Anexo revisited

Maximum gloom combined with strong fundamentals

I wrote a brief write-up on why I liked Anexo (ANX) almost a year ago when the stock was trading at 84p. I had hoped that the VW payout would be 10-20 million GBP and turned out to be only about 7.2 million for 12,000 of their 16,000 VW clients. As of their H1 2023 report they had another 12,000 Mercedes emissions clients, and they believe the VW settlement has created a precedent and have several other car manufacturers lined up, so this could turn out to become a nice profit stream after all.

The market did not share that sentiment though, the stock currently trades at about 3.5x earnings and at about 50-60% of a very conservative liquidation estimate. It even trades at a sizable discount to a short report’s target price from a few years ago (with rather flimsy arguments). It is effectively a net net with a nice business attached with multiple very interesting developments happening in 2024. 

The reason for the sell-off was likely: 

• Disappointing proceeds from the VW case

• Briefly hitting their debt covenants due to poor working capital management

• CFO leaving after only a short stint at the company

• Lack of operating cash flow over the past years 

• UK equity bear market

• Poor liquidity of the company’s shares 

• Poor communication by management

After writing the previous post I found out about the 2020 short report, so I ended up selling my shares in the 70’s at a double digit % loss. Ouch.

But when I recently took another look at the company I actually found a lot to be optimistic about. Their 2023 H1 was good. Rising profits and margins, revenue growth + positive operating cash flow. And a lot of the points made in the 2020 short report are rather lazy as receivables as a % of revenue has been relatively stable over the past few years, cash collection so far this year has been good and their growing revenue vs flat casualty rates can be explained by the company taking market share from competition.

This substack post by @THEPMTEAM really goes into the bull case better than I could. I would summarise the tailwinds over the next few years as follows:

• A large backlog of cases means the company probably has some pricing power. Management has also indicated they will select cases more carefully to improve margins.

• The company has set up an academy, since there is a shortage of personnel to handle this backlog in the industry overall and the type of cases ANX handles are rather niche.

• Settlement of cases and thus receiving cash depends on the speed of the UK court system. Pace of clearances which has been negatively affected by Covid, will likely turn into a cash flow tailwind in 2024 according to management.

• Positive free cash flow and debt reduction will be a focus going forward. Net debt is about 50m vs 18-25m of expected net income for 2024.

• Credit Hire is expected to recover both revenue and margins and exceed 2022 highs.

• Housing disrepair segment is growing rapidly with a huge TAM and will have much higher margins and ROIC, so this will likely boost overall margins as well in 2024.

• Another 5-6 car manufacturers can be sued in their emissions segment. This is lumpy but high margin revenue.

• Management owns ~⅓ of shares outstanding and are aligned with other shareholders.

So if profit, margins and ROIC expand together with positive operating cash flow, I don’t see how this will keep trading at 3.5x earnings. DBAY with their 28% stake will probably not sit there and do nothing if the shares stay this cheap. A rerating to a mere 7x PE on flat earnings gives 100% upside here. So I have taken a full position in ANX at 58p/share. Be mindful though, only about GBP 50k worth of shares trade per day on average. 

Readers of this post should do their own due diligence before buying or selling anything, since I have been wrong before and cannot guarantee all information in this write-up is 100% factual. And I may buy or sell the above mentioned stocks at any time. Also beware that this stock is rather illiquid trading only about 60,000 shares a day.