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EBIX short report, a look at Fluence, and Fed follow up -6

09:15 21-Jun-22

Ebix has followed up again, providing details the EbixCash businesses which are clearly intended to refute those in the short report.  The most salient of them are on the gift card business and World Money office locations.  I find the former to be of little use, as merely states that gift cards are sold to corporate clients, not directly to the public, but then goes on to document that:

a $100 value card is recorded as $100 in gross revenue by EbixCash while possibly getting recorded between 20 to 40 cents in net revenue by the corporate agent, who provides the card to its corporate network.

I doubt that is going to instill confidence.

For the offices the company says:

As a result of Covid-19 pandemic shut-downs and as a part of its ongoing cost rationalization efforts, EbixCash elected to close a few EbixCash WorldMoney Forex offices and relocate them to higher traffic locations

and then goes on to provide photos of relocated offices.

EBIX hasn't moved meaningfully in the pre-market.  I reiterate that claims from both sides are not contradictory, that the reputational damage is significant, and that only a successful EbixCash IPO is likely to heal it.

Ebix has responded to the short report, referencing the statements of its auditors, which contained no adverse opinions or unusual qualifications.  The company can't say much more than that, given the pending status of its red herring document, which is another reason the short report was well timed. 

I note that the opposing sides are not necessarily in conflict here.  Ebix points out that the gift card business was insignificant before the pandemic, and it's quite possible that has faded in conjunction with that.  I never had much faith in software as a consumer outreach avenue in India, nor have I ever held Ebix management in high regard.  The report has cemented the reputational damage that was already building with the delay of the EbixCash IPO.  EBIX is back above $14, but I don't expect a big rebound unless and until that looks certain.  At this point, I'd guess that it's still more likely than not to proceed, but not a wide margin, which is why the stock is trading around half its prior value.

On 6/16/22 13:34, Esekla wrote:

EBIX is down over 40%, even after earlier declines, to trade below $14.  The catalyst is a short report published this morning.  It details many of the problems I've had with the company, including the debt cliff, auditor issues, and shoddy management.  However, the report goes on to essentially say the gift card business has essentially folded, and that the EbixCash app is non-functional.  The report concludes:

We think a substantial portion of EbixCash’s gift card revenue is non-existent. Consequently, we expect the EbixCash IPO will flop or fail. Given Ebix’s massive near-term debt load in a rising rate environment, we see significant solvency risk over the next 12 months.

My take is the report is well timed, between yesterday's Fed action and tomorrow's monthly options expiration.  All such reports are bombastic, but obviously, the claims of business and technology troubles in India seem quite plausible to me, as I referenced the same risks in conjunction with the last Ebix quarterly report.  Though India may still emerge stronger from the current global balkanization, it is currently even more of a mess than usual, and this report could easily be enough to take Ebix down if it scuttles the EbixCash IPO.  Any bet to the contrary would have to be structured to account for the increased risk, and $30 is no longer a relevant price pivot.

The current market environment is making the other investments I was considering more relevant, though, and to them I will add FLNC, which is trading at 1.5x projected revenue for this year.  With Russia limiting gas supply to Europe, NFE and my other natural gas picks remain primary.  However, I see little doubt that the Union will do everything it can to accelerate renewables even further, and Fluence is pursuing that opportunity.  R&D on solid state batteries is the path forward for the western world, rather than competing with the established lithium ion business, but it remains to be seen how well and quickly this will progress.  What is more certain is that we will see deployment of new battery types in grid storage before they make their way to electric vehicles, and integrators like Fluence are a good way to invest in the face of such uncertainty.

Those who want some yield and less volatility could try going with AES at around $19, for its stake in the company, but Telus and Clearway still look much better for low volatility yield.  TU, in particular, is seeing an added dip as investors digest its acquisition of LifeWorks, but at just 2x 2021 revenue, the purchase looks like a good defensive move to me.  Bargains abound at the moment, though, as mortgage rates skyrocket and the market adjusts.  I've been warning that American real estate was set to decline.  Here we are, and that of course goes for the rest of consumer discretionary as well.  That will make things tough for Polestar's ramp, but gasoline prices will help.  In any case, it was never a short term investment, and the same goes for VIRT, which will benefit from the volatility, and HIMX, whose yield is now at 14.6%.  That could still change a lot before the ex-date on the 29th; if Putin's war ended tomorrow I still predict HIMX would quickly rise into the teens.  In the meantime, we'll see how things settle out next week, post-options.  While the Fed still has a long way to go, everyone already knew that going in.  In such an environment, rotation into the defensive names that I've been espousing can come very quickly.

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