Why I Sold Streamwide SA. (EPA:ALSTW)

Streamwide SA. (ENXTPA:ALSTW) has been on my radar for a while, and my main concern is around the sustainability of the business going forward. Although ALSTW seems to be managing its financials well, and appears to be trading around its intrinsic value, meaning we can buy its shares at a fair price, I would rather buy an outstanding business at an OK price. My problem is, ALSTW doesn’t seem to be an outstanding business, and here’s why.

First, a short introduction to the company is in order. Streamwide S.A. provides cloud-based, carrier-grade mobile value-added services and solutions in the areas of call completion, IP mobile messaging, convergent charging, virtual numbers, and social networks telephony worldwide. Since starting in 2001 in France, the company has now grown to a market cap of €18.45M.

The first thing that struck me was the pessimistic outlook for ALSTW. A consensus of FR software analysts covering the stock indicates that its revenue level is expected to decline by -15.90% by 2020. In addition to this, ALSTW is currently loss-making, delivering a recent bottom-line of -€257.00K. With a declining top-line, moving towards positive earnings becomes harder, which is a concerning issue.

ENXTPA:ALSTW Future Profit Apr 4th 18
ENXTPA:ALSTW Future Profit Apr 4th 18

Minimizing the downside is arguably more important than maximizing the upside. Generally the first check to meet is financial health – a strong indicator of an investment’s risk. Streamwide’s balance sheet is healthy, with high levels of cash generated from its core operating activities (0.22x debt) able to service its borrowings. Furthermore, ALSTW’s debt level is at an appropriate 13.40% of equity, though it has been increasing over the past five years from 8.34%. ALSTW also generates income from lending its cash which, in turn, is able to cover its annual interest payment to its debtors. Management exhibits strong capacity to effectively utilize capital, reducing my concerns around the sustainability of the business going forward. ALSTW has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. A reason I like ALSTW as a business is its low level of fixed assets on its balance sheet (1.58% of total assets) . When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. ALSTW has virtually no fixed assets, which minimizes its downside risk.

ALSTW currently trades at €6.25 per share. At 2.95 million shares, that’s a €18.45M market cap, which is too low compared to its peers based on its industry and adjusted for its asset level. Currently, it’s undervalued by 205.82%, with a PB ratio of 1.42x vs. the industry average of 4.34x.

What initially drew me into ALSTW was its robust balance sheet. However, after looking at the prospects of the business, I’m not jumping with joy. Like above, I would rather invest in a company that checks all the boxes – an outstanding business – than a mediocre one. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.