Developments at CML Group
CML's principal business is factoring.
Factoring, also known as receivables financing, is a finance service provided to assist companies with the management of their cash flow. Companies such as CML provide a short-term loan of a portion of the value (say 70%) of an invoice that a company is yet to receive payment for. When the company's customer makes payment, CML is remitted the loan value. It acts as a way for companies to be, in effect, paid earlier than they would otherwise be for providing their goods and services.
First Samuel clients have invested in CML group in three ways. All three were held in your main equity portfolio.
1/ In Jan-15 the company needed funds to assist with its growth, driven by a strong business model and growing demand for their services. To facilitate this, the company issued a convertible hybrid (ASX code: CGRG). Approximately half of your investment in the CML hybrid was acquired in this listing, with additional on-market purchases in Apr-15 and Aug-16. This investment has been providing bi-annual interest income.
The hybrid is, subject to a number of conditions, convertible to equity: 4 shares for each hybrid.
2/ In May and Jun-16 we added CML Group common equity as an equity investment at a price of 15 cents per share. The shares were acquired under a capital raising the company undertook. It has remained in the portfolio since then, providing a fully franked dividend twice a year. It is currently trading at 34 cents per share.
Source: Iress, First Samuel
3/ In Oct-16, to fund continuing growth, the company issued a debenture (debt security). This paid interest at 9% p.a. until it was fully repaid in early Sep-17.
Developments in recent weeks
Because the scale of CML's operations has increased substantially it is now able to obtain a substantial debt facility from ANZ at a lower cost than the hybrid and debenture. And so the debenture was repaid earlier this month.
Additionally, we anticipated the company’s desire to convert the hybrid to equity, having met the conditions required to allow this to happen. However, had this happened immediately the total number of converted shares, plus those already held would have exceeded ASX limits (19.99% takeover cap).
Therefore, last week we sold a number of the hybrids on-market. They were sold for $1.36 per security, a significant premium to both the hybrid issue price and subsequent purchase price of $1.00 per security.
This week CML issued a hybrid conversion notice and on 4-Oct-17 the remaining hybrid securities that you own will convert to equity shares.
The investments in CML have been pleasing on a number of levels. Firstly, there are the excellent investment returns delivered to clients.
Secondly, it is a journey that typifies our investment approach. We invested in CML on a three-year+ time horizon, in a company that has first-rate management, a sound business model and an excellent opportunity for growing operationally (which translates to profit and share price upside).
Finally, it has been pleasing to have had a small but meaningful role to play in getting the company to where it is today. Provision of funding, both hybrid and debenture, has assisted the company to reach its growth potential.
And we see further growth potential in coming years. Thus, we are happy being ongoing equity investors in CML.