Introduction:

At first glance, Tekmar Plc, a British company listed on the AIM, looks like a very interesting “hidden champion”:

The company operates in a very attractive market: its main business is to provide subsea protection systems for cables provided by its largest unit This service for the fast growing offshore wind farm market.

In addition, Tekmar claims to have a 75% market share. The combination of a company that provides an essential, relatively small ticket element to a large facility with a dominant market share, is likely to make many investors water their mouths.

The diagram from the 2020 annual report (from August 2020) looks even more delicious:

Tekmar growth

A CAGR of 25.2% in the top line is really attractive. And it gets even better:

With a current market capitalization of around 26 million GPB The trailing PER is ~ 13 and the company has no debt. Above tThe share is trading well below book value. What is not to like?

Reasons the stock is cheap:

As always, I’m trying to figure out reasons why the stock is cheap and whether I might disagree.

The first warning sign is the share chart:

Tekmar diagram

Since going public in 2018, Tekmar has lost around 2/3 of its value. This could either be a total investor misunderstanding, or things aren’t as great as they look.

Gross margin / EBITDA / EBIT margin:

What we can tell from the growth chart is that gross margins are relatively low and have declined significantly since going public in 2018 in 2018. In particular, all of the growth in fiscal 2020 (which ends on March 31, so little Covid Impact) didn’t translate this into higher profits. Adjusted EBITDA also decreased. The peak of the absolutely adjusted eBitda was reached shortly before the IPO with around half of the turnover that they currently achieve. The problem seems to be mainly the “non-wind farm” business, which has grown rapidly (supported by acquisitions) but is not profitable. Segment reporting is not easy to read as group eliminations account for ~ 80% of net income. This type of lack of transparency is always an issue.

Overall, the profit margin has never been so high, but has dropped significantly even in the core wind farm business.

One of the main drivers behind the net margin appears to have been salaries, which increased by more than 50% from 2019 to 2020.

Order book / work in progress

Tekmar shows quite innovative order book reporting. They call their heading number an “inquiry book”. Actual backlog at the end of the financial year was only £ 10m. This is a number I don’t understand. Wind parks in particular are long-term projects with long lead times. I would have expected a much larger order book. For example, Vestas has an order backlog of 150% of 2020 sales with its turbines alone, compared to just 25% of Tekmar’s annual sales.

What I also fail to understand is how 225 million inquiries result in 40 million sales and 10 million order books and they still claim to have a 74% market share. Even if they see all of the inquiries, most of the business seems to be going elsewhere.

Another issue that makes the numbers difficult to read is the fact that the company has significant assets in the works, which at the end of FY 2020 were ~ £ 15m, or ~ 40% of sales.

The missing CEO

After all, this smart-looking man, James Ritchie, has been a “founder” of the company and CEO since going public:

Ritchie 2

However, a few months ago in October, Tekmar announced that the chairman of the board would take over the role of CEO.

According to an article, they seem to have been looking for a new CEO since then and according to his LinkedIn profile, Mr. Ritchie is now rich enough to invest with his own money.

He seems quite young when the Ipoed company was dubbed “Baby Boss” by the UK press in 2018. According to the IPO prospectus, at the tender age of 19 as a member of the Board of Directors. Digging a bit deeper, it seems that his father appears to have run Tekmar in the early days, then split up, but sold a company back to his son James:

Tekmar’s CEO is 28-year-old James Ritchie, who led the company’s management buyout in 2011 at the age of 21.

Now, Tekmar Group, which was listed on AIM in June, has announced its intention to acquire Subsea Innovation Ltd for £ 4 million from its founder Gary Ritchie-Bland, pending shareholder approval, in order to spark growth as the company Fundamentals and specialist knowledge benefit from his complementary customer.

Why he left is unclear. Perhaps this has to do with Tekmar’s earnings failing to meet the performance hurdle for the options granted to it during the IPO associated with the 2020 result.

Covid-19 impact

Although sales “only” shrank by around -15% (due to an acquisition), profits more or less disappeared and the company posted a loss. Another indication that the business model is not particularly solid.

18 months business year

Another “nice” thing seems to have decided, for some reason, to extend the current fiscal year to 18 months. This is from the semi-annual report:

Outlook for the rest of the financial year 2021
The group Annual results for the 18 months ending on September 30, 2021 (“FY 2021”)) will depend on
The speed at which the markets in which we operate are recovering from the pandemic. As delays in contract times
We have not and do not intend to have had a material influence on the Group’s financial performance
reintroduce the financial performance guidelines until the time of contract award is visible again

I suspect they might want to show another fiscal year of growth, even if it takes them 18 months to get there.

Orsted problems

The most recent price decline appears to have been triggered by Orsted’s announcement that they had problems with their submarine cable protection systems in 10 wind farms, which cost around EUR 400 million. Tekmar thinks they have no problem with that, but shareholders seem to have some doubts.

Business model

The company presents itself as a “tech company”. This is the tagline from the website:

“Provide leading technologies and services for the global offshore energy markets together.”

However, R&D amounts to only EUR 0.3 million in both 2019 and 2020. My suspicion is that, in the end, Tekmar is “only” a plastics manufacturer with very little pricing power if the prices of their inputs go up.

Summary:

At this point, I have already identified a few key factors that explain why the stock is “cheap”. My main themes are a not-so-attractive business model, non-profit growth (poor capital allocation) and the exit of the longtime CEO. That’s why I stay on the sidelines and pass this share on.

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