Daily notes

Daily Notes – BWX, SOM, GWA, ISU, RWC

BWX Limited (BWX) – Management buyout… Somnomed (SOM) – New centers under performing… GWA Limited (GWA) – Focusing on power… ISelect (ISU) – Disappearing earnings… Reliance Worldwide (RWC) – Buying into Europe

BWX Limited (BWX) – Management buyout

Received an indicative proposal from John Humble (CEO and Managing Director) and Aaron Finlay (Finance Director) in partnership with Bain Capital Private Equity to acquire the company for $6.60 per share. The highly conditional offer represents a 50 per cent premium to the previous close of $4.41 and a 30 per cent premium to the VWAP since the company’s first-half results in February. The offer price implies an EBITDA multiple of about 20x, based on the company’s guidance for 2018.

The offer seems to have been prompted by a difference in opinion between management and institutional shareholders regarding how the company should pursue growth going forward, as well as weakness in the company’s share price.

20x EBITDA is an expensive multiple to be paying to take the company private. The only way it could be made to work would be to follow the tradition PE playbook of buying and bolting on revenue, stripping out costs and flogging the business back to the public, at a high multiple and loaded with debt.

Somnomed (SOM) – New centers under performing

Direct-to-consumer business showing inconsistent results across centres. Results for the first four centres continue to be strong as reported at the half year. However, the next four centres, which on average are now 10 months old, are performing at a much lower level.

With the model not transferring to new markets as well as hoped, the roll-out plan is now on hold. By the end of June the company expects to have 16 centres opened and the plan is to defer any further centres until the next calendar year. Will need to show more compelling evidence of product-market-fit before the market shows any interest.

GWA Limited (GWA) – Focusing on power

Has  been a decent stock to own over the last 2.5 years since beginning the process of divesting assets and focusing the business on where it appears to actually have some power – in bathrooms and kitchens. The source of this power is hard to pin down but in this case it appears to be as a result of scale economies.

With that said, something to keep an eye on from the half yearly presentation – falling prices and rising input cost inflation. Not a good combination:


ISelect (ISU) – Disappearing earnings

The extent of this latest earnings revision shocked investors. The resultant 55% fall in the  stock price tells the story well enough. The problem appears to be mainly a result of a decline in leads accompanied by a substantial increase in marketing spend. Not exactly something you’d expect. More spent on marketing should result in more leads, not less.

It’s a competitive space and this competition could be one of the reasons why marketing spend is becoming less efficient. This makes the latest news that Compare the Market has bought 10% of ISU interesting. It’s likely that they’d be feeling the pinch of this market as well, having to spend more on marketing for less leads. A tie up of some description would make sense, at least to bring the current marketing war to a truce.

Ultimately however, these are commodity businesses with no power in their chosen market. Any excess margin is bound to be arbitraged away by a competitor with a clever marketing message and some money to spend.

Reliance Worldwide (RWC) – Buying into Europe

Reliance floated 2 years ago on a roughly 12x EBITDA multiple. They now trade at more than 20x. The latest acquisition, which is a large one, is being done at 12x, funded by new shares issued at 20x. Nice little arbitrage there. Not to say these are not both fantastic businesses with enviable market positions and accompanying profitability. The arbitrage probably accounts for most of the 20% pop in the share price since the announcement.

By Danny Sandler

Founder of Ocean Asset Management.