I wanted to close the year with some general comments and by taking a quick look at the ideas I’ve written up since I started to write again.
I’m happy that after a longer period without being able to post new ideas I’ve been able to structure my time and work to allow me to start writing up investment ideas again. I now expect to be able to continue to do so without (long) interruptions. In addition, as a new year’s resolution, I intend to start a new segment: Short sector / industry write-ups. Writing about investments is a lot of fun and I will definitely continue to write up new ideas. However, I often start to learn about a new company /sector only to eventually reject the idea. This is a normal part of the process but in the meantime I often learn something new about a specific sector or industry. I intend to write this up as well in the future; investment ideas come and go, but general information about a sector or industry should remain relatively interesting and relevant as time passes. Also, while a specific investment idea might not be interesting or suitable to everyone, general sector comments might.
Ok, lets now have a quick look at recent write-ups.
Since the write-up Surgepays reported 3Q22 results. Overall 3Q revenues were up strongly (+150% yoy), while gross profit was flat at $1.9m. Headline gross profit looked disappointing at first sight, but basically the entire miss was the result of poor performance for the non-ACP segments (mainly LogicsIQ).
Focusing on the ACP segment (i.e. the only segment I currently care off), 3Q revenue was $27m and gross profit $3m – very much in line with my back of the envelope calculations. The base was low, but ACP gross profit nonetheless doubled qoq. This is what I was looking for, i.c. continued revenue growth AND increasing gross profit. Adjusting for the non-ACP segment, this quarter would have been the first quarter with positive ebit. If non-ACP results for 9M22 would have been = 9M21, ytd ebit would have been c. $1m positive instead of $-2.9m.
That said, this was still a relatively small quarter. More importantly, results should now really start to ramp over the next quarter. I’m expecting 4Q ACP revenue to be c. $32m and gross profit roughly $6m, making this the first profitable quarter of many to come (hopefully). Overall, given the non-ACP performance, ebitda for the year should be neutral to slightly negative. But again, all small quarters so far. We should see gross profit and earnings start to ramp up as of 4Q.
In addition to the results, Surgepays (finally) announced a new lending agreement for the financing of devices. Keeping things simple, Surgepays is now able to borrow up to $25m and repay the amounts (plus some interest) over nine months with the cash flow from its receivables. The financing room can grow to $100m should Surgepays need it the future. This is a pretty big thing, as the company’s limited ability to purchase devices was a big reason why Surgepays wasn’t growing more rapidly. In addition, during 2Q we learned that the price of devices has been creeping up to $90 or more in some cases. With this financing instrument, Surgepays can now provide a deposit for the devices it buys, saving up to $10/$15 per device. These are pretty big numbers.
Besides lower cost of revenues, this new financing is good news for the overall growth as well. It now allows Surgepays to ramp up all three channels: Field (the current source of growth, which slows down during colder months) + Online + Store. CEO Cox mentioned that until recently they had to choke the Online channel’s growth in order not to antagonize its sales people: Online is a ‘competitor’ of Field and ramping up Online given the limited availability of devices would have led to unhappy sales people (since they would earn less commission). Now that the number of devices is not a constrain anymore, we should see new subs from the Online channel grow to >2,000 per day – at much higher margins than the Field channel as there are less commissions to be paid.
Also, with respect to churn, the CEO admitted in a recent call that a ‘big mistake’ was made during summer as Surgepays did not realize users could use the tablet on wifi. Surgepays has since focussed on improving churn. From what I understand, since the summer, churn has been cut in half.
All in all, I’m pretty excited about the new growth potential. This all should become visible over the next few quarters, particularly at the gross profit level.
There’s not much to say about this one. Pretty ok, so far. If you bought CTRM after they announced the spin-off and sold after the record date, you didn’t lose anything (but obtained the right to receive shares in the spin-off), which is pretty good. Even if you bought at the time the post was published, you lost something like 8/9% – not much given that the equity in the new entity should be more than enough to cover. Toro will list is a raging bull market for clean tankers and its tankers are currently printing money. Just look at the crazy chart below.
That said, tanker companies being tanker companies, CTRM announced the postponement of the distribution date by a month, to mid-January. This is due to Toro not having yet obtained declaration of effectiveness of its registration statement. Normally this wouldn’t be an issue for me, but this is a tanker company. I would not be surprised to see some ‘changes to the terms of the distribution’ favorable to management and less so for shareholders. Let’s see.
It’s way too soon to say something useful on this one. Contrary to CTRM, FTK is an investment, not a trade, and patience is needed. The biggest risk here imo is that I’m too early. FTK is an efficient, pure-play discount broker, focussed on the smaller retail trader. If we hit a recession in Europe, the average client will suffer and trade less. Average number of trades / user is THE key metric for this one.
On the other hand I find FTK to be very cheap, mainly as a consequence of the news of the audit by the regulator (Bafin), which I consider ‘growth pains’. After the merger with DeGiro, FTK is now not ‘small and non-complex’ anymore and needs to step up and further professionalize. The company will be under increased scrutiny for the next year and has to operate with higher capital requirements (now 15.5% + 1.5% management buffer, vs. 11.6% previously). This led FTK to retain its 2022 net income and postpone its shareholder return plans. Clearly the market did not like this (as well as the news of the Bafin audit).
FTK management indicated that it intends to be fully compliant (additional people, procedures and documentation) and to have the Bafin ‘ok’ by end of 2023. That would then mean lower capital requirements for 2024, more capital available and a return of the shareholder return plans. FTK will have to invest more to take the necessary steps and that will have an impact on next year’s margin. It depends on what you assume with respect to the number of trades / user, but based on a relatively conservative number, I’m below consensus for 2023 (Bloomberg). This could mean some further downside in the near-term. Nonetheless, FTK is cheap imo and this is excluding all that the company will earn on its large balance from higher ECB interest rates. As mentioned, FTK is an investment and I’m willing to look out a few years on this one.
That’s all for this year! I’m happy to be back and eager to continue to add content to the blog. Wishing you all a Merry Christmas & happy new year.