Quick ideas #2

2 new ones and closing 1

I got two new ideas and will close one. 

The first one is Genomma Lab (LABB), a Mexican branded OTC pharma and personal care products company. The stock trades at a cheap multiple of about 10x earnings. But if you adjust for currency losses, the stock is cheaper. Although it is questionable how ‘one of’ those currency losses are given that some of their operations are in countries suffering high inflation like Argentina. 

This seems cheapish given that historically this stock traded closer to 15x earnings. What really piqued my interest though is their high ROIC of 20% and some major initiatives to boost EBITDA margins to 24-25% by 2025, from about 20% currently (from Q1 2023 call):

“For the past 6 months, we have been working on a plan to deliver productivity savings of MXN 1.8 billion. I'm personally supervising the progress of these projects on a biweekly basis. The first pillar accounts for MXN 600 million, that should come from the manufacturing plant. MXN 100 million will come from vertical integration of some of our manufacturing process. MXN 300 million from reengineering, packaging and formulas in our largest brands. MXN 400 million will come from cutting non-productive costs and maintaining SG&A fixed while growing top line over the next few years, and MXN 400 million from optimizing our go-to-market programs.”

If they hit those targets, earnings in 2025 would come in somewhere between MXN$2.5-3bn. Vs a MXN$15 billion market cap now. Assuming a 15x earnings multiple, would imply an upside of 200%. And given that the stock already trades somewhat cheapish on their current earnings you are getting this upside mostly for free.

I know this looks a bit like my failed Westrock idea (I hope all readers who followed me into that one also got out in time when I closed it), but the main difference here is that this company does not sell a commodity, but actual branded products which are much less cyclical. Providing a decent moat. And Rodrigo Alonso, the chairman and former founder/CEO of the company owns 30% of shares outstanding. So he has plenty of skin in the game.

Still I am somewhat sceptical of their 25% EBITDA target, but margin of safety should be sufficient here, even if they only reach half of those targets. And LABB management has more clearly outlined how they will realise those savings, compared to Westrock. 

There was an incident of channel stuffing almost a decade ago that is worth mentioning. This VIC write-up goes into more detail. But that was under previous management and I don’t think is really an issue here. 

Biggest risk here is probably currency losses. But this is mitigated by likely overvaluation of Mexican peso vs the USD. So I will enter this into the tracking portfolio at an average price of MXN$15.45. 

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The second stock is Anexo group (ANX). Their main line of business is offering legal services, upfront settlement of repair and recovery charges and vehicle replacement to people involved in non-fault accidents in the UK. By researching this stock I have added a new word to my vocabulary: “impecunious”. Which really means “poor”, or “having little money”. Which describes ANX customer base. And which is why they require ANX services. Not sure a new word had to be invented, but ok. On second thought, maybe I will remove it from my vocabulary again. 

The stock trades at about 5x earnings, and receivables make up the bulk of its assets. This is about a 15% ROIC business. Although returns have declined somewhat lately, possibly also due to their VW lawsuit, which they are suing on behalf of customers relating to the emissions scandal. This has caused a 6m GBP headwind in the past 2 years. And brings us to one of our catalysts, as a settlement could be somewhere between 10-30 million GBP. 

The reason why it's cheap is probably because of the lack of free cash flow. And the co has hit its covenants in the past year. Which also explains why the CFO left after only being 9 months on the job. They can easily turn on the cash flow spigot though, by just stopping growth. They are confident they can collect at least 97% of their receivables. This number would be lower if some of their customers are actually at fault, as opposed to no fault. 

They have about 3% market share and are the largest player. ANX has also entered into the business of suing landlords on behalf of tenants not happy with maintenance of their building. This business has lower barriers of entry, but management claims to generate much higher returns on capital despite that. Because it requires much less up front capital. 

Finally DBAY, a fund with a pretty impressive track record, owns almost a quarter of shares outstanding. And tried to take the company private at 150p/share in 2021. This would have implied a valuation of about 10x NTM earnings vs 4.5x right now. Current net receivables + cash - debt are about 122p/share vs current share price of 84p/share. 

I am not saying another bid is imminent, but it would not surprise me if they had another go at it if the market keeps hating this stock and the company keeps generating earnings. 

So ANX enters the portfolio at 84p/share. 

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Finally I sold Water Oasis (1161) since the stock has run up and I have a hard time figuring out their 2023 earnings. This stock will probably not trade higher than a 7-8x PE. Which is where it is right now if earnings come in the same as in 2021. I got a nice 47% return out of it in the past 6 months. 

As usual, do your own due diligence and I may sell or buy any of the above stocks at any time.