Turnaround success at Cellnet (ASX:CLT)
27/11/2018
Trav Mays
Follow @MaysTrav
Description
Cellnet (ASX:CLT), formed in
1992, is a market leader in the warehouse and distribution industry with
centres in Australia, China and New Zealand. Their main source of revenue is
warehousing and distribution, however they also own the 3SIXT technology brand,
selling everything from phone covers and screen protectors to action video
cameras. They are currently the exclusive supplier to Optus, Vodafone, Noel
Leeming and Lagardere, where they manage each peg, giving Cellnet up to date
information on stock levels and customer preferences.
Cellnet by 2014 had become
unfocused, increasing the number of brands in their fold to 72. As with Icarus, the wings that were originally their source of
success, lead to their eventual downfall. Whilst the additional brands were
bringing in more revenue, Cellnet’s expenses accelerated at a faster pace,
culminating in a large loss in 2014 and the removal of the then current CEO and
appointment of Alan Sparks to replace him.
Cellnet under the excellent
management of Alan Sparks, have achieved a remarkable feat, as Warren Buffett
says “Turnarounds seldom Turn”, Cellnet, defying the odds, falls into the
seldom group. Mr. Sparks began by cutting the expenses and streamlining the
business, reducing the number of brands to just 12 in 2014. Despite the smaller
number of brands, Cellnet has modestly increased revenue, however their
greatest achievement has been in the reduction of expenses. This is seen
through the large disparity in revenue to profit growth, revenue grew an
average of 5.2% pa whilst profit grew an average of 15.9% pa. These numbers are
heavily affected by the loss in 2014 and the subsequent recovery of 2015. A
better representation of Mr. Sparks and his team’s efforts is the last three
years, where they have achieved an average per annum revenue and profit growth
of 4.6% and 25.1% respectively.
To further help Cellnet reach its
potential, a partner was sought who not only understood the business, but would
bring with them knowledge and synergies, they found WentronicHolding GmbH. Wentronic purchased 79.77% (56.19%, 2018) of Cellnet in
2016 and with it, it brought over 25
years of knowledge and experience operating a similar and considerably larger
business than Cellnet. Wentronic is a privately owned warehouse and
distribution company with over 300 staff, 12000 products and 5 branches
throughout Europe and Asia. Wentronic opened up supply chain channels that
Cellnet couldn’t have gained alone, contributing significantly to the reduction
in expenses. Further to this, Wentronic and Cellnet in 2018 entered into a
joint venture company (51% Wentronic, 49% Cellnet) incorporated in Singapore,
Wentronic International Pte. Ltd. The purpose of which is to expand the
Wentronic and Cellnet products into markets outside Europe, Australia and New
Zealand, with both companies proportionately picking up the bill.
This joint venture coincided with
another development in 2018, 11.4% of Cellnet’s shares were purchased by a
strategic Partner JEJ, the investment vehicle of Cybernetic
of Taiwan. Cybernetic has been distributing Philips (Mr. Sparks worked for
Philips for over 7 years) accessories since 1993, shipping to many counties
including Taiwan, Turkey, Middle East Africa, Russia,
Ukraine and South America, connecting Cellnet to countries they currently don’t
sell into.
More recently (07/09/2018)
Cellnet purchased Turn Left, a warehouse and distribution company focusing on
gaming software and accessories for $6 mill. Turn Left currently outsources its
warehousing and with parallel retail partners (eg. Jb Hifi, Noel Lemming etc.)
Cellnet has ample opportunities for synergies. Turn
Left being a reputable company with distribution rights to companies such as Thrustmaster,
Steelseries, Plantronics and Kontrol Freek gives Cellnet easy access to this
lucrative and expanding (estimated 6.1% CAGR 2018-2026) market.
Gaming Hardware
Growth Rate (Source: Transparency Market Research)
Management
Complementing Mr. Alan Spark’s 40
years experience, Mr Michael Wendt (Chairman & Non-Executive Director) has
over 26 years in international retail and distribution experience. Mr Tony
Pearson (Non-Executive independent Director) has many years of board and
committee experience. Mr Michael Reddie (Non-Executive Independent Director) the
current director of Reddie Lawyers has experience in consulting clients in
M&A, Corporate Governance, Joint Ventures and strategic alliances both
domestically and internationally. Rounding out the experience board is Mr Kevin
Gilmore (Non-Executive Director) who is the current Director of Sales for
Wentronic Asia Pacific brings with him experience in management positions at
multinational corporations such as GE, Shell, Philips Electronics and Belkin.
Competition
Cellnet’s currently has limited
competition and due to this, there is little information regarding market size
and share. Force Technology International, a
privately owned company, is their main Australian competition. They work in the
same telecommunication space as Cellnet, offering cases, screen protectors etc
to their clients. Other notable competitors are Ingram Micro Ltd and Synnex
Corporation. While there is limited information regarding Cellnet’s market
share, it is my belief that they currently control a large section of the
market. They have the sole distribution rights to Optus, Vodafone, Noel Leeming
and Lagardere, they also supply all the big retailers such as JB Hifi, Kmart
etc. and are also taking advantage of the online space, selling on websites
such as Amazon and Ebay.
As there is no direct competition
to compare Cellnet to, evaluation is quite hard. It’s my belief that under such
circumstances caution is called for and I would only invest under excellent
circumstances. Below is a section of the evaluation metrics that I use, as you
can see, Cellnet has quite good scores for the traditional value metrics, .27
Price to Sales, 1.1 Price to Tangible Book, 7.08 Price to Normalised Earnings.
Along with these great values, Cellnet currently has a Pitroski Score of 8 and
a Z score of 7.72.
Catalyst
As the common aphorism states “A
raising tide lifts all ships” the inverse of this is just as true. The recent
uncertainty about the US/China trade war and the general concern of the global
economy reaching the final stages of the bull market, has resulted in stock
markets around the world reducing collectively. Despite all of the recent
changes, the acquisition of Turn Left, the joint venture between Cellnet and
Wentronic, JEJ becoming a strategic partner, the reduction in debt of 3.9 mill
and the increase in normalised profit of 34%, the market is currently pricing
Cellnet at only 5 million more than it was worth a year ago. Over the long
term, I believe the market will see the true worth of Cellnet and the price
will reflect it.
Reason to not invest
As a large percentage of shares
are owned by insiders, this reduces liquidity and some people would therefore
demand a premium. One of the main reasons for this is because the owner has
little to no influence on the shareholder votes, no large blocks can be
purchased and therefore you are essentially just going along for the ride. In
cases such as this, management has far more importance than usual, while it is
paramount that any business you purchase has reputable management, buying into
a company where your vote will do little to nothing, means that you must have
absolute faith in the management team.
Along with the low liquidity,
across the world there is a general consensus that we are nearing the final
stages of the bull market. This has many investors worried, causing them to move
their money into safer assets, driving stock prices lower. This worry is
especially true in Australia where we have low household savings rates, low
wage growth, high household debt, house prices falling sharply (mostly in the
east coast capitals) and a reduction in Chinesse demand for Australian
resources, is causing many households to tighten their purse strings. This will
have a negative and dramatic impact on the discretionary spending, where once
people may have upgraded their gaming hardware or phone, they will postpone or
stop all together these purchases. This will have a flow on effect to Cellnet
as their suppliers purchase less and less products.
Recommendation
The low liquidity to many would
seem as a reason not to invest, however if you are a long term investor seeing
the purchase as part ownership in a business than this is something that should
not concern you. As Charlie Munger says “The big money is not in the buying and
selling, but in the waiting”.
Cellnet is a turnaround story;
one that I believe has been playing out long enough to prove that it’s not just
a short term effect. They have increased their product range and further
diversified their risk by pushing their products onto the rest of the world. While
the global downturn, further exacerbated in Australia due to country specific
conditions, is a real risk to Cellnet, I believe they have positioned
themselves well to weather this storm and it is due to these conditions that
Cellnet has reduced to a price that I believe offers real value.
Thanks for reading
Just Culture Investor
Trav Mays
The author is a current owner of a portion of Cellnet, given this, they
may be subject to one or a number of biases, more specifically anchoring and/or
confirmation bias. This article is neither general nor personal advice and in no way
constitutes specific or individual advice. The website and author do not
guarantee, and accept no legal liability whatsoever arising from or connected
to, the accuracy, reliability, currency or completeness of any material
contained on this website or on any linked site. This website is not a
substitute for independent professional advice and users should obtain any
appropriate professional advice relevant to their particular circumstances. The
material on this website may include the views or recommendations of third
parties, which do not necessarily reflect the views of the website or author,
or indicate its commitment to a particular course of action
Follow @MaysTrav
Description
Cellnet (ASX:CLT), formed in 1992, is a market leader in the warehouse and distribution industry with centres in Australia, China and New Zealand. Their main source of revenue is warehousing and distribution, however they also own the 3SIXT technology brand, selling everything from phone covers and screen protectors to action video cameras. They are currently the exclusive supplier to Optus, Vodafone, Noel Leeming and Lagardere, where they manage each peg, giving Cellnet up to date information on stock levels and customer preferences.
Cellnet by 2014 had become
unfocused, increasing the number of brands in their fold to 72. As with Icarus, the wings that were originally their source of
success, lead to their eventual downfall. Whilst the additional brands were
bringing in more revenue, Cellnet’s expenses accelerated at a faster pace,
culminating in a large loss in 2014 and the removal of the then current CEO and
appointment of Alan Sparks to replace him.
Cellnet under the excellent
management of Alan Sparks, have achieved a remarkable feat, as Warren Buffett
says “Turnarounds seldom Turn”, Cellnet, defying the odds, falls into the
seldom group. Mr. Sparks began by cutting the expenses and streamlining the
business, reducing the number of brands to just 12 in 2014. Despite the smaller
number of brands, Cellnet has modestly increased revenue, however their
greatest achievement has been in the reduction of expenses. This is seen
through the large disparity in revenue to profit growth, revenue grew an
average of 5.2% pa whilst profit grew an average of 15.9% pa. These numbers are
heavily affected by the loss in 2014 and the subsequent recovery of 2015. A
better representation of Mr. Sparks and his team’s efforts is the last three
years, where they have achieved an average per annum revenue and profit growth
of 4.6% and 25.1% respectively.
To further help Cellnet reach its
potential, a partner was sought who not only understood the business, but would
bring with them knowledge and synergies, they found WentronicHolding GmbH. Wentronic purchased 79.77% (56.19%, 2018) of Cellnet in
2016 and with it, it brought over 25
years of knowledge and experience operating a similar and considerably larger
business than Cellnet. Wentronic is a privately owned warehouse and
distribution company with over 300 staff, 12000 products and 5 branches
throughout Europe and Asia. Wentronic opened up supply chain channels that
Cellnet couldn’t have gained alone, contributing significantly to the reduction
in expenses. Further to this, Wentronic and Cellnet in 2018 entered into a
joint venture company (51% Wentronic, 49% Cellnet) incorporated in Singapore,
Wentronic International Pte. Ltd. The purpose of which is to expand the
Wentronic and Cellnet products into markets outside Europe, Australia and New
Zealand, with both companies proportionately picking up the bill.
This joint venture coincided with
another development in 2018, 11.4% of Cellnet’s shares were purchased by a
strategic Partner JEJ, the investment vehicle of Cybernetic
of Taiwan. Cybernetic has been distributing Philips (Mr. Sparks worked for
Philips for over 7 years) accessories since 1993, shipping to many counties
including Taiwan, Turkey, Middle East Africa, Russia,
Ukraine and South America, connecting Cellnet to countries they currently don’t
sell into.
More recently (07/09/2018)
Cellnet purchased Turn Left, a warehouse and distribution company focusing on
gaming software and accessories for $6 mill. Turn Left currently outsources its
warehousing and with parallel retail partners (eg. Jb Hifi, Noel Lemming etc.)
Cellnet has ample opportunities for synergies. Turn
Left being a reputable company with distribution rights to companies such as Thrustmaster,
Steelseries, Plantronics and Kontrol Freek gives Cellnet easy access to this
lucrative and expanding (estimated 6.1% CAGR 2018-2026) market.
Gaming Hardware
Growth Rate (Source: Transparency Market Research)
Management
Complementing Mr. Alan Spark’s 40
years experience, Mr Michael Wendt (Chairman & Non-Executive Director) has
over 26 years in international retail and distribution experience. Mr Tony
Pearson (Non-Executive independent Director) has many years of board and
committee experience. Mr Michael Reddie (Non-Executive Independent Director) the
current director of Reddie Lawyers has experience in consulting clients in
M&A, Corporate Governance, Joint Ventures and strategic alliances both
domestically and internationally. Rounding out the experience board is Mr Kevin
Gilmore (Non-Executive Director) who is the current Director of Sales for
Wentronic Asia Pacific brings with him experience in management positions at
multinational corporations such as GE, Shell, Philips Electronics and Belkin.
Competition
Cellnet’s currently has limited
competition and due to this, there is little information regarding market size
and share. Force Technology International, a
privately owned company, is their main Australian competition. They work in the
same telecommunication space as Cellnet, offering cases, screen protectors etc
to their clients. Other notable competitors are Ingram Micro Ltd and Synnex
Corporation. While there is limited information regarding Cellnet’s market
share, it is my belief that they currently control a large section of the
market. They have the sole distribution rights to Optus, Vodafone, Noel Leeming
and Lagardere, they also supply all the big retailers such as JB Hifi, Kmart
etc. and are also taking advantage of the online space, selling on websites
such as Amazon and Ebay.
As there is no direct competition
to compare Cellnet to, evaluation is quite hard. It’s my belief that under such
circumstances caution is called for and I would only invest under excellent
circumstances. Below is a section of the evaluation metrics that I use, as you
can see, Cellnet has quite good scores for the traditional value metrics, .27
Price to Sales, 1.1 Price to Tangible Book, 7.08 Price to Normalised Earnings.
Along with these great values, Cellnet currently has a Pitroski Score of 8 and
a Z score of 7.72.
Catalyst
As the common aphorism states “A
raising tide lifts all ships” the inverse of this is just as true. The recent
uncertainty about the US/China trade war and the general concern of the global
economy reaching the final stages of the bull market, has resulted in stock
markets around the world reducing collectively. Despite all of the recent
changes, the acquisition of Turn Left, the joint venture between Cellnet and
Wentronic, JEJ becoming a strategic partner, the reduction in debt of 3.9 mill
and the increase in normalised profit of 34%, the market is currently pricing
Cellnet at only 5 million more than it was worth a year ago. Over the long
term, I believe the market will see the true worth of Cellnet and the price
will reflect it.
Reason to not invest
As a large percentage of shares
are owned by insiders, this reduces liquidity and some people would therefore
demand a premium. One of the main reasons for this is because the owner has
little to no influence on the shareholder votes, no large blocks can be
purchased and therefore you are essentially just going along for the ride. In
cases such as this, management has far more importance than usual, while it is
paramount that any business you purchase has reputable management, buying into
a company where your vote will do little to nothing, means that you must have
absolute faith in the management team.
Along with the low liquidity,
across the world there is a general consensus that we are nearing the final
stages of the bull market. This has many investors worried, causing them to move
their money into safer assets, driving stock prices lower. This worry is
especially true in Australia where we have low household savings rates, low
wage growth, high household debt, house prices falling sharply (mostly in the
east coast capitals) and a reduction in Chinesse demand for Australian
resources, is causing many households to tighten their purse strings. This will
have a negative and dramatic impact on the discretionary spending, where once
people may have upgraded their gaming hardware or phone, they will postpone or
stop all together these purchases. This will have a flow on effect to Cellnet
as their suppliers purchase less and less products.
Recommendation
The low liquidity to many would
seem as a reason not to invest, however if you are a long term investor seeing
the purchase as part ownership in a business than this is something that should
not concern you. As Charlie Munger says “The big money is not in the buying and
selling, but in the waiting”.
Cellnet is a turnaround story;
one that I believe has been playing out long enough to prove that it’s not just
a short term effect. They have increased their product range and further
diversified their risk by pushing their products onto the rest of the world. While
the global downturn, further exacerbated in Australia due to country specific
conditions, is a real risk to Cellnet, I believe they have positioned
themselves well to weather this storm and it is due to these conditions that
Cellnet has reduced to a price that I believe offers real value.
Thanks for reading
Just Culture Investor
Trav Mays
The author is a current owner of a portion of Cellnet, given this, they
may be subject to one or a number of biases, more specifically anchoring and/or
confirmation bias. This article is neither general nor personal advice and in no way
constitutes specific or individual advice. The website and author do not
guarantee, and accept no legal liability whatsoever arising from or connected
to, the accuracy, reliability, currency or completeness of any material
contained on this website or on any linked site. This website is not a
substitute for independent professional advice and users should obtain any
appropriate professional advice relevant to their particular circumstances. The
material on this website may include the views or recommendations of third
parties, which do not necessarily reflect the views of the website or author,
or indicate its commitment to a particular course of action
Location:
Australia
