seekrit squirrel

Finance => Shares => Topic started by: galumay on April 25, 2019, 02:18:29 PM

Title: AER
Post by: galumay on April 25, 2019, 02:18:29 PM
AER is a business that came to my attention on Twitter, an investor I follow mentioned the 4C result and I had a quick look and was immediatley drawn to the fact that it was such a clean 4C because the company has no debt, no other financing, almost no expences other than licensing for data and then its just revenue minus costs. I then spent an afternoon investigating the business and this is the summary of my thoughts in a discussion with Luke Winchester about the company,

Hi Luke,

I spent my spare time today reading all the back catalogue of reports and announcements for AER as well as looking through the website. It certainly fits my circle of interest, micro cap, tightly held, illiquid, management with skin in the game, simple to understand business and no debt. I like the straightforward manner that comes thru in the reports and I assume is a trait of Kerry's. I also like the story of his background and vision for the business. Its uncommon to come across real 'doers' in the corporate world, but he appears to be very down to earth and grounded. Given that you are more familiar with the business i wonder what negatives you have considered in the business? How likely is it that a bigger player in a similar space could squeeze them out? There doesnt seem to be much unique IP, they are simply buying the data, processing it, packaging and distributing. Whats to stop their bigger customers buying the data themselves and processing it, (i think some of the fire services already do so.) Also some personnel risk there, the business is almost all Kerry, something happens there and its all over. I guess on the flip side its about as capital light as a business can get, I got a laugh out of the one company vehicle, bought for $12k and already depreciated by $7k! What negatives have I missed?  Would appreciate you thoughts if you had a spare moment to share them, Cheers, RIck

Hey mate, it's a really interesting little business. You are pretty much spot on with everything you said. I suggest giving Kerry a call, he is a brilliant bloke to chat to, very happy to discuss the business and where it is going.

Biggest risk by far is simply execution risk. Kerry has big ambitions for the business, but for these nano caps it never goes as smoothly as expected. The loss of Brisbane council a couple of years ago really set the business back as they were spending a ton of R&D at the time looking to move into adjacent products

It is pretty unlikely a bigger player would come into the space simply because the market isn't that large. Their biggest competitor is simply BoM data. They offer a free alert service, but not to the same depth as AER. From memory they don't have flood which is a major one. They also don't have a thorough alert system. AERs big selling point is how customised their alerts can be across different methods.
Kerry is pretty open on his plan for the business moving forward. Apparently they have received takeover offers at values higher than the current share price (back when it was 5c, didn't say specifically who or how much) and the board are going to perform a review of the business at the end of FY19 to see whether they continue to operate and grow or take the offer

The review will primarily be focused on the Esri deal, which Kerry says could be massive or simply just good for AER. I guess if they see it working really well they will continue, it not take the cash

Thanks for the detailed thoughts Luke. I guess my only take away from that is the risk that BoM bolts the same sort of service onto their data, adds floods and develops the alerts system. The counter argument to that is that as we have seen, government departments are notoriously bad at implementing IT/tech, in fact I cant think of one case where its been done well! Thanks again for sharing, I will do as you suggest and give Kerry a call, Cheers, RIck

Yeah, they are a competitor in the sense they provide a competing product, but it isn't enough for the high risk customers AER target. If you do the numbers on revenue/customers it's roughly $10-15k so AER isn't breaking any budgets.

Hard for customers to say no when the cost to them from one of the alerts being wrong or not received is much higher

I dont really think BoM would turn into a competitor. I guess I am just trying to think about whether there is really any definable competitive advantage. There is not really anything special software wise, the main advantage seems to be they are actually doing it and have built a bit of a market - that may well be enough in a funny little niche like this. Sometimes filling obscure niches is a bigger advantage than disrupting a big incumbent industry .

Hi Luke, i have been writing up my thesis and research on my forum and one thing I do with developing unprofitable businesses like this is look at what sort of earnings would be needed to support current SP, its very, very back of the envelope, but I see it would take $285k of earnings and that might need somewhere in the region of $2.5m revenue. Which is not a huge stretch from current run rate, even allowing for a fairly big range in my dodgy numbers! But drilling down and comparing all the 4Cs, like quarter for like quarter, I notice that there was a lot of revenue growth across 2017-2018, but the last 2 4Cs suggest a much slower growth in revenue. Its still enough to see my target revenue within a couple of years but it did make me wonder whether most of the growth has already happened. I think I need to work a bit more now on understanding the ESRI deal and what the potential for revenue growth is there. Anyway, just thought I would share as I was going!

Yes I completely agree. Market cap is tiny so minimal earnings required to support it. I actually think the business is more scalable than $285k NPAT on $2.5m revenue, but I would have to go double check my numbers.

Yes growth has been slower than I expected so far in FY19. They did 30% in FY18 with commentary that it was "modest".

I suspect the answer is the Esri deal. Kerry has said to me that it has been their major focus since talks began because it opened up such a large market for them with an established player effectively doing their customer acquisition. And given they probably only have one or two employees in marketing (Kerry being the main one) it isn't a surprise that growth in the core business has slowed. I've been encouraged they have at least retained most of their existing customers.

Plus I have just become accustomed to these small businesses never developing as smooth as I hope. All you can do is give yourself a big margin of safety as you have done and if the value proposition is still good even at the low end of your probable outcomes you pull the trigger

I don't want to bias your decision making, I own so obviously like the story and value, but it is high risk and a small part of my portfolio, less than 5%

So to the simple questions, "What does the business do?" AES aggregates data it buys and produces in house, that allows it to identify current events and model predictions of extreme events like floods, severe storms, fires etc", distribute those warnings to clients via various formats, fixed line, SMS, mobile, social media, and allows clients to manage risks to workforce and assets. Their website has this very clear and concise summary of what they do -

 "EWN monitors and geospatially analyses critical threat and event data to deliver location-specific alerts to individuals and companies."

This clarity of purpose is an attractive trait that is obvious across all their communications.

Thinking about the potential for the business, it looks like there is a growth runway for the steady expansion of the business, things like climate change and the corporate & government culture of risk mitigation means that a system like this has a growing marketplace. The real question is what sort of earnings does the business have to produce to justify a given share price, and how probable is that sort of growth from what is basically a baseline of zero?

Earnings of around 0.5c per share would indicate a range of value around 7c and 0.5c per share is earnings of around $285000. By my very back of the envelope calculations revenue would need to be at least $2.5m for the full year to see that sort of earnings flow thru to the bottom line. Annualised revenue based on last 4C is a bit under $2m so its not improbable growth. Maybe 10% revenue growth currently, so that would imply 2 years to get to $2.5m revenue. One thing I note is that revenue growth has certainly slowed, 2017-2018 was the big growth when comparing Qn to Qn so that is something to consider.

Trying to get my head round what ESRI actually do and how that benefits AER, ESRI is a GIS distributer, (Geographic Information System), so they disribute data sets to clients that can be viewed in map format. Map layering and development is at the heart of ESRI and GIS. They are an international business with a large clientele, the tie up with AER supplying "geo-spatial risk data sets" to already existing ESRI clients means its a very "low friction" sale, the license fee for the client to ESRI goes up slightly, and gets passed back to AER. Essentially it opens a bigger market at no real cost to AER, in fact with some savings because their sales team dont have to find the clients.
Title: Re: AER
Post by: galumay on July 13, 2019, 04:36:58 PM
Bought a small parcel at 13c on 5/7/19

I will be scrutinising the full year financial results to inform my decision about whether to increase position or get out. 13c implies eps of at least 1c so I will want to see execution that implies sufficient growth to achieve that in the near term.