Thruvision initially appeared on one of my screeners in February and the most recent company release detailed the sale of their video business to Volpi Capital for a cash sum of £27.5m. This was instantly eye-catching given that the current market capitalisation was £21.5m.
The video business made up the vast majority of the firm’s revenues, and all that was left was a small and unproven scanner business that according to the annual report contributed less than £1m to the total revenue figure.
Crucially the company hadn’t published any financial statements since the sale, so it was clear then that the key to valuing this company was understanding the details of the disposal. This involved determining which current assets are remaining and which were being transferred in the sale.
The deal was done on a “cash free debt free basis” meaning that all cash that the company had was to be kept by the remaining entity, as were all debts and utilised overdraft facilities.
From the last balance sheet in the interim results ending on 30th September 2017 there were no outstanding debts. However in the notes to the financial statements there was reference to a £6.2m credit facility utilised after the balance sheet date. This would be retained by Thruvision.
Management said in the statement that they would use the cash proceeds to pay off all existing debts. The 27.5m cash receipt from the sale of the division, minus the £6.2m credit facility leaves us with £21.3m, £19.3m of which is received immediately and the remaining £2m pending the satisfactory completion of an existing project.
Prudently ignoring the additional £2m the £19.3m equates to 11.68p per share. The stock was currently trading at 13.1p. A 12% premium above the cash the company had sitting in the bank. This effectively valued the brand, products, and any future cash flows at just £2.2m.
This is where some good fortune came my way. On 21st February the stock fell 22% in one day. Believing I had missed some news, or some inside information had been leaked I held off from buying the shares. Two days later though the reason for the decline became apparent.
A regulatory release by the company indicating that a large investor had crossed a holdings threshold requiring a declaration. Henderson global investors, who held over 20% of the company’s stock had recklessly dumped a large portion of its holdings onto the market. The market maker kept moving the price further and further down and Henderson kept selling.
Because there was no fundamental change in the value of the company this price decline only strengthened my conviction. The stock was now trading at 9.9p representing a 15% discount to the cash in its bank account, with the implication that the company has absolutely no value.
The remaining company designed and built scanners that can scan for concealed weapons from up to five metres away. They claimed that they had already interest from government security agencies. Now I am the first to admit that I had no idea about the future prospects of this business, the quality of the product, the sales team, or the senior management. But the best thing about a valuation such as this one, is that I didn’t have to.
At a discount to the net cash I had effectively an extremely cheap call option on the stock. The worst that could happen is the company slowly burns through its (relatively) vast cash balances and eventually shuts down. With the loss in the Thruvision business in 2017 totalling £200k I estimated that this would take a while. If the scanner business took off then the potential returns are significant. This is the sort of asymmetric bets that have great positive expectancy and should always be taken advantage of.
I bought shares at 9.9p
What happened next:
Most value plays such as this require patience, as the positive reports of progress gradually expose the undervaluation. Fortunately this one did not. Two weeks later Thruvision released their first update as a stand-alone company, stating their current cash balance and announcing the progression of a government security contract in the United States and the stock rallied to 13p.
Over the following months the price continued to rise on news of new contracts. The company announced a tender offer at 17p per share to buy back approximately 20% of their shares. I tendered my full position and due to the undersubscription of the offer I ended up selling my full position at 17p, paying no transaction fees in the process.
This turned out to be my first mistake with this analysis. Upon completion of the tender offer the share price immediately jumped to 19p, and within two weeks it was trading at 25p. It fell back a month later but has gradually made up the ground again and as of December 14th trades at 27p.
Hindsight is 20/20 but at the time I did not believe I would get filled on my whole subscription in the tender offer. The investment was also a very different proposition at 17p. An unproven business valued largely on the promise of future contract negotiations, the margin for error here was small.
Retail Value Investing 