Update on Minds + Machines and Houston Wire & Cable

Minds + Machines (MMX)

MMX is progressing well on its way to become a profitable annuity business. This year renewal billings will most likely cover fixed operating costs for the first time. Recently, renewal rates reached 75% in China, more than 80% in Europe and 67% in the US. These are very good results from an industry point of view. Market leader Verisign’ renewal rates fluctuate around 70%.

Further scope for topline growth comes from unsold premium inventory names and a limitless stock of standard name inventory across MMX’s top level domain (TLD) portfolio. For instance, in November 2017, MMX will start the registration process of Chinese character .vip domains which will further increase the addressable market for this extension .Vip has been one of the most successful new generic TLDs so far with more than 800,000 registrations over an 18 months period. While a large part of .vip domains were initially registered with investors, management sees increasing usage with 50% of .vip sites bought being working websites now.

MMX is also exploring opportunities to introduce TLDs from one geographic region into another. .Vip has recently been launched in Japan. In addition, the company is currently applying for 8 additional extensions to be approved by the Chinese government with .law, .work, .beer and .购物(shopping) already granted approval by the Chinese regulator.

I expect MMX to generate an operating profit between USD 3 4 m to USD 4 5 m in 2017. This values the company at 156 to 20 times EBIT (adjusted for net cash and an USD 8 m valuation for the remaining contested TLDs). Given the future growth potential and the recurring revenue model, the current valuation looks attractive.

The equity is mostly in the hands of several London and China based investors. Insiders are only holding 3% of shares but management owns a large chunk of options exercisable in 2019 (in the case of share price appreciation). The board has recently been in discussions to sell or merge the business. At the moment however, a corporate event looks rather unlikely.

I have started to increase my position to 4% of the portfolio with a limit price of 11.5 pence per share since the beginning of the quarter. Trading volume is very low and therefore a quick exit of out of this investment in case does not work out will be difficult.

Houston Wire & Cable (HWCC)

At the end of September, David Nierenberg (friendly activist, long term, concentrated, micro cap investor) in a filing with the SEC released that he increased his stake in the company to 8.3% making him the second largest shareholder.

While he has been invested in HWCC for a couple of years now, he recently started to share his thoughts publicly by attending investor calls and presenting the investment case. The share price has not done much over the last two years. So he might be trying to draw other investor’s attention to the company. His case is based on a cyclical earnings recovery leading to an EPS of USD 1.2 once markets have “normalized”.

Apart from that, in a recent presentation, management outlined the case for returning to historic earnings reaching USD 1 per share.

I expect the company to restore profitability in the fourth quarter (Q3 has been negatively impacted by Hurricane Harvey). Energy customers have reduced their break-even levels and industrial project spending might have bottomed out. Hence, there is reason to believe that HWCC will stay profitable throughout 2018. Whether they can reach historic profitability levels remains uncertain. However, last year’s acquisition of Vertex should help to broaden the revenue base and reduce earnings volatility. As a consequence of the acquistion, debt levels are relatively high, but management seems to be focused on debt reduction in their capital allocation decision making.

Over the last two trading days, I rebalanced my investment in HWCC to a 4% portfolio position at a purchase price of USD 5.2 per share.

Disclaimer

The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!