From value trap to cigar butt – Reverse Corp (REF)

I first discovered Reverse Corp a couple of years ago, after the company collapsed from it’s $6 price down to a few cents.  As less people used payphones and prepaid Telstra mobiles, the business deteriorated badly to the point where it made a small loss in 2012.  In FY13, the business was able to post a small profit, and started offering the service to prepaid Vodafone customers, who make up a higher proportion of Vodafone’s users than the other 2 carriers. They also divested the European business.  Management confirmed that the reverse charges business would continue to decline, and investment in new revenue streams would be required.  Not a great sign but at least they were honest about it!

In FY13 REF also started a new venture, Ozcontacts.com.au, an online ordering service for ordering contact lenses, in which they own a 65% share.

Turning to FY14 and the results are much more positive.  Back-office cost reductions and increased revenue from the Vodafone contributions have grown revenue from 4.9M to 6.6M and increased EBITDA margins from 33% to 52%, increasing EBITDA to 114% year on year.

The Tritel payphone business, a consistent money loser, was divested for a negligible amount.

Ozcontacts’ revenue nearly doubled, from 1.2M to 2.2M, and EBITDA margin improved from -17% to -14%.  EBITDA losses however have halved from H1 to H2 in FY14, and the business became breakeven in H1 for FY15.  I don’t know much about contact lenses but OzContacts don’t appear to offer a subscription-based ordering model, similar to Dollar Shave and offered by competitor OPSM.  This would further lock in customers and justify a bigger marketing budget.

It is reasonable to assume that the 1800 Reverse revenue will resume its decline, however the higher revenue base and EBITDA should continue to generate cash which can be invested back into new businesses such as OzContacts.  With a market cap of $13M, no debt, and $6M in the bank, REF appear to be a well-priced Cigar Butt with some upside.

The Chairman Peter Richie seems to think so having recently acquired another 400,000 shares to go with the 4 million he currently owns.

I entered a small position today and will continue to monitor earnings carefully.