Hunting For Compounders - Wilmington

11th Mar '22 by Jack Brumby

3 comments 3302 reads

Risk has a habit of becoming invisible in good times, and painfully apparent in bad times.

The past couple of weeks have been concerning for many and, I suggest, a reminder of the real value of quality companies: not only can some of them grow for longer at higher margins, but their sound financial positions provide some protection (assuming the shares are reasonably valued).

That makes it easier to sleep at night when markets are buffeted by macroeconomic or geopolitical developments. And, over the long term, preservation of capital and risk management are key.

One stock that’s held up better than most over the past couple of weeks has been Wilmington (LON:WIL) . It’s got a number of favourable characteristics, including:

A lack of share dilution over time,
High profit margins and ROCE,
Strong cash conversion,
A net cash position,
Solid track record of dividend payments,
Recurring revenue with high renewal rates (around 38% of total)
A resilient portfolio of brands in essential Regulatory and Compliance markets, and
A diverse customer base.

Not all companies that have these traits are good investments, but good investments tend to have these kinds of traits. You can see some of this reflected in the strong (and improving) Quality Rank.

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As for Wilmington itself, while it does show promise as a solid company, consistent profitable growth has proven more elusive.

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However, an operational restructuring completed in 2021 (after three years of review) suggests now is a good time to reappraise the group’s prospects.

Simplified operating structure and essential services

Wilmington floated on the London Stock Exchange in 1995, and has in the years since built up an increasingly digital portfolio of products that provide regulatory compliance solutions to customers. It calls this the GRC market: Governance, Risk, and Compliance.

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It generates revenue across multiple geographies and has low customer concentration.

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The group provides online and hybrid learning, as well as the management and provision of mission-critical information and data. Solutions are focussed on real-world outcomes and are based on ‘significant and defendable intellectual property built up over many years’. Its teams of experienced industry practitioners and subject matter experts are central to the offering.

It now reports to investors across two divisions: Information & Data and Training & Education.

…

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Biogs

11th Mar '22

Thanks, Jack. Very interesting analysis.

greensiax

Thank you for the excellent write up (as always!) Jack.

By coincidence Wilmington (LON:WIL) popped up yesterday on a 'High Quality with High Relative Strength' screen I run periodically and I was going to look into it this weekend, so you've saved me a lot of time and given me some of my weekend back!

Thanks again,

Doug2b

An interesting and informative write up. Some positives. The number of acquisitions over the years would generally lead me to expect a lot of share issuing, but there has been no net share issuing since 2014, which is as far back as my records show, so this is a positive as mentioned above.

A business like Wilmington does not need to run with a high tangible asset base, very few tangible assets required at all in fact and this is true for its acquisitions as well of course, meaning that nearly all the purchase costs of the various acquisitions will be listed as intangibles - broadly speaking, purchase cost less the tangible assets purchased gives the value of the intangibles to go on the balance sheet following the acquisition. This is not a negative consideration, it is correct accounting for the acquisition of the type of businesses which have small tangible asset bases. Wilmington writes down its intangible assets pretty quickly, certainly more quickly than they are required to do - these days accounting rules mean that businesses are barely required to write down their intangibles at all, subject to a 'review' process. So the rapid write down of its intangibles is another positive for Wilmington.

But, while I applaud Wimington's lack of share issuing and the consistent write down of acquisition intangibles, it is the role of a business to create tangible wealth for its shareholders. This is the tangible surplus generated by the business - the sum of the average annual net gain in tangible assets added to the forward dividend, the sum then expressed as a % of the current MCap. Adjustments must also be made for share issuing or share buy backs - not applicable to Wilmington.

Over a 4 year period (i.e. 5 years of data) the average annual tangible equity growth is 1.7% of the current MCap and over a 9 year period it is 0.6% of the current MCap. Focusing on the past 4 years, the sum of the average annual equity growth as a % of MCap and the dividend is c4.7% of the MCap. No bargain at this price, slightly above a fair price in my view. The real PE is in the early 20s when you asses it in terms of the all important tangible wealth creation. The earnings growth is not the 35% that the screening shows, looking at the earnings over 5 and 10 year periods, they are all over the place, constantly falling and bouncing back, this is not earnings growth, growth is when you can look at earnings over several years and see a growth pattern or a trend showing earnings growth. Based on its current MCap and turnover, to be of interest, Wilmington would need to have generated far more tangible wealth, i.e. generated far more cash within its balance sheet.

Hunting for Compounders - Wilmington

Simplified operating structure and essential services

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Jack Brumby

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