UPDATE: November 2024 - Anexo Group Plc - Investment Thesis Affirmed
Judgment was handed on a couple of preliminary issues in the Mercedes Diesel NOx Emissions case.
Bond Turner, Anexo's subsidiary law firm, acts for over 12,000 claimants in this class action against a range of auto-manufacturers.
The matter involves the use of prohibited defeat devices or 'PDD' (the alleged 'cheat' software) which was used to manipulate vehicle performance data in a fraud against consumers.
Matters two resolved by the court:
1. The German vehicle regulator (the Kraftfahrt-Bundesamt, or 'KBA') had previously determined whether PDD devices were present. The Court found in favour of the Claimants, holding that only the vehicle Recall decisions (where the KBA had discovered a PDD and required them to be removed from vehicles currently on the road) are binding. The other decisions (including the original Type Approval of the vehicle) were not binding on the Court or the Claimants. The decision means that, in respect of the German manufacturers, the Claimants can rely on their regulatory body's finding that PDDs were present in the vehicles for which recalls were issued. For those where (for whatever reason) a recall was not issued, the Claimants will still need to prove the presence of a PDD.
2. Changes to applicable European Law and changes pursuant to Brexit have no impact on this finding.
Commenting on the Judgment, Alan Sellers, Executive Chairman of Anexo Group Plc said: "Whilst this decision is not definitive for the success of the claims, it does strengthen the Claimants' position and is a significant victory in the litigation at this stage. We are very pleased with the outcome."
More particularly, by reason of the procedure adopted by the Court to efficiently case-manage all of the manufacturer emissions cases, (now known as the "Pan-NOx" group litigations), determinations of fact and law in the context of the Mercedes litigation will be binding, insofar as relevant and applicable, across the Pan-NOx Emissions litigation and will therefore likely have at least some (albeit to varying degrees) positive impact on class actions against other manufacturers being brought by the Anexo Group.
This litigation has been ongoing for the best part of a decade and has been a drag on the performance of Anexo, largely due to the debt incurred in funding the litigation. Now that the end is in sight, with settlement expected although not guaranteed in the next 6 months, Anexo will receive an extraordinarily large cash inflow which will not only boost earnings, but will improve the balance sheet by paying down its debt.
The company still trades at less than half its net asset value, so post-settlement, a re-rating is expected. The company traded at double its current share price back in 2021 when the unit economics were not as strong as they are today. At that time it declined a private equity firm's attempt to take it private at a share price of £1.50 (versus £0.75 today), so a re-rating could more than double the company's valuation in a very short time.
The investment thesis is still very much intact and assured by this news.
This week, I had the opportunity to interview the CEO and CFO of Anexo PLC to discuss the company's progress. Here is an update on the investment thesis:
1. DEBT
While debt wasn't a major concern during the ZIRP era, the recent rate hikes have significantly increased financing costs. Currently, the company's debt levels remain high, but there is a clear objective to reduce long-term debt. According to the latest annual results, financing costs amounted to £17 million against net earnings of £15 million. This indicates that the company is currently generating more for its creditors than its shareholders. However, the counter position is that with debt reduction being underway, once achieved, net earnings should more than double, benefiting shareholders through a likely re-rating of the stock.
Some analysts have noted an increase in current liabilities as long-term debt decreases. This shift is due to portions of long-term debt nearing expiry and becoming short-term liabilities, reflecting an adjustment on the balance sheet.
The company is actively pursuing class actions against car manufacturers involved in the "diesel-gate" scandal. It settled claims against VW last year and has pending claims against others like Jaguar Land Rover, Mercedes, and BMW. With legal time limits for bringing new claims soon to expire, settlements from these manufacturers are expected around Q4 2024 or Q1 2025. These settlements should provide a significant cash influx, facilitating the elimination of corporate debt.
2. GROWTH
Anexo continues to see high demand for its services, prompting increases in both headcount and leased vehicle fleet size. This positions the company well for future growth. Notably, its newer, higher-margin segments are expanding strongly. Improved revenues, better operating margins, and reduced financing costs should significantly boost bottom-line earnings in the near future.
3. CAPITAL ALLOCATION
A primary disappointment lies in the management's capital allocation strategy. With high debt levels and significant financing costs, it is perplexing why the company is distributing cash to shareholders as dividends. This approach essentially means borrowing at high rates to pay dividends, which is not financially prudent.
Management defended this strategy, citing the need to maintain dividends to avoid losing income-focused investors. However, this overlooks the fact that high debt levels have caused the share price to drop by over 50% from relatively recent highs. Maintaining a 2% dividend yield has thus led to a significant loss of capital for long-term shareholders.
Furthermore, the share price is currently so depressed that it trades at half of its net asset value, implying a going concern value below zero. Instead of paying dividends, repurchasing heavily discounted shares would have been a more accretive use of surplus cash, potentially doubling or tripling share value as debt is reduced and earnings improve. Unfortunately, management does not seem to fully grasp the opportunity cost of its capital allocation decisions.
CONCLUSION
The investment thesis for Anexo PLC remains strong. The oversold shares trade at a ridiculous valuation that is half its net asset value. With anticipated settlements from the diesel-gate cases, an improving balance sheet, disappearing financing costs, and expanding margins, the stock has significant potential to become a multi-bagger from current prices. The risk/reward profile remains highly favourable. However, this may not be a long-term 'buy and hold forever' investment; further analysis in 2025, post re-rating, will be necessary to determine future strategy.
Interim results are encouraging. There has been significant revenue and profit growth.
Revenue +13.4% to £77.8m (H1 2022 £67.9m). This means that the business is currently being capitalized at parity to sales which, on economic earnings margins in the mid to high teens, looks way too cheap. Also worthy of note is that the higher margin HDR division saw revenues increase >25%. More particularly, the number of HDR cases on the balance sheet at the period end is up 48.4%. On the credit hire side, strong growth is forecast for H2 2023 due to a steady increase in the vehicle inventory. Results for the period include settlement with VolksWagen on the emission class action which resulted in a net positive cash position for Anexo of £7.2m. The group continues to litigate the Mercedes Benz class action claim on similar facts and currently has over 12,000 claimants. This is anticipated to bring a larger settlement than the VW claim.
Operating Earnings +19.9% with improved cash collections from all divisions
PBT +11.8% (But debt is reducing -16.3% in 6 months, so financing costs in future will be lower and PBT growth will tend towards Operating Earnings growth)
Cash collections from settled cases +14%
H1 2023 cash from operations was +£15.7m (H1 2022 was negative £5.1m)
The number of legal staff employed is up 9% YoY, which gives an indication that the management are confident that growth will continue.
Alan Sellers, Executive Chairman, commented, " The Board has been focused on delivering a meaningful reduction in net debt and increasing cash collections during the first half of the year. The results presented here are testament to the quality of our people, the ever-increasing diversity of the Group’s activities and our commitment to investment into future growth and opportunities for the business. Having demonstrated our ability to drive the business for cash generation, we are expecting growth in vehicle numbers, revenues and profits in the second half of the year, without the need to fund this growth from our current debt facilities. As cash collections continue to increase, we will be able to invest further and drive growth across all our divisions including HDR and emissions claims."
I find the results impressive and makes me more confident that it's a matter of time until the market re-rates the stock.
James, you know this company better than me. Is management conservative with their statements or should we take statements like ("[Strong growth] is forecast for H2 2023 resulting from a steady increase in vehicle numbers.") with a big grain of salt?
Strong growth not only for H2 2023 but for FY 2024 looks assured.
The company is deliberately switching capital from its core lower business credit hire segment to its rapidly expanding HDR division. Not only does this have a working capital benefit, but it means that margins get a big boost (this is one of the key drivers for shareholder returns). Then we have the windfall that is almost certain from the Mercedes Benz and BMW claims. The facts are almost identical to the VW claim that settled. Both the Mercedes and BMW claims are anticipated to result in larger settlements than the VW claim.
The company also sees huge demand for credit hire and doesn't have enough capacity to take it all on, despite growing its workforce by c.10%. This means that there is a huge TAM for the business to grow into on that side.
Debt is being reduced which lowers funding costs.
Free cash flow is up because of the stronger working capital position due to the segment re-balancing.
All in all, there is only good news. No clouds on the horizon. A recession proof business that will not be impacted by an economic downturn.
And for an investor, the shares are still trading at a huge discount to net asset value, so the business is being valued at less than zero. The market will wake up at some point (the shares are already up 10% today, but they have so much further to go).
I hope that this helps you formulate your own opinion.
For the benefit of other readers who may not have watched the presentation, a couple of observations:
- Management said during the call that they focused on reducing debt levels during 2023H1 because they've received the feedback from investors that the company had debt levels that were too high. (And they delivered on this.)
- At the end of the call, they send you a feedback form, it's the first time in 6 years investing that I see this.
It's probably not the full picture, but management gives the impresion to listen to and respond to shareholders, which I find very refreshing.
That said, I agree with you, James, I hope they do share buybacks instead of paying. I can't believe they aren't aware of the tax benefits of one option over the other..
As reported in this analysis, it was likely that Mark Bringloe would be returning as CFO.
Today (22 August), Mark Bringloe is returning to the Group as Interim Chief Financial Officer (“CFO”)
Mark originally joined the Group as Finance Director in 2009 and was appointed CFO upon Anexo’s admission to AIM in 2018. He left the Group in July 2022 and since then has been involved in other projects. Mark has been reappointed to the Board with immediate effect.
Yes, Mark stepped down originally to explore opportunities in litigation financing. He did this with Alan Sellers, Anexo Executive Chairman, so the team never split. Recently there was a UK Supreme Court ruling that added operating complexity to those in the litigation finance arena (its known as the PACCAR case if you wanted to do some reading). Essentially, litigation funding agreements ("LFAs"), constitute a "damages-based agreement" ("DBA"), a term given a specific definition by statute. In order to be lawful and enforceable a DBA has to satisfy certain conditions. The LFAs have been entered into without satisfying those conditions are unenforceable. It is possible to re-word LFAs but the judgement has thrown a spanner in the works. So maybe Mark feels that his time is better spent as CFO of an already booming business than on trying to get something else off the ground.
I submitted the question to the Q&A section but it didn't get picked up. I might be reading too much, but probably Mark doesn't know what he wants to do, or is waiting for some external event...
The investment thesis remains strong, with the key factor being the resolution of the outstanding emission claims. This resolution could unlock significant value, dramatically improve the balance sheet, double net margins, and set the stage for future business growth. If revenues and margins increase, earnings multiples could expand, and there is potential for a share buyback to reduce the share count, positioning the stock for a substantial increase in value. This may happen in the second half of 2024 or early in 2025.
A critical consideration for shareholders is capital allocation, on which they should strongly lobby the company. Although settling the emission claims will significantly reduce debt, financing costs remain excessively high, and any surplus capital should be directed toward further debt reduction as soon as possible. Additionally, with shares trading at a significant discount to NAV, using excess cash for share repurchases would greatly enhance shareholder returns and help the share price recover to a more reasonable level. Given these opportunities, the opportunity cost of paying a dividend is unjustifiably high. In other words, until debt is reduced and the share price rebounds, dividends should not be a priority. It is unclear if the board fully grasps this.
>>> Results - H1 2024 <<<
SEGMENT BREAKDOWN
* Credit Hire revenues increased by 21.8%, while PBT increased 86.4% indicating impressive operating leverage. H1 is always slower than H2 because the second half of the year includes winter months with nightfall coming earlier in the day and weather conditions deteriorating which results in more road traffic accidents. So H2 figures are anticipated to be higher than H1.
* Legal Services revenues decreased in large part due to a back log in the English Law Court service, a hangover from the Covid19 shutdown, which is delaying settlements. Figures in this segment were further impacted by investment in staffing as headcount increased 10.3% in H1 2024 to meet a 13.2% increase in vehicle claims (new personnel are paid from day one of employment, but the fruits of their labour will not be seen for many months in to the future, creating a disparity between costs and associated revenue. The average claim takes 18-24 months to settle). As the legal system clears its back log by freeing up more judicial capacity, more of the Anexo claims will settle potentially opening the cash flood gates. Additionally, Anexo currently only accepts 40% of the claims offered to it, essentially cherry picking the best opportunities. This reveals how much potential there is for the company to continue to grow and explains why a 10.3% increase in headcount bodes well for the future.
* Housing disrepair revenues increased 15.3%, while the number of claims is increasing at an impressive rate. Ongoing claims are up 17.9%, but this is not a back log as settled claims are up 27.5%. When Anexo wins a claim against a housing authority, the landlord is required to fix the property within typically 28 days, but fail to do so, which then necessitates another claim against the landlord and more revenue for Anexo. These related claims settle because the defendant has no defense, but the marginal fees generated by Anexo are small relative to the primary claim. This explains the disparity between settled claims and revenues.
* A large part of the investment thesis was the value of receivables which relative to the market capitalization. Cash collections for the period were up 8.1% to £83.7m vs a market capitalization for the company of £75.2m and receivables on the balance sheet of £233m. Net debt remains at £67.9m and so the net asset value of the business still far exceeds its market capitalization. Various analysts have suggested that the share price is trading at less than 30 pence on every pound of value. As a result, the board is considering its dividend policy and, for the first time, considering share buy-backs as a more accretive means of allocating capital. No decision has been made, but this is a significant development.
* The Group has continued its investment in diesel emissions claims in H1 2024, resulting in
active claims against manufacturers including Mercedes Benz, Vauxhall, BMW/Mini,
Peugeot/Citroen and Renault/Nissan. By the end of June 2024, the Group had secured claims
against Mercedes Benz (where court proceedings have been issued) from approximately
12,000 clients, and a further 25,000 claims against other manufacturers. The judge has linked claims of all manufacturers and so they will likely all settle together. The next milestone in this litigation is a hearing scheduled for October 2024. The potential settlement of these claims is expected to significantly enhance profitability and cashflows, while importantly reducing net debt, although the timing of any negotiations remains uncertain. The VW settlement of 2023 establishes a precedent for these other claims. Although the quantum of that settlement was subject to a confidentiality provision, it is thought to be in the region of £7.2m. That was a single claim against an individual manufacturer. This ought to provide a guide of monies that will flow from the settlement of these other claims - which may occur as soon as H2 2024.
* Debt has stabilized. Much of the debt was used to fund the very large emission claims. The cost of funding the debt has reduced by changing the debt provider. When the emission claims settle, this debt will be significantly paid down. The impact will not only be an improvement of the balance sheet, but it will significantly boost net earnings. Consider that net earnings for H1 2024 are £4.42m after a net financing expense of £4.41m and you can see that without the burden of that debt, net margins
instantly double!
* AI investments are being made to improve efficiency and productivity. This is anticipated to go live in H1 2025.
Alan Sellers, Executive Chairman, "This is an exciting time for the Group, with continued growth in our core business and huge opportunities in class actions and other litigation. As reported today, the Group has secured a meaningful increase in headroom across all our principal funding facilities, allowing the Board to react to opportunities to drive additional shareholder returns. The Board looks to the second half of 2024 and beyond with optimism.”
>>> Rock & Turner conviction in its Anexo position remains firm, but this is not investment advice. Do your own research, analysis and consult with professionals before formulating your own view ahead of investing. <<<
Markets can be irrational. Therein lies the opportunity for the likes of you and me. The efficient market theory taught at business school is a work of fiction (thankfully!)
Tech was in vogue during the ZIRP period and legal practice firms were not sexy. It is the herd mentality. But as Ben Graham always said, the market is a voting machine in the short term, but a weighing machine in the long term. This company will be re-rated at some point. The multiples make no sense against these margins. Don't expect an overnight windfall, but hold for a few years and, as my article demonstrates, the 5 year return looks almost too good to be true.
Frankly, if I had £75m in my back pocket I would be tempted to buy this company outright. Even if I chose to wind up the business, pay down any debts and collect the receivables, I would more than double my money. Now add on to that a going concern growing in double digits (both top line and employee numbers) with very healthy margins and what you have is a business which in real terms is being valued at less than zero. It makes no sense. The market will correct in time.
The company could facilitate a correction by stopping dividend payments (which are the most tax inefficient means of capital allocation) and announcing that surplus capital was instead being used to repurchase undervalued stock. Both the repurchases and the message to the market, would act as a correction catalyst.
The other thing to bear in mind is that while I don't have £75m in my back pocket, many others do. This company is ripe for a take over. That too could be a catalyst for a correction.
Hi James, a fellow shareholder here. Upon reviewing my position, a few things have began niggling me again. I would appreciate your thoughts on these.
1) I believed margin compression was almost exclusively due to increased advertising spend on SM and a higher % of senior fee earners employed. However, upon further investigation, I'm not sure the timings and accounts support this theory entirely. If my theory is correct then we should certainly not expect a return to historical margins. If my theory is incorrect then something else contributed to driving down margins suddently.
2) A large portion of the improved cash flow from the last interim relates to a delay in accounts payables. This also offsets the net debt they have paid back. This leads me to thinking there might be some crafty juggling of liabilities here.
From the outside it is impossible to know for sure, but I have had conversations with both the CFO and CEO. They seem genuine. The CEO and founder is himself a practicing lawyer and so any impropriety would risk his entire career which is based on a license to practice and trust. The company had troubles caused by Covid19, which saw a dip road traffic accidents while everyone was locked down, plus the Courts were closed which meant that recovery against legal claims was delayed. Now we are are through the other side, everything is starting to normalize again. There has also been investment in expanding the team plus increasing the fleet of credit hire vehicles. Payback on those investments takes time to filter through creating timing mismatches between investment and returns. At this stage I am prepared to give them the benefit of the doubt.
I'm not suggesting anything untoward with regards to the improved cash flow. Just stating that the lower debt position is partially due to a delay of accounts payable (overall liabilities are unchanged).
I'm not sure your explanation for the decreased margins still holds true at this point, but lets see how next earnings look. I didn't model a material increase of operating margins myself.
Thanks for the write-up. Regarding this statement "85% settle within 2 years", do you know how much of the total cash this represents? If they for example only include 30% of the total sum of collected cash then this is not as impressive as it sounds anymore as it would take many more years to collect the receivables. Maybe the rest of 15% are the big cases that represent 80% of the total sum. The more money that is in stake, the longer it could take due to legal fightback, etc.
The 85% number is the average across the portfolio. So 85% are settling within 2 years on a rolling basis. Most cases are a similar size. Someone crashes the car, is provided a rental vehicle and the subsequent legal claim recovers the damages and car hire fee. It isn't like a traditional law firm which would have a wide variety of litigation and all cases being vastly different in terms of quantum. This is very much a 'cookie-cutter' operation - almost a legal production line. The claims that take longer are typically those with complications. So the driver that the company is representing may have moved overseas, or changed address without notifying Anexo, and it is difficult to bring a legal claim in court without the claimant being present. Most of these are simple delays, a small number are written off entirely, but this is all managed within bands of tolerance by the business.
Thank you for the answer. I understand your point, however, how can you prove that almost all cases are in similar size? How would we know if the cars that are junk-cheap do not represent 85% of the cases whereas the cars that are worth a lot and would make up significant portion of the cash do not take longer due to the insurance companies fighting back? The more money that is involved, the more every party needs to care and are willing to fight back. Does 85% of cases = 85% of receivables collected in hard cash?. This is what I am trying to get a clear picture of, if the collected cash is evenly distributed amongst the cases or if it is biased. Average worth of each case as well as the standard deviation, is every case roughlt similar to the previous?. Just some thought to consider.
Anexo represents impecunious clients as stated in the article. On this basis it is safe to assume that the value of the vehicles are relatively similar. The kicker is the credit hire which can go on for months and that is only available if the client is impecunious. Again, this is similar because the vehicle being hired needs to be reasonable in the context of the vehicle that has been damaged. In fact, Anexo has moved towards representing gig-workers (zero hour contracts) such as pizza delivery drivers on mopeds and scooters. The capital outlay of a replacement hire vehicle is far lower than a car, so the margins increase for Anexo.
Let me explain. You need to take into account the fast growing debt. And i dont think you can ignore it by looking at the recievables and saying they grow proportionate so there is nothing to worry about.
Even if their recievable accounting practice is legal and general accepted, let me say i at least find it "exotic".
If you take a liabilities to net income ratio; you will see that it goes up and up. So your debt increase more than your income. This trend is not sustainable.
The revenue grew last year 17%, but the net income didn't move. If you look at interest expense; it went from 3,6 to 6,3m. So an 2,7m difference on a pretax income of 24 is 11%. So a very large chunk (11 on 17%) of your extra profit is gone in interest. So this is much more an interest rate game then one might consider.
The problem with this company is that is seems to be very capital intensive. It can grow, but only with a cost of increased debt.
The company cannot charge a higher hire car price or hire credit than the general market. Otherwise the insurance company of the third party won't reimbruse them for the difference in cost. In essence - despite the growing demand - they have no pricing power. That's why they are looking for other , more lucrative, sources of revenue.
Maybe if a recession hits hard and interest rates go down, and wages stop growing, then things will look better. But for the moment i'm not to optimistic about this company.
Thank you for your comment but it is not entirely correct.
First, credit hire rates for vehicles are higher than spot rates. If you rent a car, you pay for it today. If you cannot afford to rent a car, you have to take credit to pay for that car. Combined the return on the hire + credit (credit hire) is much higher than the return generated by a regular car rental business like Enterprise. This is all legal and the Courts award impecunious claimants damages based on credit hire rates. This is why Anexo only represents impecunious clients.
Looking at net income is misleading. As I have said, this is an investment company. All of the return on investment is reinvested in new claims and in growth. This is straight out of the John Malone play-book. Why have a fat bottom line which results in large corporation tax liabilities when the money can be reinvested in growth on a pre-tax basis? You are compounding growth using money that would otherwise be paid to the tax man. This is why net income numbers and operating cash flow numbers appear low, but an analyst needs to do work to adjust those numbers.
Buffett makes adjustments and arrives at what he calls Owner Earnings, which are a better reflection of the earning power of the business (see his 1986 shareholder letter to learn more). I do something similar. Against the real economic earnings of this business, you will see an entirely different picture. Economic earnings margins are consistently in the mid 20% range.
Yes, this is a capital intensive business because they are providing credit. You cannot provide credit to your customers without consuming capital. American Express is capital intensive credit business, but what a wonderful business that has been for investors! The question is whether the return on that capital is satisfactory. The answer here is a resounding yes.
If rates in the market go up, the amount charged for the credit hire increases. This is claimed back from the third party at fault (or more accurately from his insurer).
I should look deeper into the stock, but these are my first toughts;
I dont think if you buy the company today en liquidate it tomorrow, you will cash double what you invested. In my understanding the recievables are largely money from yet to be settled claims.
Anyway, they have a big recievable now and will still have it in 5 or 10 years (and proportional larger with revenue/ growth). So the recievables will not suddenly materialise. There is no unlocking or anything.
I think recievables just more or less project next year(s) revenue.
But it's a business with a P/E ratio of 3.5 growing at just under 20%. Better than NVIDIA at 200 P/E.
And recession proof i guess.
If your analysis on the audit, the VW claim, etc are right, it wont change anything on the long run for the company. A good company with some (percieved) temporary headwinds reflected in the stock can be a perfect strike.
Thank you for your comments. You question the receivables which is the right thing to do. Rather than respond to you in this comment thread that not many people will read, I have updated the article with three additional sections: Accounting, the CFO situation and the Audit.
Answers to your questions are in the Accounting section.
You will also gain a greater understanding from the other two new sections.
The stock dropped sharply by almost 40% around May 5 but the writeup doesn't acknowledge that. I also miss a "disconfirming evidence" or "Reasons not to invest" section. Reading this idea's thread on MCC, I see there have been audit concerns regarding receivables, and the founders are in litigation due to a personal investment gone wrong (reflective of investing skills and potential distractions).
I think the idea is still interesting but I would have preferred to find these facts in the article and get a more complete picture from the start.
Short term investors like to see FCF, but a company such as Anexo reinvests profits in growing the business. That reinvestment in claims is operating cash flow which reduces FCF. Many growth companies receive this criticism which, in my opinion, is short sighted. Amazon, for example reinvests very heavily and so FCF is not as strong as it could be, but look at the success Amazon has seen. Reinvesting for growth is straight out of the John Malone playbook (see https://rockandturner.substack.com/p/john-malone-learn-from-the-best). The company has responded to investors by suggesting a change of strategy which it describes as "Laying the groundwork for a drive towards cash". In the short term this may mean less reinvestment in order to demonstrate that it is within the gift of the company to generate FCF if it wishes to do so.
The second issue was a disagreement between the company and its auditors. The auditors questioned trade receivable impairment practices, which Anexo claims to based on historic precedent. The facts are broadly that the Anexo credit hire contract is with the individual, but on successfully representing the individual Anexo receives payment from a very credit worthy insurance company of the third party found to be at fault. Prior to embarking on legally representing the client, Anexo secures ATE (After The Event) insurance which is a means of hedging the risk of losing the claim. However, if a claim fails due to misinformation received from the client then he will not be covered by the ATE insurance and Anexo are forced to pursue the client in order to recover costs from him directly. Anexo targets impecunious clients and so you may wonder how suing them helps, but more often than not the incorrect information relates to the client’s financial position – i.e. they have more money or assets than they say they have. In such a case Anexo can recover its costs, including the use of charges against property where appropriate. Anexo is confident that it can and has recovered money in this way, but the Auditor is duty bound to take a very prudent view so the earnings report contained a statement from the auditor which caused panic in the market.
I don't think that either issue is a particular concern and the precipitous sell of since May has created a wonderful buying opportunity for you and me.
Benjamin Graham's parable of "Mr Market" demonstrates how the market has polar mood swings. When it is upbeat about something it usually over buys and drives the price to silly valuations (Tesla and Nvidia being a case in point). But when the market is down on a stock, the pendulum swings too far the other way. Anexo is in the latter classification in my opinion. These are the opportunities I like to look for. It is worth remembering that if a stock has unjustifiably fallen 50%, then it only has to recover its prior price level to reward an investor with 100% return.
Hi James, Regarding the May earnings downgrade- they were guiding for a payout of £20mm or so on the VW emissions class action and settled out of court for something like £7mm. Obviously that dampened expectations for the pending case with Mercedes Benz and hence the stock got absolutely whacked. Just thought this is useful context for why a cheap stock suddenly became a dirt cheap stock.
The value of this company is independent of the emission claims. It is trading for less than half of net asset value which means that the underlying business (discounted future cash flows) are being valued at less than zero!
The emission payouts are cream on top of their underlying business (which is credit hire bundled with legal services augmented by housing disrepair claims). The class action emission claims are not sustainable long term revenue streams. They are just fat juicy claims that land the company an outsized windfall.
The VW claim was settled early at a discount because (a) it was funded with debt finance; and (b) money was needed to fund new claims. This settlement has allowed the debt finance to be repaid and, better still, for the proceeds to be used to finance the Mercedes and other motor manufacturer emission claims in the pipeline from internal cash. This bodes very well for the existing and future claims - there is far less incentive to settle those early. So the market has this very wrong. The Mercedes settlement is likely to be significantly higher.
I'm not claiming that Mr Market's reaction was rational, just trying to explain why the stock took such a whack. I don't know the business all that well, but I suppose there were shareholders hoping for some juicy special divis who were disappointed and bailed out?
I do love a sudden gap downwards on a half decent business, my best bet here is some nice multiple expansion over the medium term- good luck with it!
UPDATE: November 2024 - Anexo Group Plc - Investment Thesis Affirmed
Judgment was handed on a couple of preliminary issues in the Mercedes Diesel NOx Emissions case.
Bond Turner, Anexo's subsidiary law firm, acts for over 12,000 claimants in this class action against a range of auto-manufacturers.
The matter involves the use of prohibited defeat devices or 'PDD' (the alleged 'cheat' software) which was used to manipulate vehicle performance data in a fraud against consumers.
Matters two resolved by the court:
1. The German vehicle regulator (the Kraftfahrt-Bundesamt, or 'KBA') had previously determined whether PDD devices were present. The Court found in favour of the Claimants, holding that only the vehicle Recall decisions (where the KBA had discovered a PDD and required them to be removed from vehicles currently on the road) are binding. The other decisions (including the original Type Approval of the vehicle) were not binding on the Court or the Claimants. The decision means that, in respect of the German manufacturers, the Claimants can rely on their regulatory body's finding that PDDs were present in the vehicles for which recalls were issued. For those where (for whatever reason) a recall was not issued, the Claimants will still need to prove the presence of a PDD.
2. Changes to applicable European Law and changes pursuant to Brexit have no impact on this finding.
Commenting on the Judgment, Alan Sellers, Executive Chairman of Anexo Group Plc said: "Whilst this decision is not definitive for the success of the claims, it does strengthen the Claimants' position and is a significant victory in the litigation at this stage. We are very pleased with the outcome."
More particularly, by reason of the procedure adopted by the Court to efficiently case-manage all of the manufacturer emissions cases, (now known as the "Pan-NOx" group litigations), determinations of fact and law in the context of the Mercedes litigation will be binding, insofar as relevant and applicable, across the Pan-NOx Emissions litigation and will therefore likely have at least some (albeit to varying degrees) positive impact on class actions against other manufacturers being brought by the Anexo Group.
This litigation has been ongoing for the best part of a decade and has been a drag on the performance of Anexo, largely due to the debt incurred in funding the litigation. Now that the end is in sight, with settlement expected although not guaranteed in the next 6 months, Anexo will receive an extraordinarily large cash inflow which will not only boost earnings, but will improve the balance sheet by paying down its debt.
The company still trades at less than half its net asset value, so post-settlement, a re-rating is expected. The company traded at double its current share price back in 2021 when the unit economics were not as strong as they are today. At that time it declined a private equity firm's attempt to take it private at a share price of £1.50 (versus £0.75 today), so a re-rating could more than double the company's valuation in a very short time.
The investment thesis is still very much intact and assured by this news.
** UPDATE ON ANEXO PLC **
This week, I had the opportunity to interview the CEO and CFO of Anexo PLC to discuss the company's progress. Here is an update on the investment thesis:
1. DEBT
While debt wasn't a major concern during the ZIRP era, the recent rate hikes have significantly increased financing costs. Currently, the company's debt levels remain high, but there is a clear objective to reduce long-term debt. According to the latest annual results, financing costs amounted to £17 million against net earnings of £15 million. This indicates that the company is currently generating more for its creditors than its shareholders. However, the counter position is that with debt reduction being underway, once achieved, net earnings should more than double, benefiting shareholders through a likely re-rating of the stock.
Some analysts have noted an increase in current liabilities as long-term debt decreases. This shift is due to portions of long-term debt nearing expiry and becoming short-term liabilities, reflecting an adjustment on the balance sheet.
The company is actively pursuing class actions against car manufacturers involved in the "diesel-gate" scandal. It settled claims against VW last year and has pending claims against others like Jaguar Land Rover, Mercedes, and BMW. With legal time limits for bringing new claims soon to expire, settlements from these manufacturers are expected around Q4 2024 or Q1 2025. These settlements should provide a significant cash influx, facilitating the elimination of corporate debt.
2. GROWTH
Anexo continues to see high demand for its services, prompting increases in both headcount and leased vehicle fleet size. This positions the company well for future growth. Notably, its newer, higher-margin segments are expanding strongly. Improved revenues, better operating margins, and reduced financing costs should significantly boost bottom-line earnings in the near future.
3. CAPITAL ALLOCATION
A primary disappointment lies in the management's capital allocation strategy. With high debt levels and significant financing costs, it is perplexing why the company is distributing cash to shareholders as dividends. This approach essentially means borrowing at high rates to pay dividends, which is not financially prudent.
Management defended this strategy, citing the need to maintain dividends to avoid losing income-focused investors. However, this overlooks the fact that high debt levels have caused the share price to drop by over 50% from relatively recent highs. Maintaining a 2% dividend yield has thus led to a significant loss of capital for long-term shareholders.
Furthermore, the share price is currently so depressed that it trades at half of its net asset value, implying a going concern value below zero. Instead of paying dividends, repurchasing heavily discounted shares would have been a more accretive use of surplus cash, potentially doubling or tripling share value as debt is reduced and earnings improve. Unfortunately, management does not seem to fully grasp the opportunity cost of its capital allocation decisions.
CONCLUSION
The investment thesis for Anexo PLC remains strong. The oversold shares trade at a ridiculous valuation that is half its net asset value. With anticipated settlements from the diesel-gate cases, an improving balance sheet, disappearing financing costs, and expanding margins, the stock has significant potential to become a multi-bagger from current prices. The risk/reward profile remains highly favourable. However, this may not be a long-term 'buy and hold forever' investment; further analysis in 2025, post re-rating, will be necessary to determine future strategy.
Interim results are encouraging. There has been significant revenue and profit growth.
Revenue +13.4% to £77.8m (H1 2022 £67.9m). This means that the business is currently being capitalized at parity to sales which, on economic earnings margins in the mid to high teens, looks way too cheap. Also worthy of note is that the higher margin HDR division saw revenues increase >25%. More particularly, the number of HDR cases on the balance sheet at the period end is up 48.4%. On the credit hire side, strong growth is forecast for H2 2023 due to a steady increase in the vehicle inventory. Results for the period include settlement with VolksWagen on the emission class action which resulted in a net positive cash position for Anexo of £7.2m. The group continues to litigate the Mercedes Benz class action claim on similar facts and currently has over 12,000 claimants. This is anticipated to bring a larger settlement than the VW claim.
Operating Earnings +19.9% with improved cash collections from all divisions
PBT +11.8% (But debt is reducing -16.3% in 6 months, so financing costs in future will be lower and PBT growth will tend towards Operating Earnings growth)
Cash collections from settled cases +14%
H1 2023 cash from operations was +£15.7m (H1 2022 was negative £5.1m)
The number of legal staff employed is up 9% YoY, which gives an indication that the management are confident that growth will continue.
Alan Sellers, Executive Chairman, commented, " The Board has been focused on delivering a meaningful reduction in net debt and increasing cash collections during the first half of the year. The results presented here are testament to the quality of our people, the ever-increasing diversity of the Group’s activities and our commitment to investment into future growth and opportunities for the business. Having demonstrated our ability to drive the business for cash generation, we are expecting growth in vehicle numbers, revenues and profits in the second half of the year, without the need to fund this growth from our current debt facilities. As cash collections continue to increase, we will be able to invest further and drive growth across all our divisions including HDR and emissions claims."
I find the results impressive and makes me more confident that it's a matter of time until the market re-rates the stock.
James, you know this company better than me. Is management conservative with their statements or should we take statements like ("[Strong growth] is forecast for H2 2023 resulting from a steady increase in vehicle numbers.") with a big grain of salt?
Looking forward to the earnings call.
Strong growth not only for H2 2023 but for FY 2024 looks assured.
The company is deliberately switching capital from its core lower business credit hire segment to its rapidly expanding HDR division. Not only does this have a working capital benefit, but it means that margins get a big boost (this is one of the key drivers for shareholder returns). Then we have the windfall that is almost certain from the Mercedes Benz and BMW claims. The facts are almost identical to the VW claim that settled. Both the Mercedes and BMW claims are anticipated to result in larger settlements than the VW claim.
The company also sees huge demand for credit hire and doesn't have enough capacity to take it all on, despite growing its workforce by c.10%. This means that there is a huge TAM for the business to grow into on that side.
Debt is being reduced which lowers funding costs.
Free cash flow is up because of the stronger working capital position due to the segment re-balancing.
All in all, there is only good news. No clouds on the horizon. A recession proof business that will not be impacted by an economic downturn.
And for an investor, the shares are still trading at a huge discount to net asset value, so the business is being valued at less than zero. The market will wake up at some point (the shares are already up 10% today, but they have so much further to go).
I hope that this helps you formulate your own opinion.
It helped, thanks.
For the benefit of other readers who may not have watched the presentation, a couple of observations:
- Management said during the call that they focused on reducing debt levels during 2023H1 because they've received the feedback from investors that the company had debt levels that were too high. (And they delivered on this.)
- At the end of the call, they send you a feedback form, it's the first time in 6 years investing that I see this.
It's probably not the full picture, but management gives the impresion to listen to and respond to shareholders, which I find very refreshing.
That said, I agree with you, James, I hope they do share buybacks instead of paying. I can't believe they aren't aware of the tax benefits of one option over the other..
As reported in this analysis, it was likely that Mark Bringloe would be returning as CFO.
Today (22 August), Mark Bringloe is returning to the Group as Interim Chief Financial Officer (“CFO”)
Mark originally joined the Group as Finance Director in 2009 and was appointed CFO upon Anexo’s admission to AIM in 2018. He left the Group in July 2022 and since then has been involved in other projects. Mark has been reappointed to the Board with immediate effect.
This is good news.
Any idea why Interim instead of permanent CFO? The announcement doesn't make any references to that.
IR got back to me on this. I understood from their reply that it's "Interim" because Mark is in the process of disengaging from other commitments.
Yes, Mark stepped down originally to explore opportunities in litigation financing. He did this with Alan Sellers, Anexo Executive Chairman, so the team never split. Recently there was a UK Supreme Court ruling that added operating complexity to those in the litigation finance arena (its known as the PACCAR case if you wanted to do some reading). Essentially, litigation funding agreements ("LFAs"), constitute a "damages-based agreement" ("DBA"), a term given a specific definition by statute. In order to be lawful and enforceable a DBA has to satisfy certain conditions. The LFAs have been entered into without satisfying those conditions are unenforceable. It is possible to re-word LFAs but the judgement has thrown a spanner in the works. So maybe Mark feels that his time is better spent as CFO of an already booming business than on trying to get something else off the ground.
I submitted the question to the Q&A section but it didn't get picked up. I might be reading too much, but probably Mark doesn't know what he wants to do, or is waiting for some external event...
UPDATE 20TH AUGUST 2024
Anexo Plc (London AIM market)
>>> SUMMARY OF THE CURRENT SITUATION <<<<
The investment thesis remains strong, with the key factor being the resolution of the outstanding emission claims. This resolution could unlock significant value, dramatically improve the balance sheet, double net margins, and set the stage for future business growth. If revenues and margins increase, earnings multiples could expand, and there is potential for a share buyback to reduce the share count, positioning the stock for a substantial increase in value. This may happen in the second half of 2024 or early in 2025.
A critical consideration for shareholders is capital allocation, on which they should strongly lobby the company. Although settling the emission claims will significantly reduce debt, financing costs remain excessively high, and any surplus capital should be directed toward further debt reduction as soon as possible. Additionally, with shares trading at a significant discount to NAV, using excess cash for share repurchases would greatly enhance shareholder returns and help the share price recover to a more reasonable level. Given these opportunities, the opportunity cost of paying a dividend is unjustifiably high. In other words, until debt is reduced and the share price rebounds, dividends should not be a priority. It is unclear if the board fully grasps this.
>>> Results - H1 2024 <<<
SEGMENT BREAKDOWN
* Credit Hire revenues increased by 21.8%, while PBT increased 86.4% indicating impressive operating leverage. H1 is always slower than H2 because the second half of the year includes winter months with nightfall coming earlier in the day and weather conditions deteriorating which results in more road traffic accidents. So H2 figures are anticipated to be higher than H1.
* Legal Services revenues decreased in large part due to a back log in the English Law Court service, a hangover from the Covid19 shutdown, which is delaying settlements. Figures in this segment were further impacted by investment in staffing as headcount increased 10.3% in H1 2024 to meet a 13.2% increase in vehicle claims (new personnel are paid from day one of employment, but the fruits of their labour will not be seen for many months in to the future, creating a disparity between costs and associated revenue. The average claim takes 18-24 months to settle). As the legal system clears its back log by freeing up more judicial capacity, more of the Anexo claims will settle potentially opening the cash flood gates. Additionally, Anexo currently only accepts 40% of the claims offered to it, essentially cherry picking the best opportunities. This reveals how much potential there is for the company to continue to grow and explains why a 10.3% increase in headcount bodes well for the future.
* Housing disrepair revenues increased 15.3%, while the number of claims is increasing at an impressive rate. Ongoing claims are up 17.9%, but this is not a back log as settled claims are up 27.5%. When Anexo wins a claim against a housing authority, the landlord is required to fix the property within typically 28 days, but fail to do so, which then necessitates another claim against the landlord and more revenue for Anexo. These related claims settle because the defendant has no defense, but the marginal fees generated by Anexo are small relative to the primary claim. This explains the disparity between settled claims and revenues.
* A large part of the investment thesis was the value of receivables which relative to the market capitalization. Cash collections for the period were up 8.1% to £83.7m vs a market capitalization for the company of £75.2m and receivables on the balance sheet of £233m. Net debt remains at £67.9m and so the net asset value of the business still far exceeds its market capitalization. Various analysts have suggested that the share price is trading at less than 30 pence on every pound of value. As a result, the board is considering its dividend policy and, for the first time, considering share buy-backs as a more accretive means of allocating capital. No decision has been made, but this is a significant development.
* The Group has continued its investment in diesel emissions claims in H1 2024, resulting in
active claims against manufacturers including Mercedes Benz, Vauxhall, BMW/Mini,
Peugeot/Citroen and Renault/Nissan. By the end of June 2024, the Group had secured claims
against Mercedes Benz (where court proceedings have been issued) from approximately
12,000 clients, and a further 25,000 claims against other manufacturers. The judge has linked claims of all manufacturers and so they will likely all settle together. The next milestone in this litigation is a hearing scheduled for October 2024. The potential settlement of these claims is expected to significantly enhance profitability and cashflows, while importantly reducing net debt, although the timing of any negotiations remains uncertain. The VW settlement of 2023 establishes a precedent for these other claims. Although the quantum of that settlement was subject to a confidentiality provision, it is thought to be in the region of £7.2m. That was a single claim against an individual manufacturer. This ought to provide a guide of monies that will flow from the settlement of these other claims - which may occur as soon as H2 2024.
* Debt has stabilized. Much of the debt was used to fund the very large emission claims. The cost of funding the debt has reduced by changing the debt provider. When the emission claims settle, this debt will be significantly paid down. The impact will not only be an improvement of the balance sheet, but it will significantly boost net earnings. Consider that net earnings for H1 2024 are £4.42m after a net financing expense of £4.41m and you can see that without the burden of that debt, net margins
instantly double!
* AI investments are being made to improve efficiency and productivity. This is anticipated to go live in H1 2025.
Alan Sellers, Executive Chairman, "This is an exciting time for the Group, with continued growth in our core business and huge opportunities in class actions and other litigation. As reported today, the Group has secured a meaningful increase in headroom across all our principal funding facilities, allowing the Board to react to opportunities to drive additional shareholder returns. The Board looks to the second half of 2024 and beyond with optimism.”
>>> Rock & Turner conviction in its Anexo position remains firm, but this is not investment advice. Do your own research, analysis and consult with professionals before formulating your own view ahead of investing. <<<
any idea on why the market misunderstands the stock? The price has been declining since 2017 so curious to hear your thoughts about it. Cheers
Markets can be irrational. Therein lies the opportunity for the likes of you and me. The efficient market theory taught at business school is a work of fiction (thankfully!)
Tech was in vogue during the ZIRP period and legal practice firms were not sexy. It is the herd mentality. But as Ben Graham always said, the market is a voting machine in the short term, but a weighing machine in the long term. This company will be re-rated at some point. The multiples make no sense against these margins. Don't expect an overnight windfall, but hold for a few years and, as my article demonstrates, the 5 year return looks almost too good to be true.
Frankly, if I had £75m in my back pocket I would be tempted to buy this company outright. Even if I chose to wind up the business, pay down any debts and collect the receivables, I would more than double my money. Now add on to that a going concern growing in double digits (both top line and employee numbers) with very healthy margins and what you have is a business which in real terms is being valued at less than zero. It makes no sense. The market will correct in time.
The company could facilitate a correction by stopping dividend payments (which are the most tax inefficient means of capital allocation) and announcing that surplus capital was instead being used to repurchase undervalued stock. Both the repurchases and the message to the market, would act as a correction catalyst.
The other thing to bear in mind is that while I don't have £75m in my back pocket, many others do. This company is ripe for a take over. That too could be a catalyst for a correction.
Hi James, a fellow shareholder here. Upon reviewing my position, a few things have began niggling me again. I would appreciate your thoughts on these.
1) I believed margin compression was almost exclusively due to increased advertising spend on SM and a higher % of senior fee earners employed. However, upon further investigation, I'm not sure the timings and accounts support this theory entirely. If my theory is correct then we should certainly not expect a return to historical margins. If my theory is incorrect then something else contributed to driving down margins suddently.
2) A large portion of the improved cash flow from the last interim relates to a delay in accounts payables. This also offsets the net debt they have paid back. This leads me to thinking there might be some crafty juggling of liabilities here.
From the outside it is impossible to know for sure, but I have had conversations with both the CFO and CEO. They seem genuine. The CEO and founder is himself a practicing lawyer and so any impropriety would risk his entire career which is based on a license to practice and trust. The company had troubles caused by Covid19, which saw a dip road traffic accidents while everyone was locked down, plus the Courts were closed which meant that recovery against legal claims was delayed. Now we are are through the other side, everything is starting to normalize again. There has also been investment in expanding the team plus increasing the fleet of credit hire vehicles. Payback on those investments takes time to filter through creating timing mismatches between investment and returns. At this stage I am prepared to give them the benefit of the doubt.
I'm not suggesting anything untoward with regards to the improved cash flow. Just stating that the lower debt position is partially due to a delay of accounts payable (overall liabilities are unchanged).
I'm not sure your explanation for the decreased margins still holds true at this point, but lets see how next earnings look. I didn't model a material increase of operating margins myself.
The next earning will be interesting for sure.
Thanks for the write-up. Regarding this statement "85% settle within 2 years", do you know how much of the total cash this represents? If they for example only include 30% of the total sum of collected cash then this is not as impressive as it sounds anymore as it would take many more years to collect the receivables. Maybe the rest of 15% are the big cases that represent 80% of the total sum. The more money that is in stake, the longer it could take due to legal fightback, etc.
The 85% number is the average across the portfolio. So 85% are settling within 2 years on a rolling basis. Most cases are a similar size. Someone crashes the car, is provided a rental vehicle and the subsequent legal claim recovers the damages and car hire fee. It isn't like a traditional law firm which would have a wide variety of litigation and all cases being vastly different in terms of quantum. This is very much a 'cookie-cutter' operation - almost a legal production line. The claims that take longer are typically those with complications. So the driver that the company is representing may have moved overseas, or changed address without notifying Anexo, and it is difficult to bring a legal claim in court without the claimant being present. Most of these are simple delays, a small number are written off entirely, but this is all managed within bands of tolerance by the business.
I hope that this helps.
Thank you for the answer. I understand your point, however, how can you prove that almost all cases are in similar size? How would we know if the cars that are junk-cheap do not represent 85% of the cases whereas the cars that are worth a lot and would make up significant portion of the cash do not take longer due to the insurance companies fighting back? The more money that is involved, the more every party needs to care and are willing to fight back. Does 85% of cases = 85% of receivables collected in hard cash?. This is what I am trying to get a clear picture of, if the collected cash is evenly distributed amongst the cases or if it is biased. Average worth of each case as well as the standard deviation, is every case roughlt similar to the previous?. Just some thought to consider.
Cheers
Anexo represents impecunious clients as stated in the article. On this basis it is safe to assume that the value of the vehicles are relatively similar. The kicker is the credit hire which can go on for months and that is only available if the client is impecunious. Again, this is similar because the vehicle being hired needs to be reasonable in the context of the vehicle that has been damaged. In fact, Anexo has moved towards representing gig-workers (zero hour contracts) such as pizza delivery drivers on mopeds and scooters. The capital outlay of a replacement hire vehicle is far lower than a car, so the margins increase for Anexo.
I hope that this answers your question.
At the end of the day this is what really matters, that the majority of the cash comes in
The more i look at it the less i like it.
Let me explain. You need to take into account the fast growing debt. And i dont think you can ignore it by looking at the recievables and saying they grow proportionate so there is nothing to worry about.
Even if their recievable accounting practice is legal and general accepted, let me say i at least find it "exotic".
If you take a liabilities to net income ratio; you will see that it goes up and up. So your debt increase more than your income. This trend is not sustainable.
The revenue grew last year 17%, but the net income didn't move. If you look at interest expense; it went from 3,6 to 6,3m. So an 2,7m difference on a pretax income of 24 is 11%. So a very large chunk (11 on 17%) of your extra profit is gone in interest. So this is much more an interest rate game then one might consider.
The problem with this company is that is seems to be very capital intensive. It can grow, but only with a cost of increased debt.
The company cannot charge a higher hire car price or hire credit than the general market. Otherwise the insurance company of the third party won't reimbruse them for the difference in cost. In essence - despite the growing demand - they have no pricing power. That's why they are looking for other , more lucrative, sources of revenue.
Maybe if a recession hits hard and interest rates go down, and wages stop growing, then things will look better. But for the moment i'm not to optimistic about this company.
Greetz
Thank you for your comment but it is not entirely correct.
First, credit hire rates for vehicles are higher than spot rates. If you rent a car, you pay for it today. If you cannot afford to rent a car, you have to take credit to pay for that car. Combined the return on the hire + credit (credit hire) is much higher than the return generated by a regular car rental business like Enterprise. This is all legal and the Courts award impecunious claimants damages based on credit hire rates. This is why Anexo only represents impecunious clients.
Looking at net income is misleading. As I have said, this is an investment company. All of the return on investment is reinvested in new claims and in growth. This is straight out of the John Malone play-book. Why have a fat bottom line which results in large corporation tax liabilities when the money can be reinvested in growth on a pre-tax basis? You are compounding growth using money that would otherwise be paid to the tax man. This is why net income numbers and operating cash flow numbers appear low, but an analyst needs to do work to adjust those numbers.
Buffett makes adjustments and arrives at what he calls Owner Earnings, which are a better reflection of the earning power of the business (see his 1986 shareholder letter to learn more). I do something similar. Against the real economic earnings of this business, you will see an entirely different picture. Economic earnings margins are consistently in the mid 20% range.
Yes, this is a capital intensive business because they are providing credit. You cannot provide credit to your customers without consuming capital. American Express is capital intensive credit business, but what a wonderful business that has been for investors! The question is whether the return on that capital is satisfactory. The answer here is a resounding yes.
If rates in the market go up, the amount charged for the credit hire increases. This is claimed back from the third party at fault (or more accurately from his insurer).
I hope that this helps.
Thanks for the write up.
I should look deeper into the stock, but these are my first toughts;
I dont think if you buy the company today en liquidate it tomorrow, you will cash double what you invested. In my understanding the recievables are largely money from yet to be settled claims.
Anyway, they have a big recievable now and will still have it in 5 or 10 years (and proportional larger with revenue/ growth). So the recievables will not suddenly materialise. There is no unlocking or anything.
I think recievables just more or less project next year(s) revenue.
But it's a business with a P/E ratio of 3.5 growing at just under 20%. Better than NVIDIA at 200 P/E.
And recession proof i guess.
If your analysis on the audit, the VW claim, etc are right, it wont change anything on the long run for the company. A good company with some (percieved) temporary headwinds reflected in the stock can be a perfect strike.
Once again, thanks for the write up!
Thank you for your comments. You question the receivables which is the right thing to do. Rather than respond to you in this comment thread that not many people will read, I have updated the article with three additional sections: Accounting, the CFO situation and the Audit.
Answers to your questions are in the Accounting section.
You will also gain a greater understanding from the other two new sections.
best regards
James
Thanks for sharing this idea, James.
The stock dropped sharply by almost 40% around May 5 but the writeup doesn't acknowledge that. I also miss a "disconfirming evidence" or "Reasons not to invest" section. Reading this idea's thread on MCC, I see there have been audit concerns regarding receivables, and the founders are in litigation due to a personal investment gone wrong (reflective of investing skills and potential distractions).
I think the idea is still interesting but I would have preferred to find these facts in the article and get a more complete picture from the start.
May 9th was the earnings release.
Two issues.
Short term investors like to see FCF, but a company such as Anexo reinvests profits in growing the business. That reinvestment in claims is operating cash flow which reduces FCF. Many growth companies receive this criticism which, in my opinion, is short sighted. Amazon, for example reinvests very heavily and so FCF is not as strong as it could be, but look at the success Amazon has seen. Reinvesting for growth is straight out of the John Malone playbook (see https://rockandturner.substack.com/p/john-malone-learn-from-the-best). The company has responded to investors by suggesting a change of strategy which it describes as "Laying the groundwork for a drive towards cash". In the short term this may mean less reinvestment in order to demonstrate that it is within the gift of the company to generate FCF if it wishes to do so.
The second issue was a disagreement between the company and its auditors. The auditors questioned trade receivable impairment practices, which Anexo claims to based on historic precedent. The facts are broadly that the Anexo credit hire contract is with the individual, but on successfully representing the individual Anexo receives payment from a very credit worthy insurance company of the third party found to be at fault. Prior to embarking on legally representing the client, Anexo secures ATE (After The Event) insurance which is a means of hedging the risk of losing the claim. However, if a claim fails due to misinformation received from the client then he will not be covered by the ATE insurance and Anexo are forced to pursue the client in order to recover costs from him directly. Anexo targets impecunious clients and so you may wonder how suing them helps, but more often than not the incorrect information relates to the client’s financial position – i.e. they have more money or assets than they say they have. In such a case Anexo can recover its costs, including the use of charges against property where appropriate. Anexo is confident that it can and has recovered money in this way, but the Auditor is duty bound to take a very prudent view so the earnings report contained a statement from the auditor which caused panic in the market.
I don't think that either issue is a particular concern and the precipitous sell of since May has created a wonderful buying opportunity for you and me.
Benjamin Graham's parable of "Mr Market" demonstrates how the market has polar mood swings. When it is upbeat about something it usually over buys and drives the price to silly valuations (Tesla and Nvidia being a case in point). But when the market is down on a stock, the pendulum swings too far the other way. Anexo is in the latter classification in my opinion. These are the opportunities I like to look for. It is worth remembering that if a stock has unjustifiably fallen 50%, then it only has to recover its prior price level to reward an investor with 100% return.
I hope that this helps
Hi James, Regarding the May earnings downgrade- they were guiding for a payout of £20mm or so on the VW emissions class action and settled out of court for something like £7mm. Obviously that dampened expectations for the pending case with Mercedes Benz and hence the stock got absolutely whacked. Just thought this is useful context for why a cheap stock suddenly became a dirt cheap stock.
The value of this company is independent of the emission claims. It is trading for less than half of net asset value which means that the underlying business (discounted future cash flows) are being valued at less than zero!
The emission payouts are cream on top of their underlying business (which is credit hire bundled with legal services augmented by housing disrepair claims). The class action emission claims are not sustainable long term revenue streams. They are just fat juicy claims that land the company an outsized windfall.
The VW claim was settled early at a discount because (a) it was funded with debt finance; and (b) money was needed to fund new claims. This settlement has allowed the debt finance to be repaid and, better still, for the proceeds to be used to finance the Mercedes and other motor manufacturer emission claims in the pipeline from internal cash. This bodes very well for the existing and future claims - there is far less incentive to settle those early. So the market has this very wrong. The Mercedes settlement is likely to be significantly higher.
I'm not claiming that Mr Market's reaction was rational, just trying to explain why the stock took such a whack. I don't know the business all that well, but I suppose there were shareholders hoping for some juicy special divis who were disappointed and bailed out?
I do love a sudden gap downwards on a half decent business, my best bet here is some nice multiple expansion over the medium term- good luck with it!
Thanks for the detailed reply, James, I have a clearer picture now.