Indeed, short sellers who have driven down Globo’s share price in the fortnight since the company issued a bullish first half trading update, and which prompted the company to issue a statement last week, would be well advised to take note especially if they are basing their investment view on the contents of two defamatory articles concerning the company circulating the internet since mid-July. In fact, having interviewed Mr Papadimitrakopoulos at length yesterday, it’s time to put the record straight.
Firstly, Globo’s boss points out that 90 per cent of all the cash on the company’s balance sheet, a sum equating to €82.8m at the end of December 2014, is deposited with “investment grade banks” and all of this money is fully accessible with no tax restrictions on transfers whatsoever. This is contrary to what the shorters would have you believe. In fact, the company only has €100,000 of its cash balance deposited with Greek banks, a point I made when I last published an article on the company (‘Primed for major re-ratings’, 22 July 2015).
Secondly, there are sound reasons why the company has opted to raise a high yield bond to finance its acquisition strategy. For starters, Globo’s current bank facilities with Barclays and East West United Bank have 10 different covenants which it must comply with. These are quite restrictive if it’s going to significantly scale up the business by making some sizeable acquisitions.
The company has a “good relationship” with these lenders, but the facilities of €65m are due to expire in October 2016 and between now and then Globo will be making capital repayments. In fact, it has already made two such payments in the past few months. True, an interest rate of Euribor plus 3.5 per cent is attractive on these current bank facilities, but by raising in excess of US$150m (£97m) through a five-year high yield bond, as Globo is trying to do right now, and with no maintenance covenants, the company is actually mitigating risk for its shareholders. That’s because any new facility with Barclays and East West United Bank would still have restrictive covenants which would be “dangerous for shareholders” if Globo pursues a substantial acquisition strategy.
Although the market will ultimately decide on the pricing of the bond issue Mr Papadimitrakopoulos says the coupon rate will be “more than 8 per cent, maybe 9.5 per cent or even 10.1 per cent”. That’s a reflection of the current state of the high yield bond market, rather than Globo which has recently been given a credit rating of f BB- from rating agency S&P and B2 from Moody's.
The point being that a ‘covenant lite’ bond issue priced around the upper end of that coupon rate would still be accretive for shareholders on a cash profit basis given the potential synergy benefits from acquisitions. Just as important, the company will not be diluting their interests by issuing shares to fund acquisitions.
Moreover, the company’s cost of equity is far higher that the likely coupon rate on the bond, and interest payments are tax deductable against operating profits. It’s also worth noting that the plan is to refinance the acquisitions within two to three years through lower cost bank facilities and possibly an equity issue once the operational and financial benefits have materialised, so the bond funding is certainly not long-term. Also, once the acquisition strategy has proved itself, then shareholders in Globo will also see the benefit from the lower cost credit lines as more of the company’s profits will be captured by them rather than the bondholders.
On the M&A trail
What has not been made clear to equity shareholders, and something that the short sellers have taken advantage of, is that half the proceeds of the bond issue will be used for “acquisitions within six months, and the balance within 15 months.” The targets being looked at are located in the US, Western Europe and Australia and importantly all offer “the technology, geographic reach and people to multiply our sales into new channels”.
Mr Papadimitrakopoulos is looking at paying a multiple of 10 times cash profits for acquisitions (and that’s before factoring in synergy benefits) and expects additional sales from tapping into these new channels to reap a further 20 per cent upside in cash profits. It’s also worth pointing out that by adopting this particular approach, rather than taking on the execution risk of building up an operation from scratch in new territories, Globo can accelerate the ramp up in its business and avoid incurring start-up losses in the first few years. That mitigates risk.
Clearly, the company’s free cashflow of €10m (£7m) in the past 12 months is not enough to fund an acquisition spree on the scale Globo is looking at even if the company uses a large proportion of its aforementioned cash deposits to pay the consideration. True, it currently has net funds of €47.4m, up from €40.4m at the end of December 2014, a sum equivalent to almost 9p a share, but even after factoring in cash on deposit then it still needs external funding to scale up the business quickly.
And that’s important because if Globo’s board want to fulfil their ambition of becoming a leading pure-play operator in the enterprise mobility management (EMM) and Mobile Application Development Platform (MADP) business segments, offering businesses solutions to expand their engagement with employees and customers through the mobile channel via a secure and extensible environment that runs on all smart devices, then strategically it needs to act now. “Tech is a fast market and you need to execute fast. You either win it or lose it” says Mr Papadimitrakopoulos. He’s in no mood to lose it.
Short covering and newsflow to spark substantial re-rating
It’s my strong view that if Globo pulls off its high yield bond issue, and I understand that some serious fixed income investors are considering the fundraise right now, and reveals details of its first strategic acquisitions to its shareholders, then short sellers will be scrambling to cover their positions. We shouldn’t have long to wait because we can expect news on this front “within weeks”.
Indeed, the share price could be in for a very sharp re-rating because investors have ignored a bullish first half trading update that confirmed that the company is bang on track to lift EPS from 6.7p to at least 8.7p in 2015. This means Globo’s shares are being priced on a cash adjusted prospective PE ratio of 4,a valuation that fails to recognise its growing international bias and intention to make complimentary acquisitions. Bears of the stock are playing a very dangerous game.
Trading on a bid-offer spread of 42.5p to 42.75p, I continue to rate Globo’s shares a buy and have a 69p target price, having initiated coverage six months ago with a conditional buy recommendation at 47p a share ('Going global', 2 February 2015).
Motoring ahead
It hasn’t taken long for shares in car dealer Cambria Automobiles (CAMB: 72p) to move into top gear. In fact, they hit my 75p a share target price within 10 days of publishing a bullish buy recommendation at 57.5p ('Driving a re-rating', 13 Jul 2015). That was well ahead of a pre-close trading statement due for release in early September and the full-year results in November. They currently trade on a bid-offer spread of 69p to 72p.
The re-rating looks fully justified too. A read across from larger rival Pendragon (PDG: 41.5p), which issued bumper half year results this week, points to an upbeat pre-close trading update being released by Cambria. Pendragon’s board commented this week that “our business continues to perform strongly across all sectors, owing to a combination of our strategy, market leading initiatives and favourable market conditions”.
Business is clearly good for Cambria. Revenues are forecast to be north of £500m in the 12 months to end August 2015 to underpin a sharp acceleration in pre-tax profits from £5.4m to £6.8m according to analyst Matthew McEachran at broking house N+1 Singer. On this basis expect EPS to increase by 29 per cent to 5.4p and a dividend of 0.7p to be declared, up from 0.6p last year.
And expect profits to motor next year too after factoring in a full contribution from the earnings enhancing acquisition of the TH White Land Rover franchise in Royal Wootton Bassett, Swindon. I am more than comfortable with analysts' predictions that EPS will rise from 5.4p to 6.3p in the 12 months to end August 2016 and for the dividend to be hiked again to 0.8p a share. This means that the shares are currently rated on 11.5 times fiscal 2016 earnings estimates and offer a 1.1 per cent prospective dividend yield which still doesn’t seem too punchy for a company where the risk to earnings is on the upside. Run profits.
MORE FROM SIMON THOMPSON...
At the end of April, I published an article with all of the share recommendations I have made this year. Since then I have published articles on the following companies in the past 13 weeks:
■ Marwyn Value Investors: Buy at 220p, target price 260p ('Exploiting a value play', 5 May 2015)
■ Pure Wafer: Buy at 113p, target 140p to 150p; Paragon: Run profits at 440p, but buy on a confirmed breakout above the 445p and new target of 500p; 600 Group: Buy at 16.5p, target 24p; Fairpoint: Buy at 127p, target 190p; AB Dynamics: Buy at 207p, target 230p ('Repeat buy signals', 11 May 2015)
■ Globo: Buy at 56p, target 69.5p; Greenko: Hold at 70p; Pittards: Buy at 128p ('Breakout looms for mobile wonder', 12 May 2015)
■ Macau Property Opportunities: Buy at 214p; Dragon-Ukrainian Properties & Development: Hold at 28p; Raven Russia: Hold at 53p ('Overseas property plays', 13 May 2015)
■ Trakm8: Run profits at 135p; Redde: Buy at 120.75p, target 140p; STM: Run profits at 45p, but conditional buy on close of 48p and new target of 60p ('Smashing target prices', 14 May 2015)
■ Bilby: Buy at 75p, target 100p ('Buy to build' growth play, 18 May 2015)
■ Bioquell: Buy at 148p, target 170p to 185p; Somero Enterprises: Buy at 140p, target 185p; KBC Advanced Technologies: Buy at 109.5p, target 165p; Inspired Capital: Hold at 14.25p ('Three value plays', 19 May 2015)
■ Renew Holdings: Buy at 315p, target range 350p to 375p; Manx Telecom: Buy at 198p, target 210p ('Renewing old acquaintances', 20 May 2015)
■ Marwyn Value Investors: Buy at 228p, target 260p; Charlemagne Capital: Hold at 13.5p; Bloomsbury Publishing: Hold at 178p ('Lights, camera, action', 21 May 2015)
■ Anite: Buy at 91.5p, target 110p ('Testing a break-out', 26 May 2015)
■ Character Group: Buy at 415p, target 525p ('Playtime', 1 Jun 2015)
■ Tristel: Run profits at 96p; Pure Wafer: Buy at 123p, target range 140p to 150p; Crystal Amber: Buy at 153p ('Hitting target prices', 2 Jun 2015)
■ B.P. Marsh & Partners: Buy at 150p, target range 170p to 180p; Moss Bros: Buy at 110p, target range 120p to 130p; SeaEnergy: Sell at 15p ('Exploiting a valuation anomaly', 3 Jun 2015)
■ Globo: Buy at 59p, target 69.5p; London & Associated Properties: Buy at 38.5p; Greenko: Hold at 44p ('Catalysts for share price moves', 4 Jun 2015)
■ Burford Capital: Buy at 148p, target 190p ('Legal eagles', 8 Jun 2015)
■ Market strategy ('Financial Market Watch', 9 Jun 2015)
■ Software Radio Technology: Buy at 29.5p, target 40p to 43p; Tristel: Run profits at 92p; Creston: Buy at 136p, target 150p; Sanderson: Buy at 69p, target range 80p to 85p ('Blue sky potential', 10 June 2015)
■ 1pm: Buy at 67p, target 80p; Vislink: Buy at 58p, target 70p ('Small-cap growth stocks', 11 Jun 2015)
■ Elegant Hotels: Buy at 105p, target 135p to 140p ('Checking into an elegant investment', 15 Jun 2015)
■ First Property: Run profits at 45p; AB Dynamics: Run profits at 225p and target 250p; Inspired Capital: Sit tight at 20p (Bargain shares updates', 16 Jun 2015)
■ Trakm8: Run profits at 159p, new target 180p; Anite: Sit tight at 126.75p; Trifast: Run profits at 129p, target 140p; Record: Buy at 37p ('Small-cap wonders', 17 Jun 2015)
■ Inland: Run profits at 71p, target 80p; KBC Advanced Technologies: Buy at 110p, target 165p; Caretech: Buy at 237p, target 300p ('Riding an earnings upgrade cycle', 18 Jun 2015)
■ Ensor: Buy at 97p, minimum target 125p ('Building up for a takeover', 22 Jun 2015)
■ GLI Finance: Buy at 54p, target 80p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('A triple play of small-cap picks', 23 Jun 2015)
■ Bilby: Run profits at 97p; Safestyle: Run profits at 220p; Epwin: Run profits at 134p ('Soaring small-caps', 24 Jun 2015)
■ Faroe Petroleum: Buy at 86p, target 100p; Greenko: Hold at 65p; Communisis: Buy at 48p ('A slick investment', 25 Jun 2015)
■ Mountview Estates: Buy at 12,250p; Inland: Run profits at 71p, conservative price target ('Running bumper profits', 29 Jun 2015)
■ Redde: Run profits at 138p, target range 150p to 155p; Trakm8: Buy at 175p, target 200p; Cohort: Buy at 312p, target 365p; Burford Capital: Buy at 175p, target 190p; Flowtech Fluidpower: Buy at 135p, target 155p ('Riding earnings upgrade cycles', 7 Jul 2015)
■ Crystal Amber: Buy at 161p; Stanley Gibbons: Buy at 258p; Somero Enterprises: Buy at 150p, target 185p; Globo: Buy at 49p, target 69.5p ('A quartet of small-cap buys', 8 Jul 2015)
■ H&T: Buy at 200p; STM: Buy at 47p, target 60p; Stadium: Buy at 113p, target 140p ('Exploiting upgrades', 9 Jul 2015)
■ Cambria Automobiles: Buy at 57.5p, target 75p ('Driving a re-rating', 13 Jul 2015)
■ Walker Crips: Buy at 47p, target 60p; 600 Group: Buy at 18p, target 24p; Henry Boot: Buy at 235p, target 260p ('A trio of small-cap value plays', 14 Jul 2015)
■ Bilby: Buy at 90p, target 120p; 32Red: Buy at 67.5p, ('Exploiting a valuation anomaly', 20 July 2015) target 90p; Marwyn Value Investors: Buy at 244p, target 275p ('Acquisitions drive earnings upgrades', 15 July 2015)
■ Vislink: Buy at 53p, target 70p ('Awarding success', 16 July 2015)
■ SPARK Ventures: Buy at 4.5p ('Exploiting a valuation anomaly', 20 July 2015)
■ W.H. Ireland: Run profits at 120p, target 140p; Safestyle: Run profits at 235p; Charlemagne Capital: Sell at 11p ('Cash rich small-caps', 21 July 2015)
■ Amino Technologies: Buy at 150p, target 180p; Arbuthnot Banking: Buy at 1,530p; Globo|: Buy at 49p, target 69.5p ('Primed for major re-ratings', 22 July 2015)
■ SPARK Ventures: Buy at 4.5p; Entu: Buy at 115p, target 165p ('Cashed-up for gains', 23 July 2015)
■ Capital & Regional: Buy at 60.25p, target 70p ('Hot property', 27 July 2015)
■ LMS Capital: Vote against proposals at EGM; Marwyn Value Investors: Buy at 238p, target 275p to 280p ('Game changers, 28 July 2015)
■ Stadium Group: Buy at 130p and take up open offer, new target range 155p to 160p; 1pm: Buy at 68p and take up open offer at 60p, new target 90p ('Powered up for gains', 29 July 2015)
■ CareTech: Buy at 245p, target 300p; Burford Capital: Buy at 170p, target 190p; K3 Business Technology: Run profits at 275p; Trakm8: Buy at 178p, target 200p ('Hitting the right numbers', 30 July 2015)
■ Non-Standard Finance: Buy at 107.5p; Software Radio Technology: Buy at 27.5p, target 40p; Character Group: Run profits at 500p; Communisis: Hold at 50p ('Value judgements', 3 August 2015)
■ Fairpoint: Buy at 138p, target 190p; Creston: Run profits at 155p; Sanderson: Buy at 71p, target 80p to 85p; Renew Holdings: Buy at 340p, target 375p ('Break-outs looming', 4 August 2015)
■ Globo: Buy at 42.75p, target 69p; Cambria Automobiles: Run profits ('Short sellers in for shock treatment', 5 August 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
