Yesterday evening Microwave vision released an update on H1 2015 performance. In my last post about the company, I have already outlined that the major problem with this investment is the company’s weak earnings quality due to slow cash conversion¹.
Yesterday’s press release is not very transparent with regard to the cash flow statement raising further suspicion from my side. However, between the lines the statement offers sufficient information to make the conclusion that working capital increased once more as net cash again declined by EUR 4.6 m to EUR 15.5 m. In addition, management indicates that inventories and receivables increased once again.
At the same time, the increase in working capital outpaced sales growth. This is a trend which started to accelerate at some point in 2013 and has not been terminated yet. The board/management seems to have realized the potential consequences of this issue: last week the company announced the replacement of the CFO who has been the focus of criticism by many shareholders. However, I am not sure whether this decision will solve the problem. The slow cash conversion is part of the company’s business model. Nevertheless, at this point in time I doubt that most of the receivables outstanding will be converted into cash. Therefore, I have to pull the plug on this investment.
The most important lesson learned: In my original investment case, I already identified the increase in working capital as a potential risk. However, I concluded that this is only temporary and that the market is wrong. In hindsight, I was wrong as I thought to be smarter than the market. Consequently, my overconfidence cost me a total loss of roughly 18% assuming that I start selling the shares from today on with a limit of EUR 7.3.
1) I also decreased my position by 100 bps at that point in time.
Edit 10/6/2015: sold my position from 9/30/2015 to 10/2/2015 at a VWAP of EUR 7.67 generating a total loss of 19.7%.
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