I've just caught up on the SM meeting recording of $8CO (Thanks @Strawman for asking my complicated question!)
Here I jot down a few simple notes supporting my decision this morning to increase my small RW position from 0.5% to 0.8%.
My detailed notes from the 4C report still largely stand although, thanks to questions from other Strawpeople, I got some further insights to explain the recent progress and outlook for Card Hero.
First of all, it is so refeshing to hear a CEO like Andrew Bond, who is candid and balanced in his answers to questions. It is the mark of a confident and grounded leader that they can speak as candidly about failures as well as successes. An example is the candour with which he spoke about missing out on a 30,000 card deal with Centrelink. So many CEOs would never do that.
I found the discussion very informative about the competitive playing field.
- Customers continue to move away from broad-based ERPs that offer everything, but don't deliver the customer experience through the deep workflow integration of a specialist platform (example. SAP and Tech One (Disc. Held) both big in Government.)
- Concur the major competitor, with DoD a negative reference case with material available in the public doman. They pulled the plug after spending between $3m and 13m (I can find reference to a number of $10m in the ANAO report from a quick search). This negative reference case might give pause for thought, particularly if $8CO can show success in GovERP rollout, which they appear to be able to.
- Still a lot of legacy, on-prem. systems, and paper-based processing going on. (Which is a surprise - I left big corporate land over 10 years ago, and we already had Concur in place.)
I found the following statements relevant to my valuation, in the context of the cash flow trend graph I plotted in the 4C report:
- 110,000 of the Total Potential Users are in mandated departments (62 of 90). Valuable insights on what pre-requisites need to be in place for an Agency to go live. This was a gap in my knowledge.
- Expects Govt ARPU to continue to trend up to "low $60s"
- There is a "strong implementation workload ahead" ..." the pipeline for new work (i.e., implementations) bigger than its ever been" meaning that the recent report of strong receipts from implementations are not one-off with the majority ot mandated entities yet to be on-boarded, and a sense this happens over the next 3 years.
- "We expect cash positivity most Qs"
For me, this is the base business that supports significant growth in revenue over 2-3 years, driven solely off the GovERP mandate. With this apparently progressing well, I ascribe minimal risk that the 3+3 Option will not be exercised.
The good news is that we also have the opportunity to track the GovERP Phase 0 milestones, as each new Deptment getting started will register payments of $40-60k on Austender.gov.au - I've just jumped on and its easy to use (enter "Expense8" in the Keyword field under Contract Notives).
Beyond the base business, there are a number of potential near-to-medium term catalysts, including:
- DoD Contract: (DoD 16k employees and ADF c. 90k - which explains the "100k users" Andrew mentioned)
- Card Hero deals ("when it drops, you'll see big things drop" and "good conversations ongoing with Government, NDIS and Universities")
To be clear, none of these are in the bag, but any one would support a tick up to the valuation.
For example, a typical large Australian University has 6k-12k FTE staff and many more heads given fractional contracts and casuals, split between academics and professional staff. A large proportion incur expenses outside of the campus, so a University rollout would likely bring anywhere from 3-6k by my estimate. Not massive, but think of it equivalent to a medium size governement agency.
Valuation
This "base" business easily supports a valuation of the current 2.5x FY23-FC revenue.
On it's current trend, I estimate that $8CO could get to a FCF of $1.5m in FY25 (runrate $1.0 by YE-FY24 and $2.0 by YE-FY25).
Looking in the payments space, $TYR is on a EV/FCF-FY25 of 31x ($SPY is on 21x). That would put $8CO on an EV of $46m, discounted back 2 years at 10% gives $38m EV, vs. $19m today.
If I look at a range around the FCF(FY25) of $1.0m to $1.7m that gives a range to the value/share today of $0.12 to $0.20 compared with today's SP of $0.087. So a reasonable margin of safety if you find the FCF multiple too aggressive.
The above's a quick calc - so I need to check it, but I think it hangs together.
Conclusion
$8CO is still very small and illiquid, and it is a high risk proposition. At this stage I could never hold a material positon in RL, partly because it is still not clear to me what the path to a material business could be, and the highway of payments start-ups is littered with wrecks. But there is time for that, as long as it continues to execute and describe clearly the opportunities immediately ahead of it.
However, both on the numbers and the quality of management, it can hold its head high in the smaller cap / higher risk part of my portfolio.
Disc: Held RL and SM