Not Tubi

Joshua Baker

Capital H Management

Today Tubi Group (2BE) issued a downgrade to their FY20 prospectus forecasts. This is a very disappointing outcome and a clear thesis break as the risks, rather than the returns, of the investment have come to fruition. As such I have exited my position in the stock suffering a material loss.

The reason offered by 2BE for the downgrade is due to a rapid deterioration of the US oil and gas industry as CAPEX reductions have driven reduced demand for pipe. As demand comes out of the oil and gas sector, it pushes excess supply into other industries, which then limits the ability of 2BE to secure contracts for additional planned plants on attractive terms. As a result of this, the company has also deferred plants 3 and 4, which has removed the FY21 growth optionality that the valuation previously and would also currently offer.

Whilst it is known that the oil & gas sector can be volatile, a downgrade of this magnitude only 2 months after reaffirming FY20 guidance alongside FY19 results that beat forecasts is tough to fathom. There is also a larger risk that it can get worse before it gets better, which means there are higher odds of further downgrades from existing operations. Essentially, things could get worse before they get better. In addition, the reduced financial strength of the company can make it harder to capitalise on new contracts if they arise in the near-term. Also, Investors now have to question the credibility of management and the board given the apparently rapid deterioration in the short and mid -term prospects of the company that have materialised “seemingly” out of nowhere.

Whilst I believe the technology is attractive and long-term it could take material share in the HDPE market, the current state of the business offers an inferior risk/return opportunity even at the current lower share price as the clarity of near-term risks and optionality around growth has been materially reduced.

When investing in micro and small caps, credibility and asymmetry in risk/return outcomes are critical characteristics to find and as I believe 2BE now offers neither, I think it is prudent to exit the position. However, I also think it is important to keep an open mind as if 2BE can re-establish both these factors, whilst sector headwinds turn back to tailwinds, then it could present an attractive investment prospect again in the future.

1 stock mentioned

Joshua Baker
Portfolio Manager
Capital H Management

Joshua has worked as an Investment Analyst across different verticals of the financial sector for 9+ years. Experience includes equities research (long/short), manager research and multi-asset portfolios.

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