The news comes as bitter sweet. Ergoresearch is being taken private for just a 20% premium over my purchase price.
When I first bought ERG, I expected so much more. The company had discontinued an unprofitable line of business, which made revenue look bad but improved free cash flow. Ergoresearch was also starting up new clinics, moving into sleep apnea treatments, and had at least mentioned returning to its acquisitive ways. The bitter part of the deal is because my investment in Ergoresearch could have been so much more.
Then the company sort of went dark. One day I noticed that I hadn’t seen a news release about earnings, so I went looking and found that there wasn’t a press release, the financial statements were simply put on SEDAR. And the numbers were only put on SEDAR in French. I thought this was a little curious, it was a bit annoying but thought it may provide value investors more opportunity to buy while ERG was unfound.
Then this news of the privatization came out not long after. The sweet part is that Ergoresearch shares were unlikely to move higher anytime soon. By not announcing earnings, and by only releasing numbers in French, it effectively hides the company from a large percentage of the investment community. I’m fully aware that the business is improving, and this is an excellent deal for Sylvain Boucher and Walter Capital. They are acquiring a business with growing free cash flow and exciting initiatives that should grow the business in the future. For small shareholders like me, we’re provided an out for our shares that were probably still going to be in the $0.20-$0.25 range for year or more.
I’m mildly disappointed in this investment. I think the prospects of ERG deserve a higher premium, but I doubt anyone who has been holding their shares is patient enough to demand it or want to keep the company public. I sold my share at $0.295 and have moved on.
Nine months ago I wrote my thesis on Integrated Asset Management, which I thought should be trading at $1.49 on September 30th (end of fiscal 2017). I’m not usually anywhere close to this right, but IAM was $1.54 on September 29th.
Since then however, IAM has traded down to its current $1.38. I made a number of assumptions coming to my 2017 target, as well as my 2018 target of $1.76, with the share price lingering I decided I ought to take another look at these assumptions and make some new targets.
I tried to be pretty conservative with my estimates of 2017’s financials, and this is how it turned out:
|Expenses||$10 million||$12.2 million
|Dividend||$.06/share, $1.7 million||$1.685 million paid out.
Dividend raised to $.08
|Managed Futures Sale closes.||Sells for $3.3 million||$3.2 million
|Invested Capital||$1.912 billion||$1.854 billion
|Cash||$12.8 million||$16.48 million
The table shows without a doubt that I don’t know what I’m talking about.
Most of my assumptions are significantly off, but what most affects my valuation is that expenses are much higher than I figured and lower EBITDA by nearly $.08. If I was a smarter investor, I would have sensed that expenses would be higher than $10 million. Despite the much higher cash balance (I had assumed $0 operating cash flow to be extra conservative), EBITDA growth was not as high as predicted which throws my target out the window. I figured an 8x EV/EBITDA multiple was fair (conservative, but fair) for IAM, and yet here we are sitting at 12x and under my target.
Reasons Not to Fret
My thesis for IAM is playing out, I just missed on the growth in earnings. There are still a lot of reasons to like the stock here.
- The dividend is now quarterly, if that matters to you for some reason. More importantly, the dividend was raised to $0.08 annually, a 5.8% yield today. This also signals confidence from management that EBITDA/cash flow will keep growing, and revenue will be smoother.
- IAM continues buying back shares. In December over 1% of shares outstanding were cancelled, and there’s a good chance that 5% of shares are bought back this year. If this happens, shareholders will have over 10% of the market cap returned to them through the dividend and buybacks.
- Cash makes up almost $0.59 of the market cap with no debt. IAM has consistently had an excess of cash on the balance sheet, but probably $6 million is extraneous and could be used for an acquisition, investment, or special dividend.
- While it did not grow as much as I thought, EBITDA still grew a lot. I originally predicted $4.825 million in EBITDA for 2018. That’s now a pipe dream, but $2.8 million is within reason, growth of over 50%.
Right now IAM is a growing, profitable asset manager with no debt and cash worth over 40% of the market cap. I can’t justify selling a company with those characteristics because I made poor predictions. I’m going to keep holding here, but will be keeping an eye on it.
Disclosure: Still long IAM.