Refreshing the thesis on De.mem – H2go.
We started coverage on De.mem some years ago and recently had the opportunity to revisit our initial thesis on the company — we spoke with management and looked into their recent acquisitions, which remind us of an early stage ‘compounder’ like Eurofins (Eurofins is well-developed by now, of course!). Note the promising growth of ARR (annual recurring revenue) below…
We think De.mem has the potential to re-rate it is European water treatment peers and this is a primary catalyst, given the higher multiples that EU peers tend to trade for and given De.mem’s clear path to cashflow break-even. We like the business model — once De.mem has won a contract their revenue (ARR) tends to be very sticky — blue chip clients include Coca-Cola, Givaudan and Rio Tinto. Please find our “refreshing” report below and the link here to our website. Given the company’s recent acquisitions we think the company is in a good place to continue to expand prudently.
See strong upside here if momentum continues…read our report below:
De.mem – H20 – Refreshing the Thesis
N.b…the catalyst — DEM re-rating to EU peers… see below:
Rakon is AI now
RAK — Short story – space is great! AI is great! Telecommunications (as we have highlighted previously) are not great! They are weak! Longer story — NBIO is still in play (they have spent +$2.2mn on various costs associated with the NBIO). Dividend is suspended, which to my mind infers the co is still very much considering the NBIO (evidence, Watson — NBIO is still in play; dividend keeps capital at the co, which the acquirer may want; the dividend was only instituted last year so to take it away so soon signals a change of direction — all heading towards NBIO). The other crucial piece of info on the earnings call was the company’s push towards AI and Space Tech — CEO Altug wouldn’t spill on who they are supplying, but confirmed the co is already supplying data centers and some “top” AI players — you do the math.
Mkt seems to agree with my assessment as the stock hasn’t moved much today — some holders I imagine are sitting in my camp, waiting on a NBIO, while others may see the value in the AI play — I think there is very real value there. Think about the need for data centres and think about the requirement chip makers who work within AI have for RAK’s Niku and MercuryX chips. In my opinion this is the value that lies within Rakon and what the value an acquirer probably sees in it.
Actual numbers poor. Lower revenue ($128mn vs $180mn). Gross margin 45% vs 49%. Mgmt valiantly tried to look on the bright side in the call but we all know that it’s been a weak year — nobody was surprised.
Three main takeaways: telecommunications will continue to be sluggish going forward. AI and NewSpace (i.e. low-orbit) are growth areas. NBIO is ongoing and I take the view the board wouldn’t spend $2.2mn of shareholder’s capital without wanting to see the deal go through.
MFT — Weaker results. Revenue $4.72 bn down 17%, profit before tax $395.4 million down 33%, NPAT before unusual items $277.9mn – down 35%. Bonuses shared with staff are down as profit on a per-branch basis was down at the majority of branches — see below:
The payment of discretionary bonuses based on satisfactory profit results remain a key part of who we are. We wish to reward those who help create profit. Unfortunately, this year’s results see many branches across our network contributing less profit than the year prior. Therefore, only $25 million will be shared with the team members of branches that qualify. A decrease of 68%, or $55 million from the year prior.
Says it all. Freight volumes have normalised. Per King Don — “No matter the prior year’s record performance, we should have performed better.”
I keep saying the word “recession” and I have said before that recessions are a necessary part of capitalism — capital expands and collapses and on it goes. Obviously freight volumes were extraordinary post-COVID. They normalise. I found Braid’s comment re: New Zealand’s roading to be particularly interesting — that KiwiRail exiting the ferry market would put +5,700 more truck and trailer journeys on the road, stretching our already fragile roading network. Highlights that i) we desperately need proper infrastructure spending in NZ (I would argue that rail is integral to this) and ii) a rail/ferry network is crucial to NZ’s infrastructure — we are an island nation. Still a holder of MFT. Hold and forget about it kind of stock.
MPG — $27.mn loss. How does that bid from Masfen and co look now?
AOF — I didn’t make it to the ASM today. Noting weaker performance across the board — cool tech, and nice first million dollar contract win in the US, but is it destined to stay on the NZX?
FPH — Revenue +10% and NPAT +6% ($264.4mn) excluding abnormal items. Homecare area performed well — +18%. Cost of recall of pre-Aug 2017 Airvo 2 machines +$20mn — a little more than provisioned for, but nothing to worry about (noting competitor Philips recently agreed to a $1.1bn settlement on sleep apnea products — stock soared +40% … the biggest winner is one of my favourite stocks, Exor, which owns +15% of the co and purchased ‘down and dirty’).
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