Ahh, you again Scoonie. What do you want?

Nothing, just to tell you I have sold all my RPM Holdings, you know the listed automotive group roll up, ASX:RPM. Got out with a small profit of about 6%, only in there about a month!

What makes you think I give a rats what you did?  

Well, I just thought you might like to know.

As I see it you should never have bought it, you dickhead.  What person in his right mind would buy a heavily leveraged roll up retail stock in a period of rising interest rates and a weakening economy? The guys who run it look to be a bunch of miscreants as well.   Outside of Wesfarmers next to none of the retailers has reported any good in the last 9 months. What makes you think RPM would be any different?

Well, you know I did a lot of research on it. Spent of lot of time reading up on the company and the industry.    

You think you did research. Most of what you did was just gathering up what RPM management had told dicks like you, and then you found some further circumstantial evidence. Now I am not saying that is not useful, you have to start somewhere.  However how do you know about what is really going on with that business? You may as well been pushing buttons and eating the free peanuts at the local VIP lounge.   

Yeah, well you are going to look pretty stupid if they report well on the 26^th of this month!

No. Whatever RPM reports it does not detract a crumb from what I am saying.

Yeah well, I made money out of it.

What you did was get in the car with Ivan Milat. Worse than that, you recognised the droopy moustache and the pools of blackness that were his pupils - and you climbed in anyway.   

And now you are running around saying how smart you are. Why’d you get in the car in the first place?  And think about this, you could have just as easily taken a little more time and walked to where you wanted to go. There was just no good reason to get in the car!    Scoonie old cock, you really do have a problem.  

Well just to correct you there, I’m not saying how smart I am.  I’m just saying I sold it. But I wonder why I keep buying rubbish stocks. Do you think it is because I am part Irish, you know I have got a lot of Irish Catholic in me, and you know how they like to gamble.  I like to punt too.  Maybe that is it?

No. You are just an impulsive f#&kwit. Don’t try to blame your dead ancestors. That’s just as stupid as blaming your live ones.   You did it, you are culpable. No one else.  

Well is there anything I can do about it?

It is not as though you are alone. Humans almost became extinct about 900,000 years ago and got down to less than a couple of thousand. So whatever is in you is in everyone else, be it Irish, Indian, Japanese or Eskimo. We all have an unalterable genetic make up. We all have a nose, ears eyes, arms and legs and the characteristics of these then just express themselves differently in all of us.  It is the same, though less obvious with our minds and emotions.  

There must be something that can be done?

Well you talk of the Irish. Remember that Irish uncle of your mothers?

 Uncle George!  I really liked him. Humorous bastard. Told funny stories all the time. I loved that man!  

Yeah, irresponsible George. Well remember how his Mrs handled the situation.   She took hold of the money coming into the household and gave him an allowance. That way she limited the damage her wayward husband could do.   Maybe when it comes to investing you need to do the same with yourself, give yourself a small separate investing allowance. You might want to give it a name, like: “Dickhead Fund”.

Thanks. Thanks, it’s been tough in parts hearing all this, but thanks.   You know I think this has all helped me a lot. Can we talk again soon?

F#&ken hope not. I’ve got better things to do, now piss off. 

What is it Scoonie, make it quick I haven’t got much time. 

I just thought you might like to know about RPM Automotive group (RPM). Not RPMGlobal Holdings (RUL) the successful software company, but the syphilitic cousin, RPM Automotive group (RPM). It’s a Melbourne based car part wholesaler/retailer. RPM is no longer popular, the share price having fallen from a high of over 40 cents in 2021 to currently around 6.5 cents.

Oh Right, a retailer now. You’re a ratbag Scoonie.  

RPM has a m/cap of $16m @ 6.5 cents (post the recently announced cap raise).  The cap raise closed on the 24/4/24 (to be voted on 27/5/24) raising $4m which management want to use to build a trye recycling facility and to partially retire a convertible note with the Melbourne based Collins St Value Fund (CSVF). 

The cap rasie was priced at @ 7.2 cents and there are to be 55.7m new ordinary shares issued and an equal number of options at 10 cents expiring 31/8/25. Options will be ASX listed. There are also to be issued 38m 10 cent lender options expiring 31/8/25. 

RPM came onto the ASX in 2019 as a takeover of an existing shell. It’s an acquirer of automotive related businesses.  At the last half yearly RPM turned over $57m, reported a profit of $2.1m and had a net operating cash flow inclusive of capital payments of lease liabilities of $2.4m.  

Net debt, post the cap raise will be $23.2m.  There are were also $4.7m of vendor earnouts on the 2023 balance sheet. 

RPM has four divisions, and the 2023 divisional figures are shown below:

1)Motorsport (RPM Racewear, Revolution Racegear, Bell Helmets)

Revenue $9m

EBITA  $1.2m

2)Repairs and Roadside (Basically, 5 existing tyre fitting businesses they bought)

Revenue $51m

EBITA $2.8m

3) Wheels and Tyres (RPM tyres, Spider GT, Elite – tyre and rim wholesalers.)

Revenue $33mm

EBITA $1.9m

4) Accessories Performance (Safety Dave, Genie, Equipit, Carline – too much going on to write about)

Revenue $23

EBITA $2.8m

Why don’t they just concentrate on the business they have? Why do they think they can make money from tyre recycling?

Don’t really know. They’re already in the tyre business, so I guess they see an opportunity. Maybe they’re just hyper-active and have got to be doing something all the time.  And agreed, it is a bit of a worry.  However, with the share price where it is they don’t have many growth options. For RPM, the buy a business / PE arbitrage train has well and truly left the station.

The share price has collapsed around 80%. How did they get themselves into such a mess?

I don’t know the ins and outs of it, but I guess it was always going to happen. In a word, debt. RPM’s been running around having intercourse with all sorts of businesses all around the country. It was inevitable RPM would catch some sort of financially transmitted disease. 

Money was cheap a few years ago and I guess it just went to their heads, and RPM started behaving like Dirk Diggler. You kiss all the pretty girls then there is going to be some you wish you’d never even made eye contact. Back in the COVID times everyone was spending money like crazy.  RPM had in the back seat a bedazzled share market and no doubt some dip-shit bankers and brokers also along for the ride. I don’t know about the bankers and brokers, but it ended up with a lot of shareholders lined up outside the VD clinic clutching their willies.  Must have been a lot of fun while it lasted though. 

Eh, know the feeling well. Anything else?

In May 2023 they gave 2023 sales guidance of $118m – $120m and EBITA of $10.5 – $12m. They missed, achieved $115m and $8.7m.  That’s a May guidance.  Not good look and not even David Dicker at Dicker Data can get away with misinformation/miscalculation like this.  

In their capital raise presentation last month they have guided as follow:

FY24f EBITDA of $11-13m and operating cashflow positive (1H24 EBITDA $5.4m and +$2.4m OPCF) 

FY25f EBITDA of $16-18m.

So they’re saying they will be this year on PE of about 4 and in FY25 a PE of about 2. Sounds pretty good.

Don’t believe it.

Well neither does the market by the looks of it. Look at their share price.

They’ve got their hand on it. Look at the sales figures for the auto companies that have reported.   

You are correct, discretionary spend is definitely under pressure. Higher interest rates are biting and parts of RPM’s business must be more vulnerable than others. And yes I agree company forecasts look optimistic. 

There is some interesting stuff going on though. For the 6 months to December 2023 they were operationally cash flow positive in the amount of $2.4m including lease liabilities payments. That’s a big plus.

They paid $10m for a business back in 2021 called Safety Dave that seems to be going stronger than when they bought it. And some of the tyre businesses, though lower margin should be fairly resilient to any impacts of a downturn.

They have stuff all over the place, tyre wholesaler in North Queensland, tyre businesses in Victoria, the Carline franchise business, Genie exhausts - you know, for all those revheads with tats and mullets.  The list goes on, go look them up on the web and you will get a sense of it. 

Mostly they seem to have focused in on tyre businesses. However other than the name “RPM”, I am not sure just what connects all these businesses together. No doubt there is a central head office function and the tyre wholesalers might be able to work in together. But other than that, its hard to see how they help each other or just what the strategy really is.

But this could be a good thing.  Am thinking if you had to, you could close it down or sell one business without impacting the other.  

It reminds me of a business years ago called the Retail Cube. Some genius had thrown three businesses together: Amazing Paints, King of Knives and a footwear business. I am sure the synergies between paint, knives and running shoes are just screaming out at you. Anyway, the paint and the knife business were complete dogs and were eventually sold and what was left became the Accent Group. Accent now has a market cap of $1b.  I am not suggesting RPM is going to go to $1b. But my point being the cleanup, whoever does it should be relatively straightforward. About closing or selling off the non-performers (and they would be there despite management’s optimistic earnings projections) and keeping the good businesses. They only have to survive, and you just have to wait.

Cash flow can drop away pretty quickly in these outfits. Anything else

They came about as a reverse takeover of an ASX shell Kairiki Energy back in 28/8/2019. The reverse acquisition wasn’t cheap it cost RPM $3m. Clive Finklestein and Lawerence Jaffe, current directors and major shareholders brought it to the ASX. They also had a cap raise back in January 2021 and raised $5.1m

Interestingly one of their first takeovers was a Melbourne wholesaler and importer of Chinese tyres called Spider GT. A bloke by the name of Wei Liu owned it. The business is still in the RPM group and we don’t get to see individual business financials in the accounts, but this is the sort of business that could make money. You know in the same way as you go to Bunnings and pick up a cressy wrench and it is $6.50 and you go: “wow, that’s cheap”. But it only cost them $3.50. And the Chinese tyres could be squeezing out the Japanese and Korean product. Potentially fat margins, that’s what I’m getting at.

Here’s another thing, some of these retail accessory businesses like Genie exhausts and alloy wheels and the like, they may be more resilient than you think. I mean look at the Summernats boys, you know the “show us your tits” crowd. They will buy this sort of stuff before toothpaste. Provided employment holds up it should all continue to sell.

And here’s a trend, a bit out there, but will help RPM over time. No one will talk about it because the car dealers, governments and the whole greenie brigade don’t want to say anything negative about electrification.  These hybrids and electric cars are weighing in around 30% more than conventional internal combustion engine cars. It’s not just us that’s getting obese. Heavier car weights feed directly into tyre wear. 

What’s the blokes running it like?

I only know what I have read. Two guys from Melbourne started it, Clive Finklestein (9.5%) and Lawence Jaffe (9.5%).   Prior to the ASX listing Jaffe was operating an earlier version of RPM for nearly 10 years. Finklestein as an Executive director earnt $275k in 2023 and Jaffe $171k in 2023. 

Jaffe is a director the ASX listed Close the Loop having a 12% interest worth around $20m.

In March of this year the Board appointed the current Executive Director and Chief Operating Officer Guy Nicholls as Chief Executive Officer of the Company. Don’t exactly know what this change all means, Nicholls seems to have been tight with the whole outfit since the start.

Who else owns it?

From the 2023 annual report:

Collins St Value Fund (CSVF) owns 4.5%. They acquired these shares in a placement in August 2021 at 30 cents each. Bet they wish now they had taken an early Chrissy holidays back in 2021. 

Henrock Pty Ltd is a 5% shareholder. Henrock is owned by the vendors of the Safety Dave business. No doubt in part consideration for selling the Safety Dave business. You know, back in the days when RPM script wasn’t something you used when you visited the bathroom.   

Tell us more about the re-financing and capital raise ?

RPM is proposing raising $4m at 7.2 cents, a 15% discount to the prevailing share price at the time, with accompanying 10 cent expiring on the 31 August 2025. CSVF also get 2,523,053 nil cost “Advisor Options”. It all goes to a shareholder vote on the 27/5/24.

Now of the $4m raised it is proposed that $2m goes towards the part repayment of the convertible note and the rest towards a tyre recycling facility.

RPM have a $5.5m convertible note option with CSVF at a 35 cents conversion and interest rate of 4.35% pa, the deal being done in December 2021. This note is for 3 years and expires in August of this year. Back in Dec 2021 an interest rate of 4.35% was pretty steep (RBA cash rate was 0.1%) and conversion at 35 cents looked possible as the shares were then trading at around 30 cents. Now looking like a sick joke.

It is not been made clear how RPM intend to deal with the remaining $2.5m of convertible note debt come August. It must be like the clap coming back again for existing shareholders, to have to raise capital when the share price is so beaten down. 

Tell us more about their debt?

Well you have this stuff going on with the $4m capital raise and the retirement of $2m of convertible loan to the CSVF. And the other $2m is going into the tyre recycling venture. If it all goes ahead then post the cap raising they will have net debt of around $23.

From the 2023 annual report as at 30/6/23 RPM owed about $23m to the Commonwealth Bank. At the time $14.2m was getting charged at 3.7% and $8.8m at a rate of 7.7%. It’s not clear when time is/was up on the $14.2 m part of the debt and they start getting hit with prevailing rates of say around 8%. 

Very roughly for the December 23 half year RPM paid $650k in interest. If they paid prevailing interest rates on the whole $23m outstanding amount it would have amounted to about $920k of interest.  So it looks that at some point the business will have to deal with about $540k of additional interest charges a year.

Can the business handle this?

Well yes, the operational cash flow inclusive of capital payments of lease liabilities for the six months to 30/12/23 was $2.4m. 

But of course, this is predicated on the businesses continuing to do OK.

What’s their arrears tracking like?

Well, wouldn’t we all just love to know.  All we know is what is published, and its 10 months old:

As at June 2023:

Not overdue: $1.7m

30 days $5m

60 days $2.3m

Over 60 days $5.5m

The over 60 days debt had doubled from the 2022 figure, from $1.8m to $5.5m. Over this period RPM’s revenue went up by 50%. 

It’s about 14 weeks away before we see any updated figures. 

One thing to consider is the proportion of the overall business that is wholesale versus retail. You would think the retail part of the business would be much less exposed to arrears debt. From a reading of the types of businesses and the divisional split you might roughly guess more than half of revenue was retail.

Anything else

Come August full year reporting, more information will be available on how RPM has been tracking. Almost inevitably, despite the optimistic picture drawn by management there will be more trouble.  

Though, taking a look at the bigger picture it is unlikely the Federal government will cut spending. Look at the budget, it’s like they are on drugs. They will continue to spend, pretty much the same right across the Western world. So whilst there are sections of pain in the economy, such as squeezed home mortgage holders, unemployment is still low and on a macro level, despite all the retailer gloom you should be pretty safe.  

So what does all this mean?

RPM is a business with high debt operating in a largely discretionary environment where things are not improving. 

On the plus side RPM is currently profitable, cash flow positive and has many disparate businesses that gives flexibility to close down or sell off parts.    

So what do you want me to do?

Well it is cheap, selling on a management projected FY 24 PE of about 4 and a FY25 management projected PE of around 2. Even if the earnings drop 50% it is still not overpriced. 

 The question to ask is: “Will this company survive?”

The key directors each have around 9%, CSVF will shortly be substantial. None of these key players have any incentive to see the business fail. Jaffe has put 13 years of his life into it. And Safety Dave is incentivised to work both hard and safely. They will be trying.

If they can demonstrate in the end of year accounts and business update, a stabilised business, one that continues to be cash flow positive and an improved debt position, they will almost inevitably re-rate. The share price may well get weaker in the next few weeks with tax loss selling, and there could be a bounce in July. Assuming the August reporting is not too frightening you could easily double your money in the next 12 months.

Heard that before Scoonie.

Bought in SM and recklessly in RL.

Maybe there are Strawman members who have an insight into this business and/or the tyre and auto parts business. Or know more about The Fink and Jaffa other than they just have funny names. 

The headlines here look amazing. However as I look under the hood, it appears the business growth being achieved is not translating to benefit the shareholders. Headline numbers touted comparing PCP:-

• Rev +73%
• NPBT +40%

This is nice, however shares on issue also increased >40% during the half from 104.9m to 149.1m, negating any shareholder benefit of the increased profitability. Showing in the EPS remaining flat at 0.98c. Where is the multiple arbitrage from these bolt on acquisitions? This is appearing more like a case of 1+1=2 than 1+1=3.

Company is forecasting increased EBITDA to $7m+ which is an increase of approx. 50% on FY21. This sounds nice, but if the shares on issue continue to grow at the rate they have been this will be an immaterial increase in EPS.

With the market trending down, I think there will be better opportunities for my capital elsewhere. I will be selling out.

RPM released an investor presentation today. Nothing specifically new to note. They did give a general outlook statement towards the end.

• A further three acquisitions announced in FY22 ytd continue the company's growth strategy
• $8m funding agreement with Collins St Value Fund to provide further funding capability.
• Targeted mergers anticipated during FY22 specifically focused in the repairs and roadside as well as the performance and accessories divisions.
• The board is buoyed by the significant improvement in retail trading conditions post the lockdowns, however, the company remains cautiously optimistic in light of the latest covid-19 (omicron) developments.

With lockdowns and restrictions easing should see trading resume back to normal. The upcoming half year result will be interesting to see just how much the restrictions affected sales. I think the tough trading restrictions may present RPM with greater acquisition opportunity with some smaller businesses struggling, and in the long run be a benefit. However looking forward I am confident the sales momentum the company had will pick back up.

RPM released a Q1 FY22 trading update today.

Headline numbers tout Rev growth of 60% to $15.0m on prior corresponding period in FY21. However, Quarter on quarter this is actually slightly down on Q4 FY21 which was Rev of $15.24m.

Gross profit was up 36.9% on Q1 FY21 to $4.04m. This was actually up quarter on quarter from $3.82m in Q4 FY21. So slightly better margins is a positive.

EBITDA was down 37.9% on Q1 FY21 to $0.92m (Q1 FY21 - $1.48m). This is a bigger drop from Q4 FY21 which was $1.78m EBITDA. The company flags this being mainly due to staff costs, warehousing and stocking expenses for 2 x new distribution centres that became operational on Oct 1. So I assume this to be a one off with EBITDA to bounce back next quarter.

All in all, I am positive on this trading update. With NSW and Victoria in lockdown for pretty much all this trading period it has meant the retail side of all their divisions were material affected. And despite this the top line remained flat QoQ. Company flags this is due to demand in their commercial side with essential services such as transport, mining and agriculture continuing regular trading throughout the lockdowns. This gives me great confidence that the commercial side underpins the company's value and once the retail trading resumes as normal we should see this propel their top line back to good growth numbers.

My valuation was based on the company achieving $70m revenue with flat net margins in FY22. Based off this trading update im confident this can be achieved. Even if revenues are flat QoQ they will achieve $60m. Now that NSW and Victoria are opening up, retail trading should normalize.

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02440432-2A1333200?access_token=83ff96335c2d45a094df02a206a39ff4

29-May-2020:  FY20 Trading Update

Trading results for both April and May [month-to-date] have surpassed expectations and while market volatility still exists, it has certainly diminished. The RPM board is now in a position to make short term commentary with reasonable certainty.  
 
RPM’s Tyre and Wheel Division has exceeded our forecasts and is surpassing the overall performance of the tyre and wheel industry, mainly driven by increased demand for TBR and Commercial Tyres and the inability of our competitors to maintain consistent supply.  RPM is also pleased to report that our recent expansion in this sector is proving successful. 
 
RPM’s Manufacturing Businesses have also seen improved sales figures driven in part by strong demand for components in repairs and roadside, as well as performance and accessories. 
 
It should be noted that as predicted, our retail businesses have experienced significantly reduced turnover, but Job Keeper and the cash flow boost have ensured that these businesses remain viable in this quarter. Cost reductions and reduced hours have resulted in improved performances across the Group. 
 
The Group’s primary strategy remains on course, with growth [both acquisitional and organic] at the forefront.  Now that management has resolved the initial challenges resulting from the onset of Covid-19, it can refocus and continue to pursue acquisitional opportunities.  While there may be delays, the board is confident that it will be able to execute these transactions. 
 
Further updates on the impact of the COVID-19 virus will be provided as appropriate. 

RPM is focused on the health, well-being and safety of both our staff and customers and continue to provide the appropriate sanitation measures and social distancing regimen. 

About RPM: RPM Automotive Group Limited is a leading player in the Australian Automotive Aftermarket comprising a number of businesses involved in: importing, wholesaling and retailing of tyres, mechanical repairs, motorsport apparel and safety equipment, niche manufacturing and a roadside assistance service for the transport industry. RPM owns brands, such as: RPM Racewear, Carline, Genie, Air Anywhere, Formula Off-Road.