On Markets & Investing

Monthly Stock Idea Lab (MSIL) #6 - September 2023

8 October 2023
Earlier this year, I started publishing my Monthly Stock Idea Lab at the end of every month. This is the sixth edition. The idea behind this product is to improve the investment results by focusing on better companies while eliminating businesses with “inherent” problems (no competitive advantages, no alignment of interests between key stakeholders, unsustainable earnings, poor returns on capital and capital allocation track record, weak balance sheets).

Since spotting a great business is relatively easy, I prefer to look for companies facing temporary issues that can mask their inherent strengths and make them look just like ordinary businesses. In an ideal case, there are two drivers for the future upside: 1) improved financial performance and 2) stock rerating once the market becomes aware of the operational progress.

Looking for ideas in less crowded places (e.g. small caps) or out-of-favour markets (e.g. resources, emerging markets) can increase the odds and allow one to purchase good businesses priced as mediocre ones.

The flip side is that it can take longer to fix the problems or that these problems become permanent. The fact that a company joins the list does not mean it is an automatic BUY signal. Instead, it suggests that a company is worth researching further since it has the necessary attributes to make it a successful investment.

Recent portfolio changes

I have sold more CNX shares this week, cutting position weight to less than 2%. I have written about my concerns before.

I used its proceeds and some spare cash to initiate two new positions.

The first new position is Trustpilot. It barely makes any profit, but I think it is mainly because of 'growth investments'. The business follows a 'triple win' business model, creating value for consumers, businesses and shareholders. The business model has a strong network effect and is capital-light. Businesses are incentivised to send more review invitations to customers, while customers benefit if more reviews are written on a particular product.

My second purchase is Team Internet (former CentralNic). The company has grown revenues at 78% CAGR over the past ten years. It is now trading at 6x PE and 14% FCF yield.

In today's edition I provide more detailed write-ups on both companies as well as three other names that came on my radar.


Ticker: TRST LN
Share price: £1.09
Mkt Cap: £457.8mn
EV: £391.7mn


Trustpilot is the opposite of a deep value opportunity. In just four years (2018-22) it grew its revenue 2.4x (24% CAGR). It is not cheap on headline numbers (2.4x EV/Sales and 100x P/E based on consensus estimates for 2024). However, if it can reach more customers by proving to them its value, its earnings can rise dramatically quite quickly. Valuation could look cheap already in 2025 if it decides to slow down its growth and focus on margins.

The company was founded in 2007 by then-25-year-old Peter Holten Muhlman in his parent’s garage. I am sure you have seen the Trustpilot logo in various ads or product reviews. I personally left a few reviews myself.

Trustpilot's business model

The company’s goal is to help consumers make confident, informed decisions while allowing businesses to fill the trust gap and gain insights to improve their services. It reminds me of one of those rare 'triple-win' businesses when all parties win if the product gets better. For example, the more consumers leave reviews, the more informative these reviews become, benefiting new consumers. Businesses benefit from rising product awareness, trust and insights, which encourages them to invite more consumers to leave reviews. As the product grows, other stakeholders (employees and shareholders) benefit from improving financial performance.

Most traditional business models face a tradeoff when making customers happy implies selling products below market prices, punishing employees and shareholders.

The beauty of this flywheel business model is that it is fairly capital-light as a lot of efforts to grow the business are carried out by business customers or consumers. Moreover, it creates strong network effects, which act as barriers to entry for new players.

The company runs a subscription-based business model where businesses pay a monthly fee to collect reviews and gain access to additional insights. In 2022, Trustpilot achieved a 100% retention rate with an average contract value of $6k.

How big is the business?

By the end of June 2023, Trustpilot had exceeded 238.4 million total cumulative reviews (+ 25% YoY), with an average of 52.4 million monthly unique users and close to 9.3 million consumers leaving their first review on Trustpilot in the period. The company had 980 thousand reviewed web domains (+21%) and 106 thousand monthly active businesses on the Trustpilot platform (+13%). Of these businesses, 25 thousand are paying customers, subscribing to Trustpilot’s software tools to collect, manage and get insights from reviews – a net increase of 4% YoY (after churn).

During the first half of the year, the business customers sent 368.2 million review invitations (H1’22: 317.6 million), an average of 61.4 million per month (H1’22: 53 million). TrustBox had achieved 9 billion monthly impressions (+15% YoY to an annualised run-rate of 112 billion).
On 5 October, Trustpilot announced the launch of reviews for Salesforce on Salesforce AppExchange. The latter is an enterprise cloud marketplace that connects customers to ready-to-install or customisable apps and Salesforce-certified consultants. Businesses in the UK and the US will benefit from every customer interaction by initiating automatic review invitations and generating feedback responses. This, in turn, should enable businesses to better spot areas of high performance as well as those that need improvement.

Financials and valuation

The business was listed in March 2021 at 265p. In just six months, the stock surged to 460p. Since then, it has been on a downhill falling to 60p in September 2022 and almost touching this level again in summer 2023. Trustpilot was banking with SVB, so it suffered earlier this year when SVB was bailed out with HSBC taking over the UK operations of the bank. There was no obvious impact from the SVB collapse on Trustpilot. The same month, its founder announced his decision to leave the CEO position to remain as a non-executive director. He committed to continue working closely with the business focusing on its brand and leadership in transparency and trust.
Trustpilot is hardly a bargain using traditional valuation metrics. It barely makes any profit. However, over half of its revenue is still going into growth expenditure, which would be treated as capex and reported in cash flows from investments for a traditional business. Trustpilot expenses practically all of its IT, marketing and admin costs. Importantly, the share of these costs as a percentage of sales has been constantly declining.

The gross margin of Trustpilot was 82% in H1 ’23.

I think the underlying profitability of the company (excluding growth investments) could be over $50mn (9.6x EV/EBIT) if management decided to stop growing. More exciting is how far the business can grow and what it can earn in the medium term.

Another important point is that Trustpilot often receives the full contract payment while it books revenue over the life of the contract. In other words, reported revenue (and profits) is lower than the cash received in a period. In some way, the business gets free funding from its customers (similarly to a float at insurance companies).

The company has been growing close to 20%, but assuming a 15% sales growth for the next 5 years, its annual recurring revenue can double to $360mn. Assuming a 25% operating margin, Trustpilot could be earning $90mn. This would put the company on just 5.3x EV/EBIT.

My return could be around 15% (annualised) if the company trades at 10.6x EV/EBIT. There is a risk of dilution as part of management compensation is paid via shares.

Insider ownership

The founder, Peter Holten Muhlmann, holds c. 5% in the company. Two private equity funds, Vitruvian Partners and Northzone Ventures, that funded the business at the early stage, hold 9% and 4%, respectively.

Executives and directors have been actively buying shares on the market (see the table below).


Some of the issues that I am not fully comfortable with:

  • It is predominantly a UK/EU brand, while the digital world is pretty global. There are examples of successful local internet businesses, but gaining large scale for a national player is definitely harder.

  • If I run an established business, I do not need Trustpilot to verify the quality of my product. So Trustpilot’s customers are less-known startups. This is a much more cyclical segment. The number of startups is highly dependent on the economic cycle and available funding.

  • It is a fairly competitive industry, with Google reviews being the most obvious alternative, although I find Google reviews more relevant for cafes and restaurants (businesses with physical presence) rather than products. But there are many more alternatives, including Amazon reviews. Here in the UK, I occasionally use Which? or Uswitch, although they are more focused on contract-based services such as insurance, broadband, utilities and so on.

  • Trustpilot reminds me a little of TripAdvisor. The latter had a great concept with strong network effects, user-generated content and a growing customer base. However, it has always struggled to be profitable. Its current market cap is just $2.2bn.

  • The growth of paying customers decreased to just 4% in H1 ’23 compared to 9% in 2022. The first half was influenced by macro concerns and declining funding for startups, so this could be a temporary slowdown.

  • With barely any profits earned, it would take a few years for Trustpilot’s valuation to achieve a more reasonable level.

Team Internet

Ticker: TIG LN
Share price: £1.2
Mkt Cap: £326.9mn
EV: £382.8mn
Team Internet is an AIM-listed company formerly known as CentralNic. It has two businesses: domain services and digital marketing. The company is an active consolidator acquiring many small teams in the fragmented industry. Its domain services segment (a fifth of total revenue) has a stable subscription-based revenue model with a low single-digit growth rate. Only 3% of customers switch providers every year. 62% of the segment’s revenue accounts for large domain resellers (e.g. GoDaddy, Newfold Digital etc.), with c. 250,00 SMBs accounting for 24% of revenue. The segment’s gross margin is 30%.

The overall gross margin is not very high (24% in 2022).

The online marketing segment is growing much faster (+120% in 2022). The online marketing segment increases the efficiency of advertising while also maintaining consumer privacy. The company focuses on online search, e-commerce and affiliates (over 3,000 affiliate advertisers use the company’s performance marketing and advertising technology platform). The e-commerce segment provides product reviews in Germany (Vergleich.org) and France (meilleurs.fr) and earns a commission if a consumer decides to buy a product online.
In some way, Team Internet is also a turnaround case. While revenue has been growing at a mind-blowing rate (+78% CAGR in the past ten years), the share price has only doubled (just over 7% CAGR) as most of the growth was funded through M&A and new share issues. The company went public in September 2013, issuing new shares at 55p (£38.7mn market cap).

Financials and valuation

In 2018, the company went through a transformative deal with a German-based KeyDrive Group. It was a reverse takeover as KeyDrive was much bigger than the existing business of CentralNic. In that year, the company issued 46.2mn shares at 52p. Within the next five years, the shares more than doubled.

KeyDrive management and controlling shareholders became the new driving force of the company.

Financial performance has also improved since then. In 2018-19, TIG generated $56mn and $109mn of revenue. In 2022, revenue reached $728mn (13.0x and 6.7x growth). At the same time, the share count increased by only 60%.

For 2022, the company delivered 77% total revenue growth and 86% growth in EBITDA. Organic growth in revenue and EBITDA in 2022 was 60% and 52%.

The latest equity issue was in early 2022, when the company raised £45mn by issuing 37.4mn shares at £1.2. The funds were used to acquire the leading German product comparison platform, Vergleich.

During its H1 ’23 results presentation, management confirmed that it expects full-year 2023 results to be at least within the consensus expectations ($783-834mn for revenue and $91-98mn for EBITDA). This suggests that the company should grow its revenue and EBITDA by 11% and 10%, respectively.

The company is valued at less than 6x P/E and 14% FCF yield, based on consensus estimates for 2024.

Capital allocation priorities

1) progressive dividend policy (1p for 2022, which represents just 6% of FCF)
2) Organic growth (+60% in 2022) and operating leverage (costs/revenue dropped from 61% in 2021 to 52% in 2022)
3) Bolt-on acquisitions
4) Buyback

5) Debt repayment and competitive cost of capital (Net Debt decreased by 30% in 2022, with Net Debt/EBITDA falling from 2.2x in 2021 to 0.9x). Leverage increased during H1 ’23 contingent consideration payment in relation to the past M&A transactions.

On 15 May 2023, the company launched its second £4mn buyback programme, which is part of the plan to repurchase up to 28.866 mn shares. So far, it has repurchased 13.7mn shares, reducing its share count by 4.8% in less than five months. The first buyback programme was announced on 30 December 2022 and completed on 18 January (2.57mn shares were repurchased).

Key shareholders

The company has a concentrated ownership structure, with only 54% of shares in free float. The rest of the share capital is owned by strategic investors (private equity and family offices) and management. Management does not have high interest, however, with the CEO, Michael Riedl, holding only a 0.94% stake. Insider activity has been mixed. One non-executive director (Max Royde) has been actively buying TIG shares, while one of the co-founders (Horst Siffrin) has been mostly selling. Max Royde is the co-founder of Kestrel Partners, an investment boutique focused on digital businesses. Kestrel is currently the largest shareholder, with a 23.1% stake. The fund has been increasing its interest in TIG consistently for more than a year.


  • The main issue with the business is the fast pace of changes and innovations. I don’t know one brand that has been operating in the digital marketing space for a very long time.

  • It also appears to be a people’s business. I would imagine that a digital marketing company could suffer if the key members of its team decide to leave and launch their own business.

  • The company is active in M&A. There is always the risk of future integration, culture clash, personnel changes and simply overpaying.

  • Finally, the big tech platforms are constantly improving their own capabilities making their platforms more attractive for advertisers.

Zoo Digital Group

Ticker: ZOO LN
Share price: 48p
Mkt Cap: £47.4mn
EV: $34.3mn

Turnaround case?

Zoo Digital is potentially an interesting turnaround opportunity. The company runs two services: media services and localisation. The former is preparing technical materials related to a new title for distribution. The latter is dubbing and subtitling.
Zoo benefits from an asset-light business model as it operates a global network of freelances who carry out most of the work.

The business has increased sales by an annualised rate of 34% in the past four years to $90.3 in FY23. Its customer retention is quite high at 98.5%.

The company is still run by its co-founder, Stuart Green, who has been the CEO since 2006. He has a PhD in computer science and has founded three other tech companies. Mr Green has just increased his stake in the company, buying 125,000 shares at 40p on 28 September 2023. He is the second largest shareholder with 11.84% stake.

The stock is down 74% YTD.
Cost-cutting at big streaming companies and Hollywood strikes were the two major issues. The company had to cut its guidance a few times this year, including on 28 September when it held its AGM. These issues, however, look like temporary factors to me.

A more serious long-term issue is AI, as it could potentially replace some of Zoo’s services. Management, however, believes AI could be an opportunity as it would improve productivity. Apparently, Zoo has been using various AI tools for a few years now and continues to look for ways to introduce more technologies to its business.

Zoo grew its revenue by 28% during its latest financial year, ending in March 2023, while its operating profit margin reached 9% ($8.1mn). This puts the company at just 5.2x EV/EBIT. Moreover, management is confident that it currently overspends on growth and underearns because of that. In other words, steady-state margins should be higher.

At the same time, the company faced lower demand in summer this year, which will likely impact its near-term earnings. According to Zoo, with its H1 FY24 revenue of c. $21mn, its EBITDA was negative. For reference, its H1 FY23 revenue was $51.4mn (EBITDA $7.3mn) and H1 FY22 revenue was $26.9mn with $2.4mn EBITDA.

Another issue I see is the structure of the industry. Demand for localisation and media services comes from several global players, while on the supply side, there are hundreds of players. So it seems that customers have more bargaining power than suppliers.
The counter-argument could be that the big streaming companies spend about $100bn on content, while localisation services represent just over 1% of this spending. If a media company try to save by opting for the cheapest provider, it runs quite a big risk if something goes wrong with translation (e.g. a local joke is translated in the wrong context, violating ethical norms in a different language). So this localisation service represents a small price to pay for the important feature. If done poorly, a big chunk of $100bn spent on content could be written off.

Another advantage of Zoo is that it is the largest player in a highly fragmented industry, and as large players focus on costs, they also want to streamline their operations and work with a few select suppliers rather than hundreds of small shops. Zoo can naturally win market share. It can also be a consolidator, as it has recently been doing with a pending deal in Japan.

Management maintains its 2030 vision to reach $400mn sales - 4.4x growth relative to FY23 (20% CAGR).

Somero Enterprises

Ticker: SOM LN
Share price: £2.63
Mkt Cap: £146.1mn
EV: £125.5
I first heard about Somero last year at one of the value investing events in London. At that time, the business looked unfamiliar, and the valuation was not strikingly cheap, so I decided to keep it on my radar for the future.

Now the stock is down over 30%. This has piqued my interest.
The company provides concrete-leveling equipment, training, and support to customers in over 90 countries. Somero claims that its equipment is one of the best in the industry, which I have not verified. It pioneered the Laser Screed machine market in 1986 and has since developed nearly 20 other machines using proprietary design. According to the management, contractors using Somero’s equipment can deliver a higher-quality job with fewer people. It serves various contractors who perform services for warehousing, assembly plants, commercial construction plants, pavements, parking and retail centres. The end customers of these facilities are often the largest companies like Amazon, Wal-Mart, Costco, Home Depot, IKEA, FedEx etc.

The company has benefited from the recent boom in investment in warehouses, but this boom has now ended, which put pressure on its financial performance. At the same time, there is a new onshoring trend with countries trying to reduce their dependence on others by building their own industrial facilities.

What also attracts me to this company is its UK listing. I can understand that existing shareholders may be frustrated by low interest from the global community low valuation and liquidity of Somero shares, but as a prospective investor, I see the opportunity to buy essentially a US company at UK prices. Somero’s headquarters is in Florida.

76% of sales come from the US, Europe and Australia account for 11% and 6%, respectively.

The business is highly cash-generative. The company requires just $2mn of cash on maintenance capex (less than 2% of sales), while its cash conversion is c. 100%.

The company has been a generous dividend payer. Since Sep 2018, it has paid $1.67 dividends per share (£1.34) which is 51% of the current share price. However, dividends have been volatile and more recently, they were on a downward trend.
In addition to that, Somero carries out regular buyback programmes. It spent $1.0mn and $1.4mn on share repurchases in 2021-22 and a further $0.4mn in H1 ’23. However, the buyback programme is in place mainly to offset the dilution effect of the equity award programmes.

One more advantage that I see in Somero is that its CEO, Jack Cooney, has been with the company since 1997.

Financials and valuation

The company generated pretty consistent revenue and EBITDA over the past two years (2021-22). Sales were $133.3mn and $133.6mn in 2021-22, respectively. EBITDA was $47.8mn and $46.0mn during the period (margin of 36% and 34%, respectively).

Performance has deteriorated this year, however. Sales dropped 14% during H1 ’23 driven by 24% contraction in the US (72% of revenue), while international operations continued to grow. Europe, the largest international market, delivered 46% growth, followed by a 33% increase in Australia.

EBITDA also declined by 28%, and EBITDA margin was 29.5% only.

For the full-year 2023, Somero expects $36mn EBITDA with $120mn sales. These targets imply a 10% contraction in revenue (better than a 14% drop in the first half of the year) and a 30% EBITDA margin (also an improvement from a 28% margin in H1 ’23).

Importantly, the company expects its net cash to rise from $25.2mn in June 2023 to $32.0mn by the end of the year.

Somero is currently valued at 4.3x EV/EBITDA (assuming ’23 targets are met), which looks low given that it is a net cash business with low capex intensity.


  • The economic slowdown has already affected the first-half ’23 performance. The business seems to be quite cyclial and it is critial to understand the mid-term normalised profitability. 2021-22 results may be cyclical peak and using them as a valuation reference could overvalue the company.

  • Equipment manufacturing is generally a competitive business. I don’t have enough market intelligence. Moreover, it seems that the industry is highly R&D intensive. For example, Somero generated 43% of 2022 revenue by 8 products launched since 2017.

  • Low insider ownership.


Ticker: RCDO LN
Share price: £4.6
Mkt Cap: £286.1mn
EV: £348.1mn
Ricardo is a strategic, environmental and engineering consultancy with in-house production capability. The company was founded more than 100 years ago. It now operates in 27 countries, employing 3,000 professionals.
The stock has severely underperformed, falling 40.7% over the past five years.
The company looks quite attractively priced relative to its current earnings/cash flows and taking into account its growth plans. It is trading at 6x EV/EBITDA while recent transactions in the sector have been carried out at 11-12x multiples.

At its August ’23 Capital Markets Day, management presented the plans to more than double operating profits in five years by delivering 6-7% revenue growth and expanding its profit margin to mid-teens.
At the heart of the plan is the company’s pivot to Environmental & Energy Transition services, which are made of two sub-segments: strategic consulting & digital solutions and Environmental & Engineering consulting. The first sub-segment is growing at over 10% CAGR with over 20% operating margin. Management expects the share of this segment to grow from less than 10% currently to ~20% of total sales.

The second sub-segment already accounts for 45% of sales and grows at 7-9% with an operating margin in the 12-20% range.

The more traditional services (Established mobility) currently account for 45% of sales but are growing at 2-3% a year and earn less than 10% margin. If management delivers on its plans, the share of this low-margin and slow-growing segment will decline under 30% of revenue, while group profitability and growth profile will benefit from the higher weight of the Environmental & Energy Transition services.

While Ricardo is a UK-listed company, two-thirds of its sales come from the international markets, namely North America (~30%) and the EU (~22%).

Insiders have started buying the stock. The Chairman, CEO, and CFO spent £227k on buying Ricardo's stock this September at an average price of £5.14.

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