I have sold my small holding in AVA. My half-year reporting review provided me with some questions that presented new risks that I don't completely understand or are not aligned with my thesis. There is some serious upside and downside potential for Ava Risk Group but I can't say which is more likely at this point. I only like to hold if I have high conviction and I don't at this point so I am selling on that basis.

Risks/problems causing negative views:

• Basic mistakes:

  • Yet another announcement that needs amending because of a mistake. Makes me wonder if management has it all together? Do they miss the finer details? Are they taking other shareholders seriously? I counted 5 errors since 28 July 2020. All since the old CEO left.

  • Emails to investor email account bounces. Online form to contact the company doesn't work.

• New details I wasn't aware of or fully accounted for:

  • Chairman's company receives payment from AVA (stated as arms length, could be a benefit but I don't like the look).
  • Potential sell off of services division. Management gets up to 32.7% of the value above $5.3 mil USD. Management has extended this agreement even though it was due to end Feb 2021. I wasn't aware of the risk here when purchasing. If the services division is sold for a inadequate valuation the rest of the business is highly overvalued (if no new IMOD style contracts come through). Management potentially takes a massive slice of the pie... Why extend this deal past 1 Feb 2021. How is it in the interest of ordinary shareholders unless they can get a price around 80% of current market cap? I wanted the services division as part of the company, its revenues are increasing nicely and this section of the business is strongly profitable.
  • IMOD is looking like a potential one off boost to profitability.

Valuation - the guessing game:

Selling of the services division at a 10x EBITDA multiple (figure based on what I've seen thrown around as reasonable):

EBITDA multiple of 10x for services (1HFY21 services EBITDA x 2 x multiple) = $3.8 x 2 x 10 = $76 mil.

Take away potential management profits @ 32.7% over USD$5.3mil($6.8AUD) =  $53 mil valuation of services division to share holders

Cash at bank = $13.4 million

Market valuation of Technology = 135-13.4-53= $68.6 million

Here is the problem for me, taking out IMOD I think this is very expensive and hoping for the best with Aura IQ. If another IMOD comes along this is super cheap....

What would I miss by selling?

• Aura IQ is a raging success. There is time before the effects come through. By then my question marks around the services division will be answered.
• They don't sell the services division or they get a great price for it.

Conclusion

Given the current market turbulence and my lack of conviction I have sold out. However, this is not a sell and forget. As things pan out I will be more than happy to jump back in as my concerns are answered. I just can't tell if this is a massive winner or loser at this time and price...