Livewire – 3 fallen angels revisited

03 Apr 2018

There’s a saying that investors should never try to catch a falling safe. To elaborate on that phrase, we like to let the safe hit the ground, see a few dollars fall out, and then walk up and collect a portion of the loot.

This time last year on Buy Hold Sell, I reviewed some ‘fallen angels’ to see if it was time to scoop up that ‘loot’. The stocks were Yowie, Isentia, and Vocus, which I called a sell, sell and hold, respectively. With those stocks down more than 50% on average, Livewire got in touch asking for an update. We also review Capitol Health, which has gained 60% since I nominated it as a fallen angel to buy, and look at an IPO that has caught our eye.

Full Article – here

Time to revisit those fallen angels?
In the case of Yowie (YOW), we’ve never really liked the business, nor the prior management team that was quoting what seemed like highly unrealistic sales forecasts. This proved to be true and the market has reacted accordingly.

The stock has plummeted to just 9c and the business continues to be loss-making on unimpressive revenues. One would not think it to be particularly challenging to sell confectionary to Americans.

Despite the company’s healthy US$22m cash balance, thanks to an A$32m capital raising at 90c in May 2016, YOW still holds little attraction for us.

Isentia’s (ISD) share price has been on the skids since it became apparent in early 2016 that their $50m acquisition of King Content was looking a touch disastrous. A challenging business landscape (resulting in two profit downgrades) and the recent exit of their Managing Director has added to its woes. ISD carries significant net debt ($50m), which could become of concern given the firm’s modest profitability. Another we would continue to avoid.

For Vocus (VOC), we thought the ‘falling safe’ may have hit the decks this time last year, having already declined, at the time, 60% from its highs. However, we weren’t convinced to stand underneath the safe with our arms outstretched, yelling “BUY NOW”, and called it a Hold.

12 months later, and VOC is almost 50% cheaper. Like Isentia, VOC’s MD has left the building, the telco space is still well out of favour (just ask any of the 1.3m Telstra shareholders), and VOC is not paying a dividend.

However, VOC has a valuable asset base and will record some $2bn in revenues for FY18. A successful sale of their NZ assets will reduce their hefty $1bn balance sheet debt and could be the catalyst for a price reversal. If any positive operational catalysts appear, we’d be inclined to tentatively step up to VOC at current levels and have a good close look.

What next for Capitol Health?

Capitol Health (CAJ) was the stock we nominated as our ‘fallen angel’ buy in Buy Hold Sell, and has operationally performed even better than we expected in the 12 months since.

They achieved an outstanding price for the sale of their troubled NSW assets (over $80m); commenced a share buyback; paid a dividend; and announced a number of acquisitions, the largest of which is listed competitor, Integral Diagnostics (IDX).

Unfortunately, the IDX acquisition looks like it will not succeed. However, we still expect impressive organic growth and further bolt-on acquisitions, which, along with prudent balance sheet management, should provide good returns to shareholders.

Opportunities ahead
Presently, we have not been significantly convinced to make new investments in any new ‘turnaround’ stories. Successful investing often comes down to patience, and overall fund returns come down all the things you do, and all the things you don’t do.

However, one recent IPO in which we’ve made a small investment is Readcloud (RCL), that digitises and distributes electronic school textbooks. At the time of listing, RCL counted 50 schools and more than 20,000 users as paying clients on its platform and produced revenues of over $1m in the half year to Dec 17.

RCL distributes its products both directly and through its channel partners OfficeMax and Jacaranda – both of which are the Australian arms of listed international parents (US listed Office Depot and John Wylie respectively).

We have been attracted by RCL’s revenue-generating business and the clear and growing thematic of electronic textbooks. As parents of high-schoolers we are acutely aware of the archaic nature of physical schoolbooks and believe, if executed well, Readcloud has a bright future.