Envoy Capital Group is a Canada based company traded at NASDAQ under the ticker symbol “ECGI” and TSX under “ECG”.
According to its latest annual report for the fiscal year ended on September 30, 2010, the company has two operating segments: the Consumer and Retail Branding Group (Branding) and the Merchant Banking Group (Banking).
Currently, the company is trading at around $1.03 per share. Given the total outstanding 8.03 million shares, the company has a market cap of $8.27 million. Yet, the company reported that as of September 30, 2010, it has $8.36 million in cash, $6.45 in short term investment, and $2.00 million in account receivables. The company carries a total of $2.6 million liability, short and long combined.
That makes ECGI a Ben Graham Net Current Asset Value Bargain company, a company traded below its Net-Net value, according to GuruFocus Benjamin Graham Net Current Asset Value Screener.
The company has been running at a loss for the past couple of years:
In the past year, the company lost about $4.1 million. The annual report provides operating results by segment: Pre-tax loss from the Branding segment was $0.1 million, and that from the Banking segment was actual less than $0.1 million. Corporate expenses came in at $1.5 million. The company’s $4.1 million loss includes a $2.4 million “restructuring expenses”.
Facing the headwind of an economic downturn, the Branding segment essentially broke even for the year. Not bad. Most of the expenses in this segment is labor costs. According to the annual report, the company has made good progress in cutting labor cost.
It is hard to say anything negative about the company’s Merchant Banking operation. Apparently, a good chunk of money has been sitting on the sideline. Not everyone is a Prem Watsa in Canada. But the company has good reasons for running a conservative portfolio. This is the explanation given by the management on its investing performance:
I am not asking much. Stay conservative is fine with me. Preserving the value should actually be encourage. The main thing is: if the economy turns around, will one see better days ahead of the company and its stock?
I am not so certain when I read further.
For Net-Net companies, usually there is no argument that the stock is cheap. Usually also, there are good reasons why the stock is traded so disparately low.
Most businesses are impacted by the economic cycle overall or the industry’s unique business cycle. Investors are aware of the fact that usually will be more forgiving so they will not push too many stocks into the Net-Net territory, a sort of the investment wasteland.
Envoy Capital Group is in the wasteland, why?
One of the reasons, at least as far as I can see, is the executive compensation scheme.
Page 36 of this annual report filed with SEC lists the salaries drawn by the management team. One individual, Geoffrey Genovese, President and Director of company’s subsidiary in Monaco stands out. In the year, he had a salary of $1,017,474. For a company with a market cap of a little over $8 million, that is … too much. I sound like I am against people getting rich. But it is excessive.
Page 37 provides some more disturbing information on Mr. Genovese’s employment contract:
Mr. Geoffrey Genovese is listed as a 19.9% owner of the company in the annual report (Page 44).
With an employment contract like that, I do not think Mr. Genovese has incentives to create value for the company, at least not for the owners of the other 80.1% shares that he does not own.
As an investor, I will not touch this stock, no matter how low it gets.
I will look elsewhere for net-net opportunities.
According to its latest annual report for the fiscal year ended on September 30, 2010, the company has two operating segments: the Consumer and Retail Branding Group (Branding) and the Merchant Banking Group (Banking).
Currently, the company is trading at around $1.03 per share. Given the total outstanding 8.03 million shares, the company has a market cap of $8.27 million. Yet, the company reported that as of September 30, 2010, it has $8.36 million in cash, $6.45 in short term investment, and $2.00 million in account receivables. The company carries a total of $2.6 million liability, short and long combined.
That makes ECGI a Ben Graham Net Current Asset Value Bargain company, a company traded below its Net-Net value, according to GuruFocus Benjamin Graham Net Current Asset Value Screener.
The company has been running at a loss for the past couple of years:
In the past year, the company lost about $4.1 million. The annual report provides operating results by segment: Pre-tax loss from the Branding segment was $0.1 million, and that from the Banking segment was actual less than $0.1 million. Corporate expenses came in at $1.5 million. The company’s $4.1 million loss includes a $2.4 million “restructuring expenses”.
Facing the headwind of an economic downturn, the Branding segment essentially broke even for the year. Not bad. Most of the expenses in this segment is labor costs. According to the annual report, the company has made good progress in cutting labor cost.
Salaries and benefits expenses for the current fiscal year were $6.5 million compared to $10.2 million last year, a decrease of $3.7 million or 36.9%. The decrease in these costs was a result of the reduction in staff as management worked on bringing labour costs down in reaction to declining revenues. Salaries and benefits expense as a percent of net revenue was 76.2% for the fiscal year 2010 compared to 87.3% in the prior year.
It is hard to say anything negative about the company’s Merchant Banking operation. Apparently, a good chunk of money has been sitting on the sideline. Not everyone is a Prem Watsa in Canada. But the company has good reasons for running a conservative portfolio. This is the explanation given by the management on its investing performance:
For the year ended September 30, 2010, the Company generated a return of 5.3% compared to last year when the Company generated a return of 2.7% on its invested capital. While investment returns were improved over last year, they still have plenty of room for improvement. In general, the Company employs a relative conservative strategy, sacrificing some upside for reduced downside risk. In a strong bull market, as we have experienced over the last several months, the Company’s portfolio will tend to underperform the overall market. As indicators continue to point to a slow recovery, the markets are starting to catch up. Management continues to make adjustments to the portfolio to take advantage of the momentum. In comparison to other widely-used benchmarks the Company underperformed for the year, as the Dow Jones Industrial Average gained 11.1% over the Company’s fiscal year, while the S&P 500 and TSX gained 7.9% and 8.5%, respectively.It is fine for the company to run a conservative portfolio, better steady than sorry.
I am not asking much. Stay conservative is fine with me. Preserving the value should actually be encourage. The main thing is: if the economy turns around, will one see better days ahead of the company and its stock?
I am not so certain when I read further.
For Net-Net companies, usually there is no argument that the stock is cheap. Usually also, there are good reasons why the stock is traded so disparately low.
Most businesses are impacted by the economic cycle overall or the industry’s unique business cycle. Investors are aware of the fact that usually will be more forgiving so they will not push too many stocks into the Net-Net territory, a sort of the investment wasteland.
Envoy Capital Group is in the wasteland, why?
One of the reasons, at least as far as I can see, is the executive compensation scheme.
Page 36 of this annual report filed with SEC lists the salaries drawn by the management team. One individual, Geoffrey Genovese, President and Director of company’s subsidiary in Monaco stands out. In the year, he had a salary of $1,017,474. For a company with a market cap of a little over $8 million, that is … too much. I sound like I am against people getting rich. But it is excessive.
Page 37 provides some more disturbing information on Mr. Genovese’s employment contract:
Geoffrey B. Genovese has agreed to act as the President and Chief Executive Officer of Envoy Monaco at an annual base salary of 720,000 Euros (Cdn $1,016,352), together with an annual bonus of up to 100% of salary, based on pre-set specific performance criteria approved annually, in advance, by the Compensation Committee of the Company. This agreement provides for a severance payment equal to the greater of (1) 3,950,000 Euros (Cdn $5,575,820) and (2) an amount equal to 200,000 Euros (Cdn $282,320) plus an amount equal to three times the total remuneration and other compensation paid to Mr. Genovese during (a) the 12 month fiscal period of Envoy Monaco immediately preceding termination (the “First 12 Month Fiscal Period”) or (b) the 12 month fiscal period of Envoy Monaco immediately preceding the First 12 Month Fiscal Period (the “Second 12 Month Fiscal Period”) or (c) the 12 month fiscal period of Envoy Monaco immediately preceding the Second 12 Month Fiscal Period, whichever is greater, if Mr. Genovese’s employment is terminated, without cause, by Envoy Monaco or if there is a change of control of the Company and Mr. Genovese elects to terminate his employment with Envoy Monaco. In addition, if there is a change of control of the Company, Mr. Genovese is entitled to receive, at the sole discretion of the Compensation Committee of the Company, a one-time bonus of up to a maximum of 700,000 Euros (Cdn $988,120). All amounts payable to Mr. Genovese by Envoy Monaco under this agreement have been guaranteed by the Company.Are you following me? I have to confess I am a bit dizzy. I think Mr. Genovese has the company trapped. Essentially the company cannot fire him without cause, nor can the company sell itself, without destroying its value by giving up a good part of the company to Mr. Genovese. On the other hand, as long as the company hires him, he is positioned to reap up to 1.44 million Euros each year, if he performs. How long do you think the company can afford to pay him like that?
Mr. Geoffrey Genovese is listed as a 19.9% owner of the company in the annual report (Page 44).
With an employment contract like that, I do not think Mr. Genovese has incentives to create value for the company, at least not for the owners of the other 80.1% shares that he does not own.
As an investor, I will not touch this stock, no matter how low it gets.
I will look elsewhere for net-net opportunities.
