Description

Investment Case:
Unsuccessful conglomerate attempt, with proven turnaround for the working parts, trading at low multiples to steady profits due to overlooked goodwill amortization from their unsuccessful acquisitions and their pnl in previous years.
New board of successful value investors. Trading at a multiple of P/E 4-6,5. Cashflow keeps building up and their first dividend is likely to come soon, with Q3 trailing showing over 6m in positive cash flow not spent. Goodwill amortization will end in the coming months, increasing profits with almost 50% on the books. Perhaps a non-grower. Although the managements track record of using capital to earn more is intriguing.
Possible growth in new product areas, a new own product line will likely be released very soon. Board games have been positively affected by corona. Which might help them internationalize to Norway and other countries, as some other successful board manufactures have been able to. There are a lot of changes in the sector. Which creates risks. They have already been proven too well manage these changes. But the risks could offset the possibilities in a valuation and a non-growth valuation are assumed. Trailing profit is above 10m after tax. With a market cap of 50- 65msek. This is reading as about 4.5m profit on the books due to the goodwill amortization, meanwhile real profits are higher. Almost zero debt after the turnaround.

Description:
WTG is a small conglomerate of companies in the kids’ sector, board games toys, baby products etc.

Sales are coming from:
1/3 Their own products
1/3 Distribution contracts with their logistics solution & packaging 
1/3 Brand agencie

The company sells to both stores, e-commerce and was early in the sustainability trend and the market shift towards digitalization and the kids product moving from specialist stores (toys stores) to online, clothing-stores, warehouses, everyday stores and low-price stores. The sector rotation is still posing some questions and growth is very difficult to predict.

History:
In 2006, the company (previously called “Valuetree”) and it owners of an already losing business starts to make a move into the kids clothes market and e-commerce, they stated that they thought no other competitor was seriously getting into the market of selling kids products online for real, and that the prospects looked extremely good – “online was the key”, they said, they were right. Unfortunately, they were perhaps too eager to get into business, and a series of acquisitions were made, the cost was seemingly too high, and the acquired companies struggled with profitability, taking large costs to gain market with high hopes of the future, tough competition and probably bad cost structures from the multiple different companies not working together. Different sorts of rights issues, costly deb, convertibles and option programs paid for all of this, and no one was rewarded. It was a horrible period for investors.

Goodwill had to be amortized for failing companies, the market cap was almost completely erased, when Matts Kastengren steps in, 2009.

Matts comes from a family who made money in heat-pumps and later real-estate, where he is now most active and has his interests, presumably much larger than his positions in WTG. Matts bought about 5% of the company for, guessing, less than 1msek. He is not on the board at that time.
Valuetree makes a few more acquisitions and todays WTG is to a large part consistent of these companies acquired before 2010, the ones that survived.

In 2011 Matts gets on the board and in 2012 he is the 2nd largest owner and becomes the chair of the board. The company, now called WTG begins to coordinate business administration, and prepare their logistics warehouse to be at one single location in Huskvarna. At least one of the previous acquired companies are closed and losses are taken. Using the K3 regulations they start to amortize goodwill on a 5–10-year plan, currently holding 32msek in goodwill. Meaning about 3msek is to be amortized annually.

In 2013 they account for a loss of 41msek (mcap at the time at 35msek). They amortize goodwill with 16m, a big customer, specialized kids-toys store (Barnens Hus), goes bankrupt, they purchase a kids’ shoes business and takes cost to integrate it. They cuts costs and keeps coordinating their businesses.

2015, all of their operations are coordinated to one location in Huskvarna, the previous CFO Sofia Ljungdahl becomes CEO and the previous manager is let go. They pay the final costs to coordinate everything to one location. A big restructuring has been made and Sofia now claims that they will be profitable from here on.

Since 2016 they have been profitable, decreasing debt and increasing equity. In 2018 they did 8,8m in EBITDA. For the last 4 quarters their current EBITDA is 10,4.

In this case EBIDTA is soon to be profit on the bottom line.

Subsidiaries (2019 numbers)

ALF – 1,5m profit after goodwill amortization
Board games, active since 1990 with over 2million games sold. This is currently their best subsidiary contributing to almost doubled profits in Q3 and Q4 2020 for WTG in total, probably corona effect with increased sales. Board games are selling well in both stores and online wholesale.
They want to grow the business from internationalizing the games to at least Norway as a start. This could be difficult, and the company has no history of growth, rather of steady results and dividends. Although it is not impossible and many other brands has done this successfully, ALF seem to already have some success with internationalizing to Norway which seems to be their target market for expansion. Due to the current increase in the interest in board games it is possible to make internationalizing easier.

Board games are by some viewed as a no-go zone.
This can be because of the unsuccessful attempts of board game lovers without a lot of business knowledge, and the large up-front costs while getting into the market. WTG has decades of proven profitability with board games, and there are examples where similar companies have been able to expand their games successfully to other countries. A lot of their games are ranking most popular in Sweden.
Board games are played to interact with each other, and perhaps does not directly compete with the fast-growing digital games. Peter Lynch stated that he prefers a no-growing industry with a great company, instead of the hot sector growing over 30% per year. Less competition will enter, and the right company might have great growth for long periods, compared to the hottest sectors. At least board games are not the hottest sector right now and valuation are low, growth or no growth.

After tax earnings without goodwill amortization is likely to be 5-15msek for this company in 2020. In Q3 WTG doubled their results, mainly due to ALF, since their other subsidiaries probably did less well due to covid. ALF most likely did very well. Sales are most likely even higher in Q4 with Christmas coming up. Future earnings valuation might give this company alone a value of 50msek, the same as WTG’s market cap. Although the sales are probably boosted by covid and normalized sales should be lower, they are still implying a high company value for ALF alone relative to the entity of WTG

Suntoy – 2,1m profit after goodwill amortization
Toys, un-branded, own brands and brand agencies. Relatively steady profits over 20 years. WTG want to grow their business by creating their own product lines. That could be a good move since distribution might not always be needed and to increase sales.
The brands WTG have agencies for have been noticed to still be sold to online stores, though, the online stores are more known to then make their own similar products and sell them cheaper. To a larger extent than what the traditional toys-stores did. This is likely one reason why WTG is starting to develop their own products as well.
Creating their own products costs money in development (costs are already being taken on the books right now, not likely to increase by too much).
This makes them more vulnerable to fast changing toy-trends. However, margins are higher and it’s easier to see their role in the product chain, and they have a good base to actually create some really good products. Most likely within the more sustainable toy-arena since this seems to be a focus for them.
They are likely to soon release information about 1 own new product/brand that they have created. Their ongoing operations is good. But one could benefit from not counting on any future growth in this valuation. If this succeeds thought, it will mean increased sales with increased margins and a good way to use excess cash after dividends to re-invest money and generate added returns on incremental capital.

Real earnings might fluctuate around 1-4m and with the agencies and network set up to more easily sell the products you want, this might be worth 20-50msek

Carlo I Jönköping AB – 0,8m profit after goodwill amortization
Mainly a distribution company. The board and the manager would probably want to address some value to this company, because they have many good brands to distribute and a lot of effort has gone in to running this slightly larger operation and getting the deals and especially many new deals where Carlo has been good at getting into distributing more sustainable products such as Herobility. However, the need of distributors in developed countries with increasing technical solutions between the brand and the selling company can be questioned. To compete you need to have low costs, and the middleman such as carlo might conflict with that in the future, as technical solutions, shipping and globalization keeps bettering.
On the other hand, the large toy stores with their own completely own product chains did not succeed, why a distributor might be needed to get the products to more sellers in lower volumes per seller. This can be the new working model of toys and baby products.
Also – the fast-growing e-commerce needs products to sell, and they usually want to add some strong brands in their stores to lure customers to their sites and increase their brands and sell more of all products. Due to their fast growth, they can be somewhat “taking in all they can”
In the long term, the low-cost producer wins, and a distributor between the brand and the seller might add to much cost for the product. And the track record is not any of solid profits, this can be seen as something to dissolve or as a potential small plus to profits if lucky, but not to count on any earnings.

This company should be worth more than its equity, due to the many years of developing the distribution systems and the products they currently have distribution ownership for. Just the logistics should have value to any potential buyer.
Company value should not be below 15m, in the best case perhaps towards 50m.

Vincent kids Shoes AB – 0,4m loss Nordic Kids shoes AB – 0,6m loss, after goodwill amortization costs.
Both these companies are selling kids shoes, something difficult and as management stated difficult with multiple sizes and models, they have made an effort to instead just sell rubber boots solely. Neither company has any real profitability or good track record, sales and losses are tiny. Hopefully both companies are on the way out.
Equity is about 4msek in tangibles and cash. To be on the safe side this company could be valued at 0 as well, if the companies will not create more losses, they are probably worth about 5msek (2019), if they lose money, it will probably not be more than 5msek and be at our valuation of 0.

Their shoes can currently in 2020 though be found in updated product ads online on more known stores such as ellos, footway and babyland.se. It is possible that they succeed in selling kids boots with some profits, although very difficult to predict and easier to not address any current value to it.

Goodwill:
Since the company made a lot of acquisitions in their history, they generated goodwill on their balance sheet. Many acquisitions were unsuccessful and are correct to be written off, others were successful but are nevertheless written off, due to the K3 accounting system. The company is trading on the spotlight exchange, where K3 accounting is allowed, on other exchanges it is not allowed, if they had to use IFRS, where you make a fair value of the goodwill and create an impairment cost for the difference, they would, as most companies today, kept a large amount of this goodwill on their books and not in their losses.
Currently they are amortizing about 3msek in goodwill every year. In Q3 they added 1m extra in goodwill amortization.

They currently (Q3-20) have 3,2m of goodwill left on the books. This will then be added to profit.

Goodwill is shortly 0% of equity.

Debt:
Debt is 19m where the largest part is VAT/TAX/Vacation days, accounts payable.
They have 6,5msek debt to credit institutions.
Due to their strong balance sheet, it is reasonable to add total 0,5msek in future profit annually due to the decreased debt and possibility to completely reduce it. If they choose to keep some debt, it is presumably only for the ongoing operation variations only. It could be reasonable to add 0,5m profit compared to recent years due to the reduced debt.
They have gone from heavy in debt to close to debt free, and the big banks are now willing to lend money at cheaper rates again. Equity exceeds debt by 2,3 times.

Equity:
Book value is 45msek Q3 2020
Assets containing tangibles such as inventory (not deflecting) and cash are almost 100% backed by equity. The company is trading close to book value containing tangibles and cash.

The return on equity at 7-12m profit is 15-27%

Cashflow:
FCF – 11msek in last quarter (Q3-20). Since goodwill amortization is not affecting real cashflow today, they are investing 3,2m more in the company than one might think.
In Q3 they had 4,5m in cash not spent on anything, trailing is above 6m. This seems to be lining up for their first dividend, which the company has communicated is their goal. It has been postponed since first communicated in 2018 only 2 years after having made the turnaround.
They aim to pay 30-40% of profit in dividend. Implying they will use the rest to try and get the company to grow. Probably from the business idea itself, if that does not work, it would not be a horrible thing to have the new board managing that cash, with investment returns of over 30% annually for a long period (Chair, Ola)

Owners & management:
Matts recently made an exit (dec 2019), likely doubling his money a few times. Matts, together with Sofia took the company from virtually bankrupt to profitable. He now leaves the position as chair and can work fully in his real estate company where his stake is much larger.
Patrik Tillman (10%) has been owning the company for many years, probably introducing it to Ola Brageborn (10%), who has purchased stock for the last 2-3years, and recently bought Matts 20% stake together with Kasper Ljungkvist who increased to 22%. Ola is now the new chairman. They bought Matts shares for 9sek, but they have likely done purchases above 13kr as well already in 2017 and 2018, and purchases at 7-8sek after convertibles and also from convertibles at 5sek. Ola was estimating about 12m profit for the company adjusting for goodwill in 2018.

Kasper Ljungkvist – Chairman of Investment AB Spiltan

Ola Brageborn (accompanied by Claes Vallin) – private investor and running kvalitetsaktiepodden with Claes (WTG at ep. 12 and 24) – returns above 30% annually, inspired by buffet, lynch, and other real value investors.
Since the company is illiquid, and Ola holds a presumably decent stake of his portfolio in the company, and takes the chair, he is probably thinking the company is more than a one time doubler from a low multiple, he has to see potential for growth and a larger play. 

Management
Sofia Ljungdahl, previous CFO for many years, initiated the move toward sustainability and the new market shift early on, been a big part of the turnaround and seems to be the right person for the job. The combination of Sofia’s management-skills backed by the new board’s investment skills is interesting.

Valuation:
Let’s say the risk and the potentials offset each other, a multiple of Price to Earnings of 10 would still imply a doubling for the ongoing current earnings. 

Basically, the company is worth their EBITDA – capex. And adjusted for future tax. This is currently above 10m trailing last 12months. Since goodwill is almost completely amortized and the company does not have to pay taxes for about 5 years due to previous losses EBITDA will in 2021 begin to become profit after tax and EPS. Profit will decrease when they start paying taxes, although, one does not know where profits are in 5 years. Today estimated normalised 10m annually

Valuing the company at PE 10 gives a price of 22-24sek/share
Valuing at assets alone could be about the same, since goodwill should be added back in value reflecting earnings power. 
However, WTG selling their profitable subsidiaries is unlikely and this value would need a similar catalyst. 
A valuation of earnings is more reasonable. 

This valuation is based on no growth, due to their history, risks in the market and my not knowing enough. Altough, If the company fails to grow organically, that cash could possibly be used in other ways to generate incremental returns on capital. That would imply a larger valuation.

If they can start generating 10-20% on that excess cash - that makes this more than a low multiple to earnings at this level.

Risks:
Sector change
– e-companies want to buy straight from supplier
– Easier to buy straight from supplier with increasing technical solutions
– E-companies make their own product similar to the branded and sell cheaper
– Agencies dissolved as well and let buyers buy right from them
– Companies make their own products instead of the branded agency product
– Growth could be relying on their own products, not yet proven successful and costs money to develop and test
– Toys are object to fast trends, having their own products can be more difficult than supplying what already works
– Stores such as Lekia, Gekås being hurt more by Covid than ALF is boosted (currently the other way around net)
– People stops buying boardgames, only to play online games with families or high-tech Vr- type off games.
– Stores going bankrupt during corona, WTG has 13m in receivables.

Upside:
Good price although assuming 0% growth.
Growth possible from
– internationalizing board games.
– Creating their own products (likely sustainability-orientated) 
– Increasing distribution for more brands
– Growth from cooperation with brands to help them create products with WTGS network and possibilities and the brands visions and market knowledge.
– closing the last unprofitable subsidiaries
– New board using excess cash to income generating returns with less restrictions on amount of incremental capital added.

Catalyst

Finished with goodwill amortization
First dividend
Investing excess cash
Recurring profits