NBA.LS - Novabase

[rolling]

Novabase is a Portuguese Information Technologies company. Up until now their business included three divisions: business solutions (BS); infrastructure managed services (IMS) and venture capital. As we will see, venture capital is a very small component of the company and they have just sold the IMS division.  Price of sale was 44 M (subject to final working capital and net debt adjustments). The interesting part is the balance sheet (and market cap) but I will start by the business units:

EBITDA IMS:

2011: 7,7 M

2012: 6,3 M

2013: 4,1 M

2014: 4,6 M

2015: 2,9 M

5yr average: 5,1; 3yr average: 3.9; Median: 4,6

 

EBITDA Business Solutions:

2011: 10,9 M

2012: 12,7 M

2013: 11,2 M

2014: 8,6 M

2015: 11,5 M

5yraverage: 11.0; 3yraverage: 10.4; Median: 11,2

 

EBITDA  Venture capital 2015:0,5M

 

2016 results are out. BS EBITDA was only 6,1M due to “an extraordinary  7 M  cost in a project”. By looking at previous results I consider this as a true one off, which would mean normal BS EBITDA would stay in the 12-13M. It should be noted part of this EBITDA is attributable to minorities.

2017 guidance: 10M EBITDA (I associate this fall to be probably related to structure costs that were shared with IMS)

 

BALANCE SHEET

At year end 2016:

CASH: 35,7M

CASH received a few days later for IMS sale: 44M

DEBT and leasings: 25,8 M

SECURITIES held to maturity: 4,9M non-current and 4,4M current (receivables from Angola were converted into government debt; they no longer do this kind of business  having already refused 20M in business in Africa due to lack of guarantees; this already shows in the balance sheet since this investments fell 1,5M since June)

 

QUESTIONS:

What will they do with the cash? Historically when they had this cash they distributed nice dividends. They will only distribute 4,7M next May, but historically excess cash was distributed in a special dividend later on. Some of the cash will be invested in R&D.

Should we expect growth from the BS unit? This unit employed 1428 workers in 2012; this number as risen every year and is now at 1936 workers (a 35,6% workforce growth in 5 years). In the same period sales grew from 98M to 131,6M (34,3% growth), from 29% international sales to 59%. EBITDA did not grow, but this seems to be a result of internationalization (additionally, I believe strong workforce growth might have anticipated some costs every year, thus reducing reported EBITDA). To me, if recent years tells us anything, it seems we can expect organic growth

 

VALUATION:

MARKET CAP: 85M

ENTERPRISE VALUE (excluding government securities): 31,1M

ENTERPRISE VALUE (considering Angola government debt as cash): 21,8M

Non consolidated units valuation on balance sheet:  4,9M ( I will ignore these since they are worth the same as the non-current Angola government debt)

Guidance EBITDA: 10M (My guess would be 2,5-3M attributable to minorities, which would mean 7M attributable EBITDA)

EV/”attributable EBITDA)=3,1

Fair EBITDA multiple? 7 seems conservative

 

LinK to their site: http://www.novabase.pt/en

 

Disclaimers:

a) this is only my second post here. Please be nice: I am a “little” less experienced than many of you (only 5 years investing experience, which includes selling two 10-15 baggers after the first 20%  :'( )

b) Corrections are welcome. I am and will be wrong in many things, and this might be one of them

c) A good percentage of my portfolio is in Novabase

 

[oddballstocks]

A blast from the past!  I owned this in 2011, very similar thesis.  The core business was trading at a low multiple when considering the cash.  Looks like earnings have declined since then.

 

You have a business trading for 2x EV/EBTIDA.

 

Here's my writeup: http://www.oddballstocks.com/2011/04/cheap-portuguese-stock-novabase-with.html

 

What's crazy is I was invested at 4x EV/EBITDA and the multiple has since contracted.  If I remember I was able to dump shares during that slight jump in 2012. 

 

This might be worth a look again.

[antao]

I am Portuguese and I refuse to invest in the Portuguese stock market. Basic valuation rules don't apply, inefficiencies tend to persist for a very long time, minority investors protection is close to nonexistent, activist investors are a mirage, qualified financial investors often stay away, regulators are slow to act and very strange things happen, like the events surrounding Banco Santo Santo and Portugal Telecom. Add to this the present  governmental coalition (center-left + communist party + extreme left-wing party), the fragile domestic economy and very fragile financial system. What appears to be cheap may be so for a reason...

[rolling]

A blast from the past!  I owned this in 2011, very similar thesis.  The core business was trading at a low multiple when considering the cash.  Looks like earnings have declined since then.

 

You have a business trading for 2x EV/EBTIDA.

 

Here's my writeup: http://www.oddballstocks.com/2011/04/cheap-portuguese-stock-novabase-with.html

 

What's crazy is I was invested at 4x EV/EBITDA and the multiple has since contracted.  If I remember I was able to dump shares during that slight jump in 2012. 

 

This might be worth a look again.

I was also invested in 2012. But sold at 2.15€ before the runup (my 3 companies portfolio at the time included a small position in novabase and two companies that went on to be a 5 and a 10 bagger from there, sold all positions at a small gain then to buy BRK... :'( )

 

When calculating returns since then you should include dividends of 0,95€ since year end 2012 (that is why I state they historically have ended up distributing excess cash). But yes, it is cheaper now than it was back then.

 

 

 

 

[rolling]

No intention to bump, but just an unexpected update:

 

https://www.euronext.com/en/news/euronext-announces-annual-review-results-psi-20-2017

 

The company Novabase selected to enter the main portuguese index. This should work as a catalyst since it creates visibility and (to a smaller extent) there might be some forced index fund purchases.

 

The price is now 3,5% higher than when I first posted here, though.

 

disclaimer: I reduced a bit my position since some big lots appeared on the sell side on some very illiquid companies I wanted to increase my position at. However this is still my largest position.

[rolling]

Just an update:

 

Novabase is now quoting at 3.2€ after a 0.15€ dividend, totaling 3.35€ (up 24% since my first post). I am already out.

 

There have been very few developments, the only thing worth mentioning is that they have repeatedly and publically said that some cash will be used for growth (which they cannot yet quantify the needs) and that remaining cash will be distributed as dividend.

 

Good luck

[kab60]

Thanks for the idea, didn't see it before now. Why did you sell for such a small gain? (you wrote how you missed 5 and 10 baggers before. No idea if this be one, but perhaps you sell too early? Please don't take it the wrong way, I do/have done it myself some times).

[rolling]

Thanks for the idea, didn't see it before now. Why did you sell for such a small gain? (you wrote how you missed 5 and 10 baggers before. No idea if this be one, but perhaps you sell too early? Please don't take it the wrong way, I do/have done it myself some times).

I thought I had better opportunities, i always think I do. I though they were longer term bets and had an higher upside long term. It had nothing to do with Novabase itself but with my assessment of relative potential.

 

Yes, selling too early is my problem (by the way the 10 bagger is now 15, and still isn't expensive, not cheap either) but i am working on it (I had a few of those recently but I am happy that i am having positive reinforcement in a position i was able to keep adding on the way up... Positive reinforcement is known for working better than negative reinforcement)