H1 2017 – 0,095 A$– ASX:CND
Clarius Group Limited is engaged in the provision of permanent, contract and temporary employment services. The Company operates in two segments: Recruitment Services, which is engaged in the provision of recruitment services (permanent and contract placements), and Information Technology Services, which is engaged in the outsourcing and technical support services. It works with a cross section of employers in Asia Pacific, placing job seekers in contract, temporary and permanent roles at all levels. It helps government and private sector organizations source permanent, temporary and contract workers, placing all levels of seniority in various specialty areas, such as accounting, administration, customer service, engineering, information management, information technology (IT), and sales and marketing. It works with organizations throughout Australia, providing talent for short-term engagements and augmenting user’s in-house programs to execute IT projects. – Google Finance.
1. The company is currently a net-net with an adequate margin of safety:
- P/NCAV < 1x
- 0,49x ✓
- MoS = 51 %
- 0,49x ✓
Assessment of margin of safety:
Clarius Group is a small Australian net-net that is focused on employment and recruitment services in Australia and China. If you are interested in a good overview of the company and its business operations I recommend looking at the 2016 AGM presentation as I won’t go into any details here. Although I like the typical Graham net-nets, Coventry Group for example, I’m also a big fan of what famous net-net investor Jeroen Bos calls “cyclical service shares” in his book Deep Value Investing. If you want a explanation why these are interesting types of net-nets to look at here is an interview with him on the topic. Besides the fact that I like ‘service net-nets’ and that Clarius Group makes it through my checklist there are three other points that in my opinion makes the company at the current share price a good addition to a diversified portfolio of net-nets:
1. Regarding NCAV margin of safety in relation to NCAV-burn rate. I would argue that there is a good enough spread between Clarius Group NCAV margin of safety of 51 % and the NCAV burn rate for QoQ (-6 %) and YoY (-16%). As a general rule of thumb I like to see that NCAV-margin of safety / NCAV-brun rate > 3x. Clarius Group have the following NCAV MoS/Burn-rate multiples, QoQ = 8,5x and YoY = 3,2x.
2. Regarding historical profitability. Clarius Group have posted negative figures on an operating income level for the three most recent years. However, looking further back in time the company posted positive figures during the period 2013-2007. If we take the average operating income over the last ten years in relation to the current enterprise value that gives us a multiple of 1,4x. In other words, if Clarius Group can get back to some form of historical average operating income profitability level the company is at the current share price a real steal. Also, note that Clarius Group net income (and retained earnings) has been hit hard in recent years as a result of recurring impairments of goodwill. In other words, taking a free cash flow perspective we get a similar picture of Clarius Group profitability as we got with the operating income measurement. The average free cash flow over the last ten years in relation to the current enterprise value gives us a multiple of 2,9x.
3. Regarding ownership structure. One similarity with my most recent addition to the net-net portfolio, Coventry Group, other then the fact that both are Australian companies can be found via their shareholder lists. Both companies are in fact owned by the Australian activist fund Sandon Capital. While it may first seem that Clarius Group is a much smaller position for Sandon (1,5 %) that is not a fair presentation of their entire ownership in the company. According to a statement of ownership Sandon Capital have in fact control of 11,33 % of Clarius Group via different companies. In addition, Sandon Capital is not the only interesting shareholder on the Clarius Group shareholder list. Just recently another value focused fund, Collins St Value Fund, increased their position from 7,25 % to 8,56 %. Also, the largest shareholder of Clarius Group with an 25,3 % ownership through the company Ego PTY Limited is a private investor know as Victor John Plummer. Although he has not made an fantastic investment so far on his position I recommend reading this article from 2012 about him and the big position he has acquired in Clarius Group. Finally, although management doesn’t have any real skin in the game (< 1 % ownership) two directors have recently bought reasonable amounts of shares (Gabrielle Trainor and Garry Sladden) in the company. To summarize and conclude, the current ownership structure of Clarius Group will probably protect minority shareholders interest better than in most companies. On this point it should be noted that the company has recently appointed a new CEO and CFO and there has also been some changes on the board of directors. If this is an effect of activist shareholder pressure I can only speculate.
2. The risk of permanent loss is low:
2.1 The risk of bankruptcy is low (criterion a) or b) must be met):
- Debt/Equity < 25 %
- 0,6 % ✓
- Z-score ≥ 3
- 2,8 X
2.2 The company’s business model has historically been profitable (criterion a) or b) must be met):
- Positive retained earnings:
- -63,5M A$ X
- Positive aggregate operating income for the last ten years:
- 49,9M A$ ✓
3. The company does not have a shareholder unfriendly capital allocation:
- Shareholder yield TTM ≥ -2 %
- Dividend yield TTM = 0 %
- Net buyback yield TTM = 0 %
- = 0 % ✓
Disclosure: The author is long ASX:CND when this analysis is published. Also note that ASX:CND is a nano-cap stock (6,5M $ in market capitalization). The trading is illiquid.