7.3m as the price fell from $1.46 to $1.10 today.
This is also effectively an early confession season entry but also possibly to clear the air ahead of next week’s Shareholder presentation day…
Shareholder Day
If I can shuffle some other commitments, I'll be attending the CHL Shareholder Day next week (e-mail [email protected] if you want an invite, RSVP's are due tomorrow) to get a better sense of the business including the PC implementation, M&A plans going forward, etc.
The best thing I may end up getting out of it is to put this idea to bed for a nice long sleep / induced coma if it doesn't seem to have the emerging quality factors that drew me to it.
Insiders
Directors were buying on market in Feb & March when the delays would have been known.
However, Apollo would have also known when they sold out at much higher prices than today, but they had their own issues and probably just needed the cash, given their subsequent downgrade.
Dirk is stuck with 90% of his shares (6.64m) out of escrow on or about 2-Jun-24, with the $1.96 the scrip part of the deal was struck at dropping to $1.10 now costing him $5.7m on paper. $2.4m of that was due to today’s fall… so he’ll not be a happy camper.
The high cost of M&A
As mentioned last week "M&A is a big risk here" and the M&A Risk for this business just got real.
I had a look a the last 2 decent size acquisitions (excluding the tent business bought for $0.8m) - PaulCamper being the largest by far and they only spent $1.8m cash on it, the rest being scrip of $48.2m @ $1.96.
The other was an all scrip seal for Tourism Holdings Limited (THL)'s ANZ assets for A$7.4m in CHL shares at a price of$3.34 ea.
So these deals were dilutive but at higher prices than now and didn't cost a lot of cash.
This is potentially lazy analysis and ignores the potential that management have destroyed value with poor capital allocation by throwing equity around like candy.
I don't think we'll know how good these acquisitions were for a while yet and mgmt have been diluted along with the rest of us. Time will tell.
What now?
The bull thesis is that it's fundamentally a good business (emerging quality), with a dominant 2-sided marketplace in select markets that should be winner takes most due to network effects.
If it wins this game without destroying value along the way it's probably cheap today, if not, it probably isn't.
CHL has 50%+ market share in ANZ, 50%+ in UK, big in selected EUR markets (dominant in Germany, also big in Netherlands & Spain), so scale is under construction and approaching an inflection point (FY25 or FY26 NPAT break even I expect) but already marginally FCF positive and self funding except for M&A which now seems unlikely in the near term.
Buffett (here we go...) has said he likes to buy great businesses with short term problems - CHL is no AMEX but if management have learned their lesson (unclear), can steady the ship (hopefully doing that now) and turn it around from here (easier said than done), $1.10 could be cheap.
The bear thesis is that this is the tip of the iceberg as @Tom73 also fears, so we may see more downgrades, it will keep making losses and possibly start burning cash as revenue is stagnant, management are out of their depth, and looking for ways to restart the growth engines.