Some updated thoughts/corrections on MIXT
I’ve sold most of my position in MIXT very shortly after purchasing it. I hate doing this, and it always feels like I’m reacting too quickly without letting a situation play out, but we all have to make sure to change our minds when new information is uncovered that materially changes the thesis. It sure doesn’t feed my ego, but is a critical part of being an investor. My thoughts about the business changed a lot over the past few weeks while digging into the opportunity more, and I uncovered two key risks that have prevented me from owning this as a full position. I still do believe the mispricing is quite wide, but I believe investors will most likely see mark to market losses in the short term due to a variety of factors, and I didn’t want to be holding the stock (at a full position) while that happens. Of course I could be wrong (I have no idea where the stock will trade in the short term), and I’ve held a small amount to capture any short term upside. I will re-visit the opportunity when the company reports FY2020 results at the end of April, and go from there. My thoughts are below.
The two biggest risks in my opinion are currency exchange risk (ZAR earnings/EBITDA are now worth much less when converted to USD given the recent large drop in the ZAR) and exposure to the oil and gas industry (when the energy sector is experiencing adverse conditions, this effects MIXT in a large way).
**A note on currency risk impacting valuation:
MIXT has a reporting currency of the South African Rand (ZAR). The ZAR has depreciated over 20% against the USD in the last month alone. While there are ADSs available to US investors (quoted in USD share price), the company’s financials will without a doubt be impacted by the foreign currency translation as it relates to top and bottom line growth. For example, my projections can be interpreted on a constant currency basis – 5% EBIT growth from 2020-2021 using an exchange rate of $14.0 ZAR/USD – but if the local currency declines 20% or more, or less, results will be impacted further on a realized exchange rate basis (5% growth in EBIT and -20% in currency depreciation would equal -15% realized growth).
In their Annual Report, MIXT outlines briefly the impact a 5% move in exchange rates would have on ZAR operating profit, with a 5% move in either direction contributing to a gain or loss of $24,000 ZAR. A 5% move in exchange rates in the other direction would result in a gain or loss of $103,000 ZAR. A 20% move would multiple that number by 4x, resulting in a gain or loss of $412,000 ZAR.
Source: MIXT Annual Report
While all foreign currencies introduce currency risk, especially during uncertain times like these, I would view the recent large depreciation of the ZAR against the USD to be temporary. The current exchange rate of $18-19 ZAR/USD is a greater than 10-year low for the currency, measured against the historical average of $15 ZAR/USD (MIXT uses an exchange rate of $14.0 ZAR/USD. Factors impacting the currency the most include COVID-19, low commodity prices, exposure to China and overall economic shutdowns.
So while results may be impacted more in the short term due to currency exchange rates and the depreciation of the ZAR, long-term MIXT should continue to drive it’s business forward in a meaningful way.
With that said, I most likely overestimated my EBITDA calculations given the USD/ZAR exchange rate move. As mentioned above, the Rand has recently depreciated over 25% within the last month.
While the severity and amount of the decline can most likely be viewed as temporary given this is the largest decline we’ve seen in the currency in over 10 years, it’s still going to impact the translation of ZAR EBITDA to USD EBITDA. As a result,
Based on the most recent results/guidance, MIXT was reporting EBITDA of ZAR $600mm. At an exchange rate of $15, that would equate to USD EBITDA of $40mm. However, the sharp decline in the currency to an exchange rate of >$18, means that if MIXT reports the same ZAR EBITDA results, that $600mm would be worth less than $33mm USD. ZAR operating earnings are worth much less in USD than they were a few weeks ago. Again, the valuation discount remains wide, but probably not as much so as I initially thought.
In addition, for my EBITDA valuation table, the % upside calculations for 2020 and 2021 should be 95% and 108%, not 143% and 160%.
Been thinking a lot about MIXT and the consequences of holding this stock through a recession in addition to a low oil price scenario
While I don’t think there is a risk of insolvency – great management, clean balance sheet – there is definitely a risk of mark to market losses, and even poor quarters over the next few quarters due to declining revenues from their oil and gas customers
While I think the business is worth more than where it trades today, we may be better off pulling back for now, having the cash on hand, and waiting for the next few quarters to see how things shake out
If I’m right – we will be happy we sold and have another opportunity to take a crack at the business at even lower prices
If I’m wrong – we watch the already cheap stock appreciate further, especially on the back of a good quarter (which I would find surprising over the next two quarters)
These guys are pretty levered to the price of oil, and oil hasn’t been this low in over 30 years
Their customers are going to start reducing fleet sizes, some of their customers may go out of business, and add in the fact that we have probably just entered into a major recession, in conjunction with indefinite social distancing, and many large fleet operators may not even be putting trucks on the road or delivering things to end customers
This could have the effect of not utilizing MIXT services during this stretch, abandoning contracts, looking to renegotiate lower prices or put a hold on paying the software subscription
I’ve been trying to get management on the phone unsuccessfully to get some updates/answers as they are usually pretty honest – haven’t had much luck so far. I just emailed them again this morning – they are currently in a blackout period
I originally purchased shares because the company was cheap, it looked like the price had declined over 30% due to COVID-19 (and not a deterioration of the economics of the business), the management team has a long track record of success, they pay a dividend, buy back their own shares, are boosted by secular growth trends (growing faster than the industry as a whole), and are one of the few players with scale across the world. In addition to being cheap on a relative and absolute basis, I thought they may be a good acquisition candidate
Also, how do they get much cheaper from here? 2015-2016 lows (during another energy recession) were around $6.00/share
The acquisition part is not a major part of the investment thesis, but after thinking about it more, I’m not sure it makes sense – MIXT doesn’t have high contract value/ARPU that FLTX did, nor do they have a US based operation
For larger players looking to grow in the US, acquiring MIXT might not be the best strategy, especially given that they have high concentration to oil and gas customers
In addition, offices in 120 countries may make it difficult to achieve synergies – closing all of those offices, trying to roll up employees, time/effort/cost etc.
Basically the way I’m looking at this now is that we could continue to hold the stock, potentially watch it decline into this oil crisis/recession/tough earnings season and buy some more at new lows and wait this out when the price of oil recovers and their customers start growing again, or we could sell now, having lost nothing, wait in cash, see if we get another opportunity to invest at lower prices, but with the risk that the share price appreciates in the short term if they report a solid Q4
So the potential for mark to market losses, OR missing out on potential share price appreciation in the SHORT TERM. Long term, I do like the business and think they will continue to grow and do the right things