Straws are discrete research notes that relate to a particular aspect of the company. Grouped under #hashtags, they are ranked by votes.
A good Straw offers a clear and concise perspective on the company and its prospects.
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· March 2023 ISP Tek Services US$66m (A$99.7m) ISP Tek Services LLC. and Captive Trade Corp. are leading refurbishers and distributors of consumer electronics within a blue-chip customer base that has helped deliver phenomenal growth in its last two years of trading. ISP Tek Services LLC is an HP Remarketing Partner and Authorized Distributor, as well as a third-party refurbisher (TPR) for Microsoft, Samsung, LG and other industry-leading manufacturers. It refurbishes high volumes of off‐ lease or previously-owned computers as well as inkjet, LaserJet and commercial printers. Products are obtained from OEM’s return route channel and mass retailer returns, plus a variety of different sources including excess inventory, bulk purchases, customer returns, cancelled orders, damaged products, and demo products. ISP Tek Services then refurbishes these products and re‐sells to the education, healthcare and private sectors, as well as providing a marketplace for direct-to-consumer sales, utilising its signature highly automated processes to reduce reliance on skilled labour and maximizing accuracy. https://announcements.asx.com.au/asxpdf/20230317/pdf/45ms8t97q7bjw7.pdf
· January 2023 In-Plas Recycling (“In-Plas”) US$4m - headquartered in Cincinnati, Ohio, In-Plas Recycling is a recycler and processor of post-industrial scrap, pellets, regrind and by-products, and also sells a broad range of recovered plastic products on the market. In-Plas operates at three sites located at key customer facilities. In-Plas works with a variety of thermoplastics and operates across multiple sectors including automotive, manufacturing and pharmaceutical. It provides bespoke solutions to maximise scrap value, create landfill costs savings and increase closed-loop recycling capabilities. In-Plas also provides verifiable destruction, rendering as unusable products such as automotive assemblies, retail and pharmaceutical packaging, CDs, obsolete signage and VCR tapes. https://www.asx.com.au/asxpdf/20230117/pdf/45kq47mz3rfz0m.pdf
· July 2022 Alliance Paper $1 - is a leading Australian supplier of thermal paper and associated paper products and services. It is the largest and longest-serving supplier and converter of paper roll products in the Australian market. Alliance offers a range of BPA and phenol-free thermal receipt rolls and other paper products which are recyclable, supplying leading Australian supermarkets as well as several leading brands including KFC, McDonalds, Nike and Bank of Queensland. https://www.asx.com.au/asxpdf/20220726/pdf/45c58qcmmcdwz2.pdf
· February 2022 Crasti & Co $5.85m - is one of Australia’s largest Flexible Intermediate Bulk Container (FIBC) and bulk packaging supplier. Crasti & Co. is a market leader in ensuring that all its FIBCs meet stringent Australian safety standards and has led the industry in developing these strict standards over many years. https://www.asx.com.au/asxpdf/20220207/pdf/455qf52rl7pjx0.pdf
· December 2021 Oceanic Agencies $3.24m - is a Queensland-based business and a major Australian supplier providing both packaging and materials handling for the aquaculture, wild caught and post-harvest sectors of the seafood industry. Oceanic supplies some of the largest seafood companies in Australia with custom-printed commercial packaging, insulated bins, flexible plastic packaging and plastic tubs and crates. It is also the largest supplier of insulated bins in Australia and is the exclusive distributor for three globally recognised brands of insulated bins, and the only local distributor of three innovative sustainable packaging brands. https://www.asx.com.au/asxpdf/20211207/pdf/453wd3731xqll3.pdf
Close the Loop Management
Inside Ownership Ordinary Shares %CLG Issued Net Value at $0.30
Greg Toll 3,600,000 0.68% $1.08M
Joe Foster 65,008,920 12.22% $19.5M
Marc Lichtenstein 4,500,081 0.85% $1.35M
Lawrence Jaffe 68,316,294 12.85% $20.495M
Grant Carman 1,250,000 0.24% $375K
Sammy Saloum 45,116,616 8.48% $13,535M
Total 187,791,911 35.31% $56,338M
Greg Toll - Non Executive Chair
Appointed director of Close the Loop in 2017.Before joining Close the Loop, CEO and Executive Chairman of Clean TeQ Holdings (ASX: CNQ) – appointed as CEO in 2007 then to the chair role, which he held until November 2013Holds a bachelor of science (veterinary) degree with first class honours and is a graduate of the AICD
Joe Foster - Group CEO
More than 40 years experience in the flexible packaging industry, with experience in engineering, production, technical, sales and marketing.Global view of packaging world due to running own businesses spanning across countries in multiple continents. Fellow of the Australian institute of Packaging and Co-Founder of O F Packaging.
Marc Lichtenstein - CFO
Joined Close the Loop in 2017 as CFO. Has led and worked in a number of senior roles in range of listed and private companies across a wide range of industries for more than 25 years.Extensive experience in leading business through significant periods of change. Chartered Accountant, Chartered Secretary and Graduate of the AICD.
Lawrence Jaffe -Executive Director /Chief Commercial Officer
CEO and Managing Director of RPM Australasia until 2015 and stepped down when the company sold off its largest divisions . He remained on as Non-Executive Chairman until the company listed on the Stock Exchange and now Strategic Director for the Group. In 2016, brought together the founders of O F Packaging, becoming CFO and executive chairman.
Grant Carman - Non- Executive Director
Over 30 years experience in corporate finance. Previous roles included CFO for ORIX Australia, GM Finance & Shared Services NAB, CEO of National Australia Corporate Advisory, Director of Acquisitions at Ferrier Hodgson CA, and Group Financial Controller at Faulding. Currently Non- Executive Director of RPM Automotive Group (ASX: RPM).
Sammy Saloum - Non- Executive Director
For over 25 years, Sammy Saloum has been a leader in omnichannel retail, merchandising, marketing, financial services and reverse logistics. Sammy has developed a global network in all aspects of retail, managing billions of dollars of profitable growth. As CEO of ISP TekServices LLC, Sammy supported some of the world’s largest consumer electronics businesses through leading circularity, reuse and re-manufacture services in the US, culminating in the acquisition of the business by Close the Loop Ltd in 2023. Prior to this, Sammy served in Sr. level executive positions with key brick and mortar retailers including RadioShack, CSK Auto and CompUSA Inc. He has a reputation for delivering strong revenues and profits, and positioning existing businesses for sustainable growth in both US and International markets.
Michael Welton - CEO of North America
Michael is an industry veteran with over 30 years’ experience in sustainability. Previously, as President of Environmental Reclamation Services (ERS), he led the growth of the company to U$50 million in annual revenue in under eight years, culminating in its acquisition by Clover Imaging Group in 2009. As an executive member of Clover Imaging Group, Michael managed global recyclables collections as well as its eCommerce platforms. Michael holds a bachelor’s degree in computer science and mathematics from Gannon University in Erie, PA.
Tom Ogonek - CEO of Close the Loop Plastics Recycling USA
Joined Close the Loop in 2011 and oversees all aspects of global operations. More than 20 years of operations experience and environmental industry perspective and is responsible for driving continuous improvement of operating efficiencies and facility management in all global operating centres.
Here's a summary of today's meeting (with some help from my AI mate Claude)
Close the Loop operates in the "circular economy", with a mission to minimize landfill waste by recycling materials into new products and packaging. Founded in 2001 as a specialist collector and recycler of printer cartridges, the company has significantly expanded its scope to include a wide range of materials such as soft plastics, batteries, cosmetics, and electronics. In late 2021, Close the Loop merged with OF Packaging and listed on the ASX, marking a significant milestone in its growth journey.
The company's core focus is on keeping products in circularity through refurbishing, remanufacturing, and recycling. Something that is seen as increasingly important by consumers and corporates that are facing increasing ESG pressures.
The company has established an extensive network of over 200,000 collection sites in North America, 60,000 in Australia, and more than 40,000 across Europe. By working closely with major OEMs (Original Equipment Manufacturers), the company collects and refurbishes products like printer cartridges and consumer electronics, helping these OEMs meet their sustainability targets and comply with increasing regulatory requirements, especially in Europe.
One of Close the Loop's key strengths is its ability to scale up operations without significant capital expenditure. The company's existing facilities have ample capacity, and by adding extra shifts, they can substantially increase processing volumes. This operational leverage allows Close the Loop to improve margins as volumes grow -- that at least is the theory.
Acquisitions have played a crucial role in its growth strategy. The company seeks out businesses that fit within the circular economy and can be integrated with their existing operations, and are judged on a pro-forma basis (but they have tended to pay 3-4x EBITDA anyway). They Stressed several times that they were NOT a roll up.
The CEO sees tremendous growth potential for Close the Loop, particularly in the North American market, with the company well-positioned to capitalize on the growing demand for recycling and refurbishing consumer electronics, driven by both consumer sentiment and regulatory pressures. By leveraging its strong relationships with major OEMs and its expertise in the circular economy, Close the Loop aims to become a half-billion-dollar business within the next 2-3 years.
We also touched on the company's capital allocation strategy, with management emphasizing the importance of maintaining flexibility and choosing the most appropriate funding option based on the opportunity at hand. Close the Loop's strong free cash flow generation provides afoundation for both organic growth and strategic acquisitions.
When asked "what does the market misunderstand" (shares are on a very low earnings multiple as others have noted), they said investors may not fully grasp the scope and scale of their operations in North America, particularly in the consumer electronics recycling space. They highlight the company's ability to refurbish and remanufacture products within a 30-day window, a concept that is not well-established in the Australian market, making it challenging for investors to draw comparisons.
There was also some underappreciation of the depth and strength of relationships with key customers, such as major OEMs. They also said investors may not fully appreciate their ability to significantly increase production volumes without substantial capital investment.
All told, I personally find it good to see the leadership team with significant skin in the game, and a lot of industry experience (the CEO was the co-founder of OF Packaging that was acquired by CLG when it listed). And there really does seem to be a very big disconnect between the growth potential and the market multiple -- although perhaps that's not unreasonable given that much of the growth as a listed company has been nullified on a per share basis due to the issue of new shares. But if we even see a modicum of growth on a EPS basis in the coming years, it's easy to see the potential for a meaningful re-rate.
On the other side of things, they didn't really answer my question on the economic rationale for customers. Is it just good vibes and ESG virtue signalling that is driving sales, or is there a genuine economic driver for their customers?
The CFO said they work with OEMs to develop "takeback programs" for products like laptops, ensuring that Close the Loop can refurbish and remanufacture these products as soon as they are returned, sometimes within hours of a new product launch. Also, customers benefit from Close the Loop's expertise and infrastructure, which allows them to focus on their core business (e.g., sales, marketing, and R&D) while Close the Loop handles the complex reverse logistics and recycling processes.
Anyway, it's one i'm adding to my watchlist.
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.
Some insights into what drove the selling pressure that started on 8 March with Challenger (Greencape Capital) disclosing it sold 14.6m shares via either it’s nominees JP Morgan or Citicorp. The date of the sale is 12 March but given volumes on the day were 1.7m I assume it covers sales back to the release of results on 28 February which is the only way to get to the number of shares sold.
Or it’s a block trade that is not recorded in the trade numbers yet (which may also explain the $0.29 price which is well below the average for the date range), but wouldn’t explain the on market volumes unless it’s the buyer of those share that had the opportunity to sell at a higher price before buying at $0.29 (like that ever happens!). The timing just on or after the half year results release gives a hint that it maybe an insider or someone who has similar trading restrictions – will have to wait for subsequent disclosures, but no other indication at this point.
JP Morgan and Citicorp nominees has a total of 11m shares at IPO ($0.20 per share), and Challenger reduced it’s position from 33.2m (7.96%) to 27.8m (5.23%) so had bought most of it’s position post IPO. A healthy gain on sale and still a significant position, but it could be a case of “right sizing” the position, needed capital elsewhere or based on valuation… they probably wont tell!
My current take is that it’s a relatively small shift in positions by relatively large holders in a low liquidity stock – hence they are paying a liquidity premium. That is it’s just volatility in price rather than a shift in value. Hence I am happy to top up at the discount.
Disc: I own RL+SM
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
New valuation: 45c (40/51c EPS/DCF methods base case, 68c bullish)
FY24: The previous valuation of 43-56c was based on guidance provided as part of the ISP Tek Service acquisition in March 2023 and transaction details. A year on the H1 FY24 results and guidance for FY24 indicate that sales (>$200m Vs $199m) and EBITDA ($46m Vs 43m) have at least been maintained, but growth on the consolidated entity is missing despite a year passing.
Also the NPAT expectation of $23.8m for the combined entity is not likely to be met when the FY24 figures are released in six months. Underlying NPBT which ignores intangible amortisation of $8.3m was the closest reference to NPAT in the half year presentation with the increase of the FY24 EBITDA guidance from $44m to $46m running intercept on the issue.
At the time of the acquisition of ISP Tek Services they noted that the $23.8m NPAT for the combined entity included interest expenses (bank and CN) which is going to be over $10m for the full year (more on that later). So I can only guess that they forgot to include the intangible amortisation (which is going to be over $16m) in their proforma NPAT estimate for the combined entities…
Sales: Sales for H1 were up 34% HoH but this was mostly the fact ISP was only included in 2 months of the previous half. Australia sales were down -15% HoH (O F Resource Recovery business impacted by lower commodity prices & packaging business soft), offset by the +98% increase in USA sales, which factoring in acquisition timing was more like +20% and how makes up 60% of sales. So ISP seems to be going well and is being talked up in terms of future growth (HP Inc 3 year contract with expanding service opportunities).
My valuation assumes sales will land around $208m in FY24 and grow at just 5% to FY28 (10% in bullish valuation), which shouldn’t be too challenging assuming the Australian business recovers and or the USA business shows a fraction of the promise being talked to. Margins (excluding other income) are around the 36% the combined entity expected and I have left them there, but ISP may increase average margins if it grows faster than the rest of the business.
EBITDA: Operating costs excluding D&A were up just 2% HoH, which is good given the 35% topline growth but we should have seen some of the US$3m in synergies from the ISP acquisition helping. What I am concerned about is board and executive remuneration when we get to the full year. In the FY23 accounts Director & Executive Remuneration increased from 1.68m to 2.88m (71%) which represented 24% of Employee Benefits expense for FY23. The proportion that was performance based increased from 12.8% to 21.9% so ignoring this the increase was 54% in non-performance based remuneration.
I am only assuming 3% growth in operating expenses FY25 to FY28, which is probably undercooked but in line with very conservative sales growth expectations. Opex excluding D&A drops from 16% currently to 15% in FY28 so only 1% operating leverage is factored in. EBITDA% increase from 20% to 21% by FY28, which is down from the 22% from H1 FY24 due to GM excluding other income, the interest part I have needed against interest expense below.
NPAT, Debt & FCF: Net debt down $11.8m to $26.2m in H1 FY24, $6.5m FCF for the half and $55.7m cash provide comfort in the face of $81.9m in borrowings. So I am not worried about the debt currently but on going asset and business purchases may change this. The key issue is the cost, which has a material impact on forecasted cash flows and NPAT.
The details of all the debt are at the bottom, but at issue is the Senior Secured Term Loan for US$40m at 12.15% to Oct29 is going to cost $7m in FY24 and $5.7m by FY28. This is expensive and locked in, I would expect they could generate cash to pay it down otherwise. Interest for all debt offset by that earned from cash I have included $34.6m in total from FY24 to FY28.
The interest costs bring us from an EBITDA% of 20-21% to an NPAT% of 4.6% up to 6.4% by FY28. The FCF remains strong due to the high level of amortisation on goodwill, so again, plenty of cash to service the debt – it’s just expensive financing. Capex of $6.8m in FY24 increasing by 10% still allows for $20m FCF increasing to $28m by FY28.
Management and Business: Over 25% of the business is owned by insiders, and most have a long standing connection to parts of the business, Joe the CEO in particular is grassroots. Hence I view management as highly aligned and with deep operational and business knowledge. Also I get the feel that they are solid business managers – having relied on running a business to put bread on the table for a long time. In addition they have a good collection of directors with ASX experience, so I expect the governance and communication to be done well (low chance of noob ASX errors).
Balanced against the management experience is the roll up nature of the business as well as the venturing into new areas. So far it’s all made strategic sense and been on script with IPO communication. However it’s combining new business in a newly developing market that is being lead by new legislation. They have tailwinds because of this, but gusty cross winds are to be expected and operational execution will need a margin of safety. I think the management are vested enough and aware enough to act appropriately, but something to keep an eye on.
The business is quite diverse both operationally and geographically now. There are definite synergies across parts of the business and geography that offer growth and innovation, but it’s very hard to quantify them. It’s also hard to even know how each part is doing due to a lack of granularity on sales and operations. So it’s both concerning not knowing but also comforting knowing that the diversity provides downside protection.
Conclusion: I am already invested and down, but thinking of topping up at current levels. The upside is very hard to grasp, so I have approached it looking at the downside. The current price offers a healthy margin of safety on a set of assumptions that are not hard to meet. Even given the muddy nature of all the consolidations, underlying businesses and the consolidation of them look healthy and profitable with solid contracts (HP Inc) and ongoing operations.
Disc: I own in RL, may top up and also may add to SM
Debt: 31 December 2023
· Senior Secured Term Loan US$40m @12.1487% from 26 Apr 23 matures 26 Oct 29. 0.625% principle paid quarterly for 2 years then 1.25% quarterly. 25% paid by maturity.
· 2 x US$7.5m CN @ 4% for 3 years from 23 Apr 23
· $4.5m trade facility
· $5.2m business bank loan
· US$7.5m Multi-Currency Revolving Credit Facility with PGIM.
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