I own a position in React Group PLC. While not a high margin or high ROIC company (I can hear Terry Smith reprimanding me in my head right now), an interesting shift has occurred at the company over the last 2 years. It would be great to get a discussion going in light of recent developments. I would love forum members to scrutinize/attack my idea, and let me know why I am wrong and what could go wrong with this investment, as well as provide their perspective. Note as a new member I cannot attach any company annual filings and can only link to max 2 documents, so members will need to seek out these documents themselves.
React PLC is a nano-cap at about 9.8M pound sterling Market Cap (based on current trading at 1.93p) that focuses on specialist cleaning services in the UK. They service judicial court houses, railroad tracks, and do reactive maintenance for emergencies. They have a reactive business (24/7 on call service), and a contracts business (recently won contracts to service rail and bus companies). After struggling mightily as a public company with constant losses, negative cashflow, and no focus, in 2019 Mark Braund became an advisor to the company and brought on a new CEO (Shaun Doak), and CFO (Andrea Pankhurst).
Mark Braund initially had a focus on recruiting services early in his career, and worked for Manpower and IBM. He founded Barker Personnel services and sold this to Carlisle group in 2000. He then moved on to Interquest Group PLC was CEO for 4 years. His career then shifted to focusing on turning around companies, first focusing on Coms PLC (later rebranded twice, first to RedStone Connect PLC, then renamed under future management to Smartspace software PLC). It appears he joined React to see if he could turn around the moribund company, and he is now Executive Chairman.
In 2019, Mark Braund and the exec. team had an interesting option warrant package where options with an exercise price of 0.25p would vest according to price targets ranging from 0.4p-2.8p. The options were set so that vesting was back end loaded to the higher prices (approx 50% above 2p), see below PDF from RNS:
Yet another grant of 11.9M in options were made on Dec 9th, 2020, per below to Mark and Andrea at exercise prices of 0.25p with vesting conditions of pricing ranging from 2-2.8p. Please visit React website to review the RNS.
I will come back to the discuss of exec comp and this plan later in this post.
Since mid 2019, great progress has been made at the company. The 2019 Annual report came out on Jan 30 2020 with Turnover of 3.1M Pounds (6% decline from 2018), NPAT at -183K (down from -1.9M).
According to management, the company took this year to sort out collectability of AR and bad debt provision, while turning away business that was not profitable or core to the company’s focus on specialist cleaning. They also focused on improving the sales team and working more efficiently to acquire customers.
Again, please go to React investor relations website to view the RNS and annual reports…
The company continued to progress, with Mark, Andrea, Shaun, and a couple of directors purchasing shares in Dec of 2020, see below two PDFs from RNS:
Again cannot link to every document, go to RNS…
Decided to use my 2nd link to link to React PLC’s annual report issued for 2020 in January 2021, see PDF:
Turnover grew 41% to 4.36M pound sterling, and the company produced its first NPAT in its history at 188K. Management stated that $440K of this was related to covid specific work. If you exclude this covid related revenue as one time in nature, revenue still grew 26% to approx $3.9M. Management has stated their intent to continues to grow the business and increase operating margins above 6%.
Management recently announced they are acquiring Fidelis Contract Services Limited on a cash free debt free basis. Fidelis Contract Services would bring in approx 3.2M pounds in revenue, and total compensation for the deal would be 4.75M pounds if all of the EBITDA related targets are met by Fidelis contract services (management paying for the deal partly through cash and stock, 1.5M is cash, they raised raised 0.2M at 2.1p for the initial 1.7M in consideration, the remaining 3.05M would be paid based on Fidelis hitting EBITDA targets). The addition of Fidelis would get React to approx 7M pounds in revenue next year assuming no more organic growth in the business at all (not a good assumption). Please visit React IR website for announcement.
The company has momentum, and would like to consolidate parts of the fragmented specialist cleaning industry. In terms of competitors, there are many local firms, with large companies like Rentokil and PCS at the very top of the market. Management have done a good job of cleaning up the business. Can they continue to execute, and acquire smartly? This is a big IF.
In terms of compensation, it is a negative that the exercise price for the options are 0.25p. At that price, they are already in the money at the current price of 1.93p. That being said, a large chunk of the options don’t vest (50% of the first tranche, 100% of the 2nd tranche) if the stock price does not go north of 2p. The exec chairman was asked on the Investor Meet Company UK Platform why management did not buy more shares on the open market. The response was that management had to do a lot of work to clean up the company back in 2019 (stock was trading below 0.25p at the time), the options have vesting at higher prices, and that it would be bad if the management buys shares while they know info about the turnaround before FY20 results were issued. I have mixed feelings about this response. Nevertheless, management has performed very well so far and have stated their intention to become the “362 kilogram gorilla” in this space. As operating profit and NPAT increases, React will finally have a positive ROIC. The question will be how effectively they can acquire small cleaning players, how high of an ROIC the business can achieve, and if the valuation will grow overtime as the company performs. Can this be become a 100M market cap company in 10-15 years? It all depends on continued stellar execution.
It would be interesting to hear the members’ insights, especially on competition in the UK.