Novabase: full year results. What now?

First of all the disappointing points:

1)      Dividend: 0,15€/sh.

2)      EBITDA guidance: >10M

3)      2016 EBITDA impacted by a 7M unexpected cost in a single project

About them:

About 1 and 2) I expected either an higher dividend or an higher guidance (since cash investment should result in an higher guidance). Unless this guidance is relative to attributable EBITDA (I don’t think it is), this should mean they expect the small growth in sales to be accompanied by a fall in EBITDA (excluding that 7M cost).

About 3) Since what matters to me is actual cash generation (see the positive points below) this charge should make no difference. It is a one off. The only thing I find strange is how can they have an unexpected 7M cost in a single project? Somebody must have screwed up big.

And finally, the positives:

1)      Net cash (as reported, I know it includes African debt) of 25,7M, which does not include the 44M received of the IMS sale. Actual cash generation was 14,4M. As such, net cash including the IMS should be about 69,7M. Which is 12,6 M above what I expected

2)      They totally froze the problem of African debt. As such, held to maturity investments already fell 1,5M since June, and are now at 9,3M, 4,4M to be received in the following 12 months. Things are improving in this point. I will quote from:

http://www.mynetpress.com/mailsystem/notician.asp?ref4=gn&ID=%7b885F2589-5CF0-490B-911F-ABCE468D7679%7d

"Deixou de ser possível comprar equipamentos a parceiros, pagá-los em dólares e depois receber em kwanzas ou em meticais", diz o gestor, confirmando que a empresa irá continuar a ter presença direta nestes países lusófonos "quando o pagamento é feito em euros ou dólares". "Já recusámos projetos no valor de €20 milhões porque não havia garantias. Não vamos trabalhar para perder dinheiro"

In English (loose translation by myself): no more Kwanza or metical payments. Presence in Angola and Mozambique will continue when payment is made in euro or dolar. 20M in projects was already refused due to lack of guarantees. No working to lose money.

And the updated math:

Market cap 84M

Net cash: 69,7M

Enterprise value: 14,3M

EV/EBITDA guidance: 14,3/over 10= under 1.43

Disclaimer: I own Novabase shares. I am and will be wrong. Always do your own research. Always read the introduction post.

Novabase: another good special situation?

Novabase is a Portuguese Information Technologies company. Up until now their business included three divisions: business services (BS); infrastructure managed services (IMS) and venture capital. As we will see, venture capital is a very small component of the company and they have just sold the IMS division. So what did they sell and keep?

EBITDA IMS:

2011: 7,7 M

2012: 6,3 M

2013: 4,1 M

2014: 4,6 M

2015: 2,9 M

5yr average: 5,1; 3yr average: 3.9; Median: 4,6

EBITDA Business Solutions:

2011: 10,9 M

2012: 12,7 M

2013: 11,2 M

2014: 8,6 M

2015: 11,5 M

5yraverage: 11.0; 3yraverage: 10.4; Median: 11,2

EBITDA  Venture capital 2015:0,5M

So they sold about somewhere between 20% and 40% of the business. The sale value initially was 38,365M, subject to adjustments, but was concluded this month by 44,0M (subject to final working capital and net debt adjustments). So basically, it seems they sold IMS for a 44,0M enterprise value (9,6x median EBITDA)
.

In June 2016, they had 8,2M net cash. In the last 6 months of 2015 they generated 4,9M net cash. If we assume they did the same in the 2^nd half 2016, then present net cash is: 8,2+4,9+44= 57,1M (or 1,82€/share).

Estimated present position:

If I am right, Novabase now consists in:

57,1M in net cash

A 11,5M EBITDA business

A small venture capital business (0,5M EBITDA in 2015)

And what does the market say?

Market cap (at 2,677): 84 M

Enterprise value (estimated): 26,9 M

What will they do with the money? – part one

 Historically:

At the end of 2012 they had 37,5M (1,19€/share) net cash (up from 14,7M in 2011). They distributed 0,8 €/share (25,1M ) in two year’s time and ended 2014 with 6,9M net cash. This means they consumed 5,5M cash in those two years despite having sold (net of cash and acquisitions) businesses worth 4,25M (so they consumed 9,75M). It is important to note that a good part of net cash generated in 2012 was likely the result of a reduction in working capital, which was reversed in the following two years (and there were restructuring costs in 2014). 

What they say:

“This is another step towards Novabase’s repositioning that has been carried out in the past few years, allowing us to accelerate internationalization with stronger means.”

Going back to previous reports:

“Novabase has defined as a priority for 2016 the continuity of the strategic focus on internationalization, adjusting the focus on the risks of the current global macroeconomic situation. Therefore, Novabase will limit its exposure to emerging markets, given the volatility in some of the economies where it operates.” – 2015 Annual report

“Novabase has defined as a priority for 2016 the continuity of the strategic focus on internationalization, adjusting the focus on the risks of the current global macroeconomic situation. Therefore, Novabase will limit its exposure to emerging markets, given the volatility in some of the economies where it operates.

“as a result of discontinuation of some offers that added lower value and our policy to limit the exposure to emerging markets Turnover and EBITDA decreased BY 6% and 7%, respectively”– 6months 2016 report.

This means they have been holding back in 2016. Despite that, business solutions international sales were 41% in 2014 and 60% in 1H2016. It is reasonable to expect that some of the cash from the sale will be reinvested. However, since 60% of total sales are already international, it is likely that most of the investment is already in place, and as such this investment might have an higher impact in profits than previous investments (probably mostly working capital investment).

What will they do with the money? – part two – what do I expect?

This time the increase in net cash is due to completely different causes than in 2012 and as such I would expect that:
a) Any working capital investment is growth investment (instead of just going back to normal levels)
b) Distributable cash is higher (in % of net cash), because growth investment is already taken care of;

Most likely they will distribute most cash as dividends (maybe 1€/share), reinvest about 20M and still keep almost 6M in net cash (they have always kept net cash so it would be foul to assume they would change to a more balanced net position). The 20M reinvestment should be enough (or more than enough) for substituting IMS EBITDA and keep profits levels, while allowing room for an higher payout of future earnings.

What valuation do I get to?

31,5M dividend plus a 15M EBITDA business with 6M net cash. At 7 times EBITDA (which seems a conservative multiple) that would mean a 142,5M (4,54€/share). At 5 times EBITDA it would mean 112.5M (3,58€/share ). Any cash generated in the meantime should be added to returns since I expect an higher payout ratio.  

Disclaimer: I own shares of Novabase. This is not an investment advice and I am not a professional adviser. Always do your own research. I am and will be wrong about many things, it is possible that this is one of those. Always read the introduction post.