Coffee Micropcaps Presentation

Hang around for the Q & A - interesting colour regarding the pipeline. 

AVA Services main competitors are, or should I say were, Brinks and G4S. Brinks acquired G4S for $860 million. G4S had adj. EBITDA of $115 M, which tranlates to a valuation multiple of 7.5 times.

AVA Services are on track for EBITDA of at least $8M in 2021, and would be worth more than $60 million going by the valuation multiple Brinks paid.

AVA prospects rely heavily on the success of the Aura IQ product.  So, what does succcess look like?   

In the HY1 presenation, AVA outlined the first POVT generated $7.2 M in savings, with an ROI of less than six months (also, 50+ opps @ $50 M).   Based on this, I come up with the following:

1) Overall cost (AVA revenue): $1.0 M per site.  

2) 40% is capital , and 60% is recurring over 3 yr period. 

So, per site, $0.4 M installation cost, and $200 k per annum per site.   

HY1 preso stated 8 sites have had POVTs completed, with contacts being negotiated - These may be the sites to be signed up by June 30.....Assuming 50% win rate, this will result in:  

FY2022 revenue of $2.0 M (assuming only 50% of annual subscription revenue) for this oppirtunity (maybe $4.0 M if all are signed up).   

They have also flagged 50+ opportunities, with $30M recurring revenue.  If they can convert 40% of these, that will add $12M in recurring revenue over the next 2-3 years.  

I assume gross margins will be 60-65% for the product.  

AVA will need to execute on their puipeline and continue to grow it maintain the current valuation. 

Getsmart outlined the numbers.  But some of my observations are:

1) Revenue was not broken out for technology and services business.  I suspect the technology revenue fell, and the services business grew over the quarter, given the change in gross margins outlined below. They stopped breaking this number out in Quarterly reports back in Q2.   Bit of a red flag for me. 

2) Gross margins fell to 43%, meaning the services busness is performing strongly in comparison to the technology business. 

3) AVA said:  "The Company progressed commercial negotiations and expects to enter new contracts to deploy Aura IQ to multiple sites during Q4 FY2021."  This is the litmus test for management, and the future prospects for the business.  AVA will be a sell for me if there are no contract announcements by June 30........

DISC - I HOLD

Services Division performing strongly and on track for EBITDA of $8.4M for FY2021.  Given management are hoping fro a sale price of 9-12x of EBITDA, a sale price of $75 - 100 M is hoped for.   Management will pocket 33%, so shareholders can expect $50-70 M in captial returned........18- 26 cents per share. 

Management are hoping for sale by June 30, 2021, as per DMX September monthly report. 

Smashing result announced.  Key takeaways:

1) Revenue up 73% on pcp.

2) EBITDA of $7.7 Millon, up 522% on pcp. 

3) CASH UP 50% FROM JUNE 30 2020, to $11.6 M.  

Services Division - Revenue of $8.1 Million, down from $7.7 M in Q4 2020.   However, gross margin expanded to 33% , with expansion plans for Asia flagged.  Bad news fo rthe Strawman classic - Incentive scheme extended to June 30 2021, so a sale of the Services division will not occur during the Classic :(.   Noting the the busness is likely to sell for around 8x EBITDA, he servies division is worth about $51 million at the current EBITDA rate.  

Technology division is generating high margins courtersy of the IMOD contract.  Maangment flagging a healthy pipeline of opportunities.   Something to watch closely as the IMOD contact phases out in Q4.  

CEO, Rob Broomfield will be presenting today at a Reach Markets event - register here. 

The promo says:  "This week we will hear from: Rob Broomfield, CEO at Ava Risk Group Ltd (ASX: AVA), a fast-growing Australian RegTech firm, with an exciting recent win in the banking and mining sector."

I am keen to see Rob present - I think it may be his first presentation as CEO. 

AVA Risk released an investore presentation.  In it there was a FY2021 guidance,  Strangely, the announcment was not marked as market sensitive.  Perhaps there is an earlier announcement, but I am yet to find it.  Here are the key takeaways:

1) Forecast Q1 2021 revenue:  +$15.5m - up 58% on pcp. 

2) Positive cashflow for Q1 2021, and an improvement on the $0.9 M reported on pcp.   It will likely translate into $3-4 millon in positive cashflow for the quarter. 

3) Repeated the IMOD $11.7M revenue forecast to be booked in FY2021 - remember, this is 100% gross margin licencing fees. 

4) AURA IQ pipeline is reproted to be +$49M, with another 6 proof of values deployments underway.  Forecast recurring revenues for this new product in FY2021.  

5) $14.6 M backlog as at June 30, 2020.  It was just $6.0 millon a year ago.  

AVA Risk are on track otearn +$60M in revenue this FY, and around 15-20% profit margins.  IT still looks remarkably cheap at this price.  

DISC - I HOLD ( a lot)

Looking deeper into the management team, the Services Division management team are quite impressive.  

Mike McGeever, is the Non-Exec Chairman, and led Transguard to success - Transguard revenue was about $500 M USD lin 2019.  Thats about 15X larger than AVA Services.  

Grant Angwin is a non- executive director, and former President of Asahi refinery NA, the worls largest gold and silver refiner.  grnat was also the chair of the London Bullion Market Association.   Grants tremendous knowledge of, and connecitons within,  the precious metals market will help AVA Services build opportunities in the sector.  

With the merger of two giant in the industry, I think AVA Services has an opportunity to win more "long tail" clients. Long tail clients are the smaller clients of G4S (that no longer exists), and that Brinks are unable or unintersted in retaining as they are small fry for them (but attractive clients to AVA Services).  

I would now prefer AVA Risk spin off AVA Services rather than sell it off to the highest bidder.   AVA Services would be worth AVA Risk's entire current market cap within 2-3 years IMO.  

Key takeaways:

1) $4 M positive cashflow for the quarter ! 

2) Company again highlights it has 100% margin revenue of $10 million forecast for FY2021 (no one seems to be listening!)

3) Services division reported strong growth in Q4 - previously reported. 

4) Technology divison reported winning a defence contract (no value provided)  and advised there are several "Proof of Value" trials for its Aura IQ conveyor health monitoring solution. 

5) Gross margins were above 50%, despite the services division GMs running at 25%.   

Very profitable 2nd half of the year, resulting in $5.7 M free cashflow generated for the full year, or 2.3 cents per share.   

If AVA can execute on sales of its Aura IQ product, it looks very cheap at the current share price.  

The CEO unfortunately made a bit of a meal of the announcement, but it is good news.  

 IMOD Contract has a value of $16.7 Million AUD, and is the sale of the licence to use and manufacture AVA's technology.  i.e. This revenue has a gross margin of 100%.  

AVA Risk recognised $5.2M in FY2020, and will recognise Around $10M in revenue in FY2021.   i.e. recognise $10M in gross profit for this one project in FY2021.  

AVA Risk report their Services Division report seperately, as they are seeking to sell this non-core division ove rhte next 6 months.   They reported the following performance:

1) $9.7 M revenue for the quarter, achieving $25.1 M in revenue fo rthe full years, representing 57% growth in revenue.  

2) Threefold increase in clients over the year.  

3) Gross margins increased to 25% from 21% over the year.  

4) EBITDA of $2.3 M for the year.   

5) Merger of largest and 2nd largest competitors creating opportunity to expand market share.  

The group is on track to achieve $40 M in revenue this FY, and to double EBITDA to around $5 million.   This would value the business at around $20 Million at a 4x EBITDA multiple.   Given AVA has a market cap of around $40M, the sale of this business could unlock a lot of value, given the core technology business is high margin, high growth business, with $23 million in revenue.  

Highlights:

1) Q4 revenue beat by 17%. 

2) FY2020 estimated to be $45M, $2M above previous guidance. 

3) FY2020 EBITDA forecast to be $6.8M (noting the ITDA will be around $2.4M). Meaning profit after tax of $4.4M.  

4) Big news:  Scott Basham, CEO has resigned.  Rob Broomfield, COO of the technology divison will take over.  

5) Technology Division is experiencing order delays due to COVID-19, with staff WFH on reduced hours & pay, but some improvement over June.  

Great result, but losing Scott, after turning the ship around, is a loss.  

If AVA can continue to grow revenue, and execute, they are very cheap at these prices, however, there si some uncertainty as a result of Scott's departure.