Today, RealDolmen released a trading update for the first quarter ending at the end of June 2015. The market reacted disappointed. And rightly so, as management seems to be unable to return to profitability levels reached in the past. Management is now expecting margins for the full year to be around last year’s level. However, last year’s level was already subdued due to a weak first half. In this context it is also alarming that revenue during the first quarter declined 4.4% y-o-y.
I invested in the company almost two years ago. The investment case was based on a reversion to the mean situation, where operating weakness in 2012/2013 should materialize as a temporary event. At the beginning, the thesis seemed to turn out as correct when the company returned to mid single digit margins and strong cash flow generation for the fiscal year 2013/2014. However, in 2014/2015 margins declined again. This trend seems to continue in 2015/2016.
The company has excess cash on its balance sheet, owns most of its operating buildings and has substantial net loss carryforwards which might lead to low tax payments in the future. However, I believe that the operating business is suffering from a secular transmission and strong competition. For instance, I am not sure whether the company’s business model has been or even can be fully adapted towards the emergence of cloud computing. While current valuation remains relatively attractive at a 7.5% free cash flow yield, I have to accept that I do not have the visibility and understanding needed to evaluate the company’s future earnings potential. This is also partly due to a low quality investor reporting and a number of downward revisions of management’s guidance in the recent past.
Consequently, I will make use of today’s very high volume and sell my position with a limit of EUR 16.5 realizing a total loss of roughly 3% over a 22 month holding period.
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