|Shares Out. (in M):||33||P/E||0||0|
|Market Cap (in $M):||70||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
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Please note this idea is likely limited to PA and small funds only given ~$16k daily average trading volume.
Evercel is an owner/operator led holding company, which is comprised of the following assets:
The thesis is simple: After backing out the fair value of the SHSP investments, cash, and notes receivable (48 cents per share of which is hidden from the latest reported balance sheet figures), the operating business trades at a 37% free cash flow yield despite revenue growth, margin improvement, and resulting FCF growth reported in FY2018. Although the Printronix business is not a high-quality business and is likely in terminal decline, the current price represents a “cigar-butt” type investment with a low probability of permanent capital loss.
EVRC trades at $2.13 per share with 33mm fully diluted shares outstanding ($70.2mm market capitalization).
An overview of the various assets within the Evercel holding company provides insight into the look-through earnings of Evercel’s 80.1% ownership in Printronix.
Evercel owns two investments in the publicly traded company SharpSpring (ticker SHSP).
I discovered EVRC after they provided the convertible note to SHSP with the objective of fueling SHSP’s high ROIC growth. I thought the deal was positive for both sides: issuing equity above market prices to accelerate growth was intelligent for SHSP (the lifetime value of customer acquisitions at SHSP was, and remains, very high relative to the cost of acquisition); paying for equity in a convertible note structure was an intelligent move for EVRC given SHSP’s low valuation & the downside protection offered by a convertible note.
Please refer to my prior writeup of SHSP for full analysis on the business (I continue to hold shares in SHSP. Despite the appreciation in shares, SHSP has a long runway ahead and one way of viewing EVRC is a compound mispricing with SHSP being potentially worth substantially more over a longer time horizon).
Other HoldCo NAV items
Evercel’s financial statements largely pertain to the 100% consolidation of it’s 80.1% ownership it the operating business, Printronix. Before getting to Printronix, there are a few items which are specific to the Evercel Holdco.
With the above items as a background, the following table presents the current NAV and implied value of Evercel’s 80.1% ownership in Printronix:
As shown above, on a look-through basis, Evercel’s 80.1% ownership of Printronix is priced at $21.6mm. Printronix reported $10.8mm of GAAP EBIT in FY2018, and after adjusting for items described below, did roughly $10.1 in normalized post-tax post-capex FCF – implying a 2.7x FCF multiple ($21.6 / (80.1% * 10.1)).
Printronix is the global leader in Line Matrix printing solutions with 90%+ global market share. A quick google search of “line matrix printers” indicates that this is largely an outdated technology, as compared to newer print options (e.g. laser, inkjet, etc) and consideration of the trend towards digitalization and resulting reduction in printing.
While line matrix printers are largely a terminally declining product, there are a number of specific use cases where line matrix printers are the best solution for enterprises. Some benefits of line matrix printers in relation to other printer types include:
As described in managements prior letters to shareholders, line matrix printers are used in the developed world across distribution and manufacturing centers of large Fortune 500 in industries such as automotive, transportation & logistics, food/beverage distribution and retail distribution. In the developing world, use cases include distribution/manufacturing centers as well as banks and utilities (printing utility bills, banking records, and government checks).
Management has made significant progress over the past 3 fiscal years in restructuring the business with the objective of improving margins (and even driving revenue growth – although growth is not material to the thesis).
One specific item to point out is the consumables segment of the line matrix printing business. Per management, this is a source of recurring revenue and high incremental margin profit for the company. In FY2017, the consumables segment did $24.7mm in revenue and $14mm in gross profit (57% margin) – management had expected these margins to increase with the consolidation of operations. In FY2018, the consumables segment did $23.7mm in revenues and $16.mm in gross profit (69% margin). Management has stated that the consumables segment requires few sales and support resources as the installed base proactively orders supplies as needed.
I’ve included the financials from FY2016 – FY2018 below which provides further insight into the impact of restructuring events executed by management.
EVRC’s ownership of 80.1% of Printronix equates to $8.1mm in FY18 FCF, a 2.7x multiple.
Of course, a 2.7x multiple is only appealing if FCF doesn’t fall off of a cliff over the next few years. Some considerations:
As a side note, it is worth considering that while seemingly a “low quality business”, FCF for FY2018 of $10.1mm was earned on $19.4mm of tangible book value (ex-holdco cash), a 52% return on tangible book.
While a qualitative assessment of management and the business is more important, a modest 6.6x (15% yield) FCF multiple seems generally reasonable for a business with moderate terminal decline yet solid management with a strong cost focus. A 6.6x multiple on EVRC’s proportion of Printronix FCF would provide 45% upside to the current price:
For a small microcap, the CEO has shown strong capital allocation and decisioning across the SharpSpring purchase, the sale of the low-margin segment of Printronix for greater than the purchase price paid for both segments (since original investment in Printronix in 2013 for $18.2mm, Evercel has received $26.7mm of distributions), and margin improving restructuring efforts in the operations of Printronix.
The CEO is Daniel Allen – his bio is as follows: After nearly a decade at Bain Capital, Dan founded Corona Park to invest and grow profitable technology enabled companies. He also serves as CEO of Evercel (EVRC), the parent company of Printronix. At Bain Capital, Dan also focused on investing in technology related growth opportunities. He helped lead more than a dozen investments including supply chain robotics company KIVA systems, VoIP provider Vonage (NYSE: VG), mobile messaging technology provider m-qube, ProfitLogic, music sharing company LaLa, and the Tennis Channel. He also built and ran the FoundersClub, a bi-annual event for top technology entrepreneurs and media executives in NYC. Prior to Bain Capital, Dan was on the founding team of Fandango, a strategy consultant at McKinsey and Company in NYC and London, and worked at ABCNews in Moscow, London, Hong Kong and NYC. Dan graduated from Harvard College and Harvard Business School. Corona Park is based in New York City.
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