When the facts change - Millennium

Harley Grosser

Capital H Management

In investing, sometimes you just get them wrong. The thesis breaks and you’re forced to recognize the error and adjust accordingly. Unfortunately, that appears to be the case with Millennium Services.

This is a quick note to keep anyone who may be interested in MIL updated on my thoughts.

What Did I Miss?

A few short weeks after publishing the original wire, a founding shareholder called a meeting. In response the Chairman and two other directors left. A new board was now in control of the company.

I didn’t view this as a thesis breaker. Another founding shareholder already involved in operations joined the board, which is usually a positive. The share ownership at board level increased significantly.

While this created real uncertainty as to the new board’s intentions, the actual operations of the business appeared unchanged and so too did the longer term investment thesis.

My main concern when the new board came in was that they might remove the CEO, although there was no actual indication this was going to be the case, just a possibility. He was the one I was backing (along with his management team) to turn the business around.

MIL’s balance sheet is highly geared and while the business produces nice cash flows, any business with debt is vulnerable to disruption. Removal of the CEO would be the kind of disruption they should carefully avoid, I thought.

A few days ago the CEO resigned.

What Now?

The new board have said they will release more details of their plans at the AGM including what sounds like potentially revised guidance, although there were no clear details. The update indicated that essentially everything is now up for review.

The growth engine in the business was the security division. That was driven by the CEO who came from a security background. I am not sure whether this will continue to be a strategic priority. We may find out at the AGM.

I should point out that I do not think that MIL is necessarily in trouble, or even that the share price is certain to fall. The new directors must have every intention of improving the value of their shares in the company and if they do that then all shareholders will benefit. They should have a number of levers they can pull to achieve this.

But the original thesis that drove the investment into MIL is now broken and when that happens you need to change your mind rather than adjust the thesis to justify holding.

So while the new board may have a plan to reinvigorate the company and turn the business around we will be on the sidelines, for now.

Disclaimer: The information above is based on the research and opinion of the author and is not intended to be viewed as financial advice. You should complete your own research and seek professional advice before making any investment decision.

Founder of Capital H Management and Portfolio Manager of the Capital H Inception Fund. Previously worked for Pie Funds and Bligh Capital.

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