Sunday, 8 April 2018

Cannabis and Cobalt


In terms of top performers, last year was a pretty great year for Australian IPOs. At time of writing there are five companies that listed in 2017 that are more than 500% up on their listing price. The companies provide a good insight into the current zeitgeist of the Australian micro-cap sector. There are two infant formula companies, one exploratory mining company, one medicinal cannabis company and one 3D printing company.


Company Listing price Current price Return
Wattle Health  $                           0.20  $                 2.26 1030%
Cann Group  $                           0.30  $                 2.75 817%
Bubs  $                           0.10  $                 0.72 620%
Titomic  $                           0.20  $                 1.22 510%
Cobalt blue  $                           0.20  $                 1.40 600%


While initially you might think trying to find common ground between such a diverse set of companies would be difficult, there is one thing that all these companies share; low or nearly non-existent receipts from customers. The five companies listed above have a combined market capitalisation of 960 million, yet their combined receipts for the first six months of FY18 is only 2.8 million.  That’s an annualised price to revenue ratio of 172, a ridiculous metric by any stretch of the imagination.

To be clear, each company has their own, potentially legitimate reason why revenue is currently low or non-existent. Cobalt Blue is still in the exploratory stages of assessing mining sites, Titomic is in the process of setting up its operations centre in Melbourne, CannGroup has multiple regulatory and legislative hurdles to pass before it can start selling cannabis and Bubs and Wattle Health are both waiting on their CFDA licenses that will allow them to sell their products in China. 

A cynical explanation for this coincidence is that it is much harder to disappoint shareholders when you are pre-revenue. A pre-revenue company is all possibility: When you are pre-revenue there are no pesky questions about profitability, client retention, or growth rates. No pre-revenue company was ever caught giving misleading statements about new customers or cooking up elaborate schemes to artificially inflate their quarterly cash flows. A company that is already making money usually needs actual growth to cause an increase in share price, all a pre-revenue company has to do is make vague claims about massive potential market sizes.

While the initial returns may be spectacular, history suggests the ASX can tire pretty quickly of these sorts of companies. You only need to look back at the best performing IPO’s from 2016 to confirm this. Interestingly enough, there are six IPO’s from 2016 that have at some point traded at over 500% return, but as of today only Afterpay Touch is still trading above this benchmark. Get Swift’s problems have been well publicised, but there are others whose drop in value have been nearly as dramatic.

Aurora Labs, a 3D printing company at one point reached a high of $3.93 before additional capital raises and elusive revenue growth pushed the share price down to it’s current $0.55. Creso Pharmaceutical, another cannabis related company (whoever said the ASX is too predictable) has dropped from its high of $1.36 to $0.70

Even without the benefit of history it seems at least some of the 2017 IPO's are pretty overvalued currently. To take Wattle Health as an example, the current market capitalisation is around $210 million vs current sales of $329,000 a month. If Wattle Health was a mature company with normal growth prospects you would expect it to be trading at around 10X gross profit (keep in mind this does not include administrative, marketing or interest costs), which would require sales of $3,017,248 a month at current margins  This means they would need to grow their revenue by 817% just to justify their current share price.  It seems safe to assume a stock with an 817% revenue growth already priced in is a perilous place to have any capital invested.

In summary, I predict the next 12 to 18 months will see a pretty steep decline in the average share prices of these five companies. But the next time you get offered shares in an IPO selling 3D-manufactured cannabis-infused baby powder you can be sure that for the short term at least you are in for a ride.

Sunday, 25 March 2018

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 15th of 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 28th of 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)

















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.

Sunday, 4 February 2018

Xinja

A couple of weeks ago, the first six AFS licenses for crowdfunding were issued, paving the way for Australian companies to raise money from retail investors without listing on the ASX. While I usually restrict this blog to reviewing initial offerings of publicly listed companies, I thought it might be interesting to review one of the first crowdfunding offers in Australia to mark the occasion. There’s something to be said for reviewing a company that doesn’t have a public market for its shares, as you are less likely to end up looking like an idiot.

While a few of the crowdfunding platforms are still in the process of setting up their first offers, Equitise seem to have got the early jump on the competition. Their crowdfunding campaign for Xinja, a start-up digital or "Neo" bank, is already live and at time of writing $1.3 million into their 3 million dollar raise. 

Xinja has ambitious goals. With the recent weakening of laws regarding setting up banks in Australia, they intend to set up a fully functioning Australian bank, complete with deposit accounts and mortgages.

Just in case you forget this is a crowdfunding offer as opposed to your usual boring IPO, they have put together a pitch video, replete with flashy animations and bubbly tech muzak in addition to the standard offer document and financials. Once you look past the executives in torn jeans and distressed-paint walls, you quickly conclude that the pitch seems entirely devoid of anything original. Xinja’s main claim is that they will be the first “100% digital bank,” offering fully online services with no branches, but ME bank has been offering deposit accounts since 2003 in Australia and has never opened a branch. Another big focus of their pitch is that they will develop tools that nudge customers to make better financial decisions, which seems pretty similar to an advertising campaign NAB has been running for years. While the idea of a new digital bank in Australia is in itself is somewhat interesting, it is a shame that this is as far as they have got in terms of originality. Watching Xinja’s pitch video I’m reminded of that old Yes Prime Minister joke, about how boring speeches should be delivered in modern looking rooms with abstract paintings on the walls to disguise the absence of anything new in the actual speech. These days the modern equivalent I guess is a converted warehouse office space and vague references to blockchain.

What makes this paucity of orginality a particular concern is that the challenge faced by Xinja is enormous. There are good reasons why Australia has been dominated by the same big four banks as long as anyone can remember, and it’s not because no one has ever thought of making banking work on your phone. The pitch seems to promote this idea that the big banks are old tired institutions, with needlessly slow and cumbersome processes, just waiting to be pushed aside by some new start-up. As someone who works in the finance industry I know this is far from reality. Banks are obsessed with innovation and change, and are constantly sinking huge amounts of money into technology to stay ahead of the curve. The simple reality is that banking is one of the most heavily regulated industries in Australia. More often than not, what you find frustrating or slow about a bank’s processes is down to legislative restrictions rather than the banks ineptitude or unwillingness to change.

A lot is made in Xinja’s pitch video of the involvement of the founder of Monzo in Xinja. Monzo is another digital/Neo bank that was set up a few years ago in England. In the pitch Monzo is held up as an example of the success of Neo Banking, but this seems like a ridiculously premature thing to say. While Monzo has been through multiple capital raises at increasingly higher valuations, the reality is Monzo’s revenue for 2017 was a paltry $120,000 vs a loss of 6.8 million. It’s true that Monzo has some interesting ideas and managed to pick up an impressive half a million customers thanks to their zero fee pre-paid cards, but it is still far too early to hold them up as some sort of success. If I started handing out free cup cakes at Flinders Street Station I’d probably run out of cup cakes pretty quickly, but it’s hardly proof of a valid business.

The example of Monzo also gives us a good example of just how much capital is needed to start a bank. According to Crunchbase, since June 2015 Monzo has raised a total of 109 million, and given how far they are off profitability more funding rounds are probably on the cards. At each raise the business valuation has increased, but it does demonstrate just how long the road ahead is for Xinja.

Valuation


While it might be considered a bit boring to talk about something as mundane as valuations and financials in the crowdfunding world, it is probably worth noting that Xinja is raising its $3 million dollar campaign at a $43.1 million dollar valuation, higher than the last 5 ASX IPOs I have reviewed on my blog.
To be blunt, the $43.1 million market capitalisation is completely ridiculous. Reading the “achievements to date” section of the prospectus it is hard to believe someone was able to write this with a straight face. While bullet points like “we have assembled a committed and exceptional team” and “we have completed 80% of our app” might be acceptable when putting together a slide deck at a hackathon, for a company valuing itself at over $40 million dollars it is downright obscene.

Not only does Xinja have no revenue from customers to date, they don’t even have trial products with customers or a license for any type of banking activities in Australia. They have only raised $7.8 million dollars before this crowdfunding campaign, which means that somehow investors are meant to believe that the other $32.3 million of their valuation has been created by coming up with a company name and hiring a few people.

Even Monzo, which seems to have ridden the hype train of ridiculous valuations pretty well, has been more restrained in their valuations. In October 2016 when Monzo valued itself at $50 million pounds, they had already been granted a restricted banking license and had a prepaid cards with a fully developed app out to 50,000 people. Earlier on, Monzo raised 6 million at only a $30 million valuation in March 2016, but at that time had a working trial pre-paid card out to 1,500 people. In contrast, Xinja has not only not yet released the beta version of their prepaid card, they still don’t even have a banking license.

To provide just one more example of how ridiculous the Xinja valuation is, it is worthwhile to look at the ratio of book to market equity. Banking has always been a capital-intensive business, and post-GFC regulations have only made it more so. This means that profits always require significant amounts of capital. The CBA, for all its market advantages from to being the largest bank in Australia has a book to equity ratio of $0.43. This means for every dollar of CBA shares you purchase, you are getting an entitlement to the earnings of $0.43 cents of equity on the CBA balance sheet. For the Xinja crowdfunding campaign, a bank with no license, revenue or market share, that ratio is only $0.22 cents.

On the Xinja Equitise crowdfunding campaign, the offer is described as a bank job. What they don’t tell you though is you’re the one getting robbed.

Monday, 15 January 2018

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 has two main business arms. There’s Simble Mobility, a business process automation service largely carried over from Acresta and Simble Energy, a more recently developed electricity management service.


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 -$               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.