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By Lucian Miers | Saturday 8 September 2018
Disclosure: The author has a short position in one or more of the shares mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Still smarting from being accused of “confirmation bias” the other week on Tesla (ie wilfully ignoring the other side of the argument), I donned my rosy tinted specs while reading the Telit (TCM) interims.
I did indeed find two positives to share. Firstly, and in contrast to other commentators on the subject, I welcome the new KPI which has been introduced as “Profit in cash”. This is arrived at by deducting capex and capitalised R&D expenses from the EDITDA number.
The stated purpose is to focus on cash generation, which I applaud. That the measure shows a loss rather than profit in cash of $5.7 million against the stated EDITDA of $12.5 million is not great but at least suggests that there is some grown-up in the background demanding a bit of transparency. Since I have grumbled in the past about capitalising R&D expenses, I can hardly complain now that it has come around to highlighting this issue.
Secondly, it rather looks like it has flogged its automotive division with particularly astute timing as H1 profits appear to have fallen off a cliff. In the year to 2017 this division accounted for 55% of group EBITDA, with an EBITDA/sales margin of 16%. In H1 this has dwindled to 19% of group EBITDA, with the margin plummeting to 7%. Put another way, instead of paying a multiple of 10 as disclosed at in July by both parties when the disposal was announced, the Chinese buyer TUS International is paying more like 20 times this year’s EBIDITA if you annualise the H1 numbers. That’s pretty good timing for Telit.
These developments have not, however, caused me to close my short. The company still seems incapable of generating cash and the net debt of $25 million has been massaged by a contraction in working capital of some $20 million, something which is unlikely to be repeated.
As for the disposal of auto, the deal has not completed yet, and loss-making TUS International - which needs to raise capital to fund the transaction - will surely have to disclose to potential investors the deterioration in the division’s finances. This could prove a good opportunity to walk away from the deal.
Without that $105 million infusion and with debt repayments to HSBC of $5.7 million per annum kicking in from October this year, Telit’s finances start to look somewhat precarious. Add the claims from both the Israeli and the Italian tax authorities, and that there is still an investigation by the FCA into CEO Yosi Fait (the wingman to the fraudster Katz who founded the company), and it appears to me that the cons somewhat outnumber the pros on Telit and that there is plenty of scope for the shares to fall further from here.
This article first appeared on the Nifty Fifty website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tip from Tom & Steve and a new shorting piece from Lucian shortly click HERE
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