Forum Topics Alcidion Group Ltd General Discussion
Noicewon11
3 weeks ago

@Tom73

Really appreciate you taking the time to share your valuation & model.

Any chance we could chat further - twitter or email?

 

Cheers,Reece

6
1
Reply

elpaso96
3 weeks ago

I agree @Tom73 valuation. 

Extremely insightful valuation with good reasons for the margin assumption. 

I like that you are also using Damodarans spreadsheet. It’s quick and gets to the point. 

8
1

Tom73
3 weeks ago

Thanks Novicewon11 and elpaso96 - I appreciate the comments.  Sharing the valuation keeps me honest in doing the work (no short cuts), which is what I like about Strawman and Andrews approach of needing to document your reason for investing (whatever that means for you).

Happy to discuss matters around the valuation via the forum, I like the open discussion which invites very valuable input from the great community here.  Like any valuation it is far from perfect and there are significant gaps in my knowledge (competition space, US opportunity, etc) which I am looking for guidance or insights and will continue to fine tune as information becomes available.

I look forward to discussing.

Cheers

9
0

Noicewon11
2 weeks ago

Sure Tom,

Just a small query with the valuation.

 

#1 - The share count.

The company has raised capital again the most recent quarter. Shares outstanding before the raise were 991m and ~56m shares were issued to take the total to 1047m. I believe there are less than ~10m options outstanding which means a maximum dilution (given no capital raise) will be ~1060m Shares.

Your model shows the share count growing to 1328m (1.328bn), and I feel like this may be unrealistic to form a valuation. Why the need for an addtional ~270m in shares, particularly given they are close to the inflexion point, if not past it.

An addtional 270m shares if raised at a SP of 0.40 would raise 108m in capital (before costs), which would NOT be needed. [*Excluding a capital raise for an acquisition, and even then it would need to be a huge acquisition].

A 270m difference in share count is a big difference, hence why I am querying.

 

#2 - The terminal discount rate

I'm a bit confused by the model, can you clarify if the 15% is the terminal discount rate for the DCF?

 

Looking forward to chatting further.

Cheers!

6
2

Tom73
2 weeks ago

Thanks for the question Noicewon11, 

1. Share count: For FY21 I have assumed an additional 10% in share which gets to 1,090k, about 30k above your more correct figure which includes the capital raise and options.  This over allowance is a bit of a buffer to take into consideration the use of share incentives and possible capital raises for acquisition.  I also allow for a 2% growth in share count each year through to 2031 for the same thing to get the share count up to 1,328k by FY31.

I use a 10% discount rate because this is around a long-term market rate, for high growth companies which should probably have a higher discount rate I build in the risk buffer via share count growth rather than play around with discounts rates (generally because they issue a lot of shares to staff as they grow).  Due to growth companies having their terminal value making up a higher proportion of present value, the additional dilution out in year 10 has a higher impact on the value calculated, which takes into account the higher risk.

This is a personal tweak, not something I have borrowed or adopted from elsewhere.  I use to worry about discount rates a lot (getting them right), but found it ultimately subjective so leave the rate flat and model risk factors via other figures in the model which I think are appropriate to the business.

2. The terminal value I have used is an EV/EBITDA multiple of 15 for FY31 as my terminal value which works out to be around a perpetual growth rate of 5% (higher than system due to industry & additional growth via optionality).  I look at both a price multiple and perpetual growth method and come to a compromise between them where the value is close and roll with the price multiple figure.  Note that the EV/EBITDA of 15 is around a 21 P/E valuation.

 

Thanks for challenging these inputs – I would love your thoughts on my assumptions and what assumptions you would use.

Cheers

9
0
wishkey
4 weeks ago

Finding myself very torn between two conflicting investing mantras on ALC today:

1. Make valuation-based decisions (in this case, sell at a relatively high valuation)

2. Hold onto promising companies, even at inflated mutliples (Phil Fisher endorsed) because they will likely continue finding ways to outperform

No one wants to be THAT guy who sold amazon at $10, but similarly, there are not many worse feelings than missing the opportunity to offload some risk at stratospheric prices prior to subsequent price decline. 

I'm no closer to a definitive solution here, just thought i'd share my thoughts, on the off-chance someone can share any words of wisdom.

18
0
Reply

Noicewon11
4 weeks ago

Same boat mate.

I decided to sell a small portion of my holding today, but yes split with the overaching decision.

At a share price of 0.44 (today's price), Alcidion's market cap is marching towards $500m. Half a billion dollars is a lot of money to pay for a company that hasn't yet recorded a maiden profit.

At least these guys have some revenues on board, which those over at Brainchip can't also say.

I do plan on doubling-down on a thorough valuation model and possibly a research write up if enough people would be interested. (Please, anyone flag if you would be bothered enough to read 20 pages or so of writing).

23
1

Tom73
4 weeks ago

A good problem to have wishkey, but a hard one.  I have lost more selling good companies (opportunity cost) than buying and holding bad ones...

Don't forget your third option: Sell some!

I am looking at this option for ALC now, sell some (about what I paid for them) then let the rest run.  Have your cake and eating it in a way and it makes riding volatility easier if you know you can't loose on the position.

10
0

Strawman
4 weeks ago

Well said @wishky, I wish I had an easy answer. Some of my biggest regrets with investing have been selling too early on valuation grounds.

I think for me the real core of it is the degree of quality and growth runway. Very few companies are comparable to Amazon, so there is certainly a point at which it becomes sensible to sell down. 

Knowing when that is, however, is something else entirely!

I really like alcidion, as you'll see from my holdings, but did sell down a bit yesterday on valuation grounds (which of course is why it's gone up today!). 

The market is very humbling :)

 

24
0

ArrowTrades
4 weeks ago

Buy because it's cheap then when runs beyond fair value, rather than sell it treat it as a momentum trade.

Value and momentum strategies have both proven that when excuted well, can outperform. The value investor selling because it's expensive is probably selling to a momentum player who has only just now become interested. 

One trade. Play and collect the alpha at both ends.

16
0

elpaso96
4 weeks ago

Yup, got this wrong but then again with the recent movement in the price it’s back to similar weighting on when I sold. In hindsight I should have waited till now to sell, but then again who has the crystal ball to figure that out? All in all made a return which I can be proud and happy to hold the remaining shares. Although, if it starts pushing towards Brainchip valuations of $1B then I really have to make a decision on what I am investing. 

8
0

Stuey727
3 weeks ago

I mean, the obvious compromise is to sell some of the position, but not exit it. If it goes up, yay, if it goes down, you can choose to re-enter if you wish. Obviously don't max out the benefits of either selling or holding though. 

8
1
Noicewon11
4 weeks ago

#Sell Down Decision - Elpaso96.

A link to his reports on the company can be found here - https://strawman.com/reports/ALC/elpaso96?inc=9380

On the back of your recent post on down-sizing your position due to valuation concerns, I would like to add my 2 cents in additon.

Previously to your post, I had the a similar frame of mind so thank you for validating the thoughts I had on the company. My valuation model now implies that a CAGR of over 20% is needed over the next 3 years to 2024. I 100% agree that the risk/reward is a completely different narrative now the share price has reached 0.37 cents and the market cap ~400m.

The business & management are doing all the right things. Kate has led the team pretty valiantly to where they are now, hopefully soon to pass the inflexion point of profitability. In saying that, a good business does not imply a good investment. I think the risk that continued growth in now priced into the stock is prevelant in today's market price.

 

In saying that, I'm reluctant to take any off the table at this stage (due to tax reasons). I will keep on eye on my positon and likely downsize should the share price move in an upwards trend given no underlying reason.

 

Again, thanks for your input Elpaso!

DISC - I hold & have held ALC shares for ~18 months.

18
1
Reply

elpaso96
4 weeks ago

Thanks mate :) 

Yea Alcidion is not an easy company to analyse. I am most likely wrong with the valuation. Funny enough my sell order has not executed due to the small dip in the price.

Also, in my latest valuation you can poke holes in the revenue growth assumption. For instance what % UK NHS trusts can Alcidion acquire organically or through acquisition like what happened with ExtraMed? I did not mention that.

Furthermore, catalysts/risk to consider are future acquisitions and USA market entry. How will that pan out? With the information we have it’s hard to know. 

10
0

thunderhead
4 weeks ago

I am also struggling with this, as ALC has become my third largest position having nearly trebled on my average. I got my minimum allotment on the recent SPP and haven't sold any shares yet, while the business has good momentum and with management steering it well.

4
0

The problem with ALC is that it is still a news-driven company. They're still a small enough business that one major contract could easily add enough revenue to make the current share price undervalued.They've recently done very well to make inroads into various trusts and hospital ecosystems, and are now in a better position than they were 12 months ago to achieve such a major contract. This will present opportunities for expansion through up/cross-selling, and they've got something to bring to the table when dealing with new clients. I see these above things as a premium that is worth paying for in the share price currently. The only risk I see in the current share price is that the contracts with the Department of Defence are subject to further negotians and funding approval. I daresay this is baked into the share price, therefore if it is not finalised/worth less than the market ecpects the share price will take a hit. I don't view that as a reason for sale however.Disclosure: I hold with very strong conviction!

19
0
DroiD
2 months ago

I agree Strawman. I would also like to add that I don't mind a capital raising if the acquisition is the right fit for the business at a reasoble price and earn-out considerations. I am unsure why investors get all negative on capital raisings when if done astutely can add to the growth of a business. Lots of good examples of this starting with EML and the PFS acquisition. Thanks to Covid they were able to renegotiate the deal at a better price and purchase Sentenial without another capital raising. If this turns out as good as the PFS I would be extremely happy as a long term holder.

I also prefer to see the Capital Raising at a higher price as its less dilutive and the new investors will need to pay up. As a long term holder I am waiting in anticipation to see what awaits for investors in ALC.

Kate has managed the business well thus far so I am backing her in for a good acquisition. 

It appears that they have bought extramed in the UK which is a good fit imo as they are another patient flow software provider. They have NHS trust hospitals on the books like ALC so cross selling opportunities for them. This will take ALC from 21 NHS trusts to 27. This acquisition will add $3m to ALC revenue and earnings by $500k.

16
0
Reply

elpaso96
2 months ago

$10M for 6 new sites is ok in my book considering the time it would take Alcidion to get an agreement with an NHS trust. Also, recently Matt Hancock (from UK government) announced more funding for NHS. The last time they did that it led to South Tees upgrading to the full suite of Alcidion products.

I wonder what would happen this time? 

9
1