This is part #11 in my series on new companies. Since I bought some share of Neopost, now Quadient, in late Sept 2016 as a turnaround speculation, I guess it is time to take a closer look …
This is not investment advice. Please read the disclaimer.
I currently own shares (economic interest) in mentioned or related companies.
Quadient (fka Neopost, NEO) provides digital communications, logistics and mail solutions. It is in turnaround-mode for some period now shifting its focus from paper based traditional mail (decreasing) to digital and more modern solutions. Success looks mixed so far, at best!
The stock (QDT FP) traded as high as €24 in February before the pandemic. Currently it trades at € 11.50 per share at a market cap of € 400m. It traded as high as €40 in 2017. It has a rather strong equity ratio of 40%. It trades at a bombed-out P/B ratio of 0.3x. Assuming that its financing receivables are recoverable at book value, this is really cheap!
- A dividend of €0.35, payed in Sept, indicated a dividend yield of 3%.
This is another part of my series of Quickies on new companies.
The company has ample cash of € 533m and equivalents to survive the near term, as of July 31, 2020. Reported net debt was € 586m (incl. IFRS 16), down from 668m six months earlier, resulting from current debt (297) and non-current debt (822), minus cash (533)… Taking into account Quadient’s considerable leasing & financing receivables of 613 results in net cash of 27m. Further, in its H1 2020 presentation the company guides for after capex cash flow of € 100m for the current financial year.
The company issued some convertible bonds (ODINARNE, note 14-1). Currently, there seems no risk of conversion (dilution) and trades at depressed levels (55/56). The bond is onvertible until May 24th, 2022. A perpetual 3.375% coupon makes for a () yield of 7.35%.
Attention: Please understand this as my ‘second disclaimer‘. In Sept 2016, I bought stock at €22.20 , and I am down -50% currently, excl. dividends of ~€2 per share. So all my analysis could be seriously biased thorugh wishful thinking of the stock going back to twenties (or forties) again!
Operations & segments
Major operations (90% of total sales, organic decline of -10.5%) include Quadient’s four strategic solutions across North America (-6%) and the main European countries (-18%), and international activitities (+4.8%) consisting of Japanese Parcel Locker Solutions and rest of world CXM or Customer Experience Management.
Additional operations (10% of total sales) posted a -28.9%-organic decline.
- The company claims that recurring revenue accounted for 75% of total group sales.
Smart hardware
MRS. Quadient’s mail-related solutions or MRS simplify mail, with smart hardware, software, and expertise required to deliver accurate, compliant and timely physical communications.
PLS. Quadient’s suite of inbound and outbound parcel locker solutions or PLS help retailers, shipping carriers, universities and property management companies manage a growing volume of parcel deliveries and returns.
Software solutions
BPA. Quadient’s business process automation or BPA software solutions help SMEs to optimize operational costs and growth potential thorugh automating business-critical outbound and inbound processes.
CXM. Quadient’s customer experience management or CXM software solutions enable its clients to manage 760m customer omnichannel communications on a daily basis. According to its CXM education day, the company serves many global enterprises, many of them with high compliance requirements for its software solutions, i.e. insurance and asset management, utilities and health care corporations. Many of the segments 2019 metrics appear rather promising:
Financial results
Total revenue was down -13% (reported), primarily driven by MRS and additional operations. Software solution sales (BPA + CXM) held up pretty well. PLS even grew slightly, based on demand for contact-less parcel deliveries in Japan. On a regional basis, European countries were hit by harder lockdowns and thus sales cratered. In general, as the below slides proof, Quadient’s operating activities and segments perform very differently, both with regard to …
- the current special pandemic situation, and
- underlying long-term trends.
Outlook & vision
The shift towards digital solutions poses a threat to existing business (MRS) but a booming e-commerce offers opportunity. Companies need to digitice and handle high volumes efficiently. Other segments (BPA, CXM and PLS) could profit from short and/or long-term trends, with the potential upside of habits changing permanently (i.e. using PLS solutions as default option). Being recognized by industry analysts, especially the CXM business seems to have a high growth potential.
A mild turnaround could be enough to proppel the shares higher, back to the twenties level as soon as the worst (pandemic) is over. A successful turnaround could deliver high shareholder returns longer-term, if unprofitable actitivities are wind down. The company seems to do the right and neccessary steps in this category (see slides #17, 26).
- transition to SaaS might be helpful and offer higher margins
- growing installed base leads to higher recurring revenue
- decreasing revenue share and importance of MRS over time
- new direction of its portfolio (i.e. YayPay)
A final deathblow could be dealt to Quadient by a strong acceleration of declining global mail-volumes. As they already stated in 2019 (emphasis mine) …
Despite ongoing portfolio rotation, structurally declining mail solutions remain Neopost’s [now Quadient] dominant segment across all geographies
2019 capital markets day
The current outlook for the financial year (ending Jan 31st, 2021) guides for € 100m of ‘cash flow after capex’ (what exactly does this mean?).
The long-term outlook for shareholders could significantly be driven by Teleios Capital Partners LLC, since they seek to maximise “long-term potential by working with management and other shareholders”. They quickly build there position in QDT. Teleois holds 15.20% of the capital and voting rights, as of Sept 30, 2020 after crossing 11%. 12% and 13% in March 9th, 27th, June 24th (H1 reported, p9). Dimensional and Marathon each hold a 4% stake.
Might the convertible bond be more attractive when compared to stocks? I do not think so, since the stock had to risse significantly to make the conversion attractive. Further, the stocks have a much higher (potential) upside than the bond.
My conclusion
I am willing to take my chances here, betting on a (mildly) successful turnaround of QDT in a relatively short time frame. On Nov 13th, I placed a buy order below current levels.
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