Pinned straw:
My notes from the Investor call this morning and the announcements. Overall, nothing really new as most were already revealed during the release of the Appendix 4C in Jan. Its all about getting the FY24 deployment of 18 units back on track.
- 27 units deployed in total, 4 new units in 1HFY24, 3 post the period vs planned 18 for the FY - to make up for this, need 6 units deployed in Q3 (of which 3 is already deployed), and 8 in Q4
- Risk continues to be flagged that 18 units may not be fully deployed this FY, with some pushed over to early 1Q25, so nothing new - it was mentioned that overlapping deployments is no longer an issue
- Issues around contractor availability experienced in 2Q have mostly gone back to normal, continued to engage the customer in planning early to mitigate risk of delays
- 27 deployed units provides a baseline annualised MMAP of $50m per year
Expense watch items:
- Depreciation & Amortisation - jump from $3.8m 2HFY23 to $5.3m was raised on the call - no concerns, step-up is in line with increase in deployed units, depreciated on a 10 year straight line basis. D&A expense is not linked to revenue and is all related to PhotonAssay, no other assets
- Employee cost has gone up from $7.9m to $10.1m, H-on-H and 86% up on pcp - expanded deployment capability and building of in-house maintenance capability, offset by a drop in Maintenance Costs from 1HFY23 of about $0.5m, aligned to Group’s strategy of global growth
- Management is finding ways to provide better visibility of the savings arising from operational leverage from the global hubs strategy
- -ve working capital of ($2.8m) is a timing issue between receivable collections and payment for purchases of parts etc - no issues of note with both customers and suppliers
Discl: Held IRL and in SM
Built the attached xls to line up the Statutory P&L and the Management View side-by-side as I found myself getting knotted up with the movement in the numbers from Half-to-Half, Qtr to Qtr and some of the numbers in the preso. Building the sheet also forced a deeper dive into the P&L which I found very helpful.
RhinoInvestor
@jcmleng Thanks for sharing. I think I will try and go back to listen to their results briefing. Any mention of staff / headcount ... the growth in their staff costs seems to be accelerating at a greater rate than their revenue. Some of that makes sense as they will need more teams to support an acceleration of deployment and more devices in the field. I'm wondering when the staff costs might start to plateau out though.
Was re-looking at this the other day (with intent to add to my IRL position given the recent pullback in Share Price). Beyond the staff item above, the amount of capital requirement to meet their deployment targets is still high (I think I worked out that they may run out of capital + pre-approved loan in about 18 months meaning another capital raise could be on the cards). The cash flow off the install base by then is probably still not going to be enough to support the annual rollout if their estimate of TAM is correct). I was also a bit concerned that we will see the interest impact of them drawing down on the commercial loan before then which will be real cash out the door.
The other thing that stood out to me was the level of depreciation of assets (which is to be expected as they deploy more units). I think that will keep them in a statutory loss position for quite a while even though they will be cashflow positive. I'm wondering what impact that will have on their share price.
Have you looked at any of these things in your deep dives? Do you have an opinion?
DISC: Held IRL and Strawman (I expect for a long time while this business model takes time to play out and demonstrate its value)
jcmleng
@RhinoInvestor There are no employee breakdowns in the segment report, nor headcount of permanent employees vs contractors - probably a good thing to ask C79 for this info in the next call While these 2 costs stood out, intuitively, I was not worried based on the following rationale:
Employee Cost
- The focus is to deploy well, fast, and as parallel as possible. Given the geographic spread of the units, the hostile country and minesite environment, there cannot but be an increase in employee cost as it is key to throw resources at deployments to keep the momentum. Throttling resources now would be the worst thing C79 can do
- I suspect a good % of the employees are contractors, as is common in mining, so employee cost should flex up and down based on deployment plans
- The CFO also talked about cost savings from the hubs not being visible enough - they are working on improving the transparency on this, this will offset the rise in employee cost which is happening, but is not visible enough
- The spike in employee cost thus makes sense to me given the priority to deploy but the extent of spikes from H-to-H is something to definitely watch out for
D&A
- Am not concerned - this is a standard 10 year straight line depreciation method and hence, should already be baked into whatever their forecasting model is, is a statutory requirement, so it will be what it will be
- What I think is not clear and won't be overly clear for some time, is the actual longevity of the machines - if I recall in the chat with Dirk, he did say that the lifespan of the units would be > 10 years, with upgrades and refurb etc. I doubt anyone has modelled this as it is still early days of the deployed machines but this will lower overall D& A cost in the long run
To get some science to confirm the initutive hypothesis, added some simple ratio's in my xls around Employee Cost, D&A as a % of Photon Revenue (MMAP + AAC only):
Assuming I got the formulas and math right, this was interesting:
- Employee cost per $ of Photon Revenue HoH - rather flat around 50-54%, despite the sharp hike in Photon Revenue growth - that gives me quite some comfort that this cost is being sensibly managed against deployment acceleration
- Maintenance Cost Per $ of Photon Revenue - trending lower as C79 moves maintenance in-house. Against flat employee cost overall, this is also encouraging as it feels like C79 is managing maintenance while ramping up deployment - a small sign of the hub efficiency?
- D&A Cost Per $ of Photon Revenue - ~3% uptick vs 29% revenue growth, probably due to the D&A being apportioned for the newly units. Did not show up anything to be worried about.
Capital Requirements
On capital requirements and raising, my overiding attitude is, it will be what it will be. The busines model requires upfront capital to build and install the machines so that the revenue flows from it. They have modelled the capital needs for the next 2 or so years, and then it could well run out - they will then need to work out the best funding options at that point. What we will have going in our favour is that debt cost will have come down sharply from today. If they capital raise, then so be it. In 2 years, the economics of the company will be very different from today.
I do not have the expectation that all future deployments will be fully funded by ongoing revenue, more so if we go past the 49 contracted units. I thus expect further capital raises and will be OK with it so long as the funds are used for long-term purposes rather than short term (ala ALC). I do not view capital raising as a thesis breaker at all.
So, I am comfortable where things are at now, financially, and the trajectory of deployment, but it would be great to see them get to 18 deployed by the end of this FY or as close to it. The biggest deployment risk is customer readiness and I sense C79 is getting on top of that challenge.
What I do want to see more off in the coming quarters though are (1) more tangible outcomes from the Barrick partnership - currently its all about sold units and the technology endorsement, not much more (2) making inroads into the remaining TAM beyond the 49 units locked in.
Discl: Held IRL and in SM