Documenting the reason I am participating in the rights issue:

·       High price for the business, but justifiable in terms of value to ALC. Silverlink lacks growth as a stand alone business but offers significant growth to ALC as a combined offering.

·       Integration looks to be a good fit in terms of both the additional features but also technical compatibility, fully accretive in terms of product offering.

·       Large benefits available from market penetration provided with existing Silverlink customers but also expanded offering increases the TAM for ALC in UK market.

·       Appreciate the reason for the discount of the offer (urgency and time of year), like that they are putting existing shareholders first which largely mitigates the dilution and value loss from the discount.

This was my conclusion having watched the webinar and read the great straws from @composer as well as reviewed my valuation but have not updated it.

Disc: I own ALC

Valuation detail attached is for the base valuation, an explanation of assumptions below.

Base valuation is what I am going with, Bull & Bear IV provide sensitivity context:

Bull: $0.63 (FY30 sales of 136m, NPAT 59.6m)

Base: $0.30

Bear: $0.15 (FY30 sales of 54m, NPAT 12.2m)

Assumptions:

·         Sales of 25m in FY21 growing at 6-7m a year lead by the UK which overtakes ANZ sales by FY26 with steady penetration into public health in both regions.  The need to implement the product puts a resourcing cap on the rate of growth, hence the almost flat line dollar growth assumption.

·         Margin improvement as recuring product income increases from 56% in FY20 to 88% by FY30 with gross margins increasing from 88% (H1 FY21) to 92.5% in FY30 but also helping reduce Opex% from 99% to 45% over the same period as service costs included in Opex drop as a % of sales.

·         Opex increases significantly in FY21 as already flagged and seen in H1 results, but as management have advised this scale up is mostly one off, so I have allowed for a 15% increase in FY22, 10% in FY23 then 5% going forward.

·         EBITDA% I expect to be negative in FY21, but positive from FY22 onwards, reaching 48% by FY30 due to operating leverage on software revenue.

·         Capex is light and I expect this to continue (R&D is expensed).

·         Share count growth of 10% for FY21 to account for the capital raise and options then 2%.  Further raises for acquisition I expect to be EPS accretive so have ignored.

·         Risk: I have not discounted for risk due to the strong cash position and clear support from capital markets to provide cash and customers to buy the product.

·         Future Opportunities: I have allowed for a 20% uplift in valuation for opportunities around growth of the product portfolio and margins via new acquisitions and product development.

In general, I see my valuation as conservative, even the bull valuation could be well under the opportunity ahead of ALC.  However, with a lack of clarity around product specific revenues, margins and user KPI’s it is very hard to put any substance behind higher levels of revenue growth.

I own ALC but have an order in to half my position at 50c.  I would buy again if it dropped to 20-25c or below and intend to hold the company for a long period base on currently available information