Tag: Thinking
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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.
Croplogic
When I first saw the Croplogic IPO I was pretty excited. Lately ASX IPOs seem to have been an endless list of speculative mining startups and suspicious Chinese organizations, so its nice to see a company that seems genuinely innovative. Based on technology and crop management techniques developed by the New Zealand government research institute Plant & Food Research, the company is looking to revolutionize the agronomics sector with various technological and modelling-based solutions. This includes both patented electronic monitoring devices that provide live soil moisture levels from the field, as well as sophisticated modelling that allows farmers to predict moisture levels and show optimal times for watering and fertilizer application. The idea is that this technology will allow agronomists to spend less time driving from field to field taking samples, while giving farmers a higher level of service at the same time. The company has been around for five years, and has completed a few trials with large multinationals. While they claim these trials have been promising, they haven’t really amounted to much revenue as can be seen by the meagre profit and loss report.
Croplogic is seeking to raise up to 8 million, with an indicative market capitalization of $23.9 million based on a maximum subscription.
Strategy
One interesting things about Croplogic is that they have decided to grow by acquiring established agronomy businesses rather than organically (if you’ll excuse the pun.) This is based on the idea that the agricultural market is suspicious of new entrants and values existing relationships. Croplogic therefore intends to purchase traditional agronomics businesses then slowly introduce Croplogic’s various innovations to their customers. While I understand the thinking behind this (at a previous role I saw first-hand a European fertilizer company fail spectacularly in their expansion into Australia due to difficulties selling to suspicious Australian farmers), there are a few factors that make me worried this strategy won’t work. Post listing, Croplogic will have only around 8 million dollars with which to buy the very specific type of company they are looking for (they are specifically targeting potato agronomics companies) in the limited amount of time they have before shareholders start getting impatient. With such specific criteria and a limited amount of time, it seems a real risk they will be forced to pay above market prices for the first suitable company they find.
Croplogic’s most recent acquisition doesn’t really inspire confidence either. On the 28thof April 2017 Croplogic acquired a company called Proag services, an agricultural consulting business based in Washington state USA. Croplogic paid $1.4 Million AUD, with another $1.25 million to be paid over the next few years provided Proag’s revenue does not decline sharply. As a test case for Croplogics acquisition model, the Proag purchase does raise a few questions.
While in the financial year ending March 2016 the business made a profit of $140,000 AUD, in 2017 this had reduced to a loss of $24,650 (to make things simpler, I am using AUD for both the revenue and purchase price, despite Proag being an American company). This loss was caused mainly by small a decrease in revenue from 2.24 million to 2.14, and an increase in operating costs from $580,000 to $690,000. To be clear, the FY17 financial year ended before Croplogic bought the business, so these costs cannot be easily attributed to acquisition expenses. While there could potentially be other factors that explain the 2017 loss, 2.65 Million seems hugely unreasonable for a company that lost money last financial year, and even seems on the steep side if you just take the FY16 numbers into account. Were Croplogic so desperate to secure an acquisition before the IPO that they ended up paying more than they should have for a struggling company? As an outsider it certainly looks like that.
While in the financial year ending March 2016 the business made a profit of $140,000 AUD, in 2017 this had reduced to a loss of $24,650 (to make things simpler, I am using AUD for both the revenue and purchase price, despite Proag being an American company). This loss was caused mainly by small a decrease in revenue from 2.24 million to 2.14, and an increase in operating costs from $580,000 to $690,000. To be clear, the FY17 financial year ended before Croplogic bought the business, so these costs cannot be easily attributed to acquisition expenses. While there could potentially be other factors that explain the 2017 loss, 2.65 Million seems hugely unreasonable for a company that lost money last financial year, and even seems on the steep side if you just take the FY16 numbers into account. Were Croplogic so desperate to secure an acquisition before the IPO that they ended up paying more than they should have for a struggling company? As an outsider it certainly looks like that.
Management
One of the things I look for in an IPO is strong founder with a real passion for the company. Bigtincan’s David Keane and Oliver’s Jason Gunn are two great examples of this. In addition to being good businessmen, both founders seem to have a real passion for their respective companies and expertise in their specific industries. You get the sense with both Jason and David that they have invested personally in their companies, and will stick by them for as long as it takes.
In contrast, the managing director of Croplogic Jamie Cairns has only been with Croplogic for just over a year and has a background in internet companies. The CFO James Jones has been with the company for even less time, and last worked at a private equity firm. While they both seem capable enough, they don’t seem to be experts in agronomics, and it’s hard to imagine either of them sticking around if they were offered a more lucrative role at a different company.
Powerhouse Ventures
The largest Croplogic shareholder is the ASX listed Powerhouse Ventures, owning both directly and through its subsidiaries roughly 20% of the Croplogic stock post listing. I like to think of Powerhouse Ventures a
s New Zealand’s answer to Elrich Bachman from Sillicon Valley. The company invests in early stage New Zealand companies, most typically those that use technology developed in connection to New Zealand universities with the hope that these can eventually be sold later for a profit.
To put it mildly, Powerhouse Ventures has not been going that well lately. Listing originally for $1.07 in October 2016, the company now trades at around $0.55, following problems with management, higher than expected expenses, and difficulties with a number of start-up investments.
This is a concern for any potential Croplogic investor, as one of Powerhouse Ventures easiest ways to lock in some profits and generate cash would be to offload their Croplogic shares. Considering the size of their stake in Croplogic, this would have disastrous effects on the Croplogic share price.
Summary
As you can probably guess if you’ve read this far, I will not be investing in Croplogic. While the shares are undeniably being sold for a pretty cheap price, their chances of success seem so small buying shares would feel more like getting a spin on a roulette wheel than a long-term investment. When you read through the prospectus, you get the feeling that the company is a weird miss-match of various technologies dreamt up in Kiwi research labs that some over-excited public servants felt would be a commercial success. Considering the minimal progress that has been made in the last five years, they probably should have stuck to writing journal articles.
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