At first glance Close The Loop Group (ASX: CLG) looks superficially attractive, because it made an accounting profit and its business is good for the environment. Therefore, I’ve been asked about it quite a few times over the years.
Below, I will introduce each of the diverse businesses that make up the listed entity, before explaining why I’ve never had much interest in the stock.
Close the Loop is a recycler of printer cartridges and provides services to major global printer OEMs with a presence in Australia, the US, and Europe. It operates on a fee per volume of per weight model.
O F Packaging Group engineers sustainable flexible packaging for the food, household products and horticultural industries and operates out of Australia and South Africa. In December 2021, the company announced the acquisition Oceanic Agencies for $3.25m plus up to $750k earn-out.
In February 2022, the company announced the acquisition of packaging company Crasti & Company for $5.85m plus earn-out.
In July 2022, the company announced the acquisition of thermal paper company Alliance Paper for $1 and an investment of $4.5m in working capital. That, and Alliance Paper management keeping their jobs.
In October 2022, Close the Loop bought The Pouch Shop, a South African packaging company majority owned by the CEO, for $701k.
In January 2023, the company announced the acquisition of recycling company In-Plas for US$4 million, supposedly adding US$1.1 million in EBITDA.
Then, in March 2023, the company announced the acquisition of recycling company ISP Tech for just under $100m, funded in part by a $45m capital raising at a price of 33c per share.
Close The Loop Group Free cash flow was a negative $3.1 million for FY 2024, calculated by taking operating cashflow, subtracting investing cashflow, and subtracting lease repayments. The company said that it expects lower capital expenditure in FY 2025. I believe that one of the major ways in which the FY 2024 result was disappointing was the weak free cashflow.
However, H1 FY 2025 free cash flow was still negative, at almost -$2.7 million. The earnings per share has also nose-dived, even as the company grows revenue. This shows how the capital raised by diluting shareholders was not sufficiently well deployed to lead to growth in earnings per share. And in fact business has declined.
It truly is wild to think anyone considered taking over this business for 27c per share. However, that did not occur, and whatever investors in the various capital raisings had hoped for has not come to pass. The truth is that the business is simply difficult to predict from year to year.
Now the share price is just 4.5 cents per share, giving Close The Loop Group a market capitalisation of around $24 million, down around 90% from its peak.
In a recent update the company disclosed that “At 30 June 2025 the company will have bank debt of US$38 million and cash on hand in excess of A$30 million. The company is well capitalized and is in a strong working capital position.”
The way the company reported cash in Australian dollars and debt in US dollars is a good example of why I generally choose to just throw such ideas as Close The Loop Group in the (mental) bin. My view is that life is too short to pay attention to companies that make it hard to understand the state of the balance sheet.
If we translate that US dollar debt to Australian dollars, it would be around $57m Australian dollars, so that means the net debt is about $27 million; more than its market capitalisation.
Close The Loop recently announced a restructuring initiative that is aimed at “simplifying their operations and sharpening their focus.” This, along with recent leadership restructuring, could mean some of the diverse grab bag of businesses that make up Close The Loop Group could be closed or sold.
Why I Avoided Close The Loop Group (ASX: CLG) Stock
Close The Loop has long triggered many heuristics for a low-quality business. And to be fair, that was useful when the stock had good momentum and was attracting more investors. It was at that time a recent IPO grown by acquisitions run by an in-group who were essentially selling parts of their private businesses to public stock market investors.
On top of that, the business itself is capital-intensive, with the free cash flow never available to back up the profits. All that hypothetical profit was going into physical assets or goodwill, with nary a drop left for shareholders.
For that reason, it didn’t really deserve much time.
Is The Close The Loop Share Price Now Too Low?
Now that the share price has dropped so far, it is a little more interesting, because even a couple of good halves could see a significant positive re-rate. Of course, there is no real reason to forecast a couple of good halves, so it is still an extremely speculative idea.
You could imagine this sort of business being mildly profitable, perhaps earning 5% NPAT margins on average over the long term. The company is currently doing around $200m in revenue per year, but I imagine a lot of that is not profitable. If it were pared down to its most profitable activities and gave up on growth, you could still imagine it making $150m in annual revenue. If it could — even without growing — make a 5% profit on that revenue, then that would be $7.5 million, more than a quarter of its current market capitalisation!
Of course, in the meantime, Close The Loop has all that debt to worry about, and those creditors rank above shareholders. It may well be that, ultimately, the business just needs to raise capital at some super-distressed price. At higher prices, Close The Loop is very unattractive, and even at current prices, it is not very attractive in my view. While I could imagine the stock going up from here, I do not think it is too low given the real possibility of significant dilution to come.
On top of that, if the business does turn around, the share price will rise, but I don’t think it will ever be a high-quality business. Because the poor quality of the business limits the likely long-term upside, buying shares in Close The Loop seems unattractively risky to me, even despite the potential for a turnaround re-rate.
Close The Loop Group does not have any of the qualities I look for in a business. In fact, it seems to lack my favourite qualities such as organic growth, recurring revenue, decent margins, high-returning opportunities for investment, and a healthy balance sheet.
While the share price could be volatile in either (or both) directions, Close The Loop Group seems like an uncompelling and risky stock to me. Arguably, the risk versus reward equation might be more favourable once the company has a stronger balance sheet.
Sign Up To Our Free Newsletter
Disclosure: The author of this article does not own shares in CLG and will not trade CLG shares for at least 48 hours following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).
The information contained in this report is not intended as and shall not be understood or construed as personal financial product advice. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement. Nothing in this report should be understood as a solicitation or recommendation to buy or sell any financial products. A Rich Life does not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. Future results may materially vary from such opinions, forecasts, projections or forward looking statements. You should be aware that any references to past performance does not indicate or guarantee future performance.