Summary
Ambertech has acquired Hills Audio Visual (HAV), a division of Hills Limited (ASX:HIL), for an enterprise value of A$4.5m reflecting an acquisition multiple of approximately EBIT
Slow moving assets make this a poor cigar-butt.
Optimistic Guidance implies a enterprise value payback time of ~3 years
Fully franked dividends expected in FY2020 and FY2021
Business Overview
Formed in 1987 and ASX listed in 2004, Ambertech Limited distributes various technologies for the professional and consumer audio/visual markets in Australia and New Zealand operates through Professional, Lifestyle Entertainment, and New Zealand segments. They are headquartered in Sydney, with offices and representatives in Perth, Brisbane, Melb and Auckland, and supported by a national network of more than 500 authorised dealers and service agents. The recently acquired Hills Audio Visual is a leading distributor of te products and services in the commercial AV vertical with distribution agreement with 25 agencies across Australia and New Zealand.
Management
Peter Amos has been the managing director of the group since 1995, whilst being involved with the various subsidiaries since the company was This involvement with the group is backed by a 6.2% ($410k) interest in the group, with a further 10% ($665k) held by his relative Tom Amos, wh non-executive director of the group and has been since 1997.
The Chairman, Peter Wallace has been with Ambertech since 2000 and holds about 3% of the shares outstanding. So he's not an independent d but it's rare to see an independent director in companies of this size anyway.
So ownership is prevalent in management holding a good portion of the shares outstanding, this compares to their remuneration of $1.37m for E Given a total Employee benefit of $10.2m this seems relatively normal and no one director is overpaid by a large portion.
Financial Health
So as mentioned in the title of this post, Ambertech is what you would consider a 'Cigar-butt' company. This is a phrase coined by Warren Buffet referring to companies that are t below what the company is worth in liquidation. That is, if you decided to wind-up and distribute the assets to the shareholders they would make a profit. However, in saying this s cigar-butts are better than others. I generally look to the quality of the assets in determining if i'll actually realise that value in a liquidation type scenario, which i will discuss below
Cash is the #1 preferred asset when it comes to buying cigar-butts in most cases (Property can be an exception) due to it's immediate liquidity. You don't have to wait for cash to value unlike other accrual items. In the case of Ambertech they hold about 25% of their market cap in cash and about 1/10 of their liabilities.
Ambertech expects to receive $70m+ in revenues in FY2020 including the contribution from HAV. So assuming their projected GP Margin of ~30%, we could estimate COGS to b which indicates an inventory turnover of just under 3x a year which isn't very high so their is some risk in slow moving inventory. This is a big risk as the majority of which creditor paid with is the proceeds from this inventory. To move it faster they may have to sell at a discount to speed up the process, possibly even below cost price.
Another risk is that the average time to get paid is quite long at 66 days in FY19. Ambertech also holds $5.6m in debt, of which interest expenses represent just over 10% of the c value. Ambertech mentions that this is an invoicing finance, which a line of credit secured against accounts receivable. The purpose of this is to stand in for slow moving receivab tells me that Ambertech is having problems with working capital liquidity having to rely on outside finance to speed up their accrual recognition. Worse even is that they take 95 da their suppliers, which is likely due to the low inventory turnover mentioned earlier. I'm not necessarily sure if this is industry standard, however payment terms are typically up to 4 before becoming past due.
All in all, i think the reliability of this as a cigar-butt is questionable and a conservative situation would just result in you receiving the market cap in appraisal of these assets. Whic provides a cap on the downside, albeit not taking into account the opportunity cost of a slow-moving wind-up.
Acquisition Catalyst
Ambertech doesn't necessarily look like the most profitable company, showing a net profit in just 3 of the last 10 years. This has been reflected in their consistent down-trend in s since 2010, so why catch a falling knife? Well the catalyst for my interest in the stock has been a particularly cheap acquisition of Hills Audio Visual (HAV).
HAV was recently acquired by Ambertech for an enterprise value of $4.5m while the company had a FY19 EBIT of $2m, that's a multiple of just 2.5x. Furthermore, there is no deb to this acquisition so Ambertech as a group is still modestly leveraged after the acquistion. Even taking into account the remainder of Ambertech's operations, the loss incurred la was equal to $1.3m, which would still put the group in a positive result if the consolidated result of 2019 included HAV as well.
In saying this, the rationale behind the acquisition besides being cheap is quite standard. Acquire a competitor and use their customer base to cross-sell group solutions to new c and vice versa. However in saying this, their is mention of good signs such as focus on customer acquisition and retention, shift to project business away from consumer electron and a continued M&A search.
Despite this, Ambertech has hugely optimistic guidance which i find difficult to believe. Firstly, they expect revenue and EBIT of $71.6m & $2.8m in FY2020 which includes HAV. Furthermore they expect $43.2m and $2.4m in just the first half of FY2021. To top this off, they intend to pay a dividend equal to 45-55% of their profits, which is expected to be 3 the next 2 years. After inspection of their annual report i also found that they have over $6m in franking credits so this will be fully franked as well.
These figures bring you to $4.2m EBIT over the next year (70% of the market cap) and dividends equal to 42% of the market cap (60% gross). These assumptions imply it'll only ~3 years to payback an enterprise value of $11m ($6.6m MC + $5.6m Debt -$1.2m Cash). Take into account the potential for the market to re-rate this and i think this looks asym enough to hold shares. The worst case scenario i can see some opportunity cost or cash burn, whilst the best is a large gain on my investment.