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Mind Gym Share Price Dives 30% As Virus Fears Mount

9th March 2020 admin

The Mind Gym share price (LON:MIND) fell over 30% in (admittedly volatile) trading today as the psychology-led seminar specialist warned about the effects of the ongoing virus which is blighting stocks all over the world. Today was probably the worst day to bring this news out. Due to the recent oil price tussle, shares have almost been indiscriminately sold off:

Mind Gym are a very interesting company. A recent IPO in 2018, they seek to specialise in the utilisation of psychology and behavioural science to improve the performance of employees. Aspects of this have been around for some time (ie. Maslow’s hierarchy), although its arguable whether companies really paid much attention to this in the past.

An increasing interest in mental health and tapering of improvements from technology has brought companies such as Mind Gym into vogue. The incredible success of many similar mobile phone applications in the app stores of Android and Apple is testament to this. As we can see on their website the potential applications of this are vast, offering Mind Gym a huge opportunity.

Today’s share price falls don’t take the price to new lows. The Mind Gym share price disappointed after IPO and sank to under 120p by April 2019. Things really began to pick up speed to the end of the year and the price was over 200p at the start of February. The collapse has been pretty spectacular, but it has been for many other companies.

What’s gone wrong at Mind Gym?

The warning comes in a trading update. We are straight into it:

Underlying trading remained strong between the half year-end (30 September 2019) and the end of January 2020, however, the Group has since experienced a material impact on revenues from the outbreak of the COVID-19 virus. As the virus has spread from region to region, we have observed an increased number of cancellations of booked sessions from clients and a material reduction in new bookings.

This is not surprising. Many companies have sent their staff home, others have cancelled conferences. And things could get worse on this front if the trend of the virus spreads. Mind Gym’s revenues are split almost equally between EMEA (Europe/Middle East/Africa) and the US so this is pretty ominous.

Fair play for them trying to quantify the impact:

Given the uncertainty about the extent and duration of the virus outbreak, it is difficult to forecast accurately the full year impact, but we currently anticipate revenues to be in the range of a 10-15% increase on the prior year (£46.5m to £48.5m), which is below our previous expectations of revenue growth for the year.

Accordingly, Adjusted PBT is now expected to be between £5.8m and £7.3m. The strong focus on cash continues, and the cash balance at 31 March 2020 is expected to remain in line or above market consensus of £14.0m.

Adjusted figures last year were in the region of £8.5m, although this included some hefty expenses related to the IPO and paying off shareholders. With these items not featuring this time around it does seem that profits will take a hit.

Mind Gym: Cash is King

One thing that would have made investors quite happy is the growth at the company. The IPO raised no money for the business, and instead was used to buy out existing shareholders. Yet growth has continued. Revenues (before today’s setback) were set to double since 2016:

This business looks rather straightforward: deliver the service and receive payment. There are very few expenses capitalised (the last year charge was £213,000 on development costs). There are also no external debts, just trade payables. With a dividend only commencing last year, much of the cash collected has gone straight into increasing the cash balance. The expected £14m balance is impressive considering that cash was under £4m in 2017.

We have seen cases where companies have expanded through many acquisitions, simply buying the contracts of others to gain exposure – Ricardo is a recent example. This hasn’t happened at Mind Gym and growth has been organic. Perhaps a reason for this is the firm is still owner-controlled. Co-founder Octavius Black still controls (in conjunction with his wife) over 50% of the shares.

Instead of acquisitions, Mind Gym appear to have diversified their income streams. Whilst the bulk of income is received from delivering advice, they also gain income streams from licensing, digital content and advisory services. Mind Gym have a big geographical reach: 276 coaches in 32 countries. The majority are freelance, allowing a great deal of flexibility both on the upside and downside. Clearly, not all coaches are deployed and neither are they cheap: staff costs in the past year were £19m for an average 208 employees. But this is a field where quality is essential.

Mind Gym: Solvency

Despite the profit warning today, there is no real question that Mind Gym may continue to thrive. The financial structure of the company means that these adjusted profits should still mean cash is generated for the company. In terms of liquidity current assets easily outweigh the current liabilities by over a factor of 2.

One concern may be that receivables have started to stack up. With a receivables day time of over 90 days, the time taken to receive payment has taken a large jump in the last year (£7.7m vs £11.6m). It may be the case that the bulk of these revenues are due from companies, or perhaps prospective coaches themselves.

Is the Mind Gym share price a bargain?

Mind Gym appear to have a lot of things going for it. The business model can be scaled according to demand with coaches being freelance. The virus effect may be smaller as at least sessions can be migrated to online (although companies may not choose to do so). The balance sheet is strong and they are conservatively managed by the co-founders.

However, a lot of this was already factored into the share price already. Today’s market cap after the drop is still around the £125m mark, and given the wide range of possible earnings this gives a wide range of variables. Personally, I believe that for many territories that Mind Gym operate in, restrictions are closer to the beginning rather than towards the end, and I would not be surprised if another trading update comes out further reducing expectations for the year.

Mind Gym may be in a good place but this does not mean it is free from competition. Notable other candidates include Headspace and Calm, both of whom have raised significant amounts of money in equity raises and may see themselves as equally qualified to take on some of the issues that Mind Gym deliver on. With deeper pockets, they may also be able to deliver a better product.

I would guess your judgement may depend on the perception on how quickly things may get back to normal. I don’t believe there is any rush to invest in anything at the moment, and given how crucial the virus may be to a company such as Mind Gym it seems too complicated to have a position either way. 3/5.

Hyve Group Share Price Falls Over 10% On Coronavirus Fears

5th March 2020 admin

After a slow reporting period through February, it appears that many companies are now beginning to quantify the effect of coronavirus on their operations. We saw yesterday how Hostelbookers saw a hit, today is the turn of Hyve (LON:HYVE) formerly ITE Group. The Hyve Group share price fell today by over 10% to new year lows on a new update:

Hyve, formerly ITE Group are somewhat of events specialists: they put on exhibitions and shows around the world. These shows are not for their own company, but rather others: to connect companies and customers. Trade shows and exhibitions clearly have many logistical challenges to overcome and it is in this space where Hyve have managed to insert themselves.

Hyve have been listed a long time under their previous ticker ITE, but their performance has been middling in the short-term and volatile over the long term. The shares gained a large boost after the general election result last year and todays profit warning has knocked the Hyve share price back around 6 months. In the longer term this is a business which hasn’t really gained traction for its shareholders. Performance has ebbed and flowed, with its fortunes tied to the economy.

What’s gone wrong at Hyve?

Given the unrelenting spread of the virus which is travelling to countries around the world and Hyve’s global exposure to events which necessitate people being close to one another, it may be interesting to hear what they made of it. They delivered that today in a ‘coronavirus update’. It begins in a understated way.

The events industry is experiencing significant disruption across multiple geographies and sectors with many events having been cancelled or postponed across Asia, Europe and the USA.

We then start to get more detail:

At Hyve, each region in which we operate has reacted differently and, in some instances, governments and authorities in impacted countries have placed certain restrictions on travel and on large gatherings to contain the spread of the virus, as well as companies implementing restrictions on business travel by their employees.

Next we have some specifics: Asian exhibitions are being cancelled, revenues at other events impacted due to non-Chinese participation, other US-facing events delayed due to reluctance to travel.

We have a financial impact:

On the basis of what we know today, we currently estimate a one-time adverse impact in FY20 of between £17m and £19m on the Group’s revenue and between £16m and £18m on Group profit in the current financial year, as a result of the issues set out above.

That is a fairly large hit and interesting that almost all revenue loss falls into profit. Stockopedia estimates were for net profit after tax to be £44m.

Hyve: A group still undergoing change

In some ways there is no great time for a virus like this to hit, but now is certainly unfortunate for Hyve. The headline profit figures suggest that this was a business that suddenly started to lose its way as revenues dropped:

Clearly, something needed to be done to get the revenue trend upward again, and in the absence of organic growth Hyve chose to expand by acquisitions. Some of them were large: Shoptalk and Groceryshop was acquired last year for a fee in excess of $140m. A 2018 acquisition, Ascential Events had an even bigger price tag: £300m.

The rationale in these cases were sound: buying an established event is much easier than trying to create one, and in the case of Ascential broadens the range of revenues and offers cross selling opportunities.

What this does mean is that many of the figures are not strictly comparable any more. The next set of annual reports will feature both Shoptalk and Groceryshop, the current ones do not. Going forward, Hyve is a bit of a different business.

Hyve Balance Sheet and Debt

The headline low profitability of the business hides the fact that cashflows were stronger. Statutory profits took the hit as acquired intangibles from previous acquisitions were amortised. Still, the resources required to make the acquisitions were far in excess of retained earnings, and given the upheaval in the business plenty of ‘exceptional’ costs are booked. This led to a large stock issue and bank debt to pay for the companies.

Considering the type of companies that they have bought, predictably this leaves them with a weaker balance sheet. Net tangible assets are largely negative (-£173.5m). In terms of liquidity current assets (£95.4m) are also much smaller than the current liabilities (£145.8m). This in itself is probably not anything untoward. Hyve would get payments in advance from customers wanting to appear at exhibitions. The large deferred income balance (£79m) represents this.

In terms of borrowings, these are high due to the acquisitions. In the annual report the group was almost fully utilising its facility – £147m of £160m had been drawn down. This has since been refinanced. In the last year, interest costs were just over £5m.

Sticky Events?

One of the advantages of Hyve is that the vast majority of their events are recurring. This gives a certain visibility to revenues, and indeed most of the revenues for the full year ahead had already been secured. In terms of the virus hit, we can see that although some are deferred and should take place later in the year, some will be cancelled and not take place at all until next year.

Most events recur annually and given this number some of the downside risk is covered in that there is no customer concentration risk. In recent years Hyve have moved away from non-core events as a loose Pareto principle applied: a smaller amount of events produced the bulk of the revenues. That’s not where the only change has been seen: geographically the business is now less dependent on the emerging markets and today has much more exposure to the UK and US. In 2017 Russia accounted for almost half of revenues, now just over a quarter.

Is the Hyve Group share price good value?

There is quite a lot to like about Hyve. They have a diverse portfolio of business and many of their exhibitions are proven and successful and very difficult for competitors to muscle in on. Cash flows are stronger than the statutory results thanks to the large amount of depreciation seen, and if exceptional costs drop off the group could be in a good position.

Unfortunately, it is not possible to look past the bad things at the moment. Coronavirus has already affected Hyve’s events badly. It is not certain how this will end up playing out, but at the moment it seems likely that things will get worse before they end up getting better. It also could be the case that demand for these types of events reduce permanently (although I see the prospect as remote).

Hyve have chosen to stretch themselves financially at a bad time, it seems. Whilst the current assessment will still see the company in profit, a prolonged downturn could really hurt. Deferred revenues being refunded (instead of providing a service) also would affect the cash position. There is no mention of covenants but the net debt to EBITDA ratio will seem to be stretched even further this year.

In my view, a company like this is simply betting on what the virus ends up doing. If life gets back to normal fairly quickly, this seems to be a good value bet. A forward P/E of around 10 is not demanding for a company with relatively sticky, diversified revenues and there are many companies that trade on double that.

However if things get worse, it seems likely there will be further downside on the Hyve share price. At present I am not optimistic regarding the virus and would seek to add a highly indebted company to the portfolio in current times. 3/5.

Hostelworld Share Price Falls 15% As Virus Fears Hit Forward Bookings

5th March 2020 admin

The Hostelworld share price (LON:HSW) fell over 15% in morning trade today as it released its preliminary results. We would instinctively think that travel-related companies may be badly hit by the ongoing coronavirus crisis. Whilst many companies have played a straight bat and given the ‘cannot be quantified’ statements, Hostelworld have been one of the first to put some numbers behind it.

Hostelworld are a well-known brand in the travel industry. They operate through three websites, the standard Hostelworld but also Hostelbookers and Hostels.com which were acquired in 2003 and 2013 respectively. As their name implies, they specialise in the booking of hostels around the world. They do not own hostels themselves, but rather act as an online booking platform. This has proven to be a solid enough niche in the same way that AirBnB have made private rental homes their own.

Shareholders may disagree, especially longer-term ones. Originally listed in 2015, the current share price is under half of its original price. 2017 was a better year for the Hostelworld share price as it surged to over 400p but a series of profit warnings has hit this badly. Even prior to the coronavirus news the share price was languishing away and had managed to almost halve in 2019.

What’s gone wrong at Hostelworld?

The bad news comes as Hostelworld reports its preliminary results. This covers the period of 12 months to 31 December 2019, so these numbers will not be tainted by recent events. There is a lot to pick through here but the key points are:

Full year revenue declined by 2%, but H2 saw a pickup
Average Net Booking Value increases by 3%
Cancellations up sharply to 9.3m EUR (from 5.5m EUR)
Operating costs flat, but marketing costs up to 41% of revenues
Adjusted EBITDA falls 9%

Of real interest to investors was how the coronavirus was affecting the company, which offers hostels in every part of the world. The first part is as we might expect:

As the Coronavirus has spread from region to region, we have observed a material reduction in bookings and an increase in marketing cost as a percentage of net revenue. This has been driven by a significant reduction of bookings from free channels, an increase in longer lead time cancellations across all channels and an increase in investment in paid channels to partially offset the bookings decline in free channels.

Fair play to the company for having a go at quantifying what this may mean:

Given that the depth and duration of the virus outbreak is impossible to forecast at this time, we are unable to calibrate its effect for the balance of the year; however, if near term trends were to persist to the end of March we estimate the impact to EBITDA to be in the range €3m to €4m for Q1’20. With continued tight cost control and our strong cash generative characteristics, the Group remains resilient in volatile market conditions.

This is a significant hit considering that adjusted EBITDA came to 20.5m EUR for the whole of 2019. And arguably the effect of the virus is fat-tailed. Even if it the outbreaks cease this week (this seems unlikely) the fear of travelling may persist for some time. And with hostel bookings of lower value than hotels, this may lead to them being more disposable.

Hostelworld: Where is the growth?

Originally IPO’ing at 185p, Hostelworld had an exciting future. The public offering raised 180m EUR for the company as it sought to grow further and grow revenues. As we can see from the subsequent results, this clearly has not happened:

Revenue has stayed pretty flat at around the 80m EUR mark, and this in an environment where costs are increasing. A look at the cashflow chart also reveals that the raise didn’t really prioritise growth: the bulk of the funds were used to clear past debts. Additionally heavy dividends were also paid out. Some 62.7m EUR in cash has been repaid to shareholders since IPO. With relatively little investment in their products, it is not a surprise that things have not moved on.

Adjusted EBITDA

There is a large gap between the statutory profit and the company preferred measure, adjusted EBITDA. The acquisitions have led to a large goodwill and intangibles balance on the Hostelworld balance sheet. Some 12.2m EUR of intangibles was amortised over the year. Curiously, domain names are the main intangible asset and are amortised on a period of 8-20 years. Given that the carrying value of these names is almost 100m EUR, there is still some way to go.

Either way, the effect of this means that Hostelworld generates far more cash than its statutory profit implies. The cashflow statement from last year is quite explicit on this: cash balances increased by over 4m EUR despite paying out dividends of over 16M EUR. That dividend policy has changed since today’s update and the current year total is 8.4c.

There is no debt at Hostelbookers and the company has a net cash balance. The large cash pile as we can expect balances out current liabilities and more, so there is not an urgency about the situation, just yet.

A watermark for revenues

Whilst depreciation of intangibles is not an immediate cash cost, the expenses the company incurs are. From the annual report these are detailed as such:

It does not seem likely that many of these will be that variable, at least in the short term. These form the major chunk of expenses for the company (dividends being discretionary and being variable with profit). It would take a very large downturn in bookings to wipe out revenues, although this may not be totally discounted yet at this stage.

Is the Hostelworld share price good value?

Hostelworld has been a cash machine in the last few years, paying back most of its profits back to shareholders at the expense of investing in projects that would allow it to grow revenues. As a result, the Hostelworld share price has pivoted to a much lower value. Today the market cap is £89m sterling, which is quite impressive if we may assume that the coronavirus is a blip and that things end up being how they were.

There are some obvious threats on the horizon for Hostelworld. It is certainly feasible that in future the traditional travel portals end up featuring hostels as well. If tourism drops permanently it may be the case that hotel prices at the low end drop, which devalues some of the hostel advantage. It is easy to see hotels in affected countries price aggressively in the short-term to try and win back custom.

There may also be the case that the hostel trend, which involves sharing a room with many strangers is devalued itself and the health aspect means that people would be willing to pay the premium to have a room on their own on health grounds.

The lack of growth in some aspects is a self-inflicted error. Dividends were paid out, and as the CEO said in the last report they suffered from underinvestment. Static revenues is not so much because of the market, but because competitors were gaining their share. It is fairly easy to search for a hostel on Booking or Trivago after all.

The intent has changed with a new ‘Roadmap for Growth’ and a cut in dividend. Details on this are scant, but with a focus on ‘multi-destination’ customers there may be scope for expansion into more activity-type holidays. The site also promises ‘improved localisation’ although what this means and whether it’ll be costly to implement is not yet known.

Given the strong balance sheet and strong cash generation I am quite bullish on Hostelworld despite the bad news flow against it. It has realised it needs to evolve a little which is better late than never. I do believe the impact of Coronavirus will be worse than the base case they have given though, and a better entry point will exist. 4/5.