Dodging a bullet: Automotive Solutions Group

I’ve been doing a lot of research into a beaten-up company, Automotive Solutions Group Ltd (ASX:4WD) recently. This company raised funds and bought a group of 8 separate businesses in a variety of 4wd and automotive retailing and manufacturing segments, with the idea of vertically integrating and cross-selling each business’ products to customers of the other businesses. They are 2nd or 3rd tier businesses (quite small) but with well known and respected local brands and the founders mostly became employees of and shareholders in the new combined venture, which I considered a very good sign.

I thought it was an interesting, if risky prospect. It reminded me a lot of National Veterinary Care Ltd (ASX:NVL) actually, in that management was like ‘give us $30 million, and we’ll buy you a business‘. Bit cheeky, really, but unlike NVL, Automotive Solutions Group looks to be coming unstuck.

After its 72% plunge since the IPO, I thought ASGL was looking dirt cheap. In particular, i thought that the 5 businesses that continued to perform to expectations were worth more than the current market capitalisation of $14 million. Businesses that were purchased for 4.4x EBITDA upon acquisition in August last year must surely be priced at like 1x EBITDA right now, right? In fact I still think that the whole is cheaper than the sum of the parts, given the respected brand names and aligned business operators.

The thesis might have gone something like ‘i am buying a dollar for 28 cents, the company has no debt, and as long as the businesses don’t go too badly backwards with cash losses, the value should become clear over time, with the added prospect of expansion in the medium term. There are a lot of low-hanging fruit to pick in terms of centralising procurement and commencing marketing, etc.‘ 1x EBITDA is astonishingly cheap, if the business is profitable and financially secure. It would make its money back in like…2-3 years maybe (probably longer because I think they were of a mind to expand aggressively, but something like that).

I had a few questions for management and some other things to back-check… And then I saw this:

expected cash outflows for next quarter (source: Company presentation)

Yeah….that’s a $14 million company with $1.2 million in the bank forecasting a $15 million cash outflow next quarter. The outflows are so egregiously large, and above expectations, that I actually wonder if they are an error. Or maybe the business is just a basket case.

(The outflows exclude inflows, i.e., sales, so the company likely won’t have to pay $15 million, but still this is a very large figure compared to the recent quarterly announcement. Forecast staff costs are doubling and manufacturing costs are 3x greater.)

If the above had not happened, there were a few other things that concerned me, such as management and director’s very low level of alignment with shareholders. The CEO holds a significant amount of shares in the company (about 4% if I recall correctly) but her actual investment was just $200,000, in the form of a capital note at the pre-IPO stage. She received 10x this amount ($2m worth) in shares at the IPO. So I don’t know that she is completely aligned with equity investors who purchased shares for $1.

I have an eye on the company, and would like to own it at today’s prices. There’s a strategic review underway which I’ll be reading with interest, but for now I say ‘no, no thank you’ to Automotive Solutions Group.

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