In this newsletter, I share the most intriguing investment ideas I've come across in the past week from a variety of sources, including Value Investors Club, various investing blogs, hedge fund letters, and more. I aim to present you with concise and easily digestible investment idea summaries that quickly capture the essence of the thesis.
This week's newsletter includes:
Short Idea: A-Mark Precious Metals (AMRK) - Overearning silver and gold bullion retailer/wholesaler.
Weatherford International (WFRD) - An attractive way to play the oilfield services boom.
Ocean Wilson (OCN:L) - SOTP play with a potential near-term catalyst.
EML Payments (EML:AX) - Potential wind-down of a regulatory problem-ridden asset.
Thank you very much for reading and subscribing to my newsletter. I hope you'll find Idea Hive to be a valuable tool for your investment research. If you do, I'd appreciate it if you could share the newsletter with your friends and colleagues.
Short Idea: A-Mark Precious Metals (AMRK, $570m)
AMRK is a retailer and wholesaler of precious metals, with a primary focus on silver coins. Driven by demand shocks and limited supply from the US government mint due to production issues, spreads between coin prices and underlying silver prices have increased more than 4x over recent years. This has resulted in AMRK’s retail and wholesale businesses massively overearning, with gross margins in both segments more than doubling vs pre-2020 levels. However, mint production issues have recently been resolved and the volume of silver coins produced by the US Mint has significantly increased since July. With the recovering supply, the spreads have been rapidly normalizing. Scraped silver eagle spreads have retraced to $2.8 as of Aug’23, which is down 65% compared to H1’23 and 69% vs 2022 levels. AMRK’s profitability has already been impacted, with gross margins dropping from 4% in Q3’22 to 2% in Q3’23. Assuming that margins fully return to normalized levels, AMRK is likely to generate $15m in FY24 EBITDA, compared to the consensus of $161m. A 10x EBITDA multiple would imply a price target of $4/share, representing an 80%+ downside. Shares are expected to re-rate as the company continues to miss earnings in the upcoming quarters. The market is asleep at the wheel as historically low spread levels in the retail business are not easily identifiable, given that AMRK made a large acquisition in 2021 and did not provide historical financials for this business. This has led to investors incorrectly assuming that recent results are representative of normalized earnings. Full AMRK write-up on Value Investors Club (free guest account is required).
Weatherford International (WFRD, $6.9bn)
Weatherford International is the fourth-largest global oilfield services provider. WFRD presents an attractive and cheap way to play the ongoing oilfield services boom driven by increased offshore E&P activity. WFRD is currently valued at 6x NTM EBITDA, significantly below the 8-11x multiples for larger peers BKR, HAL, and SLB. This valuation discount seems unjustified given that WFRD has demonstrated growth and margins in line with peers while holding #1 or #2 positions in multiple major service lines and boasting long-term contracts with state-owned supermajors such as Saudi Aramco and Petrobras. WFRD appears poised to grow its revenues and margins faster than peers in the upcoming years, driven by the continued expansion of higher-margin specialty (technology) offerings. Moreover, WFRD seems to be in a unique position to benefit from incremental demand for oilfield services due to higher spare equipment/service capacity compared to peers. An indirect indication of this is the company’s EBITDA growth per incremental $10m of capital expenditures, which stood at over 2.9% in 2022 and 2021 compared to less than 0.5% for peers. As the oil exploration cycle progresses, Weatherford is expected to capture market share from competitors. A potential share price re-rate to peer levels would imply an 80% upside on a forward EV/EBITDA basis. The opportunity exists as Weatherford fell out of favor with investors following its bankruptcy in 2019, with seemingly few investors taking notice of the company’s improved balance sheet, rapid growth, and rapidly improving margin profile. Full WFRD write-up on the Bison Interests blog.
Ocean Wilson (OCN:L, £350m)
Ocean Wilson is an investment company with two key holdings: OWIL, a fund of funds, and a 57% stake in publicly-listed Wilson Sons, one of the largest providers of maritime services in Brazil. OCN is currently trading at a 50%+ discount to NAV. However, unlike in a regular SOTP discount play, there is a clear catalyst here that could help unlock the underlying value. In June, OCN launched a strategic review for its stake in Wilson Sons shortly after media rumors that shipping giant MSC Group has been in talks to acquire the subsidiary. Wilson Sons sale seems likely given the significant M&A activity in the maritime services industry in the past couple of years, including several acquisitions completed by MSC Group. While it is not clear what OCN would do with the potential sale proceeds, there is a chance that the company could pursue a liquidation. This might be likely, given that after a potential Wilson Sons sale, OCN’s major shareholder/investment manager Hansa Investment Company would own/control two similar listed funds of funds. A full OCN liquidation would allow Hansa to simplify the corporate structure and eliminate duplicative listing/board costs. A liquidation scenario would imply a 100%+ upside. The potential downside seems minimal, given that OCN is currently trading at a historically wide discount to NAV of 50%+ versus a historical average of 32%. Full OCN:L write-up on Value Investors Club (free guest account is required).
EML Payments (EML:AX, A$440m)
EML Payments is an Australian fintech company primarily operating single-load gift card (G&I) and reloadable gift card (GPR) businesses. EML’s share price has declined significantly over recent years following the value-destructive acquisition of PFS, a diversified European fintech, in 2020. Under EML’s ownership, the PFS business has encountered regulatory issues, with authorities pushing for increased compliance and AML apparatus, among other things. Driven by endless cost escalation due to regulatory demands, EML’s operating expenses have spiraled out of control. This has led to a substantial deterioration in profitability, with consolidated EBITDA declining from A$33m-A$44m in FY20-22 to -A$3m in FY23. However, there are reasons to believe that the operational issues are likely to be fully resolved in the near term, revealing the value of the remaining highly cash-generative and capital-light gift card businesses. In early 2023, reputable activist investor and EML’s second-largest shareholder, Alta Fox, successfully revamped EML’s management team. With new management at the helm, EML has nearly completed remediation work at one of PFS's subsidiaries, PFS UK, while the remaining subsidiary, PCSIL, seems likely to be either sold or wound down in the near term. During the latest earnings release, EML announced the separation of PCSIL from the remaining PFS segment. Moreover, in mid-September, all of PCSIL’s directors resigned, with no intentions to replace them.
While EML's share price has already increased substantially since early 2023, there appears to be substantial upside remaining. In a scenario where the PCSIL segment is wound down, the remaining company is likely to generate A$80m+ in annual EBITDA vs. the current EV of c. A$500m. Valuing the gift card segment at 10x EBITDA, i.e., at the lower end of peer/comparable transaction valuations, and the remaining business at 6x would imply a price target of $1.77/share or a 51% upside. The opportunity exists as EML is a small and under-covered name that has historically destroyed a significant amount of shareholder value. The stock has also been pressured by several legacy shareholders selling down their stakes. Full EML:AX pitch from Jeremy Raper on Twitter.
My favourite of the ones here is Ocean Wilsons
Suddenly their shares just shot up!