You did ask for it Overlord...

My bear case is really based around Aura IQ and specifically how the messaging of this reflects poorly on management. Part of my thesis when I invested in AVA was around Aura IQ and the exciting opportunity this represents. The Proof of Value announcements were bullish and if they were able to commercialise this I felt this would represent a step change in the value of the business that wasn't factored into the share price.

Management made a number of announcements in relation to Aura IQ in FY21 and then in a trading update in early July they stated "management remains confident of meaningful revenue for Aura IQ sales in FY2022 starting in Q1 FY2022 as a result of the success of the proof of value trials". In mid August 2021 they announced the sale of the services business. Big tick for them in delivering on a promise they been flagging for some time. Even more exciting to me was an update in the same announcement which reiterated the previous confidence for Aura IQ to deliver revenues in Q1 - bearing in mind we're now half way through Q1 at that point so they're giving themselves six weeks to deliver. Q1 came and went without further announcements or updates. Strike one for them.

By the time of the AGM in late October the language in regards to Aura IQ was now "...AVA Group expects to sign multi-year agreements in 1H FY2022 which will generate annual recurring revenues in 2H FY2022...". 1H came and went without further announcements. Strike two for them.

In January 2022 they released another trading update. In it they didn't mention Aura IQ. Strike three for them. We're now at the arse end of Q3 and still no material signings.

I accept these things have long lead times, that COVID has restricted site access and ability to complete trials, that industry participants are reluctant to be the first to adopt. However, there are two things that the above that I have issue with:

• I'm a big believer that you under promise and over deliver. These guys don't do that. The timescales they speak to are best case. Rob's repeated talk of "spectacular" results today don't bring me great comfort - there's a disconnect between that statement, the commentary in outlook statements and what they're delivering.
• You fess up when you so clearly got it wrong. The January outlook statement was the last straw for me. I still believe in the technology and if they had turned around in January and said 'yep, we were overly optimistic, we've learnt from that lesson and here's where things are at but timeframes are hard to predict', I'd probably be ok with that. They didn't. Instead they just chose to drop it from their Outlook altogether and pretend it never happened.

As I said I still believe in the technology and suspect it will get adopted, maybe even soon. But I've lost confidence in management and that's why I'll be watching from the sidelines.

In the spirit of keeping AVA Risk honest I have to say I'm disappointed they haven't landed an Aura IQ sale as of yet.  When they announced the sale of their service division they also stated "management remains confident of meaningful revenue for Aura IQ sales in FY2022 starting in Q1 FY2022".  They didn't need to be so specific but they chose to do so and it's not really open for interpretation.  They could come out tomorrow and announce a sale (as a holder I hope they do) but it's still a miss.  It's not a thesis-breaker, but it's a yellow flag for me.

[Held]

Following the completion of the divestment of the Services Division (refer to ASX announcement 17 August 2021 for further details), Ava Risk Group is expected to hold $40.2 million in excess capital.

The Board’s intention is to use the excess capital to undertake the following capital management strategies:

1. Capital Return to Shareholders: $39.2 million (circa 16 cents per share); and

2. On-Market Buy Back: $1.0 million

The proposed capital return is subject to the Company obtaining a favorable Class Ruling from the Australian Taxation Office (“ATO”) in respect of the classification of the proposed capital return and obtaining shareholder approval. Based on feedback from advisors, the Board expects to be in a position whereby the formal proposal could be put before shareholders for approval at the Annual General Meeting (“AGM”), which is scheduled to be held on Thursday, 28 October 2021. Important details, including a timetable, will be provided in the Notice of Meeting in due course.

***

Not sure how keen I am on this.  I haven't had a chance to review their franking credit balance but if they can't find a better use for the funds than give them to me just so I can pay tax on them I'm not sure they're trying hard enough...

[Held]

Just to add to Rick and Gavco's observations below...

The market response to the long-flagged sale of AVA's services division has been good-ish - perhaps less than it would have 12 months ago, but still it's a tick for management who seem to have extracted a reasonable multiple from TTG.  However, it leaves a big hole in revenue and a smaller but still significant hole in earnings, particularly when you consider the high margin IMOD contract is almost complete.  

So what's left?  Well, there's still a very good, and now much more focussed, business there.  One that has the equivalent of 25 cents a share in cash - unlike them I'm excluding the dividend they paid in FY20 from pro-rated cash (I mean seriously?  You could pro-rata a silk purse from a sow's ear).  I think their technology gives them a moderate moat (that perhaps the services division lacked) and the cyber security thematic should provide a tailwind for the foreseeable future.  Including the proceeds of the sale their EBITDA multiple to Enterprise Value is about 6x, which seems pretty low but the IMOD contract does distort those numbers.

To me the most pertinent information is on page 5 of the release when they state "management remains confident of meaningful revenue for Aura IQ sales in FY2022 starting in Q1 FY2022".  Given we're halfway through the quarter you would have to be badly misreading the mood in the room if you're not dotting the t's and crossing the i's on at least one Aura IQ deal.  That is close to a solemn promise as you are going to get and since Scott Basham was appointed their forecasts and their delivery on promises have become alot more reliable. 

What I am watching for:

- non-replacement of IMOD contract

- Aura IQ not taking off

- more government work.  Their last significant domestic contract was awarded in May 2020.

[Held]