An article in the Fin Review today of interest to A2B holders. I no longer hold due to a portfolio reshuffle and it not making the cut:

Strange bedfellows at A2B’s new headquarters.pdf

Results are summarised at the bottom, but some comments on impact to valuation with reference to my May valuation of $1.59 first.

Valuation Impact

No surprise that Covid continues to impact results of the core profitable and cash generating Mobility Services part of the business, but it seems the market, like me hopped for a better second half but failed to get it.  It’s only a delay to returning to profitability, which will continue with the impact of current lockdowns from Delta, which probably deserves the -6% price action today as an impact on value.

However, the most interesting thing in the release was a comment on the fair value of the property holdings of the company Vs book value which hadn’t previously been flagged.  Property currently on the books at $10m has a fair value of $81m, which is over half the current market cap of around $150m…  Property is worth $0.66 a share!  Selling it would realise less so I would be comfortable in adding $0.50 to my previous value which did not include this.

The valuation depends on A2B moving towards being a digital mobility solution provider, which it is doubling down on (see outlook below), so the core thesis of the valuation remains.  Take away the delay in the legacy cash generating business recovering from Covid (-6% or -9c) and add property value (+50c) and my new value is $1.99.

IV = $2.00 ($1.59 -9c +50c)

FY21 Results

·         Revenue: -33.7% to $113m due to Covid, note this has been steadily improving with Mobility Service revenue at -27% pre-Covid levels in Q4.  Average revenue per car in the fleet has returned to pre-Covid levels, but the fleet is down from 9,525 cars to 7,131 cars and is not going to recover fully until we get past Covid.

·         Margin: Improved to 81.9% from 72.7%, due to the end of the licence dealing business which was low margin and as noted on the half year result.  The very attractive margins are due to effectively operating a franchise model for its fleet and software service fees.

·         Underlying EBITDA loss of -$3.7m from +$12.1m.  The NPAT loss of -$18.1m is better than -$23.8m last year but last year included additional impairment charges of $13m.  The $48.5m drop in revenue was offset by $32.7m in costs removed from the business.

·         Cash: $11.9m dropped from $25.8m, half due to operating losses and half capital expenditure as -$11.0m in free cash flows has broken strong FCF over prior years, +$23.0m in FY20.  None the less management are confident that the cash position is strong enough to talk about additional acquisitions, citing the property portfolio backing to debt facitities provides liquidity of $35m.  So they have enough cash to ride out Covid.

·         Outlook: Covid dependent, activities rebound strongly after restrictions are lifted so the vaccination roll out and political responses to opening up are the key.  A strategic reset is being put into place to focus on the global growth potential of MTI, advancements in A2B’s holistic payments capabilities, and the significant opportunity to fulfil first and last mile instant deliveries throughout Australia.  Details at 28 September Strategy Day.

The up coming strategy day may provide more insights for a deeper review of the valuation, but I am content that the current price provides upside value and asset base provides down side protection so will continue to hold the position I have

Valuation of $1.59 is detail in the attached, notes included and expanded on below. Valuation has general company info and points of interest.

Key Assumption Notes:

·         Revenue excludes MTI and payment systems opportunity (see below). I expect it to recover to FY19 pre Covid (Excluding 23m in Licence brokerage revenue) by FY23 then grow at just 3% going forward.  Small acquisitions would be accretive but competition and industry maturity limits growth to system at best.

·         GM% 82% average going forward, up from 73% in 2020 with the removal of low margin licence broking income, (note 83% for FY21 includes government grants from Covid).

·         EBITDA% I expect to get to a run rate of 12.4% by FY23 and hold as cost grow at the same rate as revenue (3%).  This is an undemanding EBITDA% based on history (FY19 was 16.3%)

·         Capital spend (PPE & IP) I have at 8m +5% going forward.  This links to the low growth assumptions and I would expect it to be double this if higher growth was achievable, but I would expect value added to equal or exceed additional spend.

·         Share count: A seeming rarity how days – share count is flat for the last 10 years and they returned capital in 2017.  Hence, I don’t expect increases going forward.

·         Opportunity: Software was only 6m of revenue in FY20 and payment systems opportunities in retail are just starting, so I can’t guess what the revenue may look like going forward.  However, I am willing to allow a 25% premium to the price for this opportunity, which if it goes well could dwarf the existing taxi and network revenues. IV = $1.28 without this.

Business Attributes of note:

·         Operating leverage with GM% over 80%, but growth to take advantage of this is absent.

·         Capital light, as a franchise operator, rental fleet is small and the vast majority of revenue is not leveraged to capital spend.  Lowers risk and helped in Covid.

·         Skin in the game: CEO owns 0.7% of the company and has been in place since 2014.  According to YahooFinance there is 24% insider ownership.  Not sure where this comes from but history shows that shareholder interests are front of mind in managing capital.

·         Ability to adapt to change, has adapted to Uber and handled Covid well, is a fast follower rather than ground breaking innovator (survivor).

·         Industry Risk: have applied a 10% discount to value for this, I expect challenges which would require a higher discount but lower because management has responded well so far.

·         The board has current and former directors of Thorn Group, Technology One, Afterpay and Nearmap providing credibility to the innovative tech and payments systems path it is on

I own A2B, both for the value the core business offers (even with structural challenges) and the opportunity that business has with payment and network systems.  The core business valuation is undemanding, providing a margin of safety giving effectively a free option for what the new business could be