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Micro Caps in 10 minutes #10
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Today, in 10 minutes:
Tenderhut, shares down 50%
With comments from management
For reference, I’ve written about Tenderhut in two posts:
Tenderhut shares are down more than 50% since I first invested in the company (as usual 💔) and this is for two reasons:
The company started losing money on its continuing operations.
The company lost A LOT of money from impairments.
This has left Tenderhut trading for a market cap of PLN 37M (or about 8M€). It would be easy to say that for a company that made PLN 6.4M in ‘21 and PLN 5.8M in the first 3Q of ‘22 this valuation is pretty low. But there it came Q4 ‘22 with a PLN 11M impairment. The Q1 ‘23 with PLN 4M LOSS from continuing operations and another PLN 2.5M impairment+loss from discontinued operations. Q2 ‘23 won’t be much either (as stated by management) as sales have been dropping consistently 8%-10% YoY.
Let’s dive in the two reasons for the shares to go in a downward spiral to hell hopefully temporary downturn. I’ve been lucky enough to been able to speak to management, I will share their perspective on each point.
The company started losing money on its continuing operations.
Reason for this is no rocket science. Sales went down, salaries went up.
Sales down 8% YoY from January to May. This has a big contribution from the LAB systems, whose sales went down 43%. Laboratory renovation and modernization has been postponed by big companies due to economic uncertainty. From management perspective this is mainly a postponement and they see a big pipeline. Clients should start to decide on this projects. US sales have been double of last years, they have opened a new office in UK and see interest from middle east and north Africa.
COGS is up 27% YoY, 15% of that being increased HC and 13% being increased wage pressure. Wage pressure has suddenly stopped, I see this in many companies in Poland in ‘21 a lot of companies restarted projects stopped by COVID and hired like crazy, ‘22 continued the trend. This has stopped suddenly as budgets have been frozen.
Management expects to be back to profitability from Q3-Q4 ‘23, as they have been cutting the number of employees heavily in march - may.
The lower sales are an industry wide situation, and the trend for the sector remains positive for the next decade. Tenderhut has been profitable consistently in the past and management has a clear plan to return to profitability. Tenderhut has had 10% net margins in the past years, similar to competitors. I don’t expect them to recover those margins this year. Recovering last year sales, with a 6% margin would put the company at about P/E 10, recovering 10% margins would mean P/E 5.5.
The company lost A LOT of money from impairments.
When I first assessed the company EV, I subtracted the value of the consolidated subsidiaries, which did not contribute to the main business, still lose money and would be spun off from the main company, as stated by management. To do this I make these assumptions.
I took the PLN 45M from last investment rounds and took a 50% discount. About 22.5M value for the subsidiaries, assuming ‘21 and early ‘22 valuations were somewhat bubbly inflated. From what it came next, seems that I was overly optimistic, as the entire value of the subsidiaries assets was impaired when they entered into assets held for sale. That value on the balance sheet was about PLN 11M and this would mean that in Q1 and Q2 ‘23 the subsidiaries had been sold by nothing.
That’s pretty bad. More if then you see that they have been sold to management. The words financial shenanigans come again to my mind. This is fortunately not what happened.
Tenderhut has sold the majority of its stake in Holo4med, Holo4Labs and Zonifero to management. It is true that the company has received 0 cash for the transaction, as it has taken place as a put option, with PLN 45.9M upside potential for Tenderhut.
After the transaction, the subsidiaries took a capital raise (as they are still losing money). Management took place on it with their own money, Tenderhut converted debt from the subsidiaries in equity, keeping the stake at just under 20% (the limit to consolidate them on the balance sheet).
Management acquired 470k shares in Holo4Med (PLN 2M) and 120k shares in Zonifero (PLN 1.7M). This is a substantial amount for them. So while I wouldn’t be able to bet on the value of the subsidiaries, I would bet they think they are worth well over the put options strike.
From management comments on this the VC market is dead in Poland, with -85% investment this year. With this sale to management, they expect to make the companies leaner, align the directives and keep growing until situation is more favorable for a capital raise. Zonifero is on the edge of profitability already.
My take on the situation
We probably won’t be getting 0 for the subsidiaries in the future, the put option upside is more than the current market cap (and this is excluding the current 15%-18% stake of Tenderhut in the subsidiaries) so even if we get 30% of the put option value for the entire of the stake, this would mean the company is trading at an EV of around PLN 20M, selling PLN 60-70M a year in a sector paying at least over 1x sales.
I will keep my stake for now and see how the cost reduction performs, profitability will be the main catalyst for recovery, the put option is a hidden value that will hopefully materialize in the following years, being by a sale or a capital raise at higher valuations.
And that’s a wrap for today! Hope you enjoyed.
See you in the next edition of Micro Caps in 10 minutes.
Dani
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