Thursday, July 22, 2010

Envoy Capital Group

Envoy Capital Group (ECGI) trades at just $8 million, but has net current assets of $16 million. Most of the assets are in the form of cash and marketable securities, while debt sits at just $0.8 million, making Envoy Capital an interesting asset play. The company's stock has fallen drastically over the last year, despite improving operating results.

The company is a consumer and retail branding company, but with a seemingly unrelated investment arm on the side. Losses have been piling up on the branding side, as companies have cut their marketing spend as a result of the recession. As such, Envoy was left with losses as revenues dropped while costs stayed flat. But recently, the company enacted a restructuring plan to reduce fixed costs (e.g. it closed its Dubai office), and therefore the company showed a small operating profit in this unit in the most recent quarter post-restructuring.

What may be a little bit scary for the value investor is the fact that the investment arm of the company appears to operate with a momentum strategy. Mitigating this is the fact that the company appears to hold a number of put options on market indexes which likely reduce the downside risk of the portfolio. However, investors should note that the market has fallen some 10% since the company's latest financial statements, suggesting that Envoy's investing assets may not be as high as they currently appear.

The good news is that management appears willing to take matters into its own hands when it comes to reducing the discount between the stock price and the assets: the company bought back almost 7% of its outstanding shares in the last quarter alone, and has recently announced the intention to repurchase up to 10% more over the next 12 months. Motivating this action may be the fact that the company would be in danger of having to de-list from the NASDAQ if its share price were to spend too much time under the $1 mark. Unfortunately, neither management nor the Board (save for one member) owns a number of shares of any consequence, so there is a risk that capital will not continue to be deployed in an ideal manner for shareholders who buy in at the currently depressed price.

There is no question that the investor is afforded a company on the cheap here. But there also appear to be enough risks to keep many a value investor away. Each investor will have to make up his own mind as to whether this company fits within his strategy.

Disclosure: None


Paul said...


According msn, 2 interested parties own quite a bit of the company.

Genovese (Geoffrey B) 1,604,083 1,504,630 20.0 1,691,083 03-05-10
Bailey (John H) 1,085,233 1,025,654 13.5 1,085,233 02-08-10

Ankit Gupta said...

When companies that small are public, I really have to wonder why they're public. If their costs of being public (accounting, reporting, legal fees, nasdaq fees, etc.) add up to $500,000 of impact to NI every year, an 8x multiple would mean the valuation is decreased by $4M alone.

The fact that management doesn't have much of a stake is an even bigger issue because if they don't need liquidity, why will shareholder value creation really matter to them in the next 5-10 years? The liquidity issue matters because that $4M that they're giving away by being public should be in exchange for liquidity.

My gut always makes me think that many of the companies this small exist only to raise capital and don't actually have plans to return it to the shareholders.

Saj Karsan said...

Hi Paul,

I believe only Genovese is still an insider. Bailey no longer holds an inside position with the company, so it remains to be seen whether he still owns the shares or continues to plan to hold them.

Anonymous said...

According to Market Watch 8/4/10, the "Executive Pay" for the "Officers and Executives" was 3.22 million.

2009 Revenue was 11.48 million.
2009 "Net Income" -9.76 million.

2008 Revenue was 14.57 million.
2008 "Net Income" -9.54 million.

Do you think those "Officers and Executives" have their shareholders best interests at heart? How would you rate their job performance?

Saj Karsan said...

Hi Anon,

The company's CEO made less than $300K in 2009. Furthermore, many companies lost billions in 2008 and 2009. I'm not sure how you can draw any conclusions about whether managers have shareholder interests in mind based only on the income figures you cite.

Anonymous said...

I just found your blog randomly and after going through it, I really like it!!

Just a simple question about Envoy Capital. The company seems to have always been trading at some kind of discount related to its Net current asset value.(2007-08-09 and now 10).The funny thing is that the Net current Asset Value per share has been shrinking in the last 3 years. It seems however that the discount is bigger now than it used to be... So yeah.. is it really a discount? Though call

Saj Karsan said...

Thanks Anon,

Yeah, unfortunately stocks can trade at a discount for quite a while. Note that part of the reason for the fall in ECG's current assets from 3 years ago is that they did a massive buyback pretty close to book value.