The basis of purchasing Amber Technology is a P/E and turnaround play. I think Amber provides a large margin of safety for a potentially high short term (1-2 year) return.
For the thesis to play out Amber only has to maintain the profitability of the past two halves on going. The main risk of the purchase is that these results are one offs. To counter this point, Amber recently acquired Hills AV. This seems to have provided the company with operating leverage to start producing greater revenues and profitability. Management guidance, which is normally conservative, is that the current results will continue. If the company can maintain the previous two halves results ongoing a 100% return is easily achievable with a P/E expansion to around 15 (based on profitability of $3 mil).
General positives:
- Board holds or has an interest in over 50% of shares.
- Potential tailwinds:
- COVID changes - AV solutions could be in demand. For example, business will want to refit offices to enable digital conferences.
- Many smaller studios are being created. For example, Ausbiz or streamers/Youtubers. Anyone can start producing and distributing high quality video/audio content. 20 years ago you had to be a TV or radio network to be mass producing content that was readily available to consumers. I think this trend will accelerate away from traditional producers.
- Company has been on a very slow but steady path to profitability over the past 5 years.
- Board knows the business inside out and has a recent addition to provide new perspectives.
- Provides a good dividend yield at current prices. Potential for income investors to buy in if profitability looks stable.
- No long term debt only debtor financing.
Valuation - Probabilities of outcomes:
- 10% - Extreme misfortune value @ 0c.
- 40% - Goes back to being a break even company. Value at 75% of NTA = 10.5c
- 30% - Maintains $3m profit yearly. Give this a PE multiple of 15. MC = 3*15 = 36 mil or 47c per share
- 20% - Profit of $5mil yearly with PE of 20 as some growth continues. 5*20 = 100 mil or 130.5c
- Probability based price: 44.4c
- I think the above valuation is very conservative with 50% of the potential outcome a backwards step and 80% of outcomes covers current business as usual with no further growth.
Risks:
- This is a value trap.
- Extremely Illiquid. Board holds/represents a large amount of the shares. Unlikely to sell without notice.
- Appears to be no diversity in staff and the board been refreshed often (to counter they have skin in the game). I think diverse workplaces do create better outcomes from differing life perspectives.
- Actively looking at acquisitions. Risk of a capital raise.
- Market cap is to small that fund/money managers won't be able to touch it.
How I expect this will play out:
- Purchase prior to next reporting period. To capture any potential market jump.
- Price rises on consistent results which resemble an annualised profit of $4mil or more. Profitability will increase interest in the shares.
- Wait for price to meet a more normalised P/E ratio if the profitability is stable and increasing. This may take 1-2 years.
- Expected return of at least 100% over 1-2 year period.
When to get out:
- When AMO is reasonably priced and you don't see any further growth in the business. This is a P/E play not a long term growth prospect.
- Profitability is a one off. If this thesis is wrong it will be because of Ambertech's profitability being a one off.
Disclosure: Held
