Alluvial’s fourth quarter 2020 letter is available here. Thanks for reading!
The search for new ideas in unlisted stocks and micro-caps never ends. Just recently I happened across a fascinating little holding company, Concierge Technologies. Concierge has build up a neat little collection of profitable subsidiaries and is on the hunt for more. The company is attempting to prove the conglomerate model can work at small scale. Refreshingly, the company appears relatively free of the dubious related-party transactions and conflicted management so common amongst micro-caps.
All the standard warnings apply here. Concierge Technologies is tiny and its shares are illiquid. This is a not a suitable holding for short-term investors or those unable to tolerate significant volatility. Do your own due diligence.
The story of Concierge Technologies in its present form begins in 2015 when Nicholas Gerber became the company’s CEO and largest shareholder. Prior to Mr. Gerber’s involvement, Concierge had spent years making various investments and transactions, most of which met with little success. The company had resorted to settling debt with share issuances and shareholders found themselves holding the penniest of penny stocks. Seeing an opportunity to recapitalize and turn around Concierge, Mr. Gerber and his business partner, Scott Schoenberg, invested millions in Concierge in January 2015. The transaction left Concierge with a clean balance sheet and more than $2.5 million in cash. Now to make some good investments!
First, Concierge sold off the firm’s remaining operating business, Janus Cam, to its management team in return for shares of Concierge that they held. (Concierge retained a small part of the business with the idea of changing its market offerings.) Then came the first acquisition. Strange as it may sound, Concierge somehow found a business in New Zealand selling traditional meat pies: Gourmet Foods Ltd, doing business as Ponsonby Pies Limited. Ponsonby was a decades-old brand “well known in New Zealand for selling a delicious product” per Mr. Gerber in his 2015 chairman’s letter to shareholders. Concierge paid NZ$2.55 million for Gourmet Foods.
Next, Concierge turned to Canada, buying Brigadier Security Systems. Brigadier is a home and business security systems provider in Saskatoon and Regina, Saskatchewan. Concierge paid CAD$1.54 million. At the time, Brigadier had CAD$3.5 million in sales and 20 employees.
For Concierge’s third acquisition in late 2016, Mr. Gerber “bought what he knew,” his own asset management company, Wainwright Holdings. The history of Wainwright is worth examining in its own right, having grown out of a $165,000 mutual fund launched by Gerber and some friends and family in 1996. Along the way, Wainwright established United States Commodity Funds LLC, the ETF sponsor behind the US Oil Fund LP and other popular commodity ETFs. (US Oil Fund recently met with some controversy, but more on that later.) Gerber and his fellow Wainwright owners sold to Concierge for stock with a market value of around $30 million at the time. This transaction was really more of a reverse merger considering the relative sizes of the two operations and the resulting shift in ownership. But the deal provided Concierge with something every small holding company needs: a reliably profitable, cash generating segment. It was also a vote of confidence by Gerber, who sold his life’s work not for cash but entirely for stock in a tiny, unproven venture.
To this trio of investments, Concierge has since added an organic beauty products company, another New Zealand company, and a fintech startup. In late 2017, Concierge paid $3.5 million to acquire the assets of California-based Original Sprout, which creates organic and vegan shampoos, sunscreens, baby soaps, among other items. In July of 2020, Concierge acquired New Zealand’s Printstock Products Ltd., a producer of food packagings. Concierge acquired Printstock through Gourmet Foods, paying NZ$1.9 million. Concierge’s move into financial technology comes via Marygold & Co., a development stage venture that intends to offer payments, savings, and investment tools via an online app. This app remains in development.
Now, any company can go out and buy a variety of operating businesses. It’s much harder to then operate them properly and put the cash they produce to good use. So far, Concierge has done this fairly well. Like many businesses following a conglomerate model, Concierge’s favorite measuring stock for long-term success is growth in book value per share. It is a sensible yardstick for a collection of fairly traditional businesses with limited research and development spending like Concierge. Since June 30, 2016, Concierge has grown its book value per share from $0.21 to $0.56, a highly respectable annualized rate of 26%. Let’s dig a little deeper to see how Concierge’s investments stack up…
First, Gourmet Foods (the New Zealand meat pie folks). From fiscal 2016 through 2019, Gourmet Foods’ annual after-tax profit ranged from just above break-even to NZ$326,000, averaging about NZ$163,000. Revenues have been flat in recent years, with significant changes input costs causing margins to bounce around. With no revenue growth to speak of and no apparent pricing power, Gourmet Foods appears to be a thoroughly mediocre business. (I speak only from an investment perspective. Though I have not visited nor tried the cuisine, I am sure both the pies and the people are lovely.) I would not call Gourmet Foods a successful investment by Concierge, at least not yet. Perhaps the acquisition of Printstock Products by Gourmet Foods will change the economics.
Brigadier, the Canadian security system company, is another story. Since acquiring Brigadier for CAD$1.54 million, Concierge has earned average annual profits of CAD$0.35 million, a yield on cost of nearly 23%. Brigadier also does not appear to have much in the way of growth prospects, but has still been a very successful investment for Concierge simply because Concierge purchased it at such a high earnings yield.
Evaluating the success of the Wainwright acquisition is more difficult, simply because its business model is so different than an industrial company or producer of consumer goods and services. As a sponsor of commodity-related ETFs, the company’s results rise and fall based on investor interest in exposure to natural resources. One might think high oil prices, for example, might be good for United States Commodity Funds products like US Oil Fund, LP, but the opposite is actually the case. When oil prices are low, more investors look to speculate on rising prices, leading to the creation of more fund units and higher management fees for UCSF. When oil prices are high, investors lose interest in betting on still higher prices and the number of outstanding units declines. Since acquiring Wainwright for stock worth about $30 million at the time, Wainwright’s profits have averaged $3.44 million. A respectable yield. Wainwright requires practically zero physical assets or incremental capital for growth. The company is off to a hot start in fiscal 2021, reporting earnings of $3.2 million in the first quarter alone. The longer-term trend of Wainwright’s profits is difficult to predict, but so far Wainwright has been a good contributor for Concierge.
Then there is Original Sprout. The business has grown its revenue modestly since Concierge acquired it, though profits have varied widely. The business earned a profit of $407,000 in fiscal 2019 but earnings fell substantially as COVID-19 took hold. Original Sprout’s products have good distribution, and operating efficiencies should kick in if the company can manage to grow its revenue meaningfully. But thus far, Original Sprout has been only a middling success for Concierge.
The company’s little fintech investment, the awkwardly-named Marygold & Co. is too small and early-stage to evaluate, though I don’t think its chances are good.
Taken as a whole, I would grade Concierge’s investments as good, but not great. Solid, but not exceptional. Wainwright and Brigadier were excellent purchases, but Gourmet Foods and Original Sprout have been laggards. A lot depends on what Concierge chooses to do with its 34 cents per share in balance sheet cash. This represents over half of shareholder equity. Concierge’s next few investments will have a profound impact on how that equity grows.
As quickly as Concierge Technologies’ book value per share has grown, its share price has been another story. Shares are roughly where they were 5 years ago, though of course the price/book value ratio has compressed. The market was just a little too jazzed over Concierge’s potential back then. The valuation today appears much more reasonable.
Shares of Concierge Technologies change hands at 10-11x trailing EBIT, though the ratio will decline significantly assuming commodity funds like US Oil Fund LP continue attracting investor interest and thus, profits for Wainwright. Anyone evaluating Concierge as a potential investment should keep careful track of the creation and redemption of fund units. Should Gourmet Foods and Original Sprout experience a post-COVID recovery, Concierge’s profits could experience a rapid increase.
I don’t think Concierge is for me, at least for now. The company’s track record is good, but I would like to see them complete a few more good investments and become less dependent on the highly cyclical commodity funds business. Still, I commend the company on making a solid go of it as a tiny conglomerate. This is not an easy task in today’s regulatory environment. One to watch? Absolutely.
Alluvial Capital Management, LLC does not hold Concierge Technologies Inc. securities for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at firstname.lastname@example.org.