Close the Loop has a bit of a messy history just due to a number of acquisitions that muddy the financials. 

Essentially they have 2 business segments packaging and resource recovery, both segments recover pre-used goods and repurpose them into usable products. The packaging segment deals with repurposing soft plastics and paper to make products such as food packaging, receipt paper, plastic regrinds, bulk packaging, and seafood packaging while the Resource recovery segment recovers perused items such as print cartridges, batteries, cosmetics and electronics and helps sort and repurpose them to reuse or to resell. Both segments can and do partner with clients to meet their specific recycling needs and given a low percentage of products that can be recycled actually are they are seeing strong demand as businesses become more conscious of the environment along with the fact it’s cheaper for them to reuse products. The business maintains very decent margins of 20%+ and 12%+ for EBITDA and NPAT respectively. 

They have some proprietary products such as Toner Plus which uses soft plastics as an asphalt additive and Rflex which is a repurposed plastic for manufacturers. They are seeing strong demand within the resource recovery space especially from their recent acquisition: ISP tek services which helps repurpose electronics for OEMs which they are rolling out throughout Europe and may actually be an AI beneficiary as they are seeing strong demand with what they call ITAD which is recycling of data centre servers. 

The 2 founders own 12% each, and while the business has made a number of acquisitions they have stated they are not a roll-up but wait for value-adding acquisition, and for a capital-intensive business with network effects, scale benefits and cross-selling abilities there are many synergies from acquisitions. The business has $56m in cash with $78m in debt, and reduced net debt by $12m in H1 and currently looking to just pay down debt and consolidate their acquisitions. 

Despite shipping delays in H1 within the packaging division which saw a revenue decline they upgraded guidance to $200m+ in rev and EBITDA of $44 to $46m for the full year, which should equally NPATA of ~$26m for the full year.  

CLG currently trades at a market cap of $159m equal to 6.1x full-year earnings. The business won’t revolutionise the world, but 6x earnings to too cheap IMO, and as they continue to repay their debt and grow earnings organically and potentially inorganically the value should be recognised. 

Close The Loop has significant selling pressure today – obviously the market disagrees with my valuation published yesterday! So, I doubled my position at 30c, somewhat surprised when my low-ball offer triggered.

So currently the market is valuing CLG on less than 7x FY24 expected FCF. PE is under 10 adjusting the Comsec PE for today's price move. 

Looks like someone with a large stake sees better use for the money. IPO investors are still up 50% and given a lack of dividends, insiders may need some cash… Will be looking for change in ownership declarations coming up.

Disc: I own RL+SM

Value on ISP Tek Service acquisition (43-56c): Some ways to look at the post-acquisition value based on the company presentation of the deal and expected outcome.

·        Firstly share count changes: 44.6m shares for part of the consideration, capital raise 1 for 80m shares at $0.33 and capital raise 2 for 56.4m shares at $0.33 (total A$45m raised from sophisticated & professional investors…hmmm). Plus in 2026 a possible US$15m of shares at $0.74 from convertible notes, which doesn’t impact the current capital structure (just a note).

·        So the transaction will result in shares have gone from 335m to 516m, adding A$37m net debt (per proforma balance sheet), hence EV at $0.35 per share will be A$218m (M cap 181m+net debt 37m), if they are able to achieve the post-acquisition NPAT of A$23.8m then it’s trading just under a P/EV of 9 and a PE of 7.6. 

·        It is also expected to be 100% accretive on an EPS basis, which for H1FY23 was 1.2c for the half year, so full year doubled is 4.8c which at the current price of $0.35 per share gets us back to the PE of 7.3. I think a PE of 10 or more is a reasonable expectation, which if it gets to that in a year is $0.48 and discounted at 10% is worth $0.43 today.

·        In total US$15m of 3 year convertible notes are being issued at a 4% interest rate and convertible at $0.74. That’s not a great rate of interest for the bearers unless they think they have a good chance of upside on the conversion, but the conversion is at over double the current share price. If we take $0.74 as a reasonable value in 3 years, discounted at 10% it is worth $0.56 today.

·        So a value range of 43-56c could be justified out of the deal, it also justifies “sophisticated and professional investors” being interest to buy at 33c. This just a perspective on value from the deal and ignores both the opportunities and risks for the business going forward that come from the deal.

Announcement (17/3/23): Close the Loop Group to acquire 100% of American refurbished Electronics business ISP Tek Services registered in Southlake, TX, USA. Anticipated completion date of 28/4/23

Disc: I own in RL

A seemingly rarity in today's environment for a company to release a PROFIT UPGRADE (revenue and EBITA to be more exact)

Close the Loop listed on the ASX late 2021

Close the Loop are flying under the radar. In fact, I barely knew this company existed until they released this announcement. (I have a rule not to buy a company until it has been on a public exchange for at least 6 months or one reporting cycle).

Anyway, Close the Loop is all about the 'closed economy' dealing with packaging and recycling. More research needed on the risks/tailwinds/competition/growth prospects

BUT Close the Loop is profitable/growing and the chart looks very healthy. Thus I am now following the company.