Ebix, Inc. - Get Ready for a Wild Ride
Originally Published August 22nd, 2022
As we move on to our 5th Week of the Value Finder we find ourselves in an interesting situation. This isn’t the normal Weekly Value Finder article, and in fact I don’t recommend this company to hold in a long term portfolio.
Oh but what fun this could be!
This company, while selling at a low P/E ratio and a lower than usual P/FCF for the industry, is coming to your inboxes because of two things; a massive short float and a massive controversy.
Company Highlights:
Forward P/E = 7.31
Insider Ownership = ~25%
Price to Book = 1.11
Current Short Float = ~25%
Current Short Ratio = 10.7 days
Yes you read that right, the current short float and ratios are astronomical with this company. This isn’t something that you see everyday, with a stock that only has 30 million shares outstanding.
What is this company?
Ebix, Inc. (EBIX)
A little bit about EBIX
So you’ve never heard of Ebix before? Most haven’t.
The company specializes in e-commerce and software services for insurance, travel, financial services, healthcare, and e-learning sectors.
Or as Ebix states in their latest 10-k
“Ebix's goal is to be a leading facilitator of insurance and financial transactions in the world. The Company’s technology vision is to focus on the convergence of all insurance and financial exchange channels, processes and entities for seamless data flow. Ebix combines the newest technologies with its capabilities in consulting, systems design and integration, IT and business process outsourcing, applications software, and web and application hosting to meet the individual needs of organizations.”
Sound confusing? Well that’s because it kind of is.
The company is basically split into three different segments, Ebix Cash (~89% revenue), Insurance Exchange that uses SaaS platforms, and risk compliance which is mainly consulting.
EbixCash is the main player in terms of revenue so let’s check it out. It also is split up into a few categories including payment services, travel services, and financial technologies. The payment solutions are carrying the weight here.
What makes up the payment services?
Here are the points from the EbixCash website:
EbixCash co-branded Prepaid Card (enabled by Visa and MasterCard and Rupay) in association with other banking partners delivers a simple and efficient payment solution for customers. EbixCash offers cards from a variety of Banks like NSDL Payments Bank Limited and HDFC Bank.
EbixCash’s Forex operations are in 16 international airports and 12 seaports, as well as within 1200 corporate clients, hotels, duty free shoppers stores, temples and educational institutes, conducting over USD 4.5 Billion in annual GMV (pre-COVID-19).
EbixCash’s Inward remittance business in India conducted in excess of USD 7.02 Billion in gross annual remittance business (pre-COVID-19), while accounting for approximately 70% of India’s cash to cash business. EbixCash inward remittance business involves engagement with all top international players such as Western Union, MoneyGram and Ria.
On the surface, Ebix looks to be a company on the rise. With crazy amounts of operating income growth, the EbixCash payments have grown over 14x in the last three years. The company currently obtains the majority of its revenue from India, with 2021 showing India accounting for $755 million of the $994 million total (~75%).
The company also has been fueled by acquisitions, that have required taking on significant debt. In fact, Ebix has acquired 27 different companies since 2017, and has increased the long term debt from ~$300 million to ~$600 million. The other main issue from a financial aspect is that almost all of that $600 million dollars in debt is due in early 2023.
This is where controversy comes into play.
The Controversy
Ebix recently launched an IPO for its EbixCash in India to secure money to pay off its debt load. While this was getting ready for launch, Hindenburg Research published a short report that basically claimed two things:
The "massive near-term debt load" in a backdrop of rising interest rates, saying "we see significant solvency risk over the next 12 months."
Also that "we think a substantial portion of EbixCash’s gift card revenue is non-existent," as the company has cycled through seven different auditors since 2004, "a classic hallmark of accounting irregularities…”
You can find the entire report here.
In response to this, Ebix claimed that "its financial reporting, including but not limited to all transactions from and within its EbixCash payment solutions offerings in India, and revenue recognition policies thereof, are accurate and appropriate and in compliance with GAAP and SEC reporting requirements."
A well researched rebuttal to that report can be found here.
So what happened to the stock?
It dropped like a rock.
As you can see, the stock dropped almost 50% after the short report as investors fled in fears that they weren’t getting the whole story. After a couple of months though, the reports seem to be forgotten and price has returned back to the $24 range.
What Now?
Well if the EbixCash IPO goes as planned, then Ebix is well on its way to paying off its debt and righting the ship. If it does not, well Hindenburg may be correct.
Let’s not forget though that Hindenburg was completely correct about Nikola and made a boatload of money shorting it.
This places me at a cross roads of value, and one that I think is a fun one that offers a significantly different opportunity than traditional value investing.
Let’s say I buy a call option for March 2023 at a strike price of $30 dollars for the currently listed price of $4.50 ($450). If the IPO goes off and the solvency issues are resolved, then shorts would have to cover and you could see as much as a 100% gain.
Now to hedge my bet, I can buy a couple of put options for June of 2023 (remember debt is due in early 2023), with a strike price of $12 for around $1.90 (total of $380) at time of writing. If Hindenburg is correct then we could see massive trouble occurring early in the calendar year and a significant price decrease. The short report dropped the share price to ~$14 dollars, so this financial disaster, in my opinion, would do much more. A drop to even $11 dollars would yield an almost 80% return, anything over that would be icing on the proverbial cake.
So the in summary:
March 2023 Call - Potential gain ~$450, Potential loss ~$450
Dec. 2023 Put at $1.90 - Potential gain ~$380, Potential loss ~$380
Worst case - Lose the entire $830 dollars (More likely)
Best case - Short squeeze near term, then bankruptcy (Less likely)
These of course are if nothing crazy happens. If the meme redditors jump on the ship then the call could be significantly higher. If Hindenburg is right, then the put could be significantly more profitable.
Conclusion
Look, this is much different than the previous four daily value articles that I have written the last month for you all. Sometimes you have to have a little fun and today felt like one of those days.
By no means would I recommend actually taking a long term investment in Ebix, there is just way too much unknown about the company and significantly better places to put your money. That all being said though, these are the types of set ups that could lead to massive amounts of profits on options.
As always, thanks for reading and happy investing!
The Profit Investigator