value and opportunity

Another headline for this post could have been “The good, the (not so) bad and the (very) ugly…

Let’s start with “the ugly” right away: Cars.com

Yesterday was a pretty bad day anyway but Cars.com decided that it is a good day to tell investors that a potential sale of the company will not materialize. The whole bidding process has been described in details by the company. In summary, 29 parties looked at the company but no “actionable” bid could be obtained. This alone might not have triggered the -36% share price reaction taht happened yesterday,

However the Q2 results published at the same day clearly gave the ultimate push down for the stock. Top line down -12%, EBITDA down more than -20% and a net loss instead of a profit YoY clearly shocked the remaining investors. The Q1 guidance of -5 to +2% top line development for 2019 was adjusted down to -6% to -9%, a pretty steep decline in just one quarter.

What really angers me is that they still present their bullxxxx metrics (website traffic) and don’t really explain what’s going on. What angers me even more is that I didn’t sell after my Q1 review. Clearly, with management being occupied by a very lenghty sales process, some “collateral damage” should be expected but this was a nasty negative surprise.

After yesterdays “masacre”, looking at the low end of the projections, Cars.com expects to do around 610 mn USD in sales and ~ 160 mn in “Operating EBITDA”. At a current EV of 1.5 bn (780 mn market cap and ~700 mn debt ), this translates into an EV/EBITDA of around 9. Not that much but if the business continues to shrink there is still downside risk.

I am still not ready to throw in the towel yet, as yesterday’s move might have been an overreaction,  but clearly I have not understood in my initial analysis what happened to their core business and that it looks much more competitive than I thought. This will be an interesting and humilating”post mortem” at some point in the future.

The good: Vostok New Ventures

On August 2nd, Vostok announced that they had participated in the new funding round of Babylon with 70 mn USD at a post money valuation of 2 bn USD. For the NAV of the portfolio this means a nice increase of 18% (to around 83 SEK). As a reaction, the stock price actually went down by -5% on Monday. At 61,5 SEK, the discount to the NAV is now more than 25% which in my opinion is not justified as the clearly proved that they can invest in winners outside Russia I will add to the stock on further weakness.

The (not s) bad: Majestic Wine

Also on August 2nd, Majestic announced that they finally sold their retail business to Fortress at a valuation of 95 mn GBP plus 5 mn GBO for another freehold property.

The company will rename itself to Naked Wine and focus on their online sales channel. The remaining wholesale business will als most likely be sold shortly.

The market seems to like the transaction. What irritated me a little bit was that in the original release that they expect net debt to increase during the year by 15 mn GBP:

The net proceeds will be used to:

●    Eliminate the Group’s net debt, which stood at approximately £15.5m at end FY19 and is anticipated to be in excess of £30mwhen the transaction completes;

The reason for this increase has not been explained, so I assume that this is actually a purchase price reduction as the need to finance the working capital. So the sale is clearly to a certain extent “distressed”, on the other hand it also eliminates some tail risk of a hard Brexit, From a strategic perspective it looks like a “clean cut” and allows them to concentrate on Naked Wine which in summary I would then judge was a “not so bad deal”. I will keep the position and see how Naked develops.