Given some recent news / earnings releases, its time to have a few updates on some of the companies I’ve discussed on this blog.
FTK presented good results for the full year 2022. Adjusted for stock appreciation rights, the company earned ~€ 80m in a year with a historically low level of transactions / customer. FTK is guiding for a relatively steady year as it focuses on bringing the company up to speed on all necessary compliance and regulations as guided by BaFin. Earlier this year the regulator imposed a rather symbolic fine of € 1m for its past misdemeanours. Now FTK has a year to catch up. With some internal alignments, the hiring of additional people and the appointment of special representatives, FTK intends to become fully compliant by the end of the year and possibly sooner.
Management is guiding for a more or less steady year with respect to its financials. Accounts are expected to continue to increase and FTK is expecting another year with a low level of transactions / account. On the other hand, the rapid hiking of interest rates by the central banks will result in a lot more interest income. I believe 2023 is a transition year, with the biggest catalyst being FTK becoming compliant to all necessary regulations. They will then be able to lower capital requirements and put capital returns plans back on the table. I’ve updated my back-of-the-envelope forecast for the next few years, including some adjusted figures as all the SAR provision movements make yoy comparisons a bit blurry. I believe that the medium-term estimates are rather conservative and leave plenty of room for positive surprises.
2020 and 2021 where crazy years for the (retail) market and should not be taken as a base for comparison. With FTK I’m focussing on the growing number of accounts, particularly as the company continues to grow its stable subscriber base, and operating leverage. We don’t need a buoyant market for FTK to be successful. That said, the market will turn at some point in the future as well, but that is al upside torque. FTK is still a young, growing company with plenty of levers to pull. This is a compounder which needs to mature, and as it does, so will its valuation. At ~11x p/e on 2023 est., FTK remains attractively valued imo given >20% annual earnings growth potential over the longer term.
After a few months of relative silence, Surgepays rattled the market with a guidance of $35-36m revenues for 4Q22. Taking these numbers at face value, the guidance is rather poor, as it basically implies no growth over the fourth quarter for a company that should show continued qoq growth, at least for the next few years. The market being risk-averse, particularly with micro-caps, it probably assumed this was due to increased churn, and the stock dropped ~20% over the next few days.
While increasing churn might explained the deceleration, I highly doubt it. The main reason for this is the $2-3m of cash flow generation that the company is guiding for the quarter. If churn would indeed have been the culprit, we should see accelerating losses and negative cash flow. The positive cash flow is much more an indication that the company stopped adding new subs.
Indeed, the company confirmed that they’ve been ‘throttling ACP sales’ (ie holding back on handing out devices) as they waited to sign the new financing agreement. Surgepays’ new financing allows it to purchase many more devices (~300k shipped in 1Q) at a lower average price, saving $10-15 per device. These are pretty big numbers.
Slowing sales and not ordering new devices results in an inventory draw and an overall big working capital release – hence the positive cash flow. According to the company, they had two choices in 4Q22: continue as is, i.c. handing out devices to keep sub count growing, or take a step back and focus efforts on preparing and expanding the company’s store network to be ready as a channel for ACP enrolment, and push that channel aggressively once the 300k devices are in. CEO Cox doesn’t want Surgepays to be ‘solely an ACP subscriber company’, and wants to use ACP to be a catalyst for other products to be sold.
Focussing on ACP, keep in mind that Surgepays still has to ramp up its online and store channel. These channels have much lower customer acquisition costs, which could have a big impact on profitability.
What this all means for results is that we could see an interesting dynamic over the next few months. 1Q23 could be slower than expected, but still better than 4Q22. But growth in 2Q23 (so over the next few months) should be extremely good, and much more profitable on a per unit basis.
The market is clearly in a wait and see mode with Surgepays, and I get it. The company could definitely have communicated better on the impact of the decision to slow down ACP sub growth. We’ll see.
As explained in the write-up, Cherry is very much geared towards its Gaming segment which is having a pretty tough time after the lockdown hangover and China covid lockdowns. I do not expect a full recovery anytime soon – this remains a 2/3 year story – but we should not ignore the impact of China reopening; the country is finally reopening after a long period of lockdowns. Furthermore, China seems to be ending its crackdown on the gaming industry. These two factors alone could have a very large impact on Cherry, as new games are introduced and consumers start to spend some more.
This comes on the back of what seems are improving inventory levels. Both Logitech and Corsair mentioned easing supply chain issues and improving inventory levels after a long period of destocking. This means that 1Q23 might be the through.
As a reminder, I believe my estimates for Gaming are pretty conservative, with 2025e revenues in line with 2020. I’ve also assumed a linear progression, but this kind of performance is never linear. Just as demand ramped during lockdowns, and crashed afterwards, so can demand jump back again. And at ~10x 2022e ev/ebitda, for a company that could go back growing ebitda >40% p.a. (admittedly from a low base), the shares remain attractive imo.
Kingsway Financial Services
Though I’ve not published a write-up on KFS, I’ve followed it closely on Twitter. I thought it might be a good moment to comment on it, given the recent publication of results.
As a reminder, KFS is a ‘complex’ to ‘simple’ story, a company that was tremendously obscure given a host of acquisitions and bad management decisions. The bottom line is that, while the company seems a low-earning, highly levered company, it has actually $20m ebitda, growing >40% % p.a. between organic and self-funded inorganic grow, and a rapidly simplifying balance sheet.
A few items from the earnings: A real estate asset was sold in February for $8.3m cash, Amigo was unwind (another $1.5m cash), and a few other assets will be sold soon; Ravix ebitda grew >20% and the warranty ebitda ~10%; gross debt was ~$100m in 4Q. In addition, by the end of 1Q (hence in a few weeks), the TRUPs will be redeemed and gross debt will be down to ~$40m. This means KFS will (almost) be net cash.
Now, how do you think the market will price a highly cash generative company, growing >40% and with a clean balance sheet? Not at ~10x ev/ebitda in my view. Finally, keep in mind that KFS still has no coverage and is not included in any ETF. Check out how the Bloomberg P&L overview page looks.
I believe that 2023 will be the year where KFS officially comes out of obscurity and get renewed traction.
As always, this is no advice. Do your own due diligence.