Monday 16 October 2017

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.


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.



Monday 2 October 2017

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.

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.

Thursday 7 September 2017

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.


Monday 4 September 2017

Interview With Oliver's MD Jason Gunn

Oliver’s real food has had a volatile first couple of months on the ASX. While the share price initially soared to a high of 39 cents, market sentiment cooled when the company announced at the end of July that they would narrowly miss their FY17 earnings and revenue projections. Although missing prospectus projections is never a great look, Oliver’s management stated that this was mainly due to delays in opening new locations and one-off costs rather than lower sales, and have re-committed to meeting their FY18 forecast of $41.9M revenue and 2.37M NPAT.  At time of writing the share price is in the mid-twenties, still comfortably above the initial listing price, and Oliver’s have continued to provide market updates on the roll out of their new stores.

After such a dynamic first few months as a publicly listed company, I reached out to Oliver’s founder Jason Gunn, to see if he would answer some questions over email regarding the strategy of the business and how he felt things were travelling. Jason has kindly provided the below answers to six key questions of mine about the Oliver’s business and other related topics. Jason's answers give great insight into how the business is performing and his vision for Oliver's in the future. In a first for the IPO Review, I present my interview with Jason Gunn.

Oliver’s is obviously a business that has strong values and ideals, but now as a publicly listed company there is more pressure than ever on financial performance. How do you balance your desire to be ethical and responsible with the pressure and scrutiny of being a publicly listed company?

Jason Gunn:
-To me this is simple. To actually be a business we have to make a “Healthy profit” We have always had to do that, just to survive and attract investment. But it is not the main focus of the business; it is just something we have to do, just like we have to comply with the regulations and award rates of pay etc. Our number one goal is to make healthy food choices available to the travellers on the highways of Australia, focussing on providing a great product, in a very clean environment, with fantastic customer service, and we know that we have to do that profitably.

While there has been a revised guidance to your FY17 numbers, you have maintained your forecast for FY18. This now means you are forecasting revenue to grow from 20.436 Million to 41.909 million in one financial year. As an outsider, this seems like a hugely ambitious growth target. Are you able to explain why this is achievable?

Jason Gunn
-It is achievable for a couple of reasons. 1) We have bought back the 8 franchised stores. These stores were the best stores in our network, with significant turnover. As they are the highest turnover stores in the group, they are also the most profitable.  Just buying these stores back will add over $11m to our group TO, and a significant EDBITDA contribution. 2) We are opening another 11 stores in FY18. All of the stores we are opening are expected to be good performers in great locations. Plus, with all of this growth comes scale, and with scale comes efficiencies.

You have gone from being the founder of a small start-up to the Managing Director of a publicly listed company. How do you feel your role has changed over this time, and have you had any challenges adjusting to the realities of running a larger company?

Jason Gunn
-Oh yes, there has been quite a transition. But you know, I love my role, and I absolutely LOVE this business, so I feel that this is what I am destined to do. At the end of the day the role is largely about building a really strong team of motivated and experienced people that are all pulling in the same direction. I have that now, more than ever, and with the support of a very strong board, and an committed investor base, who believe in what we are doing and where we can take this business, I feel more confident and clearer than ever before.

While online reviews of Oliver’s restaurants are generally very positive, one of the criticisms that is made from time to time is that prices are too high. You have said repeatedly that your margins are not excessive and that your prices reflect the costs of providing healthy food. Are you able to provide some detail on the costs of providing fresh, healthy food at highway locations, and do you see potential for your prices to come down as the business grows and economies of scale kick in?

Jason Gunn
-Good question, but realistically no, they wont come down. In fact I do not believe that we are expensive, it just seems that way to some people. It seems that way to some people because we have all been conditioned to think that food is cheap, when it is not. What is cheap, is highly processed food that is full of artificial colouring, flavourings, and preservatives. This is not actually food. We should stop asking why REAL FOOD is so expensive, and start asking, “How can this cheap food be so cheap?” I think it is also worth mentioning, that being the worlds first certified organic fast food chain, we face many challenges around supply chain management that traditional fast food business’s do not have to overcome.

Unlike a lot of food chains, Oliver’s has decided not to pursue a franchise model and is in the process of buying back existing franchises. Are you able to comment on your reasons for avoiding the franchise model? Was this decision at all influenced by recent franchise problems at 7-11 and Dominos?

Jason Gunn
-No, nothing to do with 7-11 and Dominos’.  Like Ray Crock in the movie “The Founder” my first experience of franchising was a disappointing. We are a unique brand in that we have strict nutritional guidelines and we are out to set a new standard when it comes to the quality of the food and the way we do business. I am not saying that we wont have a degree of franchising again at some point in the future, but for now we want to have absolute control over the way our stores are run and retain the profitability in the listed entity, rather than sharing that with franchise partners.

The Oliver’s real food IPO eventually went ahead at a lower than expected price due to what I assume was limited interest from institutional investors, and recent proposed IPO’s from Craveable Brands and Sumo Salad have been cancelled in entirety for the same reason. Is the Australian market too conservative when it comes to new IPO’s from Australian companies? Are you able to comment on the reception you received when promoting the Olivier’s Real Food IPO?

Jason Gunn
-We received a fantastic reception from the institutions we met with, but the feeling was that we were over valuing the business. That said, we had significant applications from our customer base, so they did not think it was too expensive. But there were other factors affecting the overall market, and as a result, we lower the price to meet the institutional market, and thereby achieve our goal of listing.

Thursday 10 August 2017

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 28th of 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.

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 as 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. 

Saturday 1 July 2017

Sienna Cancer Diagnostics

Overview


Sienna Cancer Diagnostics are seeking to raise 6 million dollars, with an indicative market capitalization based on full subscription of just under 37.5 million. Shares are being offered at 20 cents each.

Sienna was originally founded in 2002. The company’s focus is the development of diagnostic tools for cancer, and more specifically using tests that look at levels of Telomarese in the body to aid in diagnosis. I spent around 10 minutes clicking on links on Wikipedia trying to understand what exactly Telomarese is, but I quickly realised it goes well beyond whatever I can remember from year 10 science. Instead, as usual I will do my best to evaluate the Sienna IPO using the tools available to an average investor.

IPO’s in the biotechnology space can be broadly broken down into two categories: Pre-revenue, where all the company has is an idea and maybe some patents, and post-revenue, where the company has a proven method of generating revenue, and is now looking to ramp things up. Sienna Cancer Diagnostics falls awkwardly somewhere in the middle. While technically Sienna has been receiving revenue from product sales since 2015, if you exclude research and development expenses, revenue for the first six months of FY2017 was $291,588. There are small cafĂ©’s that turn over more money than that. It’s an unusual time to list, as the immediate question is why Sienna didn’t hold off until the listing until they had demonstrated their growth potential.

Background


Like many companies, Sienna’s past does not seem to be as straightforward and linear as the Prospectus would like you to believe.

In January 2015, Sienna Cancer Diagnostics announced their first sales agreements with a Major American pathology company. Kerry Hegarty, the CEO at the time gave an interview to The Age, where she explained that “ …Sienna has succeeded where other cancer diagnostic ventures have failed because it has been able to stay an unlisted company so far.” Hegarty goes on to talk about the flexibility of being an unlisted company when you are still in a pre-revenue stage.

4 months after giving this interview Hegarty left Sienna Cancer Diagnostics.  Later that same year in September, Street Talk reported the company was planning a 10 million-dollar IPO with Pac Partners as lead manager. Did Hegarty leave because she felt that the company’s decision to list was premature? I have no idea.


For whatever reason, the 10 million-dollar IPO with Pac Partners did not eventuate, and the company is now listing 18 months later raising only 6 million with the much smaller lead manager Sequoia Corporate Finance.  A CEO leaving a company and an IPO being delayed aren’t exactly unusual occurences, but it would be interesting to get some background on why both these events happened.

Financials


As mentioned earlier, Sienna has largely relied on government rebates and Australia’s very generous research and development tax incentive program for revenue. I take the view that if the company is going to achieve long term success, it will need to eventually stop relying on government handouts and therefore these revenue streams should be excluded from any analysis.

 The worrying thing is though, once you take this money out revenue has gone backwards from 2016 to 2017. In 2016, Sienna’s first full year of receiving product revenue, the company had annual revenue of $640,664 excluding government rebates, or $320,332 every six months. The first six months of FY17 saw revenue of only $291,588, a pretty sizeable decrease at a time you would naturally expect revenue to grow.

While there may be legitimate reasons for the decline in revenue, it is not addressed anywhere in the Prospectus that I could find. The decline in revenue also puts into question Sienna’s chosen listing date. August is an interesting time to list, as it means the prospectus does not include the full FY17 numbers, even though the financial year is over by the time the offer closes. The cynic in me says that if the FY17 numbers were any good the IPO would be delayed a couple of months, as strong FY17 numbers would make the IPO a much more straightforward process.

To further illustrate the odd timing of the listing, the balance sheet as of January 2017 showed over 1.5 million dollars in cash, vs annual expenses of around $570,000. Whatever was behind the decision to list before FY17 numbers were available, it wasn’t because the company was about to run out of money.

Shareholders


Sienna have not put any voluntary escrow arrangements in place, so a key question for any potential investor is who the existing shareholders are, and how likely they would be to dump their shares as soon as the company lists.

Earlier articles about Sienna mention the ex-CEO of Macquarie Allan Moss as one of the main shareholders and backers. Interestingly enough, his name does not appear in the current prospectus, so either he has sold out completely, or now holds less than 5% of the company. Why a shrewd investor like Moss would sell-out before an IPO is another question a prospective investor should probably think about.

Instead, the current largest shareholder is now someone called David Neate, who owns just over 10% of the company. I was immediately curious about who this person was, as I could not find him listed on the board or the senior management team of the company. After digging around online, the only information I could find on him was in regards to Essential Petroleum Resources Limited, a now delisted oil and gas exploration company that someone called David Neate (and I’m aware it might not be the same guy) held 12.6% of in October 2007. 

There is an October 2008 Hot Copper thread where someone wondered why Neate was unloading so many shares in Petroleum Resources Limited. A few months after the post in January 2009, shares fell to below 1 cent following unfavourable drilling announcements  and the company delisted later that year.

Of course, there are perfectly reasonable explanations for a major investor deciding to offload shares, but it’s not really the sort of information you want to find when you start googling the major shareholder of a potential investment.

Verdict


As this is an IPO in an area where I have no technical knowledge, I am acutely aware that I could be completely off the mark with my analysis. If using Telomarese to diagnose cancer proves to be the next big breakthrough, this could easily be the IPO of the year. However, if I’m going to invest in a company that’s actual product revenue is less than one fiftieth of the indicative market capitalisation, I would at least want to see revenue growth, not revenue going backwards. Furthermore, the small amount being raised does make me wonder if the IPO is more about existing shareholders unloading stock than actually raising capital. Contributed equity is listed on the balance sheet as only 16.6 million, which means at least some initial investors would still be making significant profits if they unload their shares well below the initial listing price.

While I may well live to regret it, this is one IPO I will not be taking part in.

Saturday 24 June 2017

Why I've sold my Oliver's Real Food Shares

I hadn’t intended to write an update on Oliver’s so quickly, but on Friday I sold my shares at 30 cents each, clocking a 50% return in two days.

Notwithstanding the money I’ve made, I’m a little disappointed to have gotten out so quickly.  I liked the idea of being an Oliver’s shareholder and I was looking forward to justifying forking out the ridiculous mark-ups on a cup of green beans by thinking I’d getting it back in dividends one day. However, a 30 cent share price puts the market capitalisation of Oliver’s at just under 63 million dollars, which seems exceedingly generous for a company projecting revenue of only 21 million this financial year.

Oliver’s originally tried to list at a market capitalisation of 50 million, yet failed to find sufficient support from institutional investors at that price. To be trading twenty percent higher than this just two days after listing does not make much sense. My best guess is the increase in share price is being driven by overly enthusiastic retail investors rather than larger institutions, and we all know how quickly this type of sentiment can change.


I will keep watching Oliver’s from the side-lines, and may even buy back in if the share price looks attractive again after their FY2017 numbers come out, but as far as this blog is concerned my investment is over. This is the first IPO recommended in this blog that I’ve sold. I can only hope my investments in Tianmei and Bigtincan end up being as profitable.

Tuesday 6 June 2017

Oliver's Real Food

I've changed jobs recently which has kept me busy, and with the Oliver’s Real Food IPO only open for two weeks I thought I would have to publish my review after the offer closed. It was with some relief then that I checked my email Friday night and saw they had decided to push things out by a week and reduced the share price from 30 to 20 cents in response to limited interest from institutional investors. The reduction in the share price isn’t as dramatic as it initially looks. Oliver’s has increased the number of shares at the same time, so while under the original offer the maximum subscription was to sell 30% of the company for 15 million at 30 cents per share, this has now been adjusted to 35.8% for 15 million at 20 cents a share. Although the share price has gone down by a third, the actual reduction in pre-offer valuation has only gone down by 25% thanks to the increase in the number of shares.

This last-minute drop in price and wrangling of share numbers puts you more in mind of a fishmonger trying to move some dodgy prawns than a multi-million dollar IPO offering. Pricing an IPO is meant to be a precise and scientific exercise, developed through numerous meetings with fund managers and other institutional investors to accurately gauge the market. Wesfarmers recently put a pin in their Officeworks IPO plans precisely because they failed to hear much enthusiasm from institutional investors at this stage of the process. For Oliver’s to be forced to drop their price at the last minute suggests that they either their fund manager skipped this step, or that Oliver's management didn't listen to the advice that was given to them.

Overview

Putting this last-minute price drop aside, Oliver’s Real Food is one of the more interesting IPO’s of 2017. The business runs a chain of healthy fast food options on major arterial roads on Australia’s eastern seaboard. While healthier fast food chains have been around for a while (Sumo Salad are rumoured to be planning an IPO of their own), Oliver’s is the first healthy fast food business that is targeting the highway service station market. As anyone who has ever tried to get a meal on a freeway can tell you, your meal choices are typically restricted to KFC, Mcdonalds, or a dodgy cafe with burgers and chicken wings sitting in bain-maries, so there does seem to be an opening for a healthier and more expensive alternative. 

Management

Jason Gunn, the main founder of Oliver’s is your classic new age guru. You can watch videos of him online talking earnestly about his love of transcendental meditation (17% of Oliver’s staff apparently are now practising transcendental meditation thanks to Jason, one statistic that was left out of the prospectus) and one of his go-to quotes is that Oliver’s is the first business that he has run that “satisfies his soul.” He also seems to have gone all-out on the photo shop options for his Prospectus photo.



While it might be tempting to dismiss Jason as some snake oil peddling charlatan, he does seem to genuinely believe in the stuff he talks about, and he has successfully built a business around a set of values that seem to work for him. He also is balanced out by his co-founder Kathy Hatzis, who has held senior marketing positions in the finance sector and seems to the more down-to-earth of the duo. The only thing I could find by her online was a much more mundane article about managing brands that manages to not mention meditation, vaccines or enlightenment. Overall, they seem like a good pair of founders, and exactly the sort of people you would want to be leading a health food chain with a new age vibe.

Growth plans

One potential cause for concern is that growth has been slower than originally planned. In March 2015, Jason Gunn told The Australian that he expected revenue to grow to 30 million per year within 12 months, yet even the projected figures for the 2017 financial year show revenue of only 21 million. More interesting still, is that in the same article Jason stated that he was aiming for an annual revenue of 30 million before proceeding with the IPO. I’m not really as concerned about this as I perhaps would be in other cases. After reading and watching a few videos on or by Jason, overestimating growth rates in a conversation with a journalist seems to be exactly the sort of thing he would do. As long as there are more sober minds around him this potential character flaw shouldn’t really be a problem. What’s more, Oliver’s growth is largely a factor of the number of stores they open, and this seems to be pretty reliant on when the big petrol stations have leases coming up. Store growth seems to have stagnated somewhat in late 2015/early 2016 with the number of company owned stores going backwards in the first half of FY2016 from 8 to 7. However, more recently things seem to have gotten going again, with 12 company owned stores at the time of the prospectus, and firm plans to increase this to 19 by the end of FY2017.
Longer term, Oliver’s have 60 sites in total they have identified for potential store locations in Australia for the next 4 years, which indicates the business has a lot of room to grow.

Financials

One of the things I like about the Oliver’s prospectus is the lack of massive pro forma adjustments to the financials. Too often, you flick through pages of rosy pro forma figures in the financial section of a prospectus only to find a few brief lines of statutory figures that show the company has actually been making massive losses. With Oliver’s the first figures presented in the financial section are the statutory profit and loss statements, and the only pro forma figures I could find were in the balance sheet. The numbers also seem to stack up pretty well. Margin over cost of sales has been steadily in the mid-thirties, and margin plus labour expenses has been consistently around 75%. While Oliver’s did make a small loss in the first half of 2017, for a company going through an IPO and growing this quickly it’s actually impressive the loss is this small.

In order to get a sense of what Oliver’s could look like as a more mature business, I projected two scenarios of a future Oliver’s profit and loss based on 40 stores here. In the first more conservative scenario, I projected that Oliver’s revenue per store would be the same as in 2015 at just under 1.6 million per year (I didn’t want to use the 2016 numbers as I wasn’t sure who store openings affected the figures), and that labour and cost of sales would stay steady at 75% of revenue. I increased the head office and general administration budget to what I feel is a generous 4 million and all other costs were simply based on the 2015 figures increased to reflect the higher number of stores. With these rather conservative estimates, the business would make just over 2.6 million per year after tax.

In the second more optimistic forecast, I projected a growth in sales per store by 20% to just over 1.75 million based on the assumption that increased brand recognition and familiarity would lead to more customers per store (Mcdonalds in Australia apparently averages over $5 million in sales per store so this is far from being unrealistic). I also used a lower cost of sales + labour to revenue ratio of 65% on the assumption that the higher revenue per store and supply chain efficiencies of having a larger business would help drive these costs down. With a slightly more optimistic leaner head office budget of £3.5 million, this shows a projected profit after tax of just under 9 million.

The indicative market capitalization based on a maximum subscription is $41.9 million at the revised offer price. The fact that a business like this has such a clear path to a profit of 9 million, while at the same time a more pessimistic model still shows profitability is a promising sign.

Food

You can pore over the financials until you are the blue in the face, but at the end of the day if you are thinking of investing in a restaurant chain It probably makes sense to actually eat in the place. For this reason, I drove down to the nearest Oliver’s to me in the Melbourne outer suburb of Scoresby last Sunday afternoon. The Oliver’s was located in a BP service station on a freeway next to an business park, with a KFC and Mcdonalds for competition. At 3:50pm on a Sunday Trade wasn’t exactly brisk. In the 20 minutes or so I was there only three other customers came into Oliver’s while the other two fast food restaurants probably served around 12 people each.

My meal of a chicken pizza pocket, one of Oliver’s trademark cups of green beans with salt and an Oliver’s brand non-alcoholic Organic Tumeric Beer came to a pricey $22.75 (the organic turmeric beer was an amazing $6.95 for 350mls, if Oliver’s can sell enough of them they should have no issues hitting their profit margins).
Pricing aside, I was pleasantly surprised with the food, the Pita wrap was fresh and tasty, and a cup of green beans flavoured with nothing but a little bit of salt is less boring than you’d think. I wouldn’t get the turmeric beer again, but I’m sure it is to some people’s taste.

Conclusion

Overall, there’s a lot to like about the Oliver’s IPO. While the last minute price change does potentially reflect badly on management, the rare opportunity of listing in a business that has both a proven track record of achieving profitability and great growth potential is too good for me to give this one a miss.