Update No. 311 – as at COB 31/05/18

Mitula Logo

Given the tough stretch we’ve had in terms of the market price of our holdings, I committed last month to describing a few of the investments we have made that have caused this underperformance and this month I will go through the first of these.

We migrated a small holding in Mitula Group (MUA.ASX) into EGPCVF when the new fund was created. Our average price on this holding across both funds (and it was the 8th or 9th largest in the fund) was just a little over 61c. Given the price in the last few months has been as low as 37c, you can see how much pain the position has caused us.

MUA is an operator of “aggregator” websites primarily in the classified and property area. They also have a fashion aggregator website. MUA is a heavily insider owned, founder led company with a clear strategy and a history of successful execution and growth. The business is headquartered in Madrid in Spain but listed in Australia as the Chairman and major shareholder Simon Baker is well known for his previous role as MD & CEO of REA Group.

I visited the Madrid office of MUA in January and was shown around the operations by CEO & founder Gonzalo Del Pozo. It was exactly what I look for in a HQ building, in modestly priced mid-grade office space. Gonzalo is passionate about the business, was frank about the mistakes they made in 2017, but had a very clear vision of where the company was going in coming years. We purchased more stock after the visit to Madrid, which is how we managed to lower our average price to around 61c.

The original assumption in listing in Australia was that the market here understood well the type of business MUA was operating and that it would therefore be ascribed a high valuation that would make an M&A strategy easier to execute. They managed to get a couple of acquisitions done, but then came the problems of 2017…

Around this time last year, they had an issue with their data centre’s which caused them to collapse in the Google rankings and took longer than it should have to rectify. As a consequence of that, revenues declined precipitously and the market savaged the stock. The board then did an uncommon and enormously honourable (in my view) thing that I can’t remember seeing before. They pledged to take their directors fees from that point forward in the stock at the pre-announcement stock price ($1). This shows responsibility for the issues and is the sort of behaviour I’d love to see more of from the boards of public companies.

In the end, the EBITDA of the business fell only from $11.9m to $11.6m year on year, but the stock price went from highs over $1 before the issue came to light, to as low as 37c. It was a reminder of just how poorly market participants in businesses that are viewed as fast growing respond to even the slightest hiccup in earnings.

In any case, at the beginning of this month, a Japanese listed company called Lifull (2120.T) bid for entirety of MUA in a scheme of arrangement (friendly pre-agreed takeover) at a price of around 85cps (though the bid is in scrip). The company will be effectively merged with the Trovit subsidiary of Lifull that is an extremely similar business. Mitula have engaged Trovit as a potential buyer previously, but nothing ever came of it and now, given the low price of MUA shares, they have become prey instead of hunter.

The tie-up with Trovit makes a lot of sense, Trovit operate out of Barcelona, so there is likely to be genuine cost benefits as well as the hoped for scale benefits. The two businesses go head to head in many of their markets and a more coherent strategy with each playing a little less aggressively (at least against each other) should see the revenue line improve also as they won’t be undercutting each other quite so savagely (I presume – that’s what I’d do…).

There are two key downsides to the offer. The first is that MUA are cycling a very difficult year where they had a number of issues that led to a slight decline in profit. My expectation is that profit will rise very sharply this year, it’s hard to pinpoint exactly, but I have been modelling greater than 30% uplift for the first half in EBITDA. If such a result were achieved, with the market reminded of what a prodigious growth business MUA is capable of being, my view was that a price around the Lifull offer price or higher was achievable somewhere in the next 12 months.

The other downside is that the scrip of the bidding business looks quite fully valued. With that said, they have a history of substantial and profitable growth, so there is some justification to the share price being as high as it is. My inclination is that the combination of Trovit and Mitula is an excellent idea. We will most likely hold the stock in the Japanese listed entity to see how the business combination works, at least for the first few results. The combined entity will speak for around 2 billion visits annually and will be a genuine force in the verticals it operates in as the businesses are No. 1 & 2 in a number of their respective markets.

The bid also presents what could be an interesting opportunity for the smaller investor because as part of the structure of the bid, owners of 20,000 shares or less have the option to take cash (rather than Japanese scrip), and the share price has ranged mostly between 69.5c-73c since the bid. At 70c, the buyer of less than 20,000 shares has the opportunity to make a little over 14% (less brokerage) in around 3 months. As such, I know people that have elected to buy 20,000 share parcels across a number of accounts. 14% over 3 months annualises to almost 70% and the risk of the deal not closing would seem to be very low, insiders control nearly half of the business and it’s a negotiated deal, not a hostile takeover.

We exited another position this month also. We have held SRG Limited (SRG.ASX) since April 2011 when the original fund was created (it was called Structural Systems back then). They have made a takeover themselves recently and raised equity at $1.60 per share. We bid heavily for the stock at that price as it seemed reasonable value and the acquisition looks like a sensible one. Unfortunately, we were heavily scaled back and got very little stock, meaning the position remained too small and the stock swiftly traded up towards $2, at which price the economics weren’t so clearly attractive, so we exited the position.

With dividends included, after our original purchase at 74.5c in April 2011, and having purchased at prices as low as 52.5c in November 2012 and as high as $1.185 again in early 2017 and finally at $1.60 in the recent capital raising, our IRR over the more than 7 years we owned the stock amounted to 24.4%, which is a respectable result. Given the poor stretch we have had in the past few months, I would happily lock in any number resembling that for our current portfolio going forward…

As always, thanks for your ongoing faith and I look forward to presenting our major report at the end of next month where I will outline our long-term ambitions for EGP Capital and “zero-fee” fund management generally – Tony Hansen (05/06/2018)

August 15th 2017 Current Price FYTD
..EGP CVF 1.0000 1.0225 2.25%
  Benchmark .. 56174.93 61021.24 8.63%


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2 thoughts on “Update No. 311 – as at COB 31/05/18

  1. John says:

    What are the chances of the MUA takeover not proceeding due to the falling share price of Lifull? At today’s price for Lifull of Y752,that equates to around 75 cents per MUA share (Y752/84 x 0.0843) Lifull was trading around Y948 on 9 May 2018, the date the proposal was made. Since then Lifull’s share price has fallen by 20%

    • tony says:

      You don’t see too many schemes of arrangement fall over when the founders and board control more than half of both sides of the transaction. I would think it highly unlikely, but one never knows. The structure of the deal obviously countenanced the possibility that Lifull scrip would react poorly to the announcement, given they structured the deal with a 10.7% downside protection for MUA holders. But you are right, the offer at todays price is effectively 75.5c – Tony

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