Anexo Group (ANX)

[Carcosa]

Anexo Group has a £148m Market Cap and appears to be significantly mis-priced and I'm not sure why.

Headlines is that the company is profitable, has had a series of positive trading updates, on a forward P/E of 6.6 (5.9 for 2023), Various analysts have a price target between 200p to 300p

Margins:
Gross margin 77%
Operating margin 23%
EBITDA margin 30%

Anexo is a provider of litigation claims focused on the recovery of credit hire and repair costs for the non-fault motorist involved in a road traffic accident. This is Anexo's core service.

It should be noted that 'motorist' in this scenario is mostly motorbike riders.

Their market is fragmented, underserved and less competitive due to Anexo serving the ‘impecunious’ customer, where the non-fault individual does not have access to the finances to pay for a replacement vehicle upfront.

This individual has the right, supported by law, to reclaim costs of credit hire (above spot hire rates), damaged vehicle recovery, storage and repair/replacement plus management of related legal claims for the non-fault customer. All of these aspects are managed by Anexo and, quite interestingly, Anexo usually provides the temporary replacement vehicle.

Anexo has a record of winning 98%+ of litigated cases

In very recent times, announced in December 2021, the company entered into the Housing Disrepair business. Anexo facilitates claimants by ensuring that their landlords, whether they be local authorities, housing associations or private landlords, are obliged to maintain their homes to a decent standard. This includes a reasonable state of repair, the provision of reasonably modern facilities, and reasonable thermal comfort, including the absence of damp and mould.

This is backed by legislation - The Homes (Fitness for Human Habitation) Act and likely to be further advanced based by the recent (16 June 2022) 'Fairer private rented sector' white paper.

The company forsees this business to become increasingly important. It's easy to see why. 1300 cases per month were added January to April this year. According to govt figures there are around 2.25m homes that fail to meet the Decent Homes Standard.

On top of this there are a couple of major 'one-off's' which are not included in the company's forecasts.

Volkswagen Dieselgate class action - Based on an out of court settlement earlier this year with another legal company analysts are expecting a settlement of £39-52mn in total. This would result in an estimated £20-25mn to the business pre-tax after £4mn of associated admin. The court case is scheduled for January 2023 but it seems highly likely an out of court settlement will be made.

Then there is a likely repeat Dieselgate event in 2024 with class action claims against Mercedes Benz.

So if all of that is not enough, how about being the subject of a Takeover? At the end of December 2020 private equity firm DBAY Advisors Limited acquired a 29.0% of the company from Alan Sellers, Samantha Moss and Valentina Slater at a 150p.

(Alan Sellers, who founded the Group in 1996, remains Executive Chairman. Samantha Moss is the Managing Director, Bond Turner, and Valentina Slater is the Sales Director, Direct Accident Management Limited)

Eight months later DBAY made an offer for the company at 150p but this failed to follow through and they ended up with three nominated Non-Executive Directors on the Board. According to public reports Anexo and DBAY are getting along together. Whether DBAY will launch another bid remains open to speculation.

So if I look hard, what are the negatives for Anexo? Well, its related to 'time'.

Debtor days are in the range of 450-500 days. This is because it takes time to make and process submissions through the courts, part of it is COVID related with courts getting backed up but that is now easing. Additionally working capital get tied up as a consequence.

It's interesting to note that the Housing Disrepair business has a significantly lower cycle. This is because once an Engineers's report is made its very hard for a landlord to argue against it; hence does not go to court.

The other quibble is the amount of debt they have. £62m gives net gearing of 48% or 2.3x Operating profit. Hardly devastating although significantly up on prior years. Debt increased due to fund the additional working capital investment in the Group’s portfolio of claims, support the investment for the VW and Mercedes Benz claims and facilitate expansion of the vehicle fleet. It should also be noted that a number of their competitors have withdrawn from the market leading to increases in market opportunities and the company have sought to take advantage of this and increase market share.

So what are Anexo going to do about it? Well, the VW settlem£ent is earmarked to pay off £15-20mn of debt.

This year there is, IMO, likely to be further positive trading updates particularly from the Housing Disrepair business.

Other positive statements coming out are:
- Credit Hire division: Average vehicle numbers for the first four months of FY-2022 stood at 2,079, an increase of 52% on the same period for FY-2021.
- Cash collections for the first four months of FY-2022 are 24% ahead of those seen in the corresponding period in FY-2021.
- Housing Disrepair expects the number of settlements to accelerate as the year progresses.

In summary, a £147m market cap., profitable, expanding business with no direct competition, supported by legislation with visible pipeline of revenue, no excessive debt, almost certain major revenue windfall this year, (and again in 2025) trading on a forward PE ratio of 6.4, yielding of 1.3 per cent and priced near P/NAV of 110p.

What am I missing?

Links:
WH Ireland (NOMAD) - Search for 'Anexo'
Arden Partners (Previous NOMAD) - Search for 'Anexo'
Anexo Group Investors Page
Shares Magazine
Vox Markets

[simoan]

Hi Carcosa,

Thanks for sharing your research. Interesting situation, but alas it's not for me; I just don't invest in these listed litigation companies. I did once hold Burford but lost my shirt and finally got out with a 40% loss. Horrible! How they calculate earnings and NAV is an absolute minefield and it served me right for not checking the accounting methods used.

The one thing that would concern me apart from the growing debt (which you have explained the reason behind), is the complete lack of free cashflow - it seems cashflow is constantly negative as cash is always being sucked in for investment but none ever comes out the other end. Cashflow is of absolutely fundamental importance to my investing these days. However, this "feature" seems to be true of all these litigation companies e.g. Burford, Manolete. You have to wonder what the purpose of a company is if it never produces any cash?

Anyway, good luck with it. Hope it works out!
All the best, Si

[Carcosa]

Thanks for you reply Si. Always interesting to get your take on things.

As it happens I made a small profit on BUR years ago... then it got too complicated!

I do not see any similarities between ANX and BUR at all. Burford is a behemoth of worldwide litigation finance, risk transfer, lending, insurance and investments whereas Anexo is a small company that provides vehicles to those involved in fault free accidents and associated legal services.

FCF may be the primary concern but WHI (nomad) forecasted the following Operating FCF improvements last month following the AGM/Trading Update as being;

2022: +5.1
2023: +15.7
2024: +18.9

These figures are an improvement over prior forecasts.

One other aspect of the business that may be of concern is that of inflation. Something common to the vast majority of businesses. In one aspect the business is inflation proof. Revenue should be able to keep up with inflation easily but admin (remuneration mostly) will be subject to inflation plus more staff are being taken on to drive sales. So will be interesting to see how that transpires.

[Carcosa]

Anexo issued their Interims today




There are several analyst notes out.
Progressive Equity Research
WH Ireland
Arden Partners

They all basically say everything is good, company undervalued by the market. However I think it worth taking a look at the Arden (ex- NOMAD) commentary as it discusses some of the perceived negatives, but first the headline comment from WH Ireland

Record results demonstrate strength of model; cash-generative in FY, huge markets.

Strong H1 results from ANX this morning reflect the strength of its model, with excellent H1 growth driven by the expansion in vehicle numbers in the latter part of FY21 and momentum continuing to build in the Housing Disrepair business stream (revenues up 113%)...it is good to see the rapid progress with the less working capital intensive, higher-return (50%-plus ROCE) Housing Disrepair activity; while Vehicle Emissions offers extremely high returns on capital employed and a prospective billion £ market as well as the promise of a meaningful cash injection when the VW case is settled (we estimate a £20-25m cash benefit to ANX, potentially as early as this year, otherwise at the start of next). Taking everything together, this is a positive set of results, which highlight the substantial market opportunities for ANX. Against the current share price, we remain comfortable with our 263p target price (DCF fair value 271p)

Now moving to select comments from Arden:

The market hasn’t rewarded Anexo’s earnings growth because it hasn’t translated into cash. However, the paradox of the core business today is that it can only report higher profits by putting more vehicles on the road, but to grow, the group has to invest in working capital. The only way to turn FCF positive is to tune the business down a bit and run it flat. This is what Anexo has been doing, albeit there is a lag here. However, we think receivables has likely now peaked, with credit hire generating cash in H2 (and going forward).

and

Management sees a significant opportunity in emissions litigation, a business that over the next 5 years could generate higher profits than credit hire and a significantly higher return on capital for shareholders. However, until Anexo settles with Volkswagen (VW), the model is not yet proven. We remain of the view that this happens ahead of the scheduled court date in early 2023, and in the meantime, Anexo is accelerating growth in acquiring emissions claims against other manufacturers.

and

We suspect that recent share price weakness has in part been driven by concerns as to the impact of rising interest rates, combined with Anexo’s growing debt load. However, we think that the company can mitigate much of the increase in the Bank Rate by charging higher rates to customers, while as noted above, we think that the credit hire business will start generating cash, which will help to reduce some of the debt.

and

we would simply note that as of today total receivables stands at almost £210mn, which itself is both conservatively booked and by a firm that has a very strong track record of converting this to cash, against a company with a market cap of just over £130mn. In other words, Anexo is trading at a significant discount to the book of business already written, with no value ascribed to the significant and growing litigation business

In summary, all the pieces for turning FCF positive are within the business. Looking at the large spread of FCF estimates for 2023 between the analysts it seems apparent that they believe 2023 will be positive. The future of the business is in Anexo's hands and there is a lot to go for.

The key is use how working capital is deployed, acknowledging there is a delay in seeing the results. The company seems to have a handle on what they are doing nd the direction they wish to go.

[Clitheroekid]

Anexo is a small company that provides vehicles to those involved in fault free accidents and associated legal services.

Anyone considering investing in this parasitical company should very carefully consider how long their blood-sucking business model is likely to be allowed to continue.

They are, in the finest traditions of LIverpool legal practice, exploiting a loophole that allows so called `impecunious' claimants in RTA's to claim extortionate rates for car hire from insurers.

I've mentioned this before - viewtopic.php?t=19509 - and I'd hoped that it would by now have been regulated away, but it's still rampant, and this lot are one of the main players.

Their most notorious claim so far (at least that I've heard of) was in the case of Harries v Baguley. The Claimant, Ms Harries, drove her Audi A5 into the back of Mr Baguley's Honda.

However, Ms H claimed that Mr B had reversed into her. With the eager assistance of Bond Turner Solicitors (part of Alexo) she sued Mr B.

In accordance with their business model Alexo stuck Mrs H in one of their own credit hire cars, racking up hire fees in the hope that Mr B's insurers, Aviva, would buckle and pay.

Fortunately, and to their great credit, Aviva decided to fight the claim, and at trial the judge found in Mr B's favour and dismissed Ms H's claim in its entirety.

But the truly astonishing aspect of the claim was that the credit hire fees imposed by Alexo amounted to ... wait for it ... £400,000!

Bear in mind that these charges were in respect of an Audi A5, not a Lamborghini or Ferrari.

This loophole must be stopped, and I can't believe that even this shambles of a Government won't eventually do so.

Any company that makes its money by exploiting such a loophole is doomed to fail as soon as their currently legal business practice suddenly becomes illegal, and in my very unhumble opinion the sooner the better.

There's a brief and readable report of the case here - https://keoghs.co.uk/keoghs-insight/avi ... hire-alert

[Carcosa]

An excerpt from an article published in November 2022 in Financier Worldwide

A flurry of consumer claims were issued against vehicle manufacturers in English courts in the first half of 2022, ahead of a potential limitation deadline. However, since the ECJ’s rulings post-date the UK’s ‘exit day’ from the EU, while English courts may still have regard to the rulings in reaching their own decision about the lawfulness of ‘thermal windows’, they are not bound by the ECJ’s decisions.

Therefore, it remains to be seen whether English courts will agree with the ECJ’s strict interpretation of the exception to the prohibition on defeat devices, which also forms part of English law. Equally, it is not yet known how the courts would regard a thermal window if it were set more broadly than VW’s relatively narrow 15 to 33 degrees Celsius. Either way, one thing which the market can count on is that the Dieselgate litigation is not over yet.

It therefore implies that there is a real chance of the remaining UK cases actually going to court in January 2023; which is somewhat disappointing. Nonetheless it seems inconceivable the final outcome would be a win for Volkswagen. Additionally it will impact the Mercedes Benz cases.