Three-minute pitch #4

Yesterday, an international micro-cap announced the sale of one of its core businesses. The proceeds from the transaction (after paying down debt) represent ~2x the company’s pre-announcement market cap. Consequently, the stock was up more than +100% on the news.

At the current price, the market is only giving credit to the company’s net cash balance. However, the remainco will have a profitable operating business and hold a stake in the for-sale business. The opportunity to buy the business at net cash presents a very attractive risk/reward setup.

Here’s a quick pitch in the interest of timeliness.

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The opportunity we are looking at today is Webcentral (ASX: WCG). The stock is an Australian micro-cap and is currently trading at ~$0.245 AUD per share (disclosure: just bought some shares). At the current price, the company’s market cap is $80m AUD (329m shares outstanding).

Webcentral provides the following services:

• Offers cloud-based solutions, managed services, and network services.

• Operation of fiber and wireless infrastructure and management of cloud computing environments.

• Operates data center facilities.

• Supplies domain name registrations and renewals, website/email hosting, website development, etc.

The planned transaction calls for the company to sell 2/3 of the domain and web hosting business (referred to as Webcentral). The deal is expected to be completed by late November 2023.

Essentially, the transaction is composed of 1) cash proceeds of $115m AUD, and 2) a 1/3 stake in the Webcentral domain business (valued at $20m AUD).

From the deal presentation

The cash proceeds of $115m will be used to pay down the company’s existing debt of $31m. Deducting transaction fees ($5m) and adding the company’s current cash balance ($5m), the company will have a pro-forma cash balance of $84m.

Management also disclosed that they intend to use some of the cash for “EBITDA-accretive acquisitions” but they also plan on reviewing the company’s capital allocation policies to consider the resumption of dividends and buybacks.

From the deal presentation

Post-transaction, the company will operate the business lines excluding the domain business. These products include: cloud, data center, data networks, managed services, digital marketing, and hardware and software.

The remainco is expected to generate ~$45m of revenue in FY24 and more than $5m in net income.

Somewhat hidden in the press release

Putting it together, we have the three pieces:

1. A very clean net cash balance of $84m AUD ($0.25 per share)

2. A 1/3 interest in the domain business valued at $20m AUD ($0.06 per share)

3. An operating business generating $5m in net income per year. At a 10x P/E multiple, this is worth ~$50m ($0.15 per share).

It’s not entirely clear what the value of the remainco should be. On the surface, it looks like a collection of OKish businesses, hence why I use the low multiple, but if anyone has a better idea, let me know!

On very rough numbers, the stock should be worth >$0.45 per share vs. the current trading price of $0.245, about ~80% upside from the current price. I would not expect the market to quickly give every piece “full value” but I do think as participants digest the news, this should trade up. Given that management expects to use some of the cash for M&A (a risk!), I would expect the market to somewhat haircut some of the value.

At the current price, however, I think the risk/reward is very compelling. You are paying a hair less than the net cash value and still get the 1/3 Webcentral stake and the remainco for free. LONG.

Note: I wrote this up very quickly, so apologies for grammar/spelling issues.

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A few resources that might be helpful

• Deal presentation

• Deal press-release

• FY23 results presentation

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Thanks so much for reading! Let me know if you have any thoughts, questions, or pushback in the comments below.