Large Asset Sale – 48% Upside
Clarke Square Capital has shared a short pitch on WCG, a tiny Australian company specializing in web hosting, domain management, and IT/cloud services. Yesterday, WCG agreed to sell two-thirds of its largest domain and web hosting segment Webcentral for net cash proceeds of A$115m vs the current market cap of A$100m. Pro-forma for the repayment of debt and transaction fees, the company will have a net cash balance of A$84m after the transaction is completed. The implied equity value of WCG’s retained 1/3 stake in Webcentral stands at A$20m. Thus, at current prices, the company trades at/below the value of cash + the retained 1/3 of Webcentral, and investors are getting WCG’s remaining profitable operating business for free. The remainco is set to generate $45m in revenue and over $5m in net income in FY24. At a 10x P/E multiple, the operating business would be worth A$50m ($0.15/share). Altogether SOTP stands at A$0.45/share or 48% upside from the current share price levels. The Webcentral transaction is expected to close next month.
Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring attention of SSI subscribers. I might not actively follow the developments of these ideas, so there might be limited updates or follow-ups in the comments section.
WGC (now known as 5G Networks Ltd, new ticker 5GN) is now trading at A$0.15/share, below net cash.
Did management do something terrible about capital allocation?
It continues to trade around cash levels as it did when the business sale was announced.
Since the initial idea was posted, the Webcentral sale successfully closed. They have now also sold the remaining one-third stake in Webcentral for A$20m, matching management’s implied valuation for the stake.
Recent results were poor. In the first half, the company reported a $2m EBITDA loss and an additional $3.7m in depreciation and amortization. This is in stark contrast to management’s guidance of $5m NPAT for 2024 when the sale was originally announced. There’s a good discussion here – https://hotcopper.com.au/threads/ann-5gn-half-year-results-presentation.7859215/
The company has a history of growth through M&A. The EV is negative, likely because investors doubt 5GN’s ability to successfully execute its strategy. In the sale announcement, 5GN stated it would use the cash to acquire other digital service companies, buy back shares, and issue dividends. They have already completed one small acquisition and more are expected.
In summary, it seems to be a question of how much to discount the existing cash and what the remaining business might generate. Additionally, there are doubts about why the company is suddenly expected to be profitable in 2024 when the H1 results were significantly negative. There are no other major catalysts—management has already fully disposed of Webcentral, yet the stock hasn’t re-rated higher.
What a dumpster fire, any reason to hold now?
https://t.co/xmVB7jAngk
I’m not a shareholder, but I might get interested if the price drops a bit or as we get closer to the shareholder vote, which is due sometime in September. It’s unclear if the vote will pass as it seems shareholders are dissatisfied with this deal. I wouldn’t be surprised if an activist investor gets involved. However, what difference would that make? The company is already trading near net cash with a loss-making business. Management was supposedly seeking other bidders but received no clear offers for the loss-making business.
Also, just a thought on management’s credibility. On what expectations did management initially guide for $5m NPAT for 2024?
The capital return is “around” A$0.15/share, which is at current market prices (before any commissions, etc.) and any potential “small” distribution in 2025, according to management. So, the market seems to be pricing this fairly as of now.
Curious if anyone has any other thoughts.