Ovato: Interim result 2019
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There are worse things in investing than losing money. A worse outcome, arguably, is to have your investment case proven by the competitor only to see your own investment dwindle. That' what we've faced with Ovato (previously PMP).
The investment case was working brilliantly until it wasn't. The downfall, when it came, was swift and we were too slow to see a broken investment case when that's clearly what it was.
Ovato continues to report awful results. The numbers speak for themselves. Revenue is down and we fear that will be worse in a cyclical downturn. Margins rose but that appears to be from cost cuts and not from being able to pass through price rises as we anticipated.
Indeed, paper price rises weren't fully recouped. Cash flow was poor, and debt has climbed to over $40m. Return on capital was actually lower this year than last.
| Year to Dec | 2019 | 2018 | /(-) (%) |
|---|---|---|---|
| Revenue ($m) | 363 | 399 | (9) |
| EBITDA ($m) | 18.6 | 20.2 | (8) |
| EBIT ($m) | 3.9 | 4.9 | (20) |
| NPAT ($m) | 0.1 | 1.1 | (90) |
| Net debt ($m) | 41.4 | 32.8 | 26 |
All this misery at a time when the company's chief competitor, IVE Group, is making hay. IVE reported excellent results with higher margins across the board, a strong balance sheet, excellent cash flows and dividends to boot. Clearly, IVE is doing something that Ovato isn't and has the results to prove it.
Lessons
As we opined in our original sell call (see PMP: repair and despair), a value investor's instinct for patience and grit worked against us.
We should have shown far less grace to a poor quality business. Buying cigar butts at the right price is ok but we must be quick to flick them away lest we get burnt fingers.
That is the greatest lesson here; not every stock is worthy of patience. Wield it with care.
Ovato has been a heavy loss - the worst single loss I have had as an investor - but at least we have learned something from it. Ovato is now down 22% since our Sell call and it looks cheap. It deserves to be cheap. There's no need to learn a hard lesson twice. CEASING COVERAGE.
Disclosure: The author still owns Ovato for cathartic purposes but will be selling.
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