Ebix – A Dark Cloud
Ebix provides B2B application software. They specialize in software and e-commerce solutions to the insurance industry. Ebix can be broken down into four operating channels: Exchanges, Broker P&C Systems, Risk Compliance Solutions and Carrier P&C systems. Interestingly Ebix has a large Indian presence, accounting for 20% of their revenues. With the US and Australia netting them 60% and 9% respectively.
Ebix has reported consistent high growth over the past few years. With the 5 year revenue growth CAGR coming in at 12.79%. Additionally Ebix’ dividend, while small at .61% yield. Has growth 31.95% over a 5yr period. From a surface level financial standpoint the company appears strong, and undervalued with comparable companies trading at a median 28x P/E compared to 14.00x P/E for Ebix. However its once you start to dig into the company things start to unravel.
Starting off with an EV/EBITDA multiple of 19.56x. When compared to the median comparables multiple of 14.88x the company begins to seem less appealing. The true issue comes when one begins to conduct due diligence on the company. Recently a series of short reports have been released questioning the companies high turnover of accountants. They most recently switched from Cherry Bekaert to auditor T.R. Chadha who, according to Viceroy research, has “never audited a US-listed entity”
Concerns further arise from the structuring of subsidiaries and particularly their India operates where Vicroy claims to have found “several account discrepancies.”
A Dark Cloud
We were first drawn to Ebix based off their high margins, consistent growth and apparent discount to Comps based of P/E multiples. We still feel that Ebix, on paper, remains an interesting investment. However with the presence of some many short reports we have been deterred from considering an investment. These short reports are a dark cloud hovering over the company. One which caused their share price to drop considerably in recent months.
Efforts to Change
Management claims to be switching to a Big 4 Accountant sometime in 2019. Should this actually occur and should no accounting discrepancies be found on their books, Ebix is likely to shoot up in value. The other appealing factor is the potential runway for growth through acquisitions. The global opportunity for rolling up smaller software companies has proven to be very lucrative, evident by the charts of CSU and OpenText, and could mean that long term Ebix shareholders could do very well.
Opportunity, if you love risk
For those with a voracious appetite for risk Ebix could provide a significant upside should the short reports be proven wrong. Fundamentally the company appears strong and seems to have a good footing in a sustainable industry. These are all big “ifs” however, and especially considering the questioning of their accounting principles the fundamentals, margins, and revenue growth that drew our attention to the company could be completely torn apart.
Ebix will remain on our radar and we will closely watch for updates on further short reports and news on their accounting situation.