Tag: IPO
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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.
Simble
I’ve been distracted by a few other things lately, so my apologies for the lack of posts. I also started a few posts before realizing I didn’t really have much to say about the company. There are certain IPO’s in technical fields where if you aren’t a subject matter expert in whatever area the company operates in its hard to offer much in the way of useful commentary.
As it looks like my investment in Bigtincan is finally paying off, it seemed like a good time to review another SaaS (Software as A Service) IPO.
Background
I’m having a little difficulty properly understanding the history of Simble. The Prospectus states that Simble was created as a merger of Incipient IT, an international technology venture group and Acresta, and Australian Software company. What doesn’t make sense though is that according to the Prospectus Simble was created in September 2015, yet the acquisition of Acresta and Incipient IT only occurred in September 2016. The prospectus doesn’t give much information on what exactly was happening with Simble during the 12 months between being created and acquiring Acresta and Incpient IT, but whatever they were doing they managed to rack up over 1 million in expenses during that time.
Just to be clear, these are statutory figures so are actual expenses for Simble, not of Acresta and Incipient IT before they were acquired. One possible explanation is that these expenses could have had something to do with purchasing the two companies, but that seems like an awful lot of money to spend on due diligence, and doesn’t explain the $86,000 marketing expenses. A more likely possibility is that Simble initially had some other business venture that they have since discontinued that the prospectus is neglecting to mention.
After doing a bit of digging around, it does seem that Simble has been involved in a few different areas that they don’t bother mentioning in the prospectus. Type Simble into the Android app store or Google and you find a bunch of results, some a little more hairbrained than others. There’s Simble Kids, a website for finding children’s activities in the United Arab Emirates (Google that one at your own risk as the website has an expired security certificate), a booking platform for small businesses (this one appears to be functional at least) and Simble Live, which was apparently a social commerce app again based in the Arab Emirates (I still have no idea what a social commerce app actually is). All these businesses seem to have largely been abandoned though, so I guess they decided it made a cleaner narrative to leave them out of the prospectus.
As an outsider, the merger between Acresta and Simble initially doesn’t make much sense. The little information I was able to find online about Incipeint IT shows that it was operating as a software venture capital firm and incubator before being acquired. Incipient IT was Co-founded by Phillip Shamieh, who may be familiar to Australian Small-Cap investors from his Australian stock research company Wise-Owl. (More Controversially, Shamieh was also involved in the now defunct sandlewood company Quintis. Wise-Owl was criticized in Glaucus Research’s now famous short report on Quintis for posting buy recommendations on Quintis Stock without disclosing Shamieh’s involvement in the company).
Acresta on the other hand, are an Australian software company with a focus on providing automation services to government and businesses.
What exactly the synergies are between an Australian Software Company and an Asian Business incubator is not that clear, but it seems that the business has been organized to maintain Incipient IT’s coding and software team in Vietnam, while keeping Australia as the businesses base of operations. Economically at least this makes sense, due to the lower costs of maintaining a development team in a country like Vietnam. I have seen a number of different businesses work with a similar model. The executive structure seems to largely reflect the merger between Incipient IT and Acresta. The CEO Fadi Geha was a co-founder of Acresta, and the next highest paid executive is the Commercial Director Phillip Shamieh from Incipient IT.
Products
Simble historically has received the bulk of its income from Simble Mobility. A good example of Simble Mobility’s work is the App they developed for Barwon Health’s Cancer Centre for patient registration and booking.
Simble will typically work with an organization to develop an electronic solution for a business process and then develop the software. It is important to note that for a lot of these projects Simble does not actually own the platform that they work on. Instead, Simble has previously used a platform developed and owned by Blink Mobile, another small Australian software company. Simble has an agreement in place to use Blink Mobile’s platform, but is does not look like its exclusive which is a bit of a concern.
From an investment perspective, this is all pretty unexciting. A large proportion of Simble’s clients in this space seem to be Not-for Profit and government organizations. Having worked previously selling products to local government I know from experience that this can be a slow moving, uninspiring slog with products that are hardly at the cutting edge of technological development. It is also an industry with little prospects for rapid growth, as each organization is likely to want their own customized products that need to be developed individually.
Perhaps unsurprisingly then, the prospectus spends a lot of time promoting the growth potential of the Simble Energy Platform. This is a recently developed platform for businesses seeking to better manage their energy use. In addition to monitoring energy consumption, the platform is able to remotely turn on and off different circuits and appliances to take advantage of lower energy prices, or sell back surplus energy to the grid when prices spike. This is achieved via an Internet of Things hardware solution that needs to be installed on the relevant appliances and machines on-site. Simble gets revenue both from the initial installation of the hardware and the monthly subscription fee to use their software.
While the Internet of Things element is a recent development for the company, Simble and its predecessor Acresta have been providing energy management services for quite some time. You can old case study for carbon monitoring services that Acresta provided back in mid-2015 to Jurlique here.
On the face of it, the Simble Energy Platform seems like a solid business idea. There’s been an increased focus lately on the variability of energy demand on grids, and the rollout of smart metres presents significant savings for businesses able to match their energy demands to off-peak times. The Internet of Things element makes a lot of sense as well, as it transforms the platform from a purely monitoring service to one that can provide real savings.
On the negative side, it doesn’t look like Simble is the only company operating in this space. Simble seems to be initially focusing on the UK for its energy management business, and the Prospectus lists a few different companies already operating in this market. More worryingly, IBM also looks like they are providing a similar solution, with both an energy monitoring and Internet of Things element. One of the biggest fears for tech start-ups is that some giant company starts offering a similar service before they are able to compete, to the extent that “what happens when Google gets involved in your business” is a standard question Venture Capitalists ask when interviewing start-ups. While IBM doesn’t quite have the reputation of Google for moving into industries and quickly destroying the competition, they are still a pretty formidable competitor for a business barely able to clear $2 million of revenue a year.
Financials
Mid-January is typically a pretty quiet time in the IPO world. It’s an awkward time to list as one month or so later you would be able to include results for the 2018 calendar year, yet as it stands you are left with financial information that is over six months old. This is a particular problem for the Simble IPO, as a pessimistic interpretation of their balance sheet from June 2017 suggests they could be bankrupt by now.
In June 2017, the business had only $182,000 in cash, vs $1,650,000 in payables, $309,000 in employee benefit liabilities, and just under one million in unearned revenue. For a company with negative net cash flows for the six months until June 2017 of -$951,000 this is a pretty major concern. Deloitte seems to have been of the same opinion, as they submitted an emphasis of matter statement regarding the troubling net working capital position when they signed off on the HY16 and and HY17 financial report.
From a revenue perspective the situation isn’t much better. Below is the normalized profit and loss for Simble, which incorporates both Acresta and Incipient IT figures from before the merger.
The labelling is a bit confusing, but the first three are all Calendar years 2014-16, then HY16 is July-December 2016 and HY17 is January-June 2017. This is due to the business recently changing to a December end of year. It’s a hard table to look at, as it switches from 12 month periods to 6 months. By subtracting the HY16 numbers from the CY16s, I was able to work out the figures for the first half of 2016, giving me 3 6 month profit and loss periods.
| $000 | jan - Jun 2016 | Jul - Dec 2016 | Jan - Jun 2017 |
| Revenue | $ 1,090 | $ 1,629 | $ 1,160 |
| Cost of Sales | -$ 340 | -$ 810 | -$ 359 |
| Gross Profit | $ 751 | $ 819 | $ 801 |
| Other Income | $ 300 | $ 455 | $ 348 |
| Operating Expenses | $ - | ||
| General and Administration | -$& nbsp; 2,243 | -$ 1,823 | -$ 1,637 |
| Marketing | -$ 164 | -$ 359 | -$ 62 |
| Total Overhead expenses | -$ 2,407 | -$ 2,182 | -$ 1,699 |
| EBITDA | -$ 1,355 | -$ 909 | -$ 550 |
| Depreceation and Amortisation | -$ 366 | -$ 407 | -$ 462 |
| EBIT | -$ 1,721 | -$ 1,316 | -$ 1,012 |
As you can see, there has been a negative trend in revenue from a high of $2.9 million in 2015 (or 1.45 Million every six months) to only $1.16 in the six months to June 2017. The prospectus mentions that the business is currently went through a restructuring period prior to listing, and it seems they are yet to see much revenue growth from their new energy platform. The jump to $2.2 million in operating expenses in the six-month period before the acquisition of Incipient IT and Acresta is also interesting. Around $1 million of these expenses are from Simble’s statutory accounts, so this does seem to confirm Simble was doing something else at that time other than simply getting ready to purchase Acresta and Incipient IT. It gets especially weird when you look further down at the cash flow statements and see that the business capitalized $4.711 million in development costs in the second half of 2016 as well.
In total, this means the business spent around $9 million in 12 months on operating expenses and software development, a phenomenal amount for a business this size. This seems to suggest the current management team is not exactly frugal, which isn’t great news considering they will have less than $7 million in net cash to play with post-listing.
Valuation
Simble made a statutory loss before tax of $1.25 million for the six months to June 2017, so any traditional valuation method as a multiple of earnings isn’t going to be possible. Instead, as seems standard for SASS companies, the main metric we can use to evaluate the company is a multiple of revenue.
With a maximum market capitalisation of $17.98 million, Simble is valuing its IPO at 7.75 times revenue. If you subtract the money that is to be raised, the pre-IPO value is $10.48 million or 4.52 times revenue. For a SASS company this is pretty reasonable. Bigtincan, a SASS company I invested in that was at the low end for SASS valuations listed at 6.6 times revenue and is now up over 50% on its listing price. On the negative side, Registry Direct, another SASS company that I invested in listed at 31.7 times revenue and now is trading around 40% lower than its listing price. However, what both these companies had which Simble doesn’t is impressive revenue growth. At the end of the day, the only reason investing in a company currently losing money makes any sense is because you think it is going to grow rapidly. The fact that Simble is currently shrinking makes this a much harder sell. If they had been able to wait long enough to show actual revenue growth from the Energy Management platform the valuation would be much more compelling, but I guess given the dire state of their balance sheet waiting six months probably wasn’t an option.
Verdict
While the idea at least of the Simble Energy Management platform seems compelling, at this stage there is too little actual evidence of real growth of this platform for me to justify an investment. In six months’ time if they can show some revenue growth it might be worth picking up some shares even if you need to pay substantially more than $0.20, but without seeing that growth the investment seems like too much of a gamble. I’ll waiting for something a little more compelling for my first investment of 2018.
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.
Registry Direct
Overview
Registry Direct is a software business that provides share registry services to publicly listed and private companies. This includes keeping track of shareholders, facilitating the issuance of new capital, convening shareholder meetings and providing meeting minutes, share raising information and other required communications to shareholders. Registry Direct aims to provide low cost registry services to smaller privately-owned companies than have typically been ignored by the established share registry companies. The maximum raise is 6 million, with a post raise market cap of 20.5 million.
Founder
One of the main things I look at when evaluating the IPO’s of new companies is the strength of the Managing Director/CEO and how long they have been involved in the business. It was a key factor in why I invested in both Oliver’s and Bigtincan, and why I passed on Croplogic. Registry Direct’s founder is a guy called Steuart Roe. Steuart has been a key figure in the Australian investing world for years. He was involved in launching the first Exchange Traded Fund on the ASX back in 2001, and more recently was the manager of Aurora Funds Management from 2010 to 2014. It is his time at Aurora Funds Management that may potentially be a concern for some investors. Aurora Funds Management was created when three separate funds management companies were merged in 2010. One of the funds that was part of the merger was a fund founded by Steart called Sandringham Capital, and Steuart became the Managing Director of Aurora Funds management upon the new funds creation.
Without going too much into the details, the fund performed poorly, and Steuart Roe left the business in 2014. This article has some insight into the problems as does this hot copper thread where someone from registry direct actually turns up to give Steuart’s side of the story.
Having spent some time reading through all of this, it seems Aurora’s problems were caused by a few unlucky investment decisions rather than incompetence or mis-management. As a result, I don’t see how this should have any negative impact on how this IPO is evaluated. On the other hand, the experience and connections Steuart must have picked up in his time running investment funds seem to make him uniquely qualified to lead a successful share registry business. If you look at how quickly Registry Direct has grown since the business began in 2012 a lot of this has to be down to Steuart’s connections and experience enabling him to both design a product that fund managers and company owners would like, and have the connections to sell if effectively. Post listing Steuart will own just under 50% of Registry Direct’s stock and will continue in his current role as managing director. And all in all, I see his significant stock holdings and continued presence in the company as a significant bonus for this IPO.
Financials
Registry Direct are one of the few companies I’ve reviewed whose only pro forma adjustments actually reduce net profit.
Below are the unadjusted audited figures for the last three years:
Whereas the figures once pro forma adjustments have been made are here:
The rationale behind the reduction in revenue is that Registry Direct received consulting fees unrelated to the share registry business in 2015 and 2016 of $377,167 and $555,224 respectively that have been excluded from the pro forma figures. Interestingly enough, these fees came from Steuart’s old company Aurora Funds Management (Aurora Funds Management was renamed SIV Asset Management in 2016). While Steuart stepped down from his Managing Director position in 2014, he only resigned from the board of SIV Asset Management in June 2017. It would be interesting to hear what shareholders of SIV Asset Management think about the company shelling out over $900,000 to a company owned by one of its directors – but that is a
topic for another day.
There can often be a real lag in revenue growth for software companies in early years, with every dollar of revenue dwarfed by massive investments in software development. That Registry Direct managed to grow its revenue so quickly is impressive, as is the fact the company managed to achieve profitability in 2015 and 2016, even if it was only due to the somewhat suspect related party consulting fees.
Industry and strategy
The Share Registry market seems to be a relatively healthy industry, with good growth potential and profitability. Computershare and Link, the two biggest companies in this sector in Australia grew their profits by 68% and 101% respectively over the last financial year. As mentioned at the start of this post, Registry Direct intends to diverge from these companies by providing cheaper registry services to a larger number of smaller privately-owned companies. The prospectus uses the below table to present Registry Direct’s proposed fee structure.
The prospectus also indicates they intend to drive this growth by allowing accountants lawyers and other professionals to sell “white label” versions of the Registry Direct software. From an outside perspective at least, this makes a lot of sense. If Registry Direct can offer simplified registry services through a standard software package, increasing customer numbers by allowing accountants and other professionals to sell Registry Direct’s software on their behalf seems like a logical way to increase revenue without hiring a large salesforce. This strategy should be further buoyed by the Turnbull government’s recent legislation changes regarding crowdfunding in Australia. These changes make it much easier for unlisted companies to raise money from the public, which should result in a dramatic increase in the number of private companies looking for cheap registry services.
Despite how promising this all sounds, it should be noted that at the date of the Prospectus, Registry Direct only had 60 share registry clients and its two largest registry clients made up over $400,000 of the companies FY17 revenue. It seems that last year at least, Registry Direct was still operating more like a typical share registry business, providing tailored services to a smaller number of high paying customers. This pivot to a larger number of lower cost clients may be good in theory, but it is worth remembering that at this stage it is more of a plan than current business operations.
Valuation and Verdict
At only $648,000 of FY17 revenue vs a market cap of 20.5 million, this IPO is a little more expensive than I would prefer. Market cap divided by revenue is a troubling 31.7, vs 6.6 for Bigtincan, a Software IPO I invested in earlier this year. However, considering the company was only founded in 2012 and just how quickly revenue has grown over the last few years, I feel that this expensive price is at least somewhat justified.
At only $648,000 of FY17 revenue vs a market cap of 20.5 million, this IPO is a little more expensive than I would prefer. Market cap divided by revenue is a troubling 31.7, vs 6.6 for Bigtincan, a Software IPO I invested in earlier this year. However, considering the company was only founded in 2012 and just how quickly revenue has grown over the last few years, I feel that this expensive price is at least somewhat justified.
Overall, the main thing that makes me willing to overlook this high valuation is how confident I feel that Registry Direct will be successful. The company has demonstrated that it can grow revenue quickly, has recorded profitability in previous years, and is led by an impressively well connected and experienced Managing Director. What’s more, the company is operating in what seems to already be a relatively profitable industry that is likely to see an explosion of demand thanks to the Turnbull governments legislation changes. While I would be happier if the price was a little lower, for these reasons Registry Direct will be my fourth IPO investment since starting this blog.
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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