Tag: Bought
The Final 3 Feet Have Become The Most Important in The Supply Chain
We have talked about "the final 3 feet" before which is defined as the leg of the supply chain where product is brought from the back room to the shelves. However, in this COVID-19 world, the final 3 feet have really become the final 5 feet as there is a building expectation that the store will bring the product to the car and put it in the trunk for your. People do not necessarily want to go in the store. My thesis is the stores which do this really well will win and they will beat Amazon.
They almost all fail at the last two which is great customer service at the car. Many stores (including the big ones) have sent people to my car without any PPE and they have leaned over to ask me a question. The entire purpose of this drill is lost when that happens.
So, I have done some of my own research as I have not been in a store for at least 1 month yet I have bought many things. I have used either Amazon or I have used the buy on-line / curbside pick-up process and I can emphatically say that when the latter is done right, it is by far the best experience. The inverse is true however. When it is done wrong it is such a pain and so frustrating I just will never go back. Here are the elements of a great curbside pick-up process (This is NOT buy on line, pick up in store - BOPIS as I do not go into the store. This is Buy On-Line, Deliver to my Car).
- A seamless web presence which allows me to buy what is in inventory at the local store. Take payment so there is a complete touchless process when I arrive at the store.
- An alert process which tells me when the order is ready.
- A tracking method, using my cell phone, which tells you when I am at the store and in the parking spot.
- A well established location to park - good signage - easy to find.
- A numbering system on the parking location to make it easy to find me.
- A "through the window" confirmation process (Show ID, Scan email etc.)
- Associates put in the trunk.
- Associates need to be the best customer service people and need to be in full PPE (Mask and gloves).
While many stores have done a good job at this, I have yet to be in one which does it all extremely well. Even the big box home stores have yet to tie all the inventory into the order system (if the store buys locally it is not in the web site) meaning I have to order some on line and some I call in.
They almost all fail at the last two which is great customer service at the car. Many stores (including the big ones) have sent people to my car without any PPE and they have leaned over to ask me a question. The entire purpose of this drill is lost when that happens.
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- Open the Shell app and it knows I am at the station. It asks me what pump number I am at.
- It then asks me how much gas I want (From a fixed dollar amount to a "fill up).
- I use Apple Pay on my phone to pay (Completely eliminates the "skimming" threat which is where a lot of credit card fraud occurs).
- The app activates the pump and all I have to do is put the nozzle in the car and select gas type.
They have solved a lot of issues by doing this and one at least (the skimming) was a pre-COVID 19 issue.
The lesson here is for all retailers:
- Invest heavily in the final 3-5 feet of your supply / value chain. The rule used to be your mission was to get people through the threshold of the store. But now a huge amount of customers will not want to cross the threshold no matter what.
- Technology is your friend - Use it aggressively and substitute in-store upgrades with technology upgrades.
- Always think seamless. If there is a spot the consumer is interrupted in this process fix it with technology.
- Train your associates to forget their political views. Give the customers what they want and they want to feel safe. Masks, gloves and touchless processes do this.
- Take mobile payments. It is almost silly in this day and age that we, as a society, are not close to 100% pay by smart phone / mobile payment. Everything should be paid this way.
Technology is the "great equalizer" for the locally owned and operated stores. If they embrace it and invest in it, the will beat Amazon. Remember, Amazon can replicate just about everything except the things I described above. GO AFTER WHAT THEY CANNOT DO!
Buy My Place
In December 2015, Killara Resources, an unsuccessful Indonesian coal mining company announced they would be relisting on the ASX as the online real estate sales company Buy My Place. The backdoor listing involved an offer of up to 25,000,000 shares at a price of 0.20 each to raise $5,000,000.
Unlike some of the more speculative backdoor listings that the ASX is known for, Buy My Place was an actual established business. Launched in 2009, Buy My Place let Australians sell their house cheaply without spending thousands on real estate commissions. For a low fixed cost, they gave you an ad on Domain and the other major property sites, photographed your property, and sent you a billboard for the front of your house. It was a simple model, designed to demonstrate just how overpaid real estate agents are in an age of inflated house prices and increased reliance on online research.
BMP re-listed on the ASX on the 15thof March 2016 at a Market capitalisation of just over $11 million, roughly 11.5 times their pre-IPO annual revenue. In the January – March quarter the company achieved revenue of $288,000, and by the July-September quarter this had grown to $514,000. Not long after that, the share price hit a high of $0.44 on the 28thof October 2016, a 120% return on investment for IPO investors in just over seven months.
While investors didn’t know it at the time, 44 cents was as good as it got. Over the next few months the share price dropped steadily, reaching an all-time low of 15 cents in July 2017. There was no defining moment that can explain this slump in price. Throughout this period updates from the company continued to be positive, promoting record cash-flow numbers with nearly every quarterly report. Reading back through the company announcements, there is nothing to suggest that this is a company losing 65% of its value.
It is only when you look at the Prospectus in more detail though, do you get a sense of how Buy My Place has failed to live up to its own expectations. While there were no forecasts in the Prospectus, the three tranches of performance rights for senior Buy My Place employees gives us an idea of what the company, and by extension shareholders, were hoping for. The three tranches vest if the company achieves 8,000 property listings, $10,000,000 in revenue or EBITDA of $3 million in one financial year by July 2019. As it stands, these goals seem completely out of reach. If you annualize their last quarter numbers, Buy My Place is on track for annual listings of 1676, revenue of $3,668,000 and so far away from profitability it’s probably not even worth discussing. Whether a 10x increase in revenue over three years while retaining profitability was a realistic goal or not, somehow it seemed that this became the standard the company has been judged against.
A slightly more charitable way to look at Buy My Place’s lukewarm first couple of years on the ASX is that convincing someone to sell their own home without a real estate agent is a harder transition than both investors and the company initially realized. People may resent the huge amounts of commission Real Estate Agents pick up with relatively little work, but the step from resentment to taking the pressure of selling a house on yourself is another matter entirely. In February 2017 the company seemed to acknowledge this fact, and launched a full-service package, where for a higher fee of $4,595 home sellers gain access to a licensed real estate for advice, who also manages the whole process. This strategy seemed to be part of a broader re-positioning that happened throughout 2017, where the company sought to increase its revenue per client. In July, Buy My Place announced the Acquisition of My Place conveyancing, an online conveyancing firm they had referred business to in the past. A few months later in September Buy My Place announced a partnership with FlexiGroup, allowing customers to finance both Buy My Place fees and other costs associated with selling their property.
To cap off these changes, in October Buy My Place announced the departure of Alan Heath and the appointment of Colin Keating as CEO, a younger executive who had spent time at American Express and more recently at an investment administration company. The new strategy seems to have also involved a re-focus on revenue growth above all else. For the last two quarters, revenue growth has increased to an impressive 20%+ per quarter, but expenses have grown just as quickly.
Buy My Place - Quarterly cash flows since listing (thousands)
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For a company running at this sort of deficit, the obvious concern is how much runway they have before they will run out of money. At the end of December, the company had $800,000 in cash, plus an unsecured, zero interest credit facility with the investment/bankruptcy firm Korda Mentha of $1,000,000. Given they are currently running at a deficit of roughly $750,000 a quarter, it seems highly likely the company will need to go through another capital raising round in the next six to twelve months.
While normally the knowledge of an impending capital raise is enough to make me lose interest pretty quickly, the current share price seems close to the floor of any potential future equity raise. In December 2017, Buy My Place raised $400,000 from sophisticated and professional investors at a price of $0.16 each. In addition, the company secured a zero interest credit facility with the finance firm Korda Mentha of $1,000,000 in return for the issuance of 6,250,000 options with an excise price of 16 cents. With this in mind, It is unlikely these investors (Korda Mentha is also a major shareholder) will allow any future equity raise at less than $0.16 cents a share, given that announcements since then have generally been positive. With shares currently trading around the $0.16 mark, future equity raises should be at or above this price.
The competition
Although there are a number of online sites offering online house sale services in Australia, the elephant in the room in any discussion of Buy My Place is Purple Bricks. The UK low cost real estate agent expanded to Australia a couple of years ago, and with revenue of more than double Buy My Place in Australia and a market capitalisation of over $900 million pounds internationally, they represent the biggest competition by a few orders of magnitude. With this in mind, I thought it might be useful to compare the two companies’ latest half year reports for Australia only.
Buy My Place and Purple bricks H1FY18 (Millions)
| Purple Bricks | PB costs/revenue | Buy My Place | BMP costs/revenue | |
| Revenue | 6.8 | 1.57 | ||
| Cost of sales | -3.2 | 47% | -0.53 | 34% |
| Gross Profit | 3.6 | 53% | 1.04 | 66% |
| Administrative expenses | -3 | 44% | -2.97 | 189% |
| Sales and marketing | -5.7 | 84% | -0.87 | 55% |
| Operating loss | -5.1 | 75% | -2.80 | 178% |
The thing that immediately jumps out is Buy My Place’s much higher administrative expenses as a percentage of revenue compared to Purple Bricks. This can partially be explained by some one-off costs Buy My Place had regarding the appointment of their new CEO and acquisition of MyPlace Conveyancing, but it does look like these are costs that need to be reined in. You would also expect this ratio to improve as Buy My Place’s revenue grows. However, the overall picture suggests that these are two companies operating in broadly similar ways. The fact that Purple Bricks has managed to hit profitability with this model in the UK should be seen as a positive for potential Buy My Place investors. Purple bricks entrance to the Australian market should also help familiarise people with low cost real estate agent options, opening up more potential customers for Buy My Place.
Valuation and Verdict
At its core, Buy My Place is an idea that I really believe in. There is no reason for a Real Estate Agent to take in tens of thousands of dollars in commission to sell a house, in an age where buyers are increasingly comfortable doing their own research and the same handful of online sites are used by everyone when searching for a house.
With a market capitalization of just under $10.8 million dollars at time of writing and annual revenue of $1.53 million as per their latest half year accounts, Buy My Place is currently trading at 3.53 times annual revenue. For a company that has managed to sustain 20%+ quarterly growth for the last six months this seems like a pretty enticing deal. While some of this can be chalked up to the Buy My Place’s rather precarious cash position, it seems that at least part of the companies relatively cheap price can be explained by the short attention span of the market. Micro-cap investors are quick to move onto the new thing, and after failing to live up to their initial hype, it seems many investors have simply lost interest in Buy My Place.
I bought a relatively small investment in Buy My Place at $0.155 cents each last week. I will be watching the coming 4C closely due in just over a month’s time, and if they can start reducing their loses I will likely add to that position.
Appetise
Appetise are a food ordering website that are seeking to raise between 4.8 and 6.8 million dollars. While they are listing on the ASX, they are so far only located in London, and have no connection to Australia. In a trend that has been growing lately, they seem to have chosen to list in Australia purely due to its lower compliance regulations and associated costs.
Background
By numbers alone, Appetise looks like one of the worst value IPOs I have reviewed on this blog. To explain, let me give a few simple facts presented in Appetise’s own prospectus:
After starting in 2008, Appetise was acquired for only $230,000 in May 2016 by Long Hill, an American investment company. After acquiring the business, Longhill poured $2,260,000 into Appetise to improve the company's website and increase the number of restaurants on the platform. However, despite these investments, revenue decreased from $91,715 in FY16 to $49,172 in FY17. This IPO now values Long Hill’s stake at $9 million, with total market capitallization on listing between 13.8 and 15 million, more than 200 times their 2017 revenue. If the IPO is successful, this will be a 261% return on investment over 18 months for Long Hill, despite no measurable improvement in Appetise’s performance. If you are getting flash backs of Dick Smith right now, you’re not the only one.
Management
When Long Hill bought Appetise they did the usual private equity thing of installing a completely new management team, getting rid of the original founder in the process. The newly appointed CEO, Konstantine Karampatsos, has had experience both setting up his own online business as well as a stint at Amazon, and the CFO Richard Hately has had a number of senior roles at both start-ups and established businesses. While the CEO and CFO both seem like logical choices, appointing such an experienced management team to a company of this size leads to some pretty ridiculous statistics.
Konstantine Karampatos will have an annual salary of $204,050, post listing, plus a bonus of $122,430. Richard Hately, the CFO, will have a salary of $195,888, and will receive a listing bonus of $81,620. The marketing director will receive a salary of $138,750, though no listing bonus. All up, this is an annual cost of over $700,000 for the three highest paid employees, for a company that had less than $50,000 in revenue last year. Even if Appetise’s FY17 revenue increased by 1000% in FY18, it would still not come close to covering the salary of its three most senior executives.
This is a perfect demonstration of why a public listing at such an early stage is a terrible idea. A $50,000 revenue company should be being run out of a garage or basement somewhere by a few dedicated founders on the smell of an oily rag, not burning through cash on highly paid executives.
This cost has real consequences too. Under their proposed allocation of funds, with a minimum $4.8 million raise, Appetise will spend $1.55 million on executive and head office expenses, vs only $2.15 million on marketing. Given that their primary goal over the next few years is to raise their profile, this seems like a ridiculous allocation of capital.
Product
As Appetise is currently only operating in England, the closest I could get to testing Apetise’s product was spending some time clicking through their website. Overall, it was a pretty underwhelming experience. There are three large tabs that block a significant part of the page, which makes scrolling through options difficult, and the colour scheme and overall design feels a little basic.
On the positive side, they seem to have invested some time into making the mobile experience work well; if anything the site actually seems to work and look better on a mobile phone. It is also worth mentioning that while the prospectus mentions that the business has a national footprint on numerous occasions, their coverage in London is pretty minimal, and at this stage they seem to be focused solely on the city of Birmingham.
The company’s social media presence is similarly disappointing. The prospectus talks a lot about social media engagement through their loyalty scheme, where users can get credit by sharing Appetise on their social network but so far they have failed to get much traction in this area. The Appetise Facebook page seems to only post bad food puns, and each post gets around 2 to 7 likes on average
(I also noticed that a company director and their marketing executive are two of their most common Facebook fans.) Compare this to Menulog’s page, an Australian food ordering and delivery service, where you’ll see content featuring available restaurants, slightly funnier puns, and as a result much higher engagement with customers. While Facebook posts might seem like a trivial thing to be hung up on in a company review, one of the key things that will affect Appetise’s success is how easily they can build an online following. The fact that so far they have demonstrated little nous in this area is definitely a cause for concern.
Market
Online food ordering is an industry with massive growth potential, and this is probably the main reason Long Hill felt they could get away with the prospectus valuation they have gone for. Appetise has a different model to the likes of Menulog or Deliveroo though, as Appetise does not take part in deliveries, instead, restaurants featured on the Appetise platform need to deliver the food themselves. The idea is this will allow them to scale more easily and not get bogged down with logistical complexities. While I don’t doubt this approach might work in the short term, (and Just Eat, a successful UK company with the same model as Appetise has proven that it can) in the long run an Uber Eats type model of flexible contractors, that can be sent wherever there is demand seems much more efficient. As websites like Uber Eats become more popular and economies of scale start to kick in, I feel there would be an incentive for restaurants to fire their delivery drivers and move from an Appetise type platform to an Uber Eats one.
Appetise makes the argument that their patform is currently cheaper, as Uber Eats charge delivery fees to customers, but just like with Uber, you would assume that these charges will eventually decrease as the site grows in popularity.
Appetise makes the argument that their patform is currently cheaper, as Uber Eats charge delivery fees to customers, but just like with Uber, you would assume that these charges will eventually decrease as the site grows in popularity.
Verdict
Appetise’s response to a lot of what I’ve said here would be that the company is uniquely placed to experience explosive growth in the near future. They have a workable website platform, and their only major competitor in the UK Just Eat has demonstrated that there is money to be made in this market. While a $50,00 revenue company with a board of directors looks ridiculous now, if in 12 months’ time their revenue is closer to $1,000,000 no one will be complaining. The problem I have with this argument though is it requires a lot of faith with not much evidence. If Appetise is really uniquely placed to grow so quickly, why not hold off on the prospectus for a few months so they can demonstrate this? Appetise runs on a March end financial year, so their first half FY18 figures should be available now. Once again, the cynic in me thinks that if revenue was actually growing, these figures would be included in the prospectus.
Even in a growing industry you need to be ahead of the curve and have a clear point of differentiation to succeed, and after reading the Appetise prospectus and looking over their website I simply don’t see this for Appetise. In one of the easier decisions I’ve had to make with this blog so far, I will not be investing in the Appetise IPO.
Even in a growing industry you need to be ahead of the curve and have a clear point of differentiation to succeed, and after reading the Appetise prospectus and looking over their website I simply don’t see this for Appetise. In one of the easier decisions I’ve had to make with this blog so far, I will not be investing in the Appetise IPO.
The GO2 People
GO2 is a WA-based labour hire company raising between 10 to 12 million, with a post listing indicative market capitalisation of 23 to 25 million. The offer closes this Friday.
The first thought I had when looking at the G02 IPO is that investors should be getting a great deal. GO2 owes 3.8 million owed to the ATO, has working capital issues with increasing receivables, and is set to make a loss for FY17. If the IPO doesn’t go ahead there seems to be a real possibility the company could be out of business in a few months. With that in mind, you would think the IPO would be priced low enough to ensure that the offer doesn’t fall through. Unfortunately for investors, this doesn't seem to be the case.
Company outlook
G02’s revenue has been on a bit of a roller coaster over the last few years. After only 20 million of revenue for the 2015 financial year, the company revenue shot up to 26.5 million for the first half of FY16 before falling off a cliff. Getting your head around the company’s revenue numbers is harder than it should be thanks to sloppily labelled profit and loss table in the prospectus. In the below table, the December 15 and 16 columns are half year figures, despite the profit (loss) label being “for the year.” Given this is probably the most important table in the prospectus, you would think someone would double check these things.
To get a clearer picture than this table provides, I graphed the revenue below in six-month blocks for the last two years. Numbers for july 2017 have been extrapolated from the provided 30 April figures.
GO2 blame the downturn both on depressed market conditions and a preoccupation with getting ready for the IPO. It doesn’t seem like a great reflection of management that they could become distracted enough to lose half their revenue, but then again what do I know?
Valuation
I struggled for a long time to get an understanding of what I thought of the IPO price. GO2 is going to get a significant cash injection of 10 to 12 million if the IPO goes ahead, increasing the company’s net equity from just over half a million to around 10 million. This will have a significant effect on the company’s operations, which means it seems unfair to use their pre-IPO revenue to value the company.
One way to look at it, is to look at the value that has been assigned to the company before the cash injection of the IPO. As the company is being valued at 25.6 million with a 12 million dollar IPO, this means the pre-IPO company is being assigned a value of 25.6-12 = 13.6 million. For a company that made a profit after tax of 1.229 million after tax last financial year but a loss of $421,696 in the most recent reportable 12 month period, this doesn’t seem like a great deal. Even if we ignore the recent downturn and use the FY16 numbers, we get a P/E ratio of 13.6/1.229 = 11.065. By way of comparison, NAB shares are currently only trading marginally higher at a P/E ratio of 13.85, and a 41% dip in revenue for NAB would be almost unthinkable. You could argue that the potential upside for a company like GO2 is much higher, but I still think given the marked drop in performance, the valuation placed on GO2’s current operation is a little high.
While 95% of revenue so far has come from the recruitment business, 72% of money raised from the IPO after costs and ATO debt reduction are subtracted will be invested in thebuilding side of the business. GO2’s founder Billy Ferreira has a background in construction, and the prospectus argues that given they already have access to a workforce through their labour hire business, they are well placed to succeed in this area. It is this element of the prospectus that makes me second guess my opinion that the IPO price is too high. The company has a signed Memorandum’s of Understanding with property investors, and could potentially grow this side of the business very quickly.
Escrow
One of the good things about this IPO, is that basically all shares other than those bought in the IPO will be held in escrow. This means there is no short-term risk of pre-IPO investors offloading their shares and hurting the share price. If you are a short-term investor, this may be significant for you, but as the goal of this blog is always to identify long term opportunities I do not put too much weight on this point.
Summary
This is probably the IPO I have been most indecisive on. GO2 have managed to grow very quickly, and it looks like one of their main barriers to growth has been managing their working capital, a concern that should be eased thanks to IPO funding. On the other hand, I can’t help thinking that the seemingly distressed nature of the company means that investors should be given a slightly better price to invest. Somewhat reluctantly then, I will be giving this IPO a miss.
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