Shares I looked at over the past week (23 June 2024)
Quartix, The Works, and Vianet
Quartix (QTX)
What: Sells hardware and software to allow companies to track their fleet of business vehicles; whether they are vans or cars. Mainly targeting SME sized companies, and mostly tradespeople / construction type companies. Quartix’s solution allows these companies to get real-time information about location and usage of their vehicles, allowing them to make smarter decisions on vehicle and employee utilisation.
My Comments:
I love a good corporate drama, and while I haven’t been able to find public information available, it very much looks like the founder, Andy Walters, has come back, after 2 years of retirement, to kick out the new management and take charge himself.
First to go was the CEO, Richard Lilwall, who was shown the door. Shortly after, the CFO, Emily Rees was also shown the door. Both were newbies in the company. There was then quite a bit of turnover of non-execs as well, and it looks like founder-favourite Dan Mendis has returned to Quartix too into a senior leadership position.
What has caused this? Well, it does look like ex-CEO Richard Lilwall made too many blunders in his short 2 year tenure. A disastrous £2m+ acquisition, Konetik, which has now being completely shut down, with the goodwill written down to zero, in less than 18 months.
Then there was runaway fixed cost increases. c20%+ in FY23 due to inflation! BUT not increasing prices for existing subscriptions! In fact, a key weakness of Quartix is that average subscription price keeps dropping every year, probably due to intense competition and the ever-decreasing cost of data and hardware. OK to manage in a zero-inflation environment, but disastrous in an inflationary environment.
So far, I’ve been impressed with the swift action that Andy Walters has taken since returning. Lots of decisive actions, and a very simple and clear plan to get back to profitable growth. Exactly what the market likes at the moment.
There is plenty to like about Quartix:
Riding the continued IoT wave. Despite all the hubris and excitement now died away (its all about AI now isn’t it)… IoT is going to continue its slow and steady growth. A structurally growing market is music to my ears; makes it easier to achieve growth rather than depending on stealing market share.
High gross margins. Currently just below 70%, but I think with some of the R&D cost efficiency focus they have, as well as fixed cost focus, this could go to like 72-75%.
Inflation linked contracts being rolled out. To almost all customers, effective from Feb24-May24. This all falls to the bottom line; no extra costs to service this revenue! We’ll see in the HY results whether this results in extra attrition though.
Potential short and medium term growth drivers. Their core market, UK, looks mature. Single digit growth. However, they are seeing double digit revenue growth in Europe (France, Spain, Italy, Germany). Andy Walters is doubling down here, increasing sales and marketing investment there. This should be the growth engine for the next 1-3 years. Medium-term, USA is the big one. They are struggling there currently, and reading between the lines, maybe there are some big competitors there. There isn’t a clear articulated strategy for tackling this market yet though… which is fine. Focus on Europe first. But I suspect Walters will be looking at the USA strategy later on this year, and what is needed.
Industry consolidation, potential M&A exit. At sub-£100m market cap, looks like it might be a tasty acquisition for a larger competitor (especially a US-based one) or adjacent category business in the $500m-$5bn range, to buy and bolt-on Quartix’s strengths in the UK and Europe. It does seem like a very commoditised market; even Walters said that the key to success versus competitors is just marketing and sales; how to get to customers before the competition! So there is synergy in combining two players, merging their tech platforms, and stripping out further costs for economies of scale.
What are some of the downsides?
Well, I think the long-term leadership is unclear; Walters probably doesn’t want to stay longer than 2 years I think, since he did retire before, and he is already 67 (?). As mentioned above, it looks like a commoditised service. So it will be interesting to see if they build something more sticky or secret-sauce in terms of features, functionality. The company is exposed to cyclicality; as they are servicing mainly SME in construction and any economic downturn will hit hard. Both in terms of new subscriber growth, but also reduction in existing customer fleet sizes.
Verdict:
Quartix was on my watchlist from 2020 to 2023, and then fell off as I didn’t quite like the acquisition, and also their high PE rating. Now very much firmly back on my watchlist.
Really like the clear, simple strategy of the returning founder and his quick decisive actions so far.
Think the current share price has priced in quite a bit of future growth assumptions. Might be putting the cart before the horse, as we’re still in the “righting the ship” phase. Furthermore, I think the market is underestimating the impact of the 4G switchover; any time you’re having to swap out customer hardware, is an opportunity for them to think whether they still need your services… or to shop around for a competitor… I’m wondering if this is what happened to the USA.
I can definitely see value in buying if the share price is below 130p, but at the current 155p I think it is up with events given the growth uncertainty, the still-commodity-like nature of their service, and possible attrition risk with France 4G as well as the RPI-increases.
The Works (WRKS)
What: High street chain in the UK that sells a range of “entertainment” and “gifting” products at the value end of the scale, skewing towards kids. Has an eCommerce website as well, but only 10% of total sales. 511 stores across the UK, so fairly large estate.
My comments:
Activist activity - one of the shareholders, Kelso Group, now has two board seats despite only having a 6% stake. It is the CEO and CFO of Kelso occupying the seats, so fairly committed time investment from Kelso here. They have a blatant ambition to unlock shareholder value, and are supportive/friendly of management rather than being combative (at this stage). Kelso is described as focused on small cap, and “unlocking trapped value in the UK stock market”.
There are also two other shareholders that look like private investors, and I wonder if they are pulling some strings in the background? The first is Hudson Management, with a c15% stake. A Google search yielded little; and to date they don’t see particularly active since going above 3% in Nov22. The second is Graeme Coulthard, who looks like a former VC partner, and formerly on the board of Card Factory (but back in 2015 and before). Definitely an interesting mix of shareholders, and potentially some further activist developments to come.
Bargain price when looking at a per-store basis; on an equity basis (ignoring debt, cash) the market is valuing each store at only £30k (and this is ignoring the website, which contributes c£28m of revenue). Each store does about £500k of revenue a year. The average lease cost of the stores is £50k. Fixtures and Fittings are on the balance sheet at c£15k per store. Clearly, the market is pricing this as though the majority of stores are unprofitable. Yet, the latest Trading Update from the company states that 96% of stores are profitable.
Crowded space on the high street - There seems to be many competitive overlap on the high street. WH Smiths, The Entertainer, Card Factory… and then there is the online threat at this cheap/value end from Shein and Temu.
Mixed picture on store estate rationalisation - only 14 closures in FY May24; out of a store estate of 500+! Management claim that 96% of stores are profitable, yet £6m EBITDA on £282m revenues suggests that many are marginal profitable, so why take on the risk and the focus-suck on management time? They’re also realising only like £14k/yr of savings during each lease renewal. Doesn’t feel worth the effort IMO. The phrase “busy fools” comes to mind.
Freight costs from Asia have increased in H1-CY24 which will be a drag on margins for them over the next 12 months.
Verdict:
Despite what seems like a poor business, and a lack of any exciting bold strategy from management… there are several things that excite me here.
First, the valuation is so bombed out (£15m) that if management managed to get just even 1pp increase in net profit margin (+£2.83m net profit) then this share will re-rate upwards by at least 30%-50% to £20-25m market cap. There is also tangible shareholder pressure now, in the form of Kelso and their two seats on the board.
Financial control seems weak? Last year’s FY23 results were delayed in publication. This year, again a delay. Blamed on change in auditor. But FY Apr24 results are only due to be published in Oct24..! A long 6 month wait. And the company doesn’t have a habit to release quarterly trading updates. So we might now get any further trading updates from now till Oct24. Given the poor consumer sentiment so far in H1, as well as the freight costs issue, and the majority of revenues seasonally in H2, I say its probably safe to wait till the results in Oct. Or for a catalyst (ie Kelso restructuring the c-suite).
Vianet (VNET)
What: Has two main divisions. Smart Machines, which supplies vending machine owners with the hardware and software to enable card payments as well as real-time analytics/information from their vending machines. Looking to sell their solutions to other verticals (eg petrol forecourts, EV charging stations, etc)
Smart Zones, which provides pub owners with real-time analytics/information on draft beer sales and beer usage. Made an acquisition last year, now also offers an inventory management system for pubs.
My comments:
Growth noises, but no signs yet in the numbers. There’s plenty of verbiage from management of the momentum and growth in Machines division, as well as Zones getting back to growth after years of contraction in the install base. However, when you look at the numbers, especially the H2 numbers (base, new installs, recurring revenues, etc) I can’t seem to see that “momentum” that management are talking about. Maybe the trading conditions have vastly improved since H2 ended in Mar24, and therefore not in the H2-FY24 numbers. But given how management have been very rosy in past results but disappointed, I am going to wait till I see some concrete numbers.
I struggle to get to the rosy valuation, currently at 113p. Statutory EPS for FY24 was 2.72p. Brokers have pencilled in a whopping increase to c6.5p. Even if that is achieved, paying 17x forward PE is pretty toppy.
I have done some bottoms up calculations, assuming c+15% operating profit growth in Machines, and zero operating profit growth in Zones, and a slightly lower loss in Vianet USA. I get an additional +1.2p EPS in a base case, and +1.9p in an optimistic case. So total of 3.9p to 4.6p EPS. A far cry from the “adjusted EPS” brokers are touting of 6.5p.
The potential is there. I can see they have several different growth areas, of which only one needs to pay off to drive good solid profit growth. Especially at 70% gross margin. There is the USA market. There is the EU market. There is the new adjacent verticals in Machines (eg petrol forecourts, other unattended retail, EV charging, etc). However, all of this is currently nascent.
Verdict:
Potentially interesting growth company. Has some of the raw ingredients, but I think I am going to wait till the next update or two, to see some tangible growth in the numbers first.
The current share price is already pricing in huge growth for FY25, AND further growth (through a high PE ratio). So buying now is already paying for all the optimistic growth scenarios already; and current management have disappointed in recent years.