Pinned valuation:
Updated valuation 15 Jul 2025
My thesis is busted for AVA. FY25 is coming below the path in my bear case in my Apr 2025 valuation (copied below).
Here are my notes from today's FY25 preliminary results:
- Revenue grew <5%, on back of 6% in previous year. This isn't fast enough to support my previous thesis.
- Mal's mis-guidance strikes again. In the latest update he confesses that FY25 will be "below guidance of $35m to $38m". But that guidance was only from Q3FY25 update. Back in Feb '25 the guidance was $37-41m; back in Aug '24 guidance was $43-55m. So not only is his guidance not useful, he is misleading about how bad his guidance has been.
- FY25 EBITDA around $2.0m is up thanks to some significant cost cutting. But statutory NPAT isn't offered. So there's a good chance the company is still running at a loss, which not much more to cut. The company has to grow its way into profit, but that's happening glacially.
- Sales orders for the year at $29.9m were below revenue, creating a headwind for FY26 growth. Also, pipeline of $88m is lower than the $100m at end of FY24 and H1FY25. Similarly, order backlog is now $6.4m compared to $7.4m at H1FY25 and $8.5m end of FY24. All these sales opportunity stats are heading in the wrong direction.
- So here's my revised valuation:
- Let's suppose a generous 8% revenue CAGR over next 5 years (last 2 years has averaged 5%), giving around $46m revenue in FY30.
- An NPAT of 5% gives $2.3m, with a PE of 15, gives a FY30 market cap of $35m.
- If I allow for 15% dilution over those 5 years, that's a FY30 share price of $0.105, giving essentially zero ROI between now and then.
- If I apply a required rate of return of 15% pa over the next 5 years (to compensate for size, risk, illiquidity) that gives a current fair price around $0.05.
As a wise man has written on his Strawman profile: "Hope is not an investment strategy". Maybe AVA has an exciting future, but for now I'll watch from the sidelines.
Valuation 16 Apr 2025
I’m a newbie to AVA. I know a lot of Strawpeople have invested in AVA over a number of years. The company has unfortunately not brought a lot of joy to our community. But I can see why folks have been optimistic. I was encouraged to dig into AVA from a recent chat with Strawman, and his ongoing investment in the company. Here’s a summary of my bull, bear and base cases. Apologies in advance for sometimes re-stating what many seasoned investors in AVA already know, these notes are my way of getting my head around the company.
Bull case
- AVA may be at the tipping point of substantial growth in profitability; last half revenue increased 20%, EBITDA was positive and NPAT essentially breakeven.
- Balance sheet is healthy with minimal debt of $2m; total liabilities around $8m are dwarfed by current assets of $21m.
- Operates in the security and detection market which has tailwinds from increased corporate and government focus on risk management.
- Delivers products, and in particular fibre detection, that have a broad range of applications across industries
- Major new products and capabilities have been released in last couple of years: Aura AI-X, Cobalt locks, LoRa wireless, safety certification for Metro applications.
- Offering customers ongoing software support for AVA’s hardware is a significant area to improve recurring revenue.
- The current competitive market is highly fragmented and AVA has the opportunity to become a market leader.
- Mal started in Jan 2023, only a little over 2 years ago, and has introduced some significant changes, in particular restructuring the sales team to sell integrated solutions across all three product lines, as well as moving from sales of bespoke solutions to scalable solutions.
- Valuation:
- I can’t take Mal’s communicated forecasts seriously (see reasons below in my bear case). But if I set a bull case around the low end of Mal’s forecast revenue ranges, I’ll assume 25% revenue growth in FY25 with 23% 5-year revenue CAGR, achieving $84m revenue in FY29.
- I’ll also assume a bullish FY29 NPAT of 12% and $10m, a PE of 30, 25% dilution.
- That gives a FY29 share price of $0.84, which will be >50% pa ROI from the current price around $0.11.
Bear case
- A lot of people have lost a lot of money investing in AVA. Momentum and reputation are headwinds.
- The security equipment sold in the Access and Illuminate product lines is a highly competitive business, one that is hard for a small player to succeed in.
- ARR is low, <10% of revenue, and only growing at the same rate as revenue growth; the business will be more attractive if it can grow ARR faster than overall revenue.
- Mal has consistently underachieved the financial targets he has announced to the market; even when he has given ranges, he has typically underperformed the low end of the range. My sense is that his targets are more like aspirational internal sales targets, rather than ones he should be sharing with shareholders.
- Mal can be a bit misleading at times; eg saying revenue was within guidance, which was only true for very recently released guidance, but was below guidance released only 6 months earlier; eg in a Strawman meeting saying Opex was “absolutely fixed” but later releases targets showing an increase in Opex; eg promoting the preferred supplier agreement with Telstra as a “contract” even though there was no guarantee of revenue (and still to-date it is not clear how much revenue, if any, has been achieved from this relationship).
- Mal has not achieved his internal management KPIs set by the Board, resulting in not being granted contingent compensation.
- Both the overly optimistic financial targets announced to the market and the internal KPIs not achieved by Mal, along with an impairment of goodwill, suggest a Board and executive that don’t have a firm understanding of their business OR a business that is unable to grow
- No Directors or executives (including the CEO) have significant skin in the game; one Director has 2% of shares, others own only tiny amounts
- Despite showing growth in revenue in the most recent half, sales orders were lower than revenue creating a headwind for further growth.
- No metrics for customer or employee engagement and retention are offered.
- No metrics are offered about customers such as number, avg order size, size of largest customer.
- Roughly 25% of current revenue, and perhaps a higher proportion in the pipeline, comes from the US which may be impacted by tariffs.
- Highly illiquid; hard to enter or exit; about $80k avg/wk traded over last couple of months; can be >10% difference in buy and sell offers for parcels >$10k.
- Although the $100m pipeline Mal promotes might initially sound attractive and might be useful for comparing one period to the next, if we apply success probabilities of 80%, 50% and 20% to the three tiers, it comes down to around $35m in possible revenue, and that will include multi-year deals; in which case the pipeline feels light for the growth targets that Mal has promoted.
- A cap raise was required in March 2024 to sustain the business.
- There may be a systemic reason why the competitive market is highly fragmented among many small players - it may simply be the market is not large and it is not easy to differentiate.
- Valuation:
- If we assume growth is modest, perhaps 8% 5-year revenue CAGR, we get FY29 revenue of $44m.
- I’ll also assume a modest FY29 NPAT of 4% = $2m, PE of 12, 15% dilution.
- That gives a FY29 share price of $0.06, about 45% lower than current share price.
Base case
- The investment thesis for AVA rests on Mal gaining sustainable traction from the changes he has introduced over the last 2 years. We’ve seen green shoots in H1FY25, these need to thrive.
- Valuation:
- Based on past performance, my base case assumes Mal will underachieve even the low end of his communicated forecasts of FY25F $37-41m and FY26F $52-$66m. Instead I’ll assume 20% growth in FY25 dropping to 15% in FY29, achieving FY29 revenue of $69m.
- For profitability, I will also assume that Mal does not achieve his EBITDA target of 25%. I’ll assume FY29 EBITDA around 15% and NPAT around 8%.
- With that growth and profitability a reasonable PE might be 25.
- With 20% dilution we get a FY29 share price of $0.39, which will be healthy 5-year ROI around 30% pa from current share price around $0.11.
- To come up with a fair current price, I’ll factor in the risk associated with the size and liquidity of the business (and hence use a higher discount rate), as well as the asymmetrical upside of the bull case compared to the bear cases. Applying a 15% discount rate, and equal probabilities to the bull and bear cases, the abacus spits reads a current fair price of $0.24.
- I know a lot Strawpeople apply a standard 10% discount to all opportunities. If I use a 10% discount rate, the fair price increases to $0.30.
- AVA is a high risk investment, so I won’t be betting the house. But I am willingly walking into this lobster pot and will slowly continue to build so long as my base case looks achievable.
To address the point about management skin in the game; Market Index shows David Cronin (non-exec chair) indirectly holds 11% via a nominee company.
It's true that David Cronin owns 11% of AVA through Plexis Holdings @Superfluous however it pays to remember that Cronin has been a director of AVA since 12th April 2018, so INCLUDING when they sold off their "non-core" Services Division, Ava Global, in October 2021 for US$46.4 million (A$63.1 million), with the company intending to focus exclusively on their "leading security technology and sensing solution providers", Future Fibre Technologies and BQT Solutions. I have written about this extensively here, however the main points are:
- Ava Global was AVA's most profitable division at the time that they sold it, by a BIG margin.
- Instead of reinvesting the proceeds of that sale back into the remaining AVA business, the Board (including Cronin) instead used almost all of the proceeds to pay themselves over A$20m in management incentives and accrued bonuses (see here) and to pay shareholders a large special dividend and a capital return that together totalled A$39.2 million (see here).
- Of the A$42.4m left after the AVA management incentives and bonuses were deducted from the A$63.1m (US$46.4m) sale price, they decided to keep just A$3.2 million, distributing the remaining A$39.2m to shareholders as a special dividend and a capital return. It pays to note that their Board and management at that time had a lot more skin in the game (held much more of the company's shares) than the current AVA management and Board do (most of them left the business after collecting their incentive payments, bonuses, capital return and special dividend) so once again they were looking after themselves, paying themselves more money, this time in the form of a capital return and a special dividend. Yes, all shareholders shared in those payments (I was one of those shareholders at that time), but was that really how that money should have been best used?
- AVA has struggled since then and one of the main reasons for that is that they have been clearly undercapitalised. Another reason is that they had sold their most profitable division and were left with a much less profitable business.
- The AVA Board in 2021 and 2022 (during which time Cronin was on the Board but Mal was not) made capital allocation decisions which enriched themselves in the short term but did so at the expense of the company's medium term and longer term future prospects. In other words, they made bad capital allocation decisions as a company Board.
- And that is all to say that just because management has plenty of skin in the game, it does NOT mean that they will always make decisions that are in the best interests of ordinary shareholders longer term interests, or the company's longer term interests.
- Mal was brought in to put things right, but he inherited an undercapitalised company which operated in an environment in which he understood not nearly enough, including timeframes, new tech adoption rates within the industry, the fact that sacking over half the sales team would mean losing a number of pending deals and cause churn, and other stuff that he has admitted to in his latest meeting with our own @Strawman - and the outcome of that has been that he has consistently overpromised and underdelivered since taking over the top job at AVA. That is not the way to win back the trust of shareholders and attract new shareholders - that is a sure-fire way to piss off existing shareholders and lose many of them.
If that's all too long, the following is the TL;DR version:
Disc: Not holding.
Stick to what works for you @Strawman but I wouldn't be wading back in while every current AVA Board member except Mal was there during those 2021 and 2022 very poor capital allocation decisions that have left AVA in the state they are now in.
Competent Management Matters!
Quality Management Matters!
Especially with microcap companies!
I wasn't trying to yell there by posting those last three lines as headings - just trying to reinforce what I see as the MAJOR reason why the investment thesis in AVA is broken for me - so from my own personal perspective. Doesn't mean there isn't money to be made buying AVA here. I'm just saying that there's elevated risk there and to understand that risk you need to understand their history over the last 5 years.
I have heard you say a few times @Strawman that the reason that some companies can be bought cheaply is that there are a few hairs on them, or to put it another way, "If a company looks cheap, there's probably going to be a few hairs on it right?"
Agreed, but when it comes to microcaps, you don't want that to be hairy management.
A few hairs are fine, but you want competent management - including a Board - who can navigate through or around obstacles - and have the track record to show that they can and will. If the hairs are on the actual Board and Management - then my belief is that the risk is just too high.
Hard to fault too much of that @DrPete.
Bottom line, show me the growth.
I’m extremely patient with management given the crushingly tough game of business (some would rightly say to a fault) but at some point you can give too much rope.
I’m a sucker for niche tech that’s (hopefully) on the cusp of breaking out, even if just within a relatively small industry — but one that could still represent tens or hundreds of millions in revenue for anyone providing a valuable solution.
It's a nice area to fish, and you don't need a great strike rate to do well overall. BUT.. it only works if you acknowledge a broken thesis when it happens. Even if sometimes you need it to slap you in the face.
Now that the markets closed, let me telegraph my intention to sell down on Strawman tomorrow.. I'll do the same in real life next week.
Maybe I'll keep a small "hope" parcel.. ;)
For those that continue hold.. you're welcome for the inevitable 10-bagger that will surely follow lol