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Ebix auditor resigns -5

17:48 24-Feb-21


I've been getting some questions on my Ebix stance and am ready to follow up with quantification and more analysis.  Some have expressed dislike for management and I've been explicit about how distasteful I find them on multiple occasions.  I fully expect that is playing a part in the extreme reaction, but there are only a few things that would dissuade me from a medium term price target in the general neighborhood of $50:
  1. something that indicates no EbixCash IPO by the end of next year
  2. big change to the top or bottom lines
  3. some covenant that accelerates the debt profile
Monday's press release already rules out the first two, at least for the short term, and here's my math on #3 with the disclaimer that I am NOT an accountant...  Back in May, Ebix amended its credit agreement in response to the pandemic.  Most important among the changes was the specification of a Maximum Consolidated Net Leverage Ratio of 5.5x for this quarter, gradually stepping down to 4.5x for 4Q21 and thereafter.  The classification of the $30M in question matters for this calculation, since cash is subtracted from the debt, but current assets are not.  As you can see from this table

1Q20 2Q20 3Q20 e4Q20
Op. Income 34.313 31.85 31.899 32 130.06 <- eFY20 Op. Income
Net Debt Ebix 653 638 629 629 4.84 <- Ebix CNLR
Net Debt RSM 683 668 659 659 5.07 <- RSM CNLR
my calculations indicate that the discrepancy is NOT an immediate problem with respect to Ebix debt covenants.  However, it would become a potential tipping factor around mid-year, assuming the requirement for leverage reduction 0.25x per quarter this year.  Ebix will have to resolve the discrepancy before filing its annual report, and I fully expect a 12b-25 extension filing in early March, which should give the company another 15 days to sort things out.

I have constantly priced in management risks with EBIX, but ultimately, I don't have any evidence that they are dishonest.  In my eyes, matters actually improved slightly when they passed a basic sanity check by bailing on the Yatra acquisition.  I can still easily believe the Ebix audit committee was asleep at the wheel when responding to RSM, but doubt that company finances are in any serious jeopardy.  My guess is that this winds being some one-off charges that are excluded from adjusted earnings, and a reminder that management quality matters.  My response is that price matters more, and successful investing involves taking advantage disproportionate sentiment.

I also have no reason to believe that the mood brighten overnight.  Given that EBIX options are monthly, it's to be expected that price weakness is persisting throughout this week.  Nonetheless, I would guess shares will trade well north of $30 by the end of March, with filing of even mediocre official results.  Even just scheduling the report will probably be helpful.  Over the longer term, my $50 price target would also increase significantly with better confidence in the EbixCash IPO.  EBIX went nowhere in the first half of December as I reversed my stance on the stock.  Even so, I have to acknowledge that I was somewhat late in discarding sentiment to make that call.  Now, I am now thankful that good, cautious hedging brought on in part by a realistic view of (lacking) management quality is giving me a chance to repeat part of that opportunity at a better price point.
 
On 2/22/21 8:34 AM, Esekla wrote:
Ebix has followed up the 8-K with a press release which discloses preliminary results:
  • operating income & cash flow >$32M
  • from >$220M of revenue, which beats by at least $62M
The operating income is barely above last quarter, where the company earned 93 cents per share (80 cents on a GAAP basis), which means that earnings should beat the 92 cent average of estimates.  However, it should be noted that while adjustments are generally positive, they are unknown at this point.

Ebix also states that it intends to move as quickly as possible to replace RSM in order to complete its 2020 financial audit, and that it believes that the accounting for its gift card business is consistent with GAAP requirements.  Finally, the next 7.5 cent dividend has also been announced, with a March 1st ex-date.

Although I can understand the fear that we've only seen the tip of the iceberg on the company's far from conservative accounting, this is a risk have always priced in, and I continue to think the market is over-discounting the shares.  The reaction to this event could be exacerbated by options expiring concurrently with the 8-K filing, but I did not see any open put interest that would have been exercised.  I will look at the early volume in both shares and options this morning, possibly commenting further, but so far this is another situation where I expect that being nimble can pay off.

On 2/19/21 7:52 PM, Esekla wrote:
In a typical Friday night 8-K filing, Ebix has disclosed that its auditor has resigned over the classification of $30M relating to a gift card program as Current Assets vs Cash Equivalents.  The amount is a little over 5% of projected FY20 revenue and not of huge significance, in my opinion.  I see the real risk here as being in further delay of the EbixCash IPO.  However, so long as that gets done some time next year, my long thesis on EBIX stands.  Black eyes like this are the main reason why I've also characterized the shares as risky, even during periods of very cheap pricing. 

We may be getting back to that as EBIX has dropped over 30% after hours, to trade below $35, which would represent a trailing P/E of 11.  I have little doubt that will improve as the pandemic eases.  So even though I don't trust official numbers that indicate dramatic improvement, I regard such pricing on the stock as a value and an opportunity.  I also think global investment interest outweighs domestic credit stress for the country.  I've spent untold hours looking for emerging market alternatives to India and Brazil.  Some, like Vietnam, have equally good prospects, but I've found no others that have enough scale and liquidity.

I actually wouldn't be surprised if there's an element of that in this event.  Ebix management is hardly a bastion of conservative honesty, but I have no doubt that the surprise implied by the filing is genuine; I can't believe they would just refuse to reclassify the amount in question.  Wall St. is a place of back room deals and nefarious motives; RSM wouldn't be the world's sixth largest accounting firm if it was immune to that.  This is a negative no matter how one looks at it, but I think a single digit percentage drop would be more appropriate.  Ultimately, I'm glad that I hedged when and how I did, if only because the position roll off now gives me the opportunity to cautiously repeat the process, if this pricing persists next week.