25/4/15Looking at a company called ICU that a friend who runs a small investment fund has been discussing, this is what he had to say,
At the 14c price today, the market cap is about $18.9m, normalise for cash & debt & EV is around $16m. I think they are capable of earning nearly $4m in 2015 with the ARTE acquisition and the growth rates are quite explosive.
4x EV is extraordinarily cheap for a cashed up company that looks set to grow revenues and earnings rapidly. Directors underwrote the recent capital raising, so they have real skin in the game (which I like).
The smart part about their play is that they are targeting the segment of population with no access to bank accounts or credit cards. So this neatly sidesteps Apple and Google. I suppose one possible threat is the telco’s withdrawing support. This is mitigated to a certain extent if ICU could keep building their content. Both telco and ICU benefits from increasing ARPU, so at least their interests are aligned.
DNA spent nearly $9m for iSentric. iSentric bought Arte for $18m. 2 years of growth later, a combined purchase value of $27m is now worth $16m EV on the ASX.
When I look at them its hard to find much info because its a reverse listing and the history is just not there in the financials, some takeaways though, NVAVPS is 0.05c, with a current price of 14c that means they are not a bargain in the old Graham sense of NVAV or net/net - but then nearly nothing is!
I cant see where Tony sees 4m NPAT this year, 1/2yr revenue is 4m roughly so lets call it 10m for the year with strong growth, costs would have to be around $5m and opex $1m and even without D&A or tax backed out that means a total of $4m. Maybe he sees more increase in revenue than that, because I cant see costs being a lot less.
Even if we accept a much lower figure, say $2m NPAT, thats still an EV/E of 8 which makes it very cheap by that metric alone. Although I think the EV will be a bit more than the 16m he postulates because they will burn some of the cash in that time which will mean it rises a bit, but that wont have a material effect on the ratio.
Much as I am tempted to have a punt on this company, I simply dont have any capital available at the moment to allocate to it. I think it could only be a small allocation as there is significant risk attached to this investment, no track record of profitability, untested business model, developing market, no income stream etc.
My prediction is that its next announcement will show the company is profitable and the price will reflect this within 12 months. Based on EPS using a NPAT of $2m i get an IV of around $1.Tony and I were both completely wrong on this one, even Mr Market was too optimistic, profit completely evapourated, to be about $20K - rather than $4m or $2m or even $250k. It was always risky but didnt see this train wreck coming! Guess I will hold to see if they can pump the tyres up and get it moving. Still cant quite see where i went wrong to such an extent??? 21/9/15
OK did some more analysis of the AR and emailed tony with my thoughts, "It seems to me that basically I grossly underestimated the costs associated with the transition to a new business and was overly optimistic about an increase in profitability in the available time frame.
Now my thoughts have turned to increasing my holdings in ICU, I think its been oversold at current prices and my rough calculations suggest things could improve considerably this year. It would also allow me to average down which will certainly help my position if the price does turn around.
Looking at the Annual Report and backing out the “non-recurring” items of roughly $1m I get a NPAT of about $850K, now while that might be well under the $2m+ we had expected, its still a reasonable return on current equity valuation - a multiple of about 13.
NPAT should improve drastically as the benefits of the new entity flow through the full year, as long as the one off, non-recurring costs and write downs are completed!"Ok, ICU released an update this week, 6/10/15 - on track for $3m EBITDA, so maybe $2m NPAT, jumped over 100% on the news! If they only manage $1m NPAT it would mean an IV based on EPS of around 50c and if Tony is right and its $4m then it will be around $2.00
Some very crude FCFE analysis gives me an IV of about 50c based on NPAT of $2m
Invert, invert always invert, says Munger, so Mr Market thinks ICU is worth 14c, leaving my usual growth rates in the formula it suggests an eps or 0.8c in Mr Market's valuation, which translates to a NPAT of $250K.
SO Mr Market thinks that based on all the available information, NPAT of $250K is the likely outcome for this company currently. Another possible inversion is that the market expects FCFE similar to my calculation, but is attaching a Risk Free Rate of 15% to the company.
This is more plausible to me, accept the likely earnings, but apply a much higher discount rate due to the risk.
All in all a pretty compelling buy! I will have to think some more about how and where to free up capital for this opportunity.
Aug 16 Well better late than never, ICU had a much better year and delivered over $2m NPAT, trading at about 5.5 x for EV/E looks like its turned the corner. Market hasnt really reacted much yet.The other companies on the top of my watch list are TRG Tassal Group and ICS a medical software company.
TRG are at near 52 week lows, no doubt the combination of concern about potential restrictions due to investigation of environmental concerns and also the report from HUO about the impact of Norwegian Salmon dumping on the Australian market due to russian boycotts has had this impact.
Again inverting, the current share price suggests the market has either revalued the growth, risk or earnings - one would imagine its the earnings and or growth, and the price suggests a 30% hit to earnings. The notice from HUO suggested the likely impact for them will be 20% hit to earnings so there may be some over reaction in the market. Although +/- 10% is hardly significant.
Interestingly the following article points out the ban will likely end in August!
http://www.seafoodsource.com/all-commentary/27645-norway-s-seafood-exports-unscathed-by-russia-s-trade-ban Still, I think at around $3.20 I am keen to be a buyer.
My prediction is that neither the environmental issues or the norwegian imports will prove to have as much impact as Mr Market has priced in, so i would expect that once the financials for the 2nd half are released the price will recover to around $3-50-$4.00. Its quite possible the dividends will not be impacted at all.Seems my prediction was on the money this time, trading at $3.95 in a very soft market. Nice to get one right!Worst case scenario is that both the enviromental issues and supply issues conspire to impact earnings more than i have predicted, the current price should give a buffer to one or the other, but not both. In the event of both risks turning to reality, I will have made a poor decision and capital will be at risk
ICS is fully valued now that its trading over $1 and so it goes back on the watch list.
My pediction is there will not be much growth unless there is consistent good news on earnings growthSo that very good news on earnings growth came to fruition and they would have been a much better buy than ICU in hindsight! With the recent fall in the market i reckon they are cheap at $1.25 and i would love to have some free capital to allocate. 21/9/15in looking at what I could sell to free up capital, the obvious contenders are BRG, RCG, RFG, CCP and ANZ.
ANZ I feel are pretty fully valued at current prices and any softening of the property bubble will have a negative impact, wouldnt mind waiting till they went ex div though, CCP when I revist them I think they have more value to be unlocked yet, RFG is much the same, the early figures on the mixed business are looking awfully strong, RCG probably need to take a clip at some point, another $15000 @ 70c coming in the CR - and they would be worth around $23k at current prices. (note - not quite, will get clipped on over subscription.)
BRG i suspect I paid pretty near fair value at the time I bought, I dont think there is a lot of upside left in them so they may be the best choice to divest.
So at this point strategy is to sell out of RCG to rebalance to $20K approx, and sell BRG to reinvest in TRG and ICU. There will be CGT implications with these trades as they have been held less than 12 months, but being in the SMSF it will still be low.
On thinking about it, better not to rebalance RCG at this point, $20k from BRG is enough to take initial stakes in both TRG & ICU. WHY DID I THINK THAT! must put reasons down. Reviewing it I think its better to rebalance RCG, when i went back and looked at all my research on BRG, yes I probably paid near fair value at the time, but they are still a company I want to own and they are a business i understand very well. Selling the excess of RCG provides enough capital to take a position on both TRG & ICU so that is the direction i will take.
I predict both growth and yield will be better from TRG & ICU than from continuing to hold BRG,