Fyffes, Tricorn, Expansys

Quick-fire thoughts

Looking at interesting companies and then hitting a roadblock is always a bit disappointing, but perhaps there’s something to be said for being extra prudent with your money when the market has risen lots. A rising tide lifts all boats, as they say, and some of those boats are liable to sink rather more quickly than the marker might expect. Since I’ve spent the last couple of hours looking at three companies, then, I thought I might as well go through where I got to.

Expansys

Expansys popped up in my screen as it’s now trading at what is, apparently, a discount to its tangible assets. The online retailer and SIM card distributor now trades at 0.48p, about a quarter of where it sat a year ago, and significantly under the 14p per share it reached in 2010. The latest cliff the share price dropped off of came about because of a trading update on the 21st of March, noting that trading had been significantly below expectations, with the usual chatter about cost saving initiatives being implemented and a strategic review being undertaken. I was a bit confused by this:

The Board is undertaking a strategic review in order to accelerate its objective of becoming an end-to-end solutions provider to MNOs, MVNOs and OEMs. This is not currently envisaged to involve a sale of the Company.

My understanding of the business was that a large chunk of their revenues, as well as their previous capital expenditure, has gone on the retail side of things – their expansys.com website and the regional operations. Their previous half yearly report was talking about double digit growth rates. Is being involved in retail a part of being a ‘end-to-end solutions provider to (hang on while I google these) Mobile Network Operations, Mobile Virtual Network Operators and Original Equipment Manufacturers’? There’s also potential legal trouble in the SIM card segment, apparently with O2.

I just don’t really get it. Management’s narrative confuses me – which may very well be my own fault by being too easily confused – but I can’t help but feel there’s far too much stuff I’m missing that’s relevant to the valuation. I’m pretty sceptical of online retail businesses anyway given the way Amazon seem to operate. If they’re shifting into other segments for that reason, fine – but I don’t want to pay ~1.5 times net assets for that. I value simplicity. I know I probably miss good opportunities because of a lack of drive to ‘get to the bottom’ of situations like this one, but at the moment I don’t feel confident or comfortable enough to do that, so my time is better spent elsewhere.

Fyffes

I remember Fyffes from a while ago – I never looked at it in to much detail, but I recall it showing up on screens and being discussed. The judgement of the bloggers who did plump for the  seem to have been correct, as it’s doubled over the last two years. The mechanism of the valuation was particularly interesting here because the underlying business has been obscured a lot recently by (a rather common story) the fluctuations of the property market. Fyffes has a large investment in another company, Balmoral, which owns properties in Ireland and on the continent. Leveraged as these property companies always are, the collapse in Irish property prices left equity basically worthless, and saw Fyffes write off a huge amount of assets as it did so – they owned 40% of Balmoral. I don’t really know why companies do this – there’s probably a good historical reason, but as an investor I do not want my companies to own other companies in different industries. It adds more risk and uncertainty.

Either way, stripping that out, Fyffes seems like a decent company. Many of the valuation questions stem from whether you think last year was exceptional or not – they doubled profits and massively increased revenue on an asset base roughly equal to what it has been for the last 5 years. This sort of plays into the story that Fyffes have had some operational slack over the last few years which is getting ironed out now, and returns on capital are improving with it. If they keep up their good performance, they’re on the cheap side. If it’s more of a one-off, they’re a little expensive. I don’t have a strong opinion either way.

Tricorn

I covered Tricorn back in January and was a little ambivalent on the share. Having taken a second look, I’m more positive. The biggest update in the last few months has been Tricorn splashing out £2m on an American business that was in receivership. This is a significant sum for a company with a market cap of about £7m, and answers the question I was pondering last time – what are they going to do with their cash pile? That story is an interesting one. They’re acquiring £2.8m of net assets for £2m, and the company thinks it’ll help them establish a more international business. Count the ‘globals’ in the following from their statement:

This acquisition represents a further and very significant step in the Tricorn Group achieving a considerable multi-site global business, delivering global tube solutions to a global OEM customer base.

The risk, as always, is that the acquisition won’t pay. The statement says that the business posted a net loss of £1.4m (!!) last year, though £0.9m of that was one-offs and interest charges. A loss of £0.5m is clearly still a hefty sum for a company of Tricorn’s size, though. If Tricorn manage to turn the newly acquired businesses around to be nearly as profitable as their current assets, though, they’ve got it all to gain. There’s lots of benefits of scale in companies this small – getting bigger means you’re spreading a lot of fixed costs (listing costs, accountancy costs, management, centralised business etc.) over more revenue. It strikes me that you have to have a good deal of faith in management when they make an acquisition like this, though.

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