GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Ebix - Exponential Bargain in Exodus

August 14, 2013 | About:
I'm going to cut right to the chase. Exodus by definition is “a mass departure of people.”

Ebix is a leading international supplier of On-Demand software and E-commerce services to the insurance industry. Ebix provides end-to-end solutions ranging from infrastructure exchanges, carrier systems, agency systems and BPO services to custom software development for all entities involved in the insurance industry. Ebix uses a growth-by-acquisition strategy.

“Our future growth may depend in part on acquiring other businesses in our industry.”

Fortune ranks EBIX 6th fastest growing technology company in America – 2012.

Fortune ranks EBIX 4th fastest growing technology company in America & 19th fastest across all industries – 2011.

Fortune ranks EBIX 3rd fastest growing company & 3rd best investment in the world – 2010.

Some of the more recent acquisitions are outlined below by closing date.

June 1, 2012 - Closing of acquisition of California-based PlanetSoft Holdings Inc. for $35 million in cash and 296,560 shares valued at 16.86 PPS.

Nov. 15, 2011 – Merger ofFresno, a California-based Health Connect Solutions for $18 million in cash with the right to an additional $4 million if revenue targets are achieved over the following two-year period.

Feb. 7, 2011 - The merger of Atlanta-based ADAM was closed for a fixed exchange ratio of 0.3122 Ebix shares for 1 ADAM share. ADAM is a leading provider of health information and benefits technology in the U.S.

During the fiscal year 2012 Ebix continued to actively buyback shares at a rate of 983,818 shares or aggregate purchase price of $18.4 million. I would continue to view buybacks as very accretive to shareholders based on a ROIC of 20% versus P/E of under 6.

The dividend is not anywhere near at risk with a payout ratio of 10.6% for 2012 funded from FCF. I continue to believe Ebix will be an amazing dividend grower over the next five to 10 years based on FCF growth and ROIC. If credit facilities become reluctant to continue to lend, or FCF is drastically reduced through lack of revenue growth (roughly 35% of revenues convert to FCF) or a higher effective tax rate, it could lead to problems for Ebix (all of which are unlikely to occur). Capital expenditures are relatively small to maintain current infrastructure with the majority of goodwill coming from past acquisitions, customer accounts and proprietary software.

Financial Health is by all means stable, with a current ratio of 1.56 and a quick ratio of 1.44. The debt to equity ratio is also fairly low at 0.18.

In fiscal year 2012, Ebix earned 1.80 dilutes EPS and is currently trading at 5.28 P/E or 18.93% earnings yield. It is not everyday you find high-growth companies with a five-year average above 20%. ROIC is trading at extinction fundamentals.

Revenue in 2012 ($199.37 million) was derived from four segments, exchanges ($159.67 million), broker systems ($18.61 million), business process outsourcing ($16.14 million), and carrier systems ($4.94 million).

Running various sets of data, both conservative and aggressive through the DCF model (basic and more advanced), I have come to the same results of over 50% margin of safety and as high as 90%.

I have also used two assumptions when running various calculations, one being a 40% tax rate on initial cash flow (competitors highest effective tax rate) and another assumption, shares outstanding diminished to $27 million through the active 24-month buyback effective June 30, 2011(Note 10 of the annual report). Also note incorporating an effective tax rate of 40% in the DCF allows for “double taxation” as FCF already accounts for tax, depreciation, change in working capital and capex.

$EBIX – Insurance Software
Initial Cash Flow:$70,000,000
Years:1-56-1011-15
Growth Rate:20%10%5%
Terminal Growth Rate:4%Discount Rate:13%
Shares Outstanding:27000000Margin of Safety:50%
Debt Level:$155,000,000
YearFlowsGrowthValue
184,000,00020%$74,336,283
2100,800,00020%$78,941,186
3120,960,00020%$83,831,348
4145,152,00020%$89,024,440
5174,182,40020%$94,539,228
6191,600,64010%$92,029,337
7210,760,70410%$89,586,081
8231,836,77410%$87,207,689
9255,020,45210%$84,892,441
10280,522,49710%$82,638,659
11294,548,6225%$76,788,134
12309,276,0535%$71,351,806
13324,739,8565%$66,300,351
14340,976,8485%$61,606,521
15358,025,6915%$57,244,997
Terminal Year$372,346,718
PV of Year 1-15 Cash Flows:$1,190,318,501
Terminal Value:$661,497,746
Total PV of Cash Flows:$1,851,816,248
Number of Shares:37,170,000
Intrinsic Value:$45.65
Margin of Safety IV:$22.83
What Percentage of IV comes from Terminal Value:36%






$EBIX – Insurance Software
Initial Cash Flow:$70,000,000
Years:1-56-1011-15
Growth Rate:20%10%5%
Terminal Growth Rate:4%
Shares Outstanding:27000000
Debt Level:$155,000,000
Discount Rate:13%
Margin of Safety:50%
YearFlowsGrowthValue
184,000,00020%$74,336,283
2100,800,00020%$78,941,186
3120,960,00020%$83,831,348
4145,152,00020%$89,024,440
5174,182,40020%$94,539,228
6191,600,64010%$92,029,337
7210,760,70410%$89,586,081
8231,836,77410%$87,207,689
9255,020,45210%$84,892,441
10280,522,49710%$82,638,659
11294,548,6225%$76,788,134
12309,276,0535%$71,351,806
13324,739,8565%$66,300,351
14340,976,8485%$61,606,521
15358,025,6915%$57,244,997
Terminal Year$372,346,718
PV of Year 1-15 Cash Flows:$1,190,318,501
Terminal Value:$661,497,746
Total PV of Cash Flows:$1,851,816,248
Number of Shares:37,170,000
Intrinsic Value:$45.65
Margin of Safety IV:$22.83
What Percentage of IV comes from Terminal Value:36%




$EBIX – Insurance Software
Years:1-56-1011-15
Growth Rate:20%10%5%
Terminal Growth Rate:4%
Shares Outstanding:27000000
Debt Level:$155,000,000
Discount Rate:13%
Margin of Safety:50%
YearFlowsGrowthValue
184,000,00020%$74,336,283
2100,800,00020%$78,941,186
3120,960,00020%$83,831,348
4145,152,00020%$89,024,440
5174,182,40020%$94,539,228
6191,600,64010%$92,029,337
7210,760,70410%$89,586,081
8231,836,77410%$87,207,689
9255,020,45210%$84,892,441
10280,522,49710%$82,638,659
11294,548,6225%$76,788,134
12309,276,0535%$71,351,806
13324,739,8565%$66,300,351
14340,976,8485%$61,606,521
15358,025,6915%$57,244,997
Terminal Year$372,346,718
PV of Year 1-15 Cash Flows:$1,190,318,501
Terminal Value:$661,497,746
Total PV of Cash Flows:$1,851,816,248
Number of Shares:37,170,000
Intrinsic Value:$45.65
Margin of Safety IV:$22.83
What Percentage of IV comes from Terminal Value:36%


On a discounted cash flow basis, no matter how I slice it I can find 50% to 60% ROI and as high as 450% through common equity (assuming IV is reached). The pessimistic DCF growth scenario has not much to do with actual company fundamentals and was meant to show an absurd valuation discrepancy.

The prior SEC investigation yielded no accounting irregularities and no wrongdoing on disclosure-related complaints. One thing that cannot be faked on the balance sheet is cold hard cash, and Ebix is making plenty of it. Dividend growth, share buybacks and continued acquisitions will lead Ebix from the current irrational market valuation towards a more appropriate valuation.

The tax implications are widely known that Ebix uses Singapore (as well as Brazil and India) as a tax strategy to reduce expenses through transfer pricing agreements. The effective 2012 tax rate was 9.6% derived from a statutory rate of 35%, decreased by 15.6% (India Tax Holiday through 2015), further decreased by 8.1% (through foreign subsidiaries, primarily Singapore), and finally 3.1% by Sweden permanent passive income exemption.

“The Company also has a relatively low-income tax rate in Singapore in which our operations are taxed at a 10% marginal tax rate as a result of concessions granted by the local Singapore Economic Development Board for the benefit of in-country intellectual property owners. The concessionary 10% income tax rate will expire after 2015, at which time our Singapore operations will be subject to the prevailing corporate tax rate in Singapore, which is currently 17%, unless the Company reaches a subsequent agreement to extend the incentive period and the then applicable concessionary rate.”

The company must pay a MAT (minimum alternative tax) rate in India of 19.94%, but using the tax paid under MAT will be carried forward up to seven years against future tax liabilities. More on the tax matters is under Note 9 of the 2012 10-K. Essentially, Ebix is able to utilize such a low global effective tax rate due to the worldwide product development operations and intellectual property being located in Singapore and India as well as having the majority of pre-tax income originate or reside there.

Because of the indefinite nature of investments in business subsidiaries intended to finance on going operations, domestic income tax expenses are not recognized to the full extent. If deferred U.S. tax liabilities were provided because indefinite invested earnings were not indefinite, Ebix would have $71.8 million of deferred U.S income taxes. As of Dec. 31, 2012, the company had domestic non-operating losses (NOL) carry forwards of $47 million, of which $35 million was attributable to the ADAM acquisition. Portions of the NOLs are set to expire 2020 through 2027.

In regards to tax I believe the company is strategically and financially responsible at minimizing taxes for shareholders.

In July 2011 a class action lawsuit was filed based on derivative stock option awards, or so I presume based on the disclosure provided. If that is all the lawsuits pertains to, I believe it will be likely settled or dismissed during the discovery phase based on 2010 Ebix Equity Incentive Plan approved by shareholders.

YEARDiluted EPSFree Cash Flow
20020.082.5
20030.082.79
20040.082.44
20050.155
20060.213.61
20070.412.72
20080.7626.21
20091.0330.75
20101.5151.03
20111.7568.46
20121.870.33
10-Year Avg. YOY % Growth40.8855630655.47420128
5-Year Avg. YOY % Growth38.1758880345.24284245


I believe the hard times will pass and Ebix will continue to grow FCF at impressive clips. I am comfortable buying under $20 (recently at $8.40, one-third position) or 12x earnings but am trigger-happy when FCF is under 6x to 10x in a presumable growth industry. I will continue to play with the DCF model adjusting for realized disclosures in future 10-Qs and 10-Ks. Currently I am comfortable assigning an IV of $35 with 50% margin of safety being under $17.50 and estimating $2.00 or more EPS at 13x to 15x P/E gives $26 to $30 PPS target.



Disclosure:
This is not a recommendation to buy or sell anything. I have no position in any of the stocks mentioned but may initiate a position in the next 72 hours.

Any and all comments or questions welcome.

About the author:

Tannor Pilatzke
I am a self taught investor through Warren Buffett, Charlie Munger, Ben Graham, Peter Lynch, Joel Greenblatt, David Einhorn, Seth Klarman, Howard Marks, Phillip Fisher and Thornton O'Glove. My focus is a bottoms up Value-GARP strategy with a mix of top down contrarianism.

"When you find yourself on the side of the majority, it is time to pause and reflect." - Mark Twain

Visit Tannor Pilatzke's Website


Rating: 3.4/5 (9 votes)

Voters:

Comments

shb600
Shb600 premium member - 10 months ago
Any thoughts on Gotham City Research's analysis that stock could be worth zero because of tax issues, etc.?
wl.abhishekt
Wl.abhishekt - 10 months ago
very useful informatiton. thank you for shairng it.

thanks

pmd
TannorP
TannorP premium member - 10 months ago
No problem,

I am not an expert on international tax and accounting regarding inter-company transactions. It seems to be recycled news from 2011, although it is a cause of concern if the allegations prove to be true. The cash that is being generated (revenues) can not be falsified easily and the NOL carry forwards and operating earnings would be able to cover an effective tax rate of over 40% based on my analysis. I have no position currently, I had a few long dated call options I bought a day or two after the news had broke.(The Avg. cost cited in the article was the strike + premium) It ended up providing me with a large return that was suppose to be used towards lowering the ACB of the equity. I was reluctant to buy shares as I found other alternatives that had more clarity and certainty. The margin of safety is large and I wouldn't be as reluctant if I operated a diversified portfolio instead of the concentrated portfolio I hold.

Cheers.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide