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BigTinCan
Overview
As someone working in business development, I’m used to being called into a room by an executive or manager for a presentation of the new sales tool that is going to reduce our admin/allow us to accurately forecast sales/provide quality leads. 9 times out of 10 it’s a bit of a let down. The tools are rarely demonstrated in a live environment, the data is often inaccurate, and the supposed insights with “machine learning” seems to be nothing more complex than a couple of if arguments in an excel cell. It is for this reason that I was a little sceptical when picking up the prospectus for Bigtincan, a content platform for sales people on mobile devices.
The Bigtincan hub allows companies to selectively push sales content to the mobiles and tablets of sales staff. The idea is that instead of sales people having to hunt through different emails or folders for the presentation or collateral that they need, all content can be accessed from the one hub, with both offline and online capabilities. Bigtincan is seeking to raise 26 million for a fully diluted market capitalisation of 52.34 million once all the various options and are taken into account.
Financials
BigTinCan is currently burning through a lot of money. The total loss in 2016 was nearly 8 million, and based on their own forecast figures they will lose another 5.2 milllion in 2017. In any other sector, trying to argue a company with these sorts of losses is worth over 50 million dollars would be ridiculous but in the tech space this is pretty standard. Any successful tech company you can think of lost huge amounts of money during their growth phase, sometimes for a long time. To use the most recent example, Snapchat’s market capitalisation post listing was around 29 billion dollars, despite losing over 500 million dollars last year.
Taking a closer look at the numbers, the extent of the loses seem more strategic than involuntary. In FY 2016, BigTinCan spent just under 9.5 million on product development and marketing, or 135% of their total revenue, and they plan to spend another 12 million in FY 2017. They could have easily reduced their loses by cutting back in these areas, but as every other tech company knows, the real key to success when you are selling software is scale. It costs nearly the same amount of money to sell a product to a million-people compared to a thousand, and you only get to sell to a million people if you have a great product. The key metric for any young software company is growth, and here Bigtincan does not disappoint. Total revenue was 5.17 million in 2016 and grew 35% to 7.04 million in 2016, with projected revenues of 9.7 million for FY2017.
The one potential problem I found regarding Bigtincan’s financials is whether there is enough available cash to sustain the future losses the business might make. BigTinCan will have 14.421 million dollars cash immediately after the IPO. Given their current and projected loses, there is a reasonable risk that they may need to refinance before they get into the black, which needs to be taken into account when deciding if purchasing these shares make sense.
Product
As someone who is often on the road presenting to customers in my day job, I get the appeal of the Bigtincan Hub. In sales, you are constantly searching through folders and emails for the right presentation or tool that suits the customer you are dealing with, and when you have to do it all on an Ipad it becomes even harder. A centralised hub that can deal with a range of different file types, allow commentary and collaboration, and let managers push files to different users has definite appeal.
What’s more, from all the research I have done, it seems the BigtinCan Hub has delivered as well. Most reviews they have received are pretty positive, and they have received some impressive testimonials from large customers.
Perhaps the most impressive write-up comes from Bowery Capital, a venture capitalist firm that publishes an exhaustive summary of all software tools for start-up sales organizations every year. In their latest piece, Bigtincan receives the best rating out of the 13 other companies in the “content sharing space.”
The only reservation I have with the Bigtincan hub is that it is targeted to address a very specific need. What happens if in a couple of years’ time, Google, Apple or Microsoft release something that can do everything that Bigtincan can do and more? Given the natural advantages these larger companies have, it would probably be the end of Bigtincan. Of course, the more palatable outcome is one of these companies deciding they want to acquire Bigtincan by buying out shareholders at a healthy premium over market price, so there is upside to this possibility as well.
Past court cases
Buried in the financial section of the prospectus is a small note that there were two court cases that had an impact on the Statutory profit and loss for the last two years. As investing in a company with a troubled legal history is an alarming prospect, I decided to do some digging to see if I could find out more about this.
The first court case was a dispute with an early director called David Ramsay. From what I can understand from Bigtinc
an’s version of events, David Ramsey was given money to develop software for Bigtincan which he then used instead to develop an app for his own company. It appears Bigtincan won this case and Ramsey had to pay $300,000 in damages as a result. While Ramsey has tried to appeal this, it looks like his appeal to the high court was rejected. so it seems this chapter at least is closed.
The second case was with an American Software company called Artifex, which filled a lawsuit against Bigtincan over the use of technology that let users edit Microsoft office documents on their smart phone. Bigtincan reached a confidential settlement with Artifex over this matter, so we do not know the exact outcome, but as Bigtincan has continued to grow since then we can assume that whatever concessions were made did not have a major impact on the Bigtincan business.
I don’t really see any major cause for concern with either of these court cases. Given the potential money at stake, it seems inevitable that software companies get into squabbles about proprietary technology, and most successful tech companies have a story of some estranged director or other in their past, if only to give Aaron Sorkin and Ashton Kutcher material.
Price
Evaluating Bigtincan’s listing price is a more complex than for most companies, as I was unable to rely on a basic Price to Earnings ratio to get a feel for what would be reasonable. Instead, I decided to use price to revenue as an alternative as nearly all software companies list at a loss.
Based on these figures, the Bigtincan valuation seems pretty reasonable. Total revenue from the 2016 calendar year was 7.934 million vs a fully diluted market cap of 52.34 million, giving a Price to Revenue ration of 6.6. Linkedin’s initial listing was at a Price to Revenue ratio of 56 and Salesforce’s was around 11 (this was back in 2004 when internet companies were viewed with suspicion). Closer to home, Xero the New Zealand based accounting software company listed on the ASX in 2012 with a price to revenue ratio of 25.
In addition to comparing Bigtincan to other technology IPOs, I have modelled the next five years after 2017 to try and get an idea of where Bigtincan could end up, assigning different growth rates to their main revenue and expense areas.
Based on the assumptions I have made (and I accept that many will disagree with a lot of these) the company will have an EBITDA of 4.4 million in 2022. To me this is very compelling. I do not think I have been overly optimistic with the growth rates I have used, and you do not have to be Warren Buffett to know that a fast growing SaaS company earning 4.4 million dollars a year will be closer in market capitalisation to 150 million than 50 million.
Verdict
There are significant risks with this IPO. Bigtincan is still a young company operating in a competitive environment, and all it would take is a change in industry direction or a better product from a larger tech company to end their prospects completely. However, the potential upside if things go to plan is pretty substantial, and for me the price is low enough to justify getting involved.
The Fat Prophets Global Contrarian Fund
Overview
If you’ve heard of one hedge fund manager from the last ten years there is a good chance it’s Michael Burry. The eccentric investor made millions on his bets against the housing market during the Global Financial Crisis and was immortalized in the book and later film The Big Short. What is less well remembered about Burry’s story is that before the housing market blew up countless panicked investors withdrew their money from his fund, worried by Burry gambling so much money betting against a housing market in the middle of a boom. While Burry still made millions from his bet, it was less than it could have been, and the stress and frustration of the whole process led to him deciding to close his hedge fund.
Burry’s story highlights a fundamental issue with hedge funds: investors in hedge funds can withdraw their money whenever they like. It is often precisely when a hedge fund manager sees the most opportunity, for instance when the market is falling or in Burry’s case when a bubble is about to burst, that investors want their money back.
It is for this reason amongst others that Listed Investment Companies (LICs) have gained in popularity in Australia over the last decade or so. LICs are basically a hedge fund or managed portfolio that is publicly traded on the ASX. Unlike a hedge fund though, when investors decide to they want their money back from an LIC they simply sell their shares, which doesn’t reduce the money available to the manager of the LIC. This means that LIC managers are less beholden to their investors, and, the theory goes, therefore more able to concentrate on maximising returns.
The Fat Prophets Global Contrarian fund is the latest such LIC to list on the ASX, with their 33 million dollar IPO at $1.10 a share expected to close on the 10th of March. Fat Prophets was started in the year 2000 by their founder Angus Geddes as a subscription based investment advice and funds management company. Investors who sign up to their service are given access to a daily newsletter, as well as reports on certain stocks with buy and sell recommendations. Since inception the organisation has grown to over 75 employees and 25,000 subscribers, and now provides stock picks for a range of different markets and sectors. The Fat Prophets Global Contrarian fund is the first time Fat Prophets has branched out into the LIC world, and it will be run by Angus Geddes and his team using the same contrarian investing principals that has made Fat Prophets a success.
Pros
The Fat Prophets track record
Fat Prophets impressive growth over the last 16 years has been largely due to a record of stock picks which would be the envy of most fund managers. Since their inception in 2000 until the end of 2016, the annual return of an investor who followed all their Australian equities stock tips would have been 18.49%, against an All Ordinaries return of only 7.96%. They have had similarly impressive success in their other sectors. On the Fat Prophets website all of their past stock tips from 2006 to 2016 are publicly available, and reading these you get a good sense of the company and how they have achieved this level of success.
Each stock tip is thoughtfully written, with impressive amounts of detail about each company and its market outlook. If you want to gain an understanding of their investing rationale and style, have a look at their buy recommendation for Qantas shares in August 2014.
The post goes to painstaking lengths to break down Qantas’s market position, their recent challenges, and why the Fat Prophets team felt the struggling airline could turn things around. Not only did the recommendation prove to be spot on, with the share price more than doubling over the next twelve months, but they were even correct about how it happened. They correctly predicted that a decrease in flight volumes along with the cost savings of Alan Joyce’s restructures would help bring the company back into profitability. Of course, not all their recommendations ended up being as spectacular as this one, but in all their tips they display a similar level of knowledge, discipline and intelligence. The opportunity of being able to get in on the ground floor with a team like this as they embark on a new venture is definitely an appealing prospect.
Minimal Restrictions
Reading through the prospectus, one of the things that jumps out at you is the loose rein Angus Geddes has given himself. While most LICs typically restrict themselves to certain sectors, areas or assets types, the prospectus makes it clear that Angus Geddes and his team are going to invest in whatever they feel like. They reserve the right to trade in everything from equities to derivatives, debt products and foreign currencies, and to go from 100% cash holdings all the way to 250% leverage. While some might see this as a risk, to me this makes a lot of sense. If you believe that Geddes and his team are worth the roughly $400,000 annual fees plus bonuses they are charging to run the fund, it makes little sen
se to restrict them to a sector or investment type. With this level of freedom, Geddes can go after whatever he feels will give the most value, and there will be no excuses should the fund not perform.
Cons
Listing price
As a new entrant with a smaller Market Capitalisation than the established LICS, fees are inevitably higher than some of the more established listed investment companies. The Fat Prophets Global Contrarian Fund will charge 1.25% per annum of their net assets in fees. In addition, a quarterly bonus will be paid each time the portfolio ends a quarter on a historical high of 20% of the difference between the current portfolio value and the next highest historical portfolio value. By contrast, Argo and AFIC, two of the largest Australian Listed Investment Companies charge fees of under 0.2% of their net assets per annum. It should be pointed out though that both Argo and AFIC regularly underperform their benchmark indexes, so perhaps in the LIC world you get what you pay for.
Net Tangible Assets
After the costs of the offer are paid for, the Net Tangible Assets of the Fat Prophets Global Contrarian Fund based on a maximum subscription will be somewhere around $1.08 per share. Listed Investment Companies usually trade at a relatively small discount to the net value of their portfolio, as the market prices in the fees an LIC charge. This means we can assume the shares actual market value will be somewhere around $1.05 to $1.07 after listing, versus a purchase price of $1.10. While this is the same for every newly listed LIC, it does mean that any investor thinking of participating in this offering needs to be in it for the long haul, as there is a good chance the shares will likely trade at below listing price for at least the first couple of months.
Wildcard
Loyalty options
Every investor who participates in the Fat Prophets IPO is issued with a loyalty option for each share purchased. From 12 to 18 months after the listing date, shareholders will have the option to buy an extra share in Fat Prophets for $1.10 for each share they own, regardless of what the actual stock price is. These loyalty options are forfeited if an investor sells their shares in the first year and are not transferred to the new owner. Initially this seems like a great deal, as you can double your holding at the listing price if the fund performs well, however the fact that everyone participating in the IPO is issued with the same loyalty options negates most of the benefit. In fact, in a simplified world where the stock price equals the net assets and no one sells their shares in the first 12 months, the loyalty option provides no benefit at all.
To understand this, imagine that based on these assumptions the shares are trading at $2.20 after 12 months. Initially you might say the loyalty options now give each shareholder a bonus of $1.10 per share, as they could buy shares for $1.10 then immediately sell them for $2.20. However, this overlooks the fact that every other investor would also be exercising their options, doubling the number of shares on offer. At the same time, the company assets would only increase by a third from the sale of the loyalty options, from $66 to $99 million. With $99 million of net assets and now 60 million shares on issue, the share price would now be $99,000,000/$60,000,000 = $1.65. This means that not only would shareholders only make 55 cents per loyalty option, their original shares would have also lost 55 cents in value at the same time, giving a net benefit of zero for the option.
Of course, the real world never plays out like the textbook. Some shares will inevitably change hands in the first 12 months, reducing the number of options available and therefore providing some value to those who still have their loyalty options. However, any investor thinking of participating in this offering should make sure they have the funds available to exercise their options after 12 months if the share price is trading above $1.10, as otherwise they risk seeing the value of their shares reduced by other investors cashing in their options without being able to benefit themselves.
Summary
If you are looking to for an IPO that is going to double your money in six months, this isn’t the one for you. Any gains here are likely to be in the long term. Nor is this an IPO in which to invest your life savings, as the freedom Geddes and his team have given themselves mean that the risks could be considerable. However, if you are looking for a good long term investment opportunity for a portion of your portfolio, investing in this IPO could make a lot of sense. The Fat Prophets team have proven they know what they are talking about when it comes to investing, and if they can get anywhere close to their previous success the fund will do very well.
Personally, Geddes track record is too good to pass up, and I will be making a small investment.
Personally, Geddes track record is too good to pass up, and I will be making a small investment.
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Eildon Capital
Overview
Eildon Capital is currently a subsidiary of the publicly listed investment company CVC Limited. The company focuses on high yield debt and investments in the property sector. They plan to raise between 2 and 10 million dollars via the IPO, with a market capitalisation on completion between 24 and 32 million. In the prospectus, they state that their goal for debt yields on property are between 12 and 18 percent before management fees and taxes. As a Mezzanine finance company, security on these loans will usually be equity in the ventures themselves.There’s a lot of things to like about this prospectus; an experienced and stable management team, a good track record and at least on the surface a reasonable price, with every one dollars’ worth of shares bought giving you $1.01 of net assets in the newly created company. I’ve got a few misgivings though, and there are three main reasons I won’t be taking part.
The property sector
As a long term believer in the idea that the housing market is overdue a downward correction, it’s hard to think of who would be more exposed to this than a company specialising in high yield property development loans. A substantial portion of their current assets are mezzanine loans to apartment developments in Melbourne, the Gold Coast and Brisbane. When I think “housing bubble,’ an apartment development in the Gold Coast is probably one of the first things that comes to mind. While Eildon stress in the prospectus that they have ways to mitigate their risk, if they are getting double digit yields on loans it’s hard to believe they are able to protect themselves that well.
Vanda Gould
Another thing that makes me a little suspicious of this listing is a controversy that has been hanging around Eildon capital’s current parent company, CVC Limited. Founded in 1985, one of CVC Limited’s founding directors and chairman for many years was a guy called Vanda Gould. Vanda Gould resigned in 2014 after becoming embroiled in a lengthy dispute over tax avoidance with the ATO. He recently lost an appeal to the high court over a tax bill of more than $300 million for companies he owns and advises, and is also facing criminal charges relating to tax avoidance that could potentially land him in jail. The guy seems like one of the real characters of Australian investing, his chairman’s letters for CVC would regularly get pretty philosophical, quoting Shakespeare and referencing interest rates from ancient Rome and Babylonia. While these days he holds no position at CVC and you won’t even find his name on the website, it’s hard to believe he is completely disentangled from all of CVC’s various affairs. To give an example of a potential continuing connection, over 10% of the shares of Eildon capital will be held by a company called Chemical Trustees Limited on listing, a company that had its assets frozen in 2010 due to alleged tax avoidance in relation to Vanda Gould. I have no idea if there is still any connection between Chemical Trustees and Vanda Gould, but if they end up having to sell their holding in a hurry or the shares are seized it could have a significant effect on the share price.
Pricing concerns
The last thing going against this prospectus is CVC Limited’s current share price. With net assets of $214 million as of the end of the last financial year, CVC’s market capitalisation has hovered around the 196 million dollar mark for the last couple of months. This means every 1 dollar you invest in CVC Limited buys you $1.09 of net equity on CVC’s balance sheet. That’s 8 cents more than you will get of Eildon Capital’s equity if you take part in the IPO. As CVC currently owns Eildon capital, this could mean that the IPO is priced above the current market price. Of course, it’s impossible to know for sure what assets exactly on CVC’s balance sheet the market is undervaluing, but it could just as well be the Eildon capital assets as anything else. If this is the case, there is a real danger the share price will drop by around 6% or 7% upon listing. If you are a long term believer in the company this may not bother you, but it does mean you may need to commit to holding these shares for quite a while if you want to make money.
Verdict
Despite all these issues, the target returns will no doubt be enticing for some investors, and if you have an appetite for a bit of risk and are not currently that exposed to the housing industry taking part in this IPO could make sense. For me though, my scepticism of the housing market along with concerns about the Vanda Gould connection makes me happy to give this one a miss.
The offer closes on the 24th of January.
Ardrea Resources
Overview
It’s hard not to be charmed by the prospectus of Ardea resources. Something about the long term consultant getting his first shot at a Managing Director role, the all or nothing plan of investing all money raised into exploratory digging in the next few years and the hopeful and earnest pictures of gold nuggets, abandoned mine sites and old letters makes it feel like something out of a Poldark episode.
The whole project seems to be a creative way Heron Resources management have dreamt up to finance exploration of some of their existing tenements they think look promising without annoying their shareholders who would rather they focused on their existing mine. Ardrea resources will be given the tenements and in exchange Heron Resource shareholders will be given over half of the shares in Ardrea Resources. Ardrea will then raise 6 million dollars through the IPO selling off the other shares
While it's an elegant solution, it is a rather expensive way of doing things. The IPO will apparently cost $900,000, or 15% of the money raised and that’s before the additional salaries of board members and directors that will need to be paid each year are factored in. The cynic in me thinks that if those gold nugget pictures that are talked about so excitedly in the prospectus where compelling enough Heron Resources management would have convinced shareholders to let the company do the drilling themselves, though perhaps that's unfair.
Analysis
The payoff tree for Ardrea is pretty simple: The two year exploration will either turn up something that warrants a mine, or the company will have burnt through nearly all its money on the exploration drilling and the shares will be close to worthless. This means that in order to evaluate this deal we need to decide on two things: how much the share price will be if the drilling turns up something, and the likelihood of that happening.
To try and quantify what the Ardrea share price would be if the drilling work uncovers a feasible mine site we can use the share price of Heron Resources itself. As it stands currently, Heron Resources has had the Woodlawn mine approved as economically feasible with works due to start early next year. With this information supposedly factored into the share price, the company has a market cap of just under 52 million dollars. If you subtract the net cash the mine has of around 24 million dollars, it means the market value of the Heron Resources mining site plus any other remaining tenements is around 28 million dollars. The market cap on listing of Ardrea Resources will be 14.3 million if fully subscribed, meaning that if Ardrea was to find a mine site that a feasibility report showed was worth developing, the market cap and share price doubling to 28.6 million and 40 cents respectively may be a reasonable assumption. I know this may be overly simplistic, but there seem to be so many unknowns in regards to what could be found that trying to be more specific seems futile.
Trying to assign a percentage to the drilling finding anything is harder still. I’m not going to even pretend that phrases like “’wallaby style magnetite epidote alteration’’ mean anything to me, so the Prospectus isn’t really much help in this regard. There are a couple of things though that make me feel this percentage isn’t that great. Firstly, these tenements are not exactly new, with the Prospectus mentioning they have been looked at by previous miner’s numerous times, which can hardly be a good sign. Secondly, I keep coming back to the idea that if this really was a great opportunity, there must be easier ways to raise 6 million than through an IPO. Surely there would be private investors who would jump at the chance to put up money if they thought this opportunity was worthwhile. With all this in mind, I find it hard to be confident that the drilling prospects are above 50%.
With that low of a chance of a payoff, the deal doesn't seem that enticing.
There’s one more reason I’m reluctant to invest in this Prospectus. One of the conditions of the prospectus is that Heron Resources shareholders get priority if the IPO is oversubscribed. This means that for the average non-Heron Resources holding investor you are in a catch 22 situation: If the Heron Resources shareholders know this is a good deal, all or most of the shares will be snapped up before reaching the general public, and you will be left out. If, on the other hand, Heron Resources Shareholders think that this drilling project isn’t worth it, your bid will probably be filled.
Verdict
This one is a pass for me. If I had shares in Heron Resources it might make more sense, but as it stands there are too many potential downsides to make the potential payoff worthwhile.
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