Noise and Dialight (DIA) ... wimps & romantics

Friday 30th October 2015

My inbox coughed up a "Conviction List Update". Its content issued from some of the finest, indefatigable minds in broker land. 

Having read the word conviction, I reckoned on the substance being top notch. Sure things. Bullish patterns. Great numbers. Super-fired. Plenty room for upside. Coiled and ready for a big move up. 

The sky is the limit. 

Hands beginning to shake I carefully placed my cup of tea back on its coaster. 

And there it was. The fool proof ideas I never knew I needed.

"Just Eat & Trinity Mirror In. Chemring out." 

Hang on a sec. Chemring out?

Chemring had a profit warning on Monday. Its stock's dropped 24% since. 

That's some conviction. 

Where was the courage in this list of conviction? The strength in the face of pain and grief? 

And good grief, 24% was plenty of pain. 

I picked my cup of tea back up and turned my attention to Dialight. 

Dialight

Dialight share price
Source: Bloomberg

On Wednesday, Investec was the latest broker to savagely cut its earnings forecasts for Dialight. This came after Tuesday's severe mauling by DIA's house broker, Canaccord. 

Canaccord cut its operating profit forecast by 62% to £6 million for 2015. 2016's operating profit forecast was reduced 43% to £10.5 million. The lighting segment was expected to see no revenue growth in H2 2015, and bounce back by 15% in 2016. That's some bounce. 

Investec was less touchy feely. It cut its 2015 EPS forecast by 73% to 4.8p/shr (implying a loss in H2) and its 2016 EPS forecast by 50% to 16.1p/shr.  

Investec's numbers would put the stock on 114x 2015 forecast EPS and 34x 2016 forecast EPS. 

Miraculously, Investec left DIA on a "Hold" rating. 

They all have "Buys" or "Holds". It's no mystery behind the romancing. 

Whatever the recommendations, consensus earnings forecasts likely still need to go lower. According to Bloomberg, two analysts in that consensus are still in the fantasy section of broker land, one plumping for 16.6p the other 20p of earnings for 2015 and then 29.9p and 31p of earnings for 2016. 

They must be taking long vacations.  

Dialight semi-annual EPS and implied H2 2015E EPS from consensus forecast
and H2 EPS as multiple of H1 EPS
Prior to 27th October 2015 strategic review and trading update
Source: DIA interim and annual reports, Bloomberg

Dialight semi-annual EPS and implied H2 2015E EPS from consensus forecast
and H2 EPS as multiple of H1 EPS
After the 27th October 2015 strategic review and trading update
Source: DIA interim and annual reports, Bloomberg

And another thing

During the years since DIA's earnings grew from 23.2p per share in 2010, to 36.4p per share in 2014, I calculate that the group achieved a somewhat lowly average of £1.8 million per annum in free cash flow. 

The group's net cash position has dwindled from £10.4 million in 2010 and a peak of £15 million in 2012, to a net debt position of £8 million to 30th June 2015. 

Quite what the FCF and net debt profile will look like over the next year or so against the backdrop of the planned realignment is uncertain. But I would reckon a £179 million market capitalisation appears somewhat lofty in the context of the group's record of FCF generation and the way consensus appears to be heading.   

No position Chemring. 

No position Trinity Mirror. 

I'm short Just Eat. 

I'm short Dialight. 

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

Globo (GBO) ... two and a bit reasons ...

... why the cash might not be there. 

Wednesday 28th October 2015

As the ceramic dust settles from the self inflicted smashing of plates over the heads of Globo shareholders, the last straws are being clutched at. Does the company have all that €47 million of net cash it reported in its interims to 30th June 2015?

I very much doubt it and here's two and bit reasons why ...

Firstly, we know that the former CEO, Mr Costis Papadimitrakopoulos "Costis", fessed up at the weekend. Although not before flogging as much of his Globo stock as was humanly possible in the weeks leading up to that. All told he is reported to have sold c. 42 million shares outright in the weeks leading up to Thursday 22nd October 2015, and pledged 10 million shares as collateral for a loan.  

Volume data would suggest that a large chunk of Costis' stock was dumped on Tuesday 20th and Wednesday 21st October 2015, immediately following Tom Winnifrith's fireworks at Globo bearcast at Shareprophets.com on that Tuesday, and the call he received on the Wednesday from the FT's, Dan McCrum (that Globo timeline in full).

The volume data also suggests that the other big sales came in the days and weeks prior and before rumours of the killer Quintessential Capital Management report began. 

Globo trade volume data
Source: Bloomberg

If so, then it looks likely that the catalyst prompting Costis to begin his dumping of stock was the failure of the $180 million high yield bond issue, finally revealed as cancelled, also on Wednesday 21st October 2015. This had been dragging on since June last and so its impending failure had been a long time coming. 

One possible reason Costis began selling may have been his knowledge that a failure to raise a further and far larger debt would leave the company insolvent due to the cash balance also having been misrepresented and falsified.

That's one theory

A second reason there may be no cash is from an inspection of the group's balance sheet and the receivables, payables and debt held by its subsidiaries and associates. 

Below is the group's assets and liabilities to 30th June 2015

Globo assets and shareholders' equity
Source: Globo interims

Globo liabilities
Source: Globo interims

The group claims €104 million in cash and cash equivalents.

Also in the assets section is €55 million in trade receivables, €5 million of other receivables and €35 million in other current assets. 

Within its liabilities, the group reported €57 million in borrowings, €9 million in trade and other payables and a further €10 million in other liabilities. 

Without doubt the debt is definitely real, leaving the reported €47 million in net cash. What is less likely is, given the reported falsification of data, that the trade receivables, other receivables and other current assets are entirely real or ever likely to be recovered. 

However, by contrast, I would imagine that a large portion of the liabilities (excluding debt) are very real. Ex-debt and tax, the remaining liabilities come to c. €19 million. 

Here is the balance sheet of  Globo's divested associate, Globo Technologies, to 31st December 2014.

Globo Technologies balance sheet
Source: Globo Technologies

This shows, that Globo Technologies had a total €27 million in borrowings. As it is an associate, Globo Technologies debt will not have been consolidated into Globo's accounts. But there is possibly some risk that the debt is fully secured against Globo Plc or that Globo Plc is on the hook for at least 49% of it.   

Another factor to consider is that historically all facilities provided by banks have been secured against receivables, and it was never quite understandable what the statement "In addition, the Group has also secured major customer contracts in exchange for 60-70% of the contract value." ever meant.

Historically borrowings were secured
Source: Globo 2012 annual report

Further, the 2014 annual report highlights that "When the Group's share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate."

So are there any legal obligations?

Investment in associate
Source: Globo 2014 annual report

And another thing

As we now know, Globo has(d) a partnership with Metis SA. Indeed, in its report, QCM reckoned on Metis being one of the satellite companies to Globo.

Metis partnership with Globo
Source: www.metis-net.com/en-GB/our-partners/

According to Metis' website, Pyramis is/was a customer of Metis.

Pyramis is a Greek based kitchen sink manufacturer of all things.

I say is/was, as rather perversely, up until Friday 23rd October 2015, Pyramis seemingly was a customer of Metis. The Pyramis logo has mysteriously disappeared since Globo announced its financial irregularities. It is also the only customer to have seemingly disappeared from Metis' webstite.

Now why would that be?

Now you see it!

Metis SA customer list including Pyramis
Source: Wayback machine snapshot from 23rd October 2015

Now you don't!

Metis SA customer list no longer including Pyramis
Source: www.metis-net.com from 28th October 2015

The Pyramis website shares the same server as Altanet and indeed, bottom right of the Pyramis website is a link to Altanet's, Altab2x logo, which directs you to the Altanet website.

Pyramis website "Powered by altaB2x"
Source: www.pyramis.gr

Pyramis website "Powered by altaB2x"
Source: www.pyramis.gr

So Pyramis has some sort of relationship with Alanet.

As it happens, Altanet also designed a number of the Globo subsidiary websites.

Altanet's design of Globo's subsidiary, Profitel's website
Source: www.altanet.gr

It would appear that Altanet is a customer to Globo and vice versa.

Altanet partnership with Globo
Source: www.altanet.gr

Altanet strategic partnership with Globo
Source: www.altanet.gr

So Metis is a customer/reseller/partner of Globo's.

Pyramis is/was a customer of Metis; mysteriously this relationship seems to have ended in recent days.

Pyramis is also a customer of Altanet.

Altanet is a client of Globo and Globo is a client of Altanet.

It's all rather incestuous and circular.

Incidentally, a Mr. Nikolaos A. Bakatselou is the CEO of the fore-mentioned, Greek based, kitchen sink manufacturer, Pyramis.

Pyramis Group board
Source: www.pyramisgroup.com

He is also on the board of the Greek based, Attica Bank.

Attica Bank board
Source: www.atticabank.gr

That's the bit I found interesting.

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Just Eat (JE/) ... more fine dining than Grub?

Tuesday 27th October 2015

Pursuant to today's warning by the US listed online restaurant order and delivery service, GrubHub (GRUB US, mkt cap $2.2 billion), I sold short a few Just Eat (JE/ LN, mkt cap £2.9 billion), the UK listed online restaurant order and delivery service. 

This was not a difficult decision to make. 

You may reckon that JE/ with its superior market capitalization to GRUB is as distinguished in terms of its prospective P&L. However, this is not the case. 

For sales:

• GRUB is forecast* to achieve £237 million in sales in 2015, rising 29% to £305 million in 2016. 

by contrast

• JE/ is forecast* to achieve £235 million in sales in 2015, rising 34% to £315 million in 2016.

In terms of EBITDA and EBIT:

• GRUB is expected* to deliver £72/44 million in EBITDA/EBIT in 2015, rising to £96/63 million EBITDA/EBIT in 2016. 

while

• JE/ is penciled* in for £55/48 million in EBITDA/EBIT in 2015, rising to £89/83 million in EBITDA/EBIT in 2016. 

The major difference between the two companies appears to be in valuation:

• GRUB trades* on 40x this year's earnings, falling to 31x 2016. Or alternatively an EV/EBITDA multiple of 16.9x 2015 falling to 12.7x 2016.

as compared to

• JE/ trading* on 76x this year's earnings, falling to 47x 2016. Or alternatively an EV/EBITDA multiple of 49x 2015 falling to 30x 2016. 

*Bloomberg consensus

So what gives? 

I reckon one set of valuations is wrong. US investor appetite would suggest it's Just Eat's. 

Consequently I sold short. 

GRUB share price as compared to JE/
Source: Bloomberg

GRUB P/E de-rating as compared to JE/
Forward P/E multiple
Source: Bloomberg

GRUB EV/EBITDA de-rating as compared to JE/
Forward EV/EBITDA multiple
Source: Bloomberg

And another thing

GRUB's warning (and subsequent slide in value) is probably unhelpful for any positive read across to Foodpanda, which no doubt explains why Rocket Internet fell 6% on the day. 

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.

Globo (GBO) ... finally, all is revealed

Monday 26th October 2015

"Falsification of data and misrepresentation of the Company's financial situation."

Who'd have thunk it?: Globo thread 

CEO gone.

CFO gone. 

COO's palm to forehead ... thwack ... and suspended. 

CEO sold as much of his stock as possible. 

Joint broker, Canaccord resigned with immediate effect. 

Major questions for Grant Thornton the auditor and RBC Capital Markets the Nomad.

And who bought the CEO's 42 million shares? 

GBO - it's all over
Source: Bloomberg

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Dialight (DIA) ... more expensive than you think?

Monday 19th October 2015

Dialight has defied gravity of late. I wonder if buyers realize how expensive it likely is. 

Bloomberg consensus earnings expectations for full year 2015 are set at 21.7p per share. That would suggest DIA trades on a relatively pricey 32x this year's earnings. But it's likely no where near that cheap. 

Firstly, as I have highlighted prior (Dialight - three years in a row), a 21.7p outturn would require that Dialight's second half earnings performance is more than 3x improved upon what it reported in the first half of 2015. In H1 2015 it only managed 5.4p per share of earnings, down 63% from H1 2014. A 21.7p full year performance would mean 16.3p of earnings in H2 2015 to meet consensus. 

But there's more ...

That Bloomberg consensus forecast is calculated from the mean of submissions by six analysts. However, two of these are seemingly significant outliers. They are so hopeful, that they expect full year 2015 earnings to be north of 30p per share! 

30p full year earnings would require a miraculous bounce in Dialight's performance from a 63% YOY earnings contraction in H1 2015 to 12% YOY growth in H2 2015. This seems unlikely. 

I reckon full year earnings will be 12p per share at very best, and that DIA is on course for a 45% miss. But my view is neither here nor there. What seems more likely is that the two outliers in the consensus will have to significantly cut their forecasts, which I reckon would bring consensus down to c. 17.6p. Even though I reckon 17.6p would still likely be overoptimistic, what it would mean is that DIA is not on a relatively pricey 32x earnings, it's probably on 40x. 

I note the outliers are also considerably more optimistic for 2016 forecasts as compared to their fellow analysts.

Dialight 2015 and 2016 consensus earnings per share breakdown
Two outliers to the upside
Source: Bloomberg

Dialight share price
Source: Bloomberg

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.