John Rolfe

Long/short equity, value, special situations, growth at reasonable price
John Rolfe
Long/short equity, value, special situations, growth at reasonable price
Contributor since: 2010
Do you really fail to see my point? When making a case, either long or short, the devil is in the details. Either you don't know the difference between revenue and income, or your attention to detail is so lacking that you failed to distinguish between the two. This calls all of your assertions into question. As an aside, the company's revenue contribution by segment is vastly different than its operating income contribution by segment.
Author doesn't seem to realize that "revenue" and "income" are two different concepts. Embarrassing. Should probably do more fact checking prior to publication if expecting to be taken seriously.
World Food Program would disagree...they've chosen UEPS to run their flagship program in early launch markets. That puts them in pole position to get the global contract. This will give UEPS early experience in other emerging economies and put them in a good position to partner with local lenders to drive new business. I don't think anybody invested in UEPS is comping them to PayPal, Alibaba, etc. They are clearly focused on the underbanked, so likely markets are emerging economies. This is why the World Food Program launch is so meaningful.
Since the author's first two articles haven't had a meaningful impact on the share price, I expect that within a week we'll get another article claiming that 100% of UEPS revenue is going to disappear.
There is something that I find ironic. The author is a short seller. By definition, since he has borrowed shares, that means that he has access to credit (i.e. credit = borrowing). You can not legally sell shares short in a cash account, only in a margin account, which by definition means that you have access to credit. Yet, he claims that UEPS is "predatory" for providing credit to people at the bottom end of the socioeconomic scale. So the author is savvy enough to use credit responsibly, but UEPS customers are not. Therefore, they must be predatory. We've heard this argument before. Poor people are stupid and/or incapable of making rational economic decisions. We need to regulate what they can have access to, because since they're poor they also must be gullible much more predisposed to being exploited than rich smart folks.
Peter,
That's exactly what they're doing. About half the SASSA beneficiaries (4-5mm) get ancillary services from UEPS. UEPS is in the process of moving them over to its EasyPay Anywhere service. With the recent news regarding cancellation of the contract tender (due to lack of bidders), UEPS now likely has at least two years to get this transition done.
I agree with the author that "the investment community in general has a very poor understanding of UEPS' business..." However, I believe that this misunderstanding is a function of an over-reliance on the sort of innuendo and misinformation laid out in the article. In other words, the shares are undervalued and not overvalued.
As a previous commenter highlighted, many of the allegations and rumors surrounding the company historically have been planted by tender competitors. One-by-one, they have been debunked. Shares trade @ 7x earnings - a clear indication that the author's contention that the market doesn't realize there is potential earnings headwind is false. With 80% of EBIT coming from transaction processing businesses, and transaction processing competitors trading @ >20x EPS, the market is clearly assuming the $2.30 (or so) of earnings is unsustainable, this despite the fact that management has laid out a credible plan (with early execution trending ahead of expectations) to replace SASSA revenue/EBIT with EasyPay Anywhere income streams.
It doesn't make sense to debunk the article's allegations line by line. However, I will lay out a few thoughts
* The company has received favorable judgments from the South African National Consumer Tribunal with regards to the allegations of noncompliance alleged by the National Credit Regulator (see May 6, 2015 press release). The company was deemed to be in compliance with the South African National Credit Act, and existing compliance notices were vacated (set aside). Summary: Moneyline, the microloan provider/sub, is in compliance with existing laws.
* Bank account withdrawals for ancillary services are all approved by the account holder. These are not "unauthorized", as alleged. Moreover, bank account debits all are made in accordance with national law that lays out a hierarchy for payments, i.e. highest priority goes to insurance payments, 2nd priority to loan payments, third/last priority goes to other payments (mobile top-up, etc.). Payments to the third/last priority tranche are randomized. UEPS payments get no priority, they fall in line just like any other debit payments under national law.
* Marketing of ancillary services to social grant recipients is explicitly permitted under the current contract. Reimbursement rates (from SASSA to UEPS) were cut in half (roughly) under the existing contract (from prior levels). SASSA permitted ancillary services marketing to help defray some of this cut to the service provider (UEPS).
* KPMG performed an independent audit of UEPS systems to determine whether beneficiary information was being shared among UEPS subsidiaries. It was not.
* 2013, which the author uses as his base for implying earnings downside, was burdened with $100mm of costs related to startup of the SASSA contract. Ex these costs, the company would have done > $1.60/shr in EPS
Jaret,
I've followed this company for a number of years. I was (unfortunately) a shareholder in Jazz Technologies prior to its purchase by Tower, and subsequently became a Tower shareholder. I ultimately exited my position after being consistently disappointed in the management team's actions.
Ellwanger is a nice enough guy, but he absolutely does not think like an owner. His focus is virtually always on top line potential, and never on truly building value for equity holders. Part of this may be a function of the company's convoluted capital structure (i.e. capital notes), itself a legacy of Israeli restrictions regarding the ability of creditors to convert their loans into "true" equity. However, the lack of open market purchases by senior management over the years speaks volumes IMO, particularly given the fact that multiple periods of (negative) share price dislocation corresponded with times when management continued to speak publicly about the massive potential of the underlying business.
When they bought the Micron fab a few years back, it was heralded as a tremendous deal. Now it's being shut down. Between 2010 and 2013, share count (excl dilution from capital notes, etc.) rose by 150%, yet revenue actually declined, and EBITDA declined significantly. That's a brutal track record. Yes, there are some extenuating circumstances, but not enough to explain away that sort of underperformance.
You may be right, that with the Panasonic JV they have finally captured lightning in a bottle. To the extent that's the case, you will certainly benefit from not having the same sort of management fatigue that I have. However, if I have one piece of advice, it would be to take profits on this one sooner than you otherwise might.
I really enjoy your posts; you do good work.
Good luck.
Russ...you've done a great job covering MU (INTC as well). I have one nit to pick with the article. Baupost doesn't have anywhere near 30% of his fund(s) in Micron. Baupost has roughly $30bn under mgmt, only a small fraction of which ($3.5bn) is invested in US equities. Since the 13D filing only requires disclosure of US equities, it might appear that their $1.1bn MU position is 32% of the portfolio, but in fact is 32% of their publicly-listed US equity holdings. It is closer to a 3% position of the overall/broader ($30bn) investment portfolio.
To be fair, she may actually have an amazing beard in combination with some extremely effective depilation techniques.
Sorry, been absent for a while. The investment premise has obviously completely changed since the original writeup, and has very little margin of safety left. Having a free upside option on a real estate parcel with ongoing operating cash streams providing your downside support is one thing, being (possibly) completely dependent on a real estate development project for your entire value is another thing entirely. Disconcerting, to say the least.
Agree with you. Valuation range is huge. Downside is that you own a bunch of cash plus real estate, but have an operating business with effectively no revenue that is (therefore) losing money. Upside is that they fill in the existing capacity with new customers/products and get back to $1 or $2 per share in EPS. In any case, the uncertainty level is extremely high.
Yes, a big surprise, and not of the positive variety. Obviously a very disappointing quarter. Surprising how quickly the LCM business collapsed. Next few quarters (at a minimum) are obviously going to be very tough. Difficult from here to figure out what the normalized earnings power of the business is. Long-term average has been roughly $0.75/share, so that may be an appropriate number to use for valuation purposes.
I believe that your 2013 estimates are too aggressive. Management called for a 10% increase in the "non-LTE" portion of their business, which they stated was 85% of the total last year. So with roughly $240mm of 2012 non-LTE revenue growing at 0-10%, you get 2013 non-LTE revs of $240-$264mm. Add the $15mm of LTE and you get to $255-$279mm in 2013 revs. GM @ 46-48% yields $117-134mm, back out $72-76mm of OpEx to get $41-62mm of pre-tax, tax @ 15% yields $35-53mm of net income. Even with these (lower) numbers it's still awfully cheap, but figured I'd point out the discrepancy.
I echo DTEJ's comments. 1Q is typically quite weak from a seasonal perspective, but should show good progress on a year-over-year basis. From a qualitative perspective, it would be reassuring to hear that mgmt has made progress on diversifying the customer and/or product base. They've made reference in the past to working on a number of material new opportunities.
If you're going to draw an Apple-HP management comparison, I think it might be more relevant to compare Cook to Hurd. As you stated, the market initially responded positively to both from a share price perspective. Both are/were similar to the extent they're operating guys at heart, i.e. they can take somebody else's vision and do a great job running with it. However, there's a decent argument to be made that both are lacking in their own internal vision. By all accounts, Hurd starved HP of the R&D it needed to ensure (or at least increase the chances of) successfully transitioning to a rapidly changing landscape, focusing instead on aggressive cost management to boost profit margins (and EPS) in the short-term. Cook, too, has yet to prove himself anything close to visionary. He certainly hasn't starved Apple on the R&D front, and he's kept the ball rolling on the existing product line(s), but he's yet to show that he is capable of positioning Apple to exploit the next great wave in consumer computing devices.
I think that a severe downside case would see $1/shr in earnings. At 6x EPS plus cash that gets to you roughly $10/shr. Could it trade lower? Of course, but this management team has proven relatively resilient in finding new sources of revenue and income, so I don't think it would stay there for an extended period.
Yeah, same writeup with a few minor tweaks.
rc,
The Company expects to spend $50-70mm on the new Shenzhen facility, with about 75% of that earmarked for facility construction and the balance for equipment. Monetization of the current Shenzhen location should offset anywhere from a material portion of this, to well more than this amount. In any case, even with a big chunk of cash left in the Company to keep customers sleeping well at night, there should be a fair amount of discretionary cash available.
We must be speaking about different companies, because it looks to me like EDGW was up 38% in 2012, which clearly isn't anywhere close to "almost doubling". This 38% gain, moreover, had the benefit of strong tailwinds from a rising market; hardly something to write home about after a full decade of brutally dismal performance. I have no doubt that it is possible to find brief periods where EDGW outperformed relevant indices, but from my perspective a "good reporter" looks at the totality of the CEO's tenure. From that perspective, Ms. Singleton has been a disaster.
No, sorry. Punched out of this one long ago.
bazooooooka,
I've been out of the name for quite some time. Between the leverage and the deterioration in the fundamentals, I don't see much margin of safety. If they get this boat turned in time to benefit from a turn in the global economy, there's enormous upside. However, they'll need that economic wind at their back in order for this to work, and that's obviously a variable that's out of management's hands. Given the potential upside, I'd rather buy this 20% higher with things going in the right direction than take a marker on on the global macroeconomy.
John
In my view, no, because they haven't tied the balance sheet up in order to bring this component of their operations in-house. In your example (10x multiple), the implied return on the asset if they were to own it is only 10% pre-tax, well below what they're able to generate by investing their available capital into more productive outlets. From my perspective, return on capital and/or equity is not a theoretical construct, it's a real-world result of capital allocation decisions that management makes. In this case, they've found a superior structure (i.e. operating lease) that gives them access to an asset without requiring them to put up capital to get that access.
Frank,
The related party leases are in large part a function of the company's roll-up legacy, as related party leases seem to be a typical structure for many small and mid-sized privately-held companies. I'd rather that they didn't exist at all, but take some comfort in the fact that the aggregate dollar amounts being paid out to any one party are relatively modest in the grand scheme of things. I haven't independently verified management's assertion that these are all at market rates, but have found their overall approach to governance to be relatively conservative.
With respect to acquisition multiples, I gain comfort from a couple of things. First, this management team has a history of being disciplined with respect to pricing acquisitions. They're very cognizant of return on capital and value accretion. You can go back and piece together multiples for their acquisitions and get some comfort in this regard. Private market multiples are typically at a discount to where Boyd trades, in part as a result of a very limited group of potential buyers, so accretion isn't difficult to come by. Note, as well, that these multiples are on a pure standalone basis, i.e. they don't make any forward assumptions regarding overhead takeout or associated margin expansion. Recent commentary from management, moreover, has pointed to incremental improvement in both the number of small deals they're seeing, and price flexibility on the part of sellers (read through last Qs earnings call transcript...if my memory serves me correctly they spent some time discussing the M&A environment).
Brock (CEO) is a conservative guy overall, and the Company's DNA at this point is fairly risk-averse. After its brush with the downside of leverage a few years back, the management team really took a much more conservative view of risk and has demonstrated this ever since. Last year's equity offering is a pretty good example. Although there were clearly some shareholders that were unhappy with the dilution (and who would have likely argued for more leverage instead), it was not out of line with Brock's general financial conservatism.
Hope that helps.
Buy the local (Canadian listed) shares (Bloomberg ticker BYD-U CN). They trade roughly 40,000 shares/day. Unfortunately, SA only permits write-ups on US-listed stocks, so I had to file this one under the US-listed pink sheet ticker which, as you pointed out, it basically untradable due to extremely low volume.
Thanks for your comments Alex. I agree with respect to RLGT; I've been involved in the name for some time, and think that Bohn and his team are doing a good job. At some point, the market will take more notice of what they've done.
3Q nums out...
Positives: continued sequential improvements in 1) earnings (both pre- and post-tax, although post-tax somewhat meaningless given material tax assets), 2) return on capital measures, 3) capital ratios, 4) efficiency ratio
Negatives: 11bp seq decline in NIM (first decline in a while), allowance for loan losses +16 bp seq, total "troubled" loans (nonaccrual, ROE, TDR) ticked up sequentially, primarily due to increase in nonaccruals
Will post more details if/when I get them.
Kraven,
I suggest you speak with Lowell Dansker. If you pick up the phone and call the NY headquarters, he will get back to you in a timely manner. He's accessible, and very willing to discuss whatever issues or questions you might have. He can undoubtedly add more color than I can.
That said, I'll take a swing at a some of your questions.
With respect to historical loan loss provisioning, and the bulk sale required by regulators, I think that the Company will argue that their historical provisioning was appropriate, and that subsequent performance of the sold loans supports this. If my memory serves me correctly, the bulk loans were sold at around 70 cents on the dollar, and many of those were subsequently resold relatively quickly for 90 cents on the dollar. The OCC took a very hard line in the Company's opinion. The OCC has a reputation as the toughest of the bank regulators, and they have taken the position that the turmoil of 2008-09 was not an isolated event, but is something that may well occur again in the near future. As such, they were looking to impose some draconian assumptions on the loan books of the banks under their purview, and IBCA ended up being in the crosshairs. All that said, it is hard to argue that the operational changes demanded by the OCC have not strengthened the origination and monitoring process for IBCA, so even if you believe their historical loan process was flawed, you should have some comfort that it is now stronger than it once was.
The issue of the Company's deposit base and associated cost is an interesting one. Some other investors in this name have commented (rightly) that IBCA is more of a real estate finance company with a bank charter, than it is a typical bank. I think there is some validity to this. Matching duration has clearly held higher priority with mgmt than the cost of funding; I find it hard to argue with them in this regard assuming they're able to keep originating loans at an attractive spread to the funding cost. I think the point is that you have to either agree with mgmt in this regard or not if you're going to buy into their strategy. The fact that it is somewhat difficult to analyze them in the manner of a traditional "bank" probably helps contribute to the discount at which they trade, and somewhat limits the addressable pool of investors willing to consider the equity. There are certainly lots of folks on the institutional side who take a pass on anything that doesn't fit neatly into their preconceived notions of how certain types of businesses should operate. I'm not trying to pass judgment...just pointing out what I see as reality. The upside of this is that it provides an opportunity if you are willing to buy into something non-traditional, the downside is that you may relegate yourself to a value trap. Again, I would suggest speaking with Lowell as he can articulate his strategy much better than I.
Lastly, my understanding is that while they have had a ton of brokered deposits historically, they’ve been moving away from this channel to some extent, and as these roll off it should provide opportunity for NIM expansion.
John
Joey,
Thanks for the comments. Anecdotally (per Lowell), the Company has a strong record on recoveries from non-accruing assets. As you point out, this should provide an addl margin of safety.
Kraven,
A couple of comments:
With respect to TARP, mgmt would definitely like to get out from underneath this. The TARP loan rate ticks up to 9% in 2013, so that's a soft target from a timing perspective. Mgmt would like to take advantage of the current interest rate environment to refinance, possibly through a convertible preferred, or some combination of straight debt w/a warrant kicker. There are some restrictions related to TARP that limit their ability to dividend funds up to the holding company, however, mgmt feels that with a few more quarters of decent earnings under their belt they will be able to get the necessary consents from the Fed and the OCC. Time will tell.
Future interest rates will certainly impact the cost of their funding source (CDs), however, I think this is more of a positive than a negative at this point. As the current batch of CDs roll off, IBCA should continue to benefit from cheaper funding. Cost of funds has dropped virtually every quarter sequentially over the last three years, and there is still a large gap between what they are paying today, and what they would be paying if they could refinance everything at current rates. With cost of funds currently near 3% (high, as you pointed out), there is a lot of room for rates to rise before they would see an aggregate increase in their cost to fund.
Agreed. Moreover, Lowell's knowledge of his loan book is impressive. While any loan book will be subject to the vagaries of the macroeconomy, I've developed a fair degree of confidence through my discussions with him (regarding specific loans) that there's a decent margin of safety on an individual loan level even in a relatively weak environment.
Thanks for the comments/questions.
I don't know what portion of year-end fiscal 2011 is restricted, but I would expect that it would be a relatively modest portion of the total, as it was in fiscal 2010.
Your point regarding the cash balance and its relationship to customer prepayments is valid. The Company consistently runs a negative working capital cycle, as it collects customer cash in Aviation ahead of delivering the service/flight. As long as the business grows, the negative working capital cycle will be a contributor to cash flow, if revenue declines it will be a drag on cash flow. There are certainly highly divergent views with respect to how both the cash and the working capital impact on cash flow should be treated. Personally, I am comfortable giving them credit for the cash as I believe they have a reasonably long runway to continue growing Aviation and, as such, I expect that cash to continue to be available to them to do with as they please. However, the valuation is low enough, and the corresponding margin of safety high enough, that if you choose to penalize them to some extent by only giving them credit for a portion of the cash, the investment still appears attractive (in my opinion).
With all due respect, your analysis of a buyback's impact on book value per share is irrelevant. With the possible exception of fab-based semiconductor manufacturing (due to its asset intensity), book value has little relevance for a tech company. Microsoft's intrinsic value lies in its intellectual property, which is not reflected on the balance sheet due to the fact that it was developed internally. Tilson/Firm X's argument with respect to a buyback is based on the accretion that would occur from an earnings per share standpoint, which is much more relevant to MSFT from a valuation perspective than book value. We know that theoretically, a stock's intrinsic value is the present value of its future cash flows, and earnings per share is a good proxy for this. There are relevant arguments to be made regarding the advisability of a buyback, but this certainly isn't one of them. And to suggest that they want to do a buyback simply to decrease the outstanding number of shares, which could be just as easily accomplished by doing a reverse split, is pure folly. None of us are that uninformed.