$1.8+ million Multi-Site Rail Contract Award

Ava Risk Group Limited (ASX: AVA) (“Ava Group” or “Company”) is pleased to announce that its world leading Aura Ai sensing solution has been selected to be deployed for a multi-site program to upgrade security at certain major rail facilities in South America:

•  Security upgrade program with total award value of more than US$1.40 million (A$1.84 million).
•  Multiple Aura Ai-2 systems will be fully integrated with the customer’s existing video management software and CCTV system.
•  First purchase order received exceeding US$0.47million (A$0.61 million).
•  Initial deployment at first sites in early Q4 FY2021 with the balance of sites expected for deployment before the end of Q4 FY2021.

Disc; I hold....

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02357253-3A564166?access_token=83ff96335c2d45a094df02a206a39ff4

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...

H1 FY21 Results out and are as flagged mid-January (others have quoted), additional information & points of note:

·         IMOD contract saw sales in India grow 241%, about 40% of the growth YOY – not a surprise

·         Europe accounted for 47% of growth YOY and remains the largest market at 44% of sales.  I suspect this is linked to the 101% growth in the Logistics business.

·         USA sales dropped 50% and now account for just 7% of sales – disappointing.

No change to valuation, FY21 full year forecast is under baked but until we see more contracts like the IMOD, there are gaps to fill for future sales

Half Yearly Report

AVA released their half yearly report this morning

Highlights:

Revenue up 72% to $35M
Licence fees from IMOD project make up $7.7M of above
Profit up 1,071% to $11M
Special dividend of 2cents/share payable March 10th
Strong balance sheet with $13.4M cash

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02347126-3A562418?access_token=83ff96335c2d45a094df02a206a39ff4

Ava Risk Group is a market leader of risk management services and technologies, trusted by some of the most security-conscious commercial, industrial, military & government clients in the world. The Group features a range of complementary solutions including intrusion detection for perimeters, pipelines and data networks, biometric and card access control as well as secure international logistics, storage of high value assets and risk consultancy services.

Through decades of innovation, the Ava Group continues to build upon a comprehensive portfolio of premium services and technologies for the most complex and demanding markets. The business truly serves a global market, with our knowledgeable team spread across six continents, providing market and industry expertise directly to customers. With thousands of sites protected, the Ava Group is proven to deliver first class services and technologies that surpass the expectations of our partners and end users.

The business is really an amalgamation of 3 different businesses (with different brands) playing in different parts of the market

1. Future Fibre Technologies

2. BQT Solutions

3. AVA Global logistics

Performance:

FY20

  Revenue: $46m (15% growth YoY)

  EBITDA: $7.4m

Q1FY21 

  Revenue: $17m (73% pcp) with

  EBITDA: $7.7m (!)

H1FY21

  Revenue: $35m

  EBITDA: $12m

Valuation

  Market-cap: $143m

  EV: $130m

  No debt, $13m cash

  EV/Rev < 3

  EV/fRev ~ 2 

Good video here with their new CEO:

https://www.youtube.com/watch?v=4Zkp99KH7nk

What I see: a well-run but poorly branded business, with valuable tech, demonstrating solid growth in a growth space (in our new 'geopolitical normal' security is going to be front & centre). I believe the market is mispricing this unloved, unsexy business/

2 obvious red-flags that require attention:

1. Customer concentration "Revenue from one customer in the International Valuable Logistics division amounted to $9.845 million (FY2019: $5.296 million) and revenue from one customer in the Perimeter Security division amounts to $4.962 million (FY2019: no customer greater than 10% of total revenue). " Annual Report 2020

2. Once-off nature of most of their revenue. This is something AVA are working to address it seems

AuraIQ is their newly launched product for 'conveyor belt health monitoring' using fiber-optic cable to sense and pick-up on changes in vibration patterns (predictive maintenance).

Was productized as a SaaS- $ license fee per-meter per-month.

22/02/21 Alkasab continues their sell-off

Dropping voting power from 6.8 to 5.5% in a series of sells initiated from late last year.

Similar sell-off from Alkasab in another holding of mine. Totally different industry.

Cashing in for liquidity I suppose. I wonder where that money's gonna go.

AVA has announced a new contract to deploy Aura IQ across 15 Airbase sites with a large Asian country (I feel this may be India given the relationship with the IMOD contract).

I see this as a fantastic step in the right direction where AVA has created a lucrative new sales pipeline through their investment in Aura IQ and are now able to get the ball rolling. Remember this execution on strategy is two fold, not only does it give AVA a success story for future sales but it also nets them tidy revenues from a new product.

They mention they have the go ahead for 4 sites at $700k AUD. This is $175k a site, extrapolating this across all 15 sites,  (conservatively, I assume the cost will increase/decrease per site depending on size) we are looking for a total contract value of $2.625m AUD. At a gross margin of 40% that is $1.05m profit. This will be recognised across FY21 and FY22 which gives a good taper off to the IMOD contract.

This is very promising and has addressed some concerns I had about the companies ability to generate new sales. I still think the company will need more sales in late FY21/early FY22 like this to take the place of the IMOD contract but this is a step in the right direction.

12 February 2021

Multi-base Air Force Contract Award Ava Risk Group Limited (ASX: AVA)(“Ava Group”or “Company”) is pleased to announce that its world leading Aura Ai sensing product has successfully completed comprehensive Site Acceptance Testing at a major airbase located within a large Asian country and been selected to be deployed for a further 15-site program to upgrade security at certain major airforce bases.

• Multi-site security upgrade.
• Initial purchase orders received exceeding US$0.55m (A$0.7m) for the next 4 sites.
• Deployment at these 4 sites is expected during Q3 FY2021 with follow on orders anticipated for the remaining 11 sites during Q4 FY2021 and FY2022.

 Correction statement to February 2021 Investor presentation

Ava Risk Group Limited (ASX: AVA) (“Ava Group” or “Company”) wishes to advise of a typographically error on Slide 13 of the investor presentation released to market yesterday. The 3rd bullet point which read “Total contract value estimated at US$11.9M+ (A$16.7M+)” should have read “Total contract value estimated at US$11.9M+ (A$15.6M+)”. The error was due to use of a prior, rather than current USD/AUD exchange rate. Management apologies for the error.

AVA Special Interim Dividend, announced

• Record date 10th Feb 2021

• 3.66% yield

• 0.02c

• 0% Franking

• Pay date 11th Mar 2021

... YTD 2021 up +5%, will be looking for positive bullish sentiment this week. Positive earning on the QTR & future growth forecast of +22% YOY going forward.  I think momentum is favourable but we shall see what the market decides. 

INVESTOR PRESENTATION INCLUDES PRELIMINARY H1 FY2021 

HIGHLIGHTS:

STRONG REVENUE GROWTH

• FY2020 revenues $46.1M, increased by 46% over PCP

• 1H FY2021* revenues $35M, increased by 70% over PCP

HIGHLY SCALABLE MODEL

• Multiple new customer wins in both Services and Technology Divisions

• Significant conversion of repeat customers upgrading products on multiple sites

• FY2020 generated $6.0M net operating cashflow, 1H FY2021* generated $8.2M

STRONG COMPETITIVE ADVANTAGE'

• Highly defensible competitive position, breadth of product range, performance and blue-chip customer base

• Experienced leadership team, with broad global industry knowledge and deep market sector understanding

GLOBAL EXPANSION OPPORTUNITIES

• Expanding technology and services sales efforts into several new attractive markets globally

• Highly competent global sales force with significant pipeline of known technology projects, and increasing addressable customer spend for provision of valuable logistics services

• Thousands of products installed in more than 70 countries

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02336851-3A560484?access_token=83ff96335c2d45a094df02a206a39ff4

DISC: I hold in strawman and TRW

Well, ppl worried about imod have a fair reason to do so, but its making hay while the sun shines - special dividend incoming!  Thats a 5.8% yield in 1 half on current SP!

Ava Risk Group Limited (ASX: AVA) (“Ava Group” or “Company”) is pleased to announce a Special Dividend. Shareholders at the Record Date of 10 February 2021 will receive an unfranked dividend of $0.02 per share, paid on 11 March 2021.

Ava Group CEO, Rob Broomfield said “I am very pleased that our record H1 FY2021 results have delivered material profits and positive cashflow which has enabled the board to approve a dividend for our shareholders, the second Special Dividend that we have announced in FY2021. As our profits, cashflow, and cash balances increase, the board is committed to rewarding its shareholders”

Ava Risk group has reported net operating cash flows of $4.4m for Q2 -- up $0.7m from the proceeding quarter and up $4.6m from the same time last year.

$2.6m was from the Indian Ministry of Defense (IMOD) and the same amount is exected in the current quater. After this, most of the contract value will have been paid but the business should remain cash flow positive.

AVA has $13.4m cash at the bank. 

The following is an excellent investment thesis on AVA from Patrick Melville, Freelance Writer at Rask Australia (published 19-Jan-2021):  Epic post: Everything you need to know before investing in AVA Risk Group Ltd (ASX: AVA) shares.

[I hold AVA.]

This one's really going to ruffle a few feathers given AVA's popularity on strawman.

Please @ me in the forum tab regarding my work for some constructive feedback/discussion, rather than simply downvoting, its what the purpose of the strawman community is for!

Happy reading,

Reece

I am both an investor who takes into consideration both the fundamental and technical profile of every company I invest in. 

From a TA perspective AVA is looking horrible. A re-treat back into the consolidation zone which it had already achieved months ago after the first half guidance is a big red flag. Accordingly, I was about to exit on TA basis and re-enter when there was some form of an uptrend again. I also thought about how this company might not perform so well in the 2H of the year given it's apparent reliancy on the IMOD contract. 

However, then I crunched the numbers..

• Question to answer - is revenue and earnings meaningfully growing ignoring IMOD? In 1H total revenue is 35million (at least). Revenue from IMOD was 7.7 million. Last year first half revenue (excluding IMOD) was 20 million. EBITDA was 2.2 million.
• The IMOD update in Oct 2020 suggests that only 3.9 million of “cash” is attributable to IMOD in the first half
• .:. the EBITDA can be assumed to be 12- 3.9 = 8.1 million (compared to 2.2 last year with IMOD excluded which is still around 200% increase in earnings). It also implies the companies is not as heavily reliant on IMOD and that it can be considered okay to be a transient contract and it is growing organically.
• However assuming all 7.7 million cash accounted for from IMOD during the half then EBITDA would be 12 - 7.7 = 4.3 million .:. almost 100% increase in earnings compared to the previous half suggesting the company is still growing even in the background of IMOD. However this is clearly not the case as per the Oct 2020 release.
• Revenue wise IMOD is 7.7 million .:. total 1H revenue is 28 million compared to 20 million last year excluding IMOD .:. 40% growth excluding IMOD (which is notable since IMOD is an actual contract the company achieved and it should be taken into consideration for it’s valuation).
• If looking specifically at the technology division - total IMOD earnings 3.9 million. Technology did 8.5 million (at minimum) in earnings .:. actual non IMOD earnings of at least 4.6 million. In FY20 first half technology did 1.8 million in EBITDA.. So we have significant growth in EBITDA YoY for the technology division alone too.

After actually looking into the numbers, this company is actually growing even if you completely ignore the existance of the IMOD contract - and at a solid rate at that. It's blue chip customer base, and it's ability to demonstrate consistency in growth in the COVID environment earns a strong buy and hold from me.

Price target $2.00

To arrest the drop in the SP, AVA decided to drop news early and it certainly did the trick! Back up to 64.5c, the question is, will it leg up?

Delving into the numbers, AVA are suggesting a $34M revenue and $12M EBITDA for H1.

Q2 drop in EBITDA is a big one.  By my calcs, if those conditions remain, thats a difference of 45% GM and 24% GM.  So lets go worst case to see where current value stands..

Rev outside of IMOD has been Q1 $13.4M and Q2 $13.9M.

EBITDA ex IMOD (assume IMOD ~60% GM) was Q1 $5.5M and Q2 $1.84M - OUCH!

As non-IMOD rev grew 3.73% Q1-Q2, lets conservatively assume thats what we get Q3 & 4.  So Q3 would be $1.96M and Q4 $2.1M EBITDA, giving a total FY21 EBITDA of ~$11.44M.

PE of 15 and you have an MC of $171M and SP of 71c.  Not bad!

By my calcs, if you add in IMOD, then we are on track for something like a $20M EBITDA for FY21 and ~$300M SP.

Now, are they going to replace IMOD? My guess is no.  So what if I take Q4 from my ex IMOD model and turn it into an IRR.  My estimate is Q4 will be ~$14.96M Rev and ~$2.1M EBIDA. x4, that means an ARR EBITDA of $14.29M and an SP target of 88.7c, or a 37% upside.

Now this is all on a relatively conservative growth of ~12% pa for non-imod contracts.  Nor does it account for the potential multiple growth available if/when they sell the services business.  So plenty of upside yet to come!

First, my valuation for AVA is still north of where it sits.  But a few items I drew from the H1 statement that had me a little less excited:

1) Organic revenue growth stalled between Q1 & Q2.  Now Q1 was bumper and so YoY Q2 is a big increase.  However, it appears to me that revenue growth from Q1 to Q2 is almost entirely due to IMOD.

2) A negative $3.2M hit from Q1 to Q2 due to Forex (~$1M), a drop in govt incentives and a contract finishing isnt great.  It doesnt destroy the business case, but it does make it less attractive.  Particularly as the exchange rate may continue to be unfavourable (reckon a lot of companies will be hit by this in Q2 reporting!)

Anyway, thats enough negativity after a great day. Check my bull case shortly for the positive vibes!

14-Jan-2021:  As @Rapstar has mentioned here in both the AVA General Forum and in his "Services Division" Straw for AVA today, AVA is held by DMX Capital Partners, a division of DMX Asset Management.  Their monthly newsletters are free to access from here:  https://www.dmxam.com.au/monthly_archive.html

I do see that in their September 2020 newsletter that they've said:

Management meetings

We are pleased to share below a summary of our notes and insights taken from meetings with management of several of our disclosed portfolio positions. We share these insights to showcase four of our holdings where we feel our discussions with management have highlighted some interesting aspects to the business, that are perhaps not well understood by the market.

------------------------------------------------------------------------------------------------------------------------

AVA Risk Group (ASX:AVA)

Meeting with David Cronin (Chairman) and Rob Broomfield (CEO)

As previously noted, FY20 was a big year for AVA, as it delivered an impressive turn-around. In speaking with management, we were keen to focus on FY21 and whether that momentum could be sustained. Key insights are discussed below.

• AVA’s logistics business (“Services”) recorded $3m sales in July 2020, with EBITDA in excess of 15% (compared to FY20 EBITDA of ~9%). Management confirmed they expect revenues to remain strong for the remainder of FY21, as it benefits from the full year contribution of client wins during COVID-19 (in 4Q20). AVA also expect Services to maintain its EBITDA margin of ~15% for the balance of the year. With the Services business due to be sold in the next 12 months, Management are looking to target an EBITDA sale multiple of 9x to 12x, given the capital light nature of the business. AVA are happy to take a commercial approach in relation to the timing of the sale in order to maximise the sales price.
• Technology revenues for FY21 are tracking ahead of the same period in FY20, while management continue to expect at least $11m from its Indian Ministry of Defence (IMOD) contract this year (at close to 100% margin).
• A key feature of the FY20 result was the margin expansion resulting from both revenue growth and reduced operating expenses. AVA expect to maintain FY21 OPEX at similar levels to FY20.
• Management are particularly excited about the progress they are making with their powerful fiber optic technology. We believe this is a key part of the AVA thesis that is under appreciated by the market. AVA are positive about the commercialisation of AuraIQ (using fiber optic cables for conveyer belt monitoring) where one potential deal is currently progressing its way through a customer’s CAPEX approval process. In addition to AuraIQ, AVA has been applying its fiber technology capabilities incrementally into other non-security applications such as condition monitoring for roads, rail lines and power cables. Potential distribution partnerships are being worked on for some of these use cases that are in early stage validation. One such example is monitoring the impact of wave motion on power cables in the Hudson River in New York.
• Management expect publicity around a similar focused company, chaired by technology entrepreneur Bevan Slattery, to drive further interest in what AVA is doing with its fiber technology.

In summary, we took a lot of confidence from our meeting with AVA. Its Services division has significant momentum, and when sold, we think has the potential to generate sales proceeds to AVA of $50m to $60m (before Management profit share is accounted for). Its technology business will grow in FY21 underpinned by the IMOD contract. AVA’s fiber technology offering perhaps hasthe most upside, and its potential least appreciated by the market, but we acknowledge it will take some time for this potential to play out.

--- end of excerpt ---  [to read the notes/insights from DMX's other 3 company management meetings (with PTB, EGH & UCW), click here.]

While I can't find any reference in there (or in any of their newsletters) to AVA extending their own management performance plan termination date to June 30, 2021 (from Feb 1, 2021), I'll take @Rapstar's word for it; it sounds right.  I do note that they (DMX) stated: "With the Services business due to be sold in the next 12 months, Management are looking to target an EBITDA sale multiple of 9x to 12x, given the capital light nature of the business. AVA are happy to take a commercial approach in relation to the timing of the sale in order to maximise the sales price."

Onwards and upwards then.

During the past 12 months, DMX have mentioned AVA in their February, May, July, August, September and October newsletters - all can be accessed from here. 

Their December newsletter had not been uploaded to that webpage when I typed up this straw, but I expect it will be shortly, once they publish it.

[I hold AVA shares.]

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. 

14 January 2021

Ava Group Achieves Record Result for H1 FY2021(unaudited) Ava Risk Group Limited (ASX: AVA)(“Ava Group”or “Company”) is pleased to announce revenue and profit growth in the first half of FY2021:

• Sales Revenues have increased by approximately 70% compared to the same period last year to be in excess of $35.0 million for the half year.
• EBITDA has improved by circa 450% compared to the same period last year, to exceed $12.0 million for the half year.
• All business units are profitable for the half-year.
• Cash at bank as at 31 December 2020 of $13.4million.

Services Division–H1 FY2021 Snapshot

• H1FY2021 Revenue approximately $18.4m (With Q2 FY2021 revenues more than $2.2m+ above Q1FY2021)
• Gross Marginto be maintained at around 34%, considerably above the 25% in FY2020
• H1 FY2021 EBITDA to exceed $3.5m (versus $2.4m for the whole of FY2020)
• New contract awarded in the wholesale banknote sector, with annual revenue in excess of $1m, commencing Jan 2021
• New operational staff in Frankfurt and Miami, supporting recent and anticipated growth in the Americas and EMEA, in addition to the New General Manager Asia, based in Singapore, appointed in Q1 FY2021
• Whilst there has been some normalisation of pricing due to the lifting of certain COVID-19 air freight restrictions, the underlying revenue and gross margin trend remains strong
• Industry consolidation continues to provide additional revenue opportunities with current and prospective customers

Technology Division–H1 FY2021 Snapshot

• 1H FY2021 Revenue approximately $16.6 million
• 1H FY2021 EBITDA in excess of $8.5 million
• Q2 FY2021 EBITDA was adversely impacted compared to Q1 FY2021 EBITDA by FX losses on a strengthening Australian dollar, the completion of the BQT Australian DoD project early in Q2 FY2021, and the cessation of government incentives income (combined impact of circa $3.2 millionvs. Q1). We had previously estimated an FX benefit of circa $0.4 million in Q1. Our latest review of the combined Q1 and Q2 FX impact has resulted in a revised estimate of circa $0.9 million FX loss for 1H FY2021
• Indian Ministry of Defence revenue for the large-scale data network protection program (FFT’s SecureLink product) is expected to be approximately $7.7m for H1 FY2021
• Despite Covid-19 restrictions continuing to delay certain orders due to travel restrictions and office shutdowns, our Technology Division has continued to operate, and delivered systems to both current and new customers including deliveries for major defence programs
• Growing commercial interest in our new conveyor health monitoring solution (Aura IQ) with multiple Proof of Value trials completed and/or underway
• Increasing activity with our assurance sensing solutions for terrestrial and sub-sea power cables
• First shipments of the latest version of our FOSS platform delivered during the half year –with Machine Learning software which is the completion of the first step in our roadmap of innovative solutions that will be offered to our customers on a SaaS revenue model.

Relentless selling

If anyone wants to find out why AVA is trending down, one of the subs is selling heavily

They are a little known company in Dubai called "Alkasab United Company"

I couldnt' really find much about this company though.

I hold but the selling by the substantial holder is getting me a bit worried. I did top up recently around 0.53.

30-Oct-2020:  IMOD Project Update

Indian MOD Data Network Protection Project Update

Ava Risk Group Limited (ASX: AVA) (Ava Group or Company) today provides the following market update and clarifications with respect to the large-scale supply of FFT’s SecureLink technology to protect data communications cables for the Indian Ministry of Defence (IMOD):

• Large scale supply of FFT’s SecureLink technology to protect more than 40,000kms of data communications cables for the Indian Ministry of Defence
• FFT licenced technology to in-country manufacturing partner SFO Technologies Private Limited (SFO)
• Total contract value estimated at US$11.9M+
• SFO’s Bank Guarantee to Ava for US$2.1m (A$3.0m), to cover the 120 days payment terms remains in place.
• Contract establishes FFT technology in growing cyber security market
• Fulfilment and licencing model providing low working capital, low risk and high margin GTM approach

FY2020 Recap:

• US$3.2 (A$4.8) million in revenue recognised
• US$0.1 (A$0.2) million in tax credits recognised
• US$1.0 (A$1.5) million in cash received

Q1 FY2021 (unaudited):

• US$2.4 (A$3.6) million in revenue recognised
• US$0.3 (A$0.4) million in tax credits recognised
• US$1.0 (A$1.3) million in cash received

Updated Forecast:

• Contract balance of circa US$5.9 (A$8.2) million (revenue and tax credits)
• Q2 FY2021 revenue expected to be A$3.3 – A$3.8 million
• US$1.8 (A$2.6) million in cash due to be received within Q2 FY2021
• Additional revenue from subsequent seven-year spares and maintenance contract with an estimated value of a further US$3.4M (A$4.8M)

Historical A$ amounts are based on actual USD/AUD exchange rates achieved. Forecast $A amounts are based on the current USD/AUD exchange rate at time of release. Actual final A$ amounts achieved may differ depending on exchange rates achieved at the time.

[I hold AVA shares.]

29-Oct-2020:  Annual General Meeting Presentation

That document is unfortunately NOT formatted to suit the ASX's new "FOR PERSONAL USE ONLY" always-on-top watermark (the left margin isn't wide enough) so the text is obscured.  To make matters worse, if you use AVA's own website (https://www.theavagroup.com/investors/) to download the document, they just use the ASX's URL, so you get the same damn problem because it's the same document.  AVA need to start using wider left margins or else have a library of their docs BEFORE the ASX damages them that people can access from their website.  Many other companies do this.  It's not hard.  Anyway, good report/presentation.  I liked it.  The market liked it.  AVA rose +13% to close at 65.5 cps ($0.655), which is where they also closed on Monday (3 days ago).  On that day (Monday 26-Oct-2020) they also set an intra-day 4-year high of $0.735 (during the day).

I hold AVA shares.  I also hold ZNO shares and they also rose +13% today (on their positive test results report), however ZNO are still in a strong 3-month downtrend, whereas AVA are most certainly in a very strong 3-month uptrend. 

I was bullish on AVA but they've certainly surprised me with how fast and far they've run in such a short time.  I bought them less than 7 weeks ago (on 15-Sep-2020) for 32 cps (cents per share) and they're already up +104%, i.e. their share price has more than doubled in a month and a half. 

I bought them in stages on my Strawman.com scorecard, as they kept rising, so paid higher prices, so I'm "only" up +81% on AVA here on Strawman.com, but in the real world, where brokerage costs exist, I tend to make fewer and larger trades, and I have just made the one purchase of AVA - back in mid-September.  My only regret is that I didn't buy more!

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.  

Ava Risk Group has released a very encouraging first quarter report.

Sales for the 3 months to to September 30 were 73% higher at $17m, with EBITDA up a massive 522% to $7.7m (45% margin).

The services division reported $8.1m in revenue with EBITDA of $1.6m. Improving economies of scale helped lift gross margins to 33% (compared with 25% in FY20). But it was the Technology segment that really propelled operating profit, with $6.1m in EBITDA being generated off $8.9m in sales.

You can read all the detail here

You really do love to see it, record quarterly revenue of $17m and record EBITDA of $7.7 EBITDA for the quarter. Just to be clear, they have earned their FY20 EBITDA in one quarter.

My valuation has increased on the back of this release and I will be updating it shortly. Great to see IMOD cash receipts coming in and strong commercial interest on Aura IQ. The new CEO Rob Broomfield is still riding the wave of growth Scott left behind as he moved on however I think all things considered the growth and opportunity here is something to behold.

Full release here: https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02295346-3A552913?access_token=83ff96335c2d45a094df02a206a39ff4

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 Group Limited (ASX:AVA) is pleased to announce a Special Dividend. Shareholders as at the Record Date of 24 September 2020 will receive an unfranked dividend of $0.01 per share, paid on 23 October 2020.

Fantastic news! Parts of their business are reliant on non-recurring revenue, so to pay a special dividend shows that they are confident in the upcoming order book. 

I anticipate that this means the service business is continuing it's strong growth and there may also be some Aura IQ conveyor monitoring contracts on the way. Three POV trials have been completed and there are now another 6 underway. I love this part of the annual report...

"In a recent Proof of Value (POV) Trial with a large multinational group, Aura IQ was used to monitor a 1.7km conveyor located in an underground coal mine in Queensland. In terms of business outcomes, the estimated financial benefits/costs savings per year were estimated to be A$37.1 million per annum, with utilisation time up by 5%*. These types of outcomes are indicative of how Aura IQ can increase productivity, maintenance efficiency and cost savings. Since its launch, interest in Aura IQ has been significant with a diverse portfolio of rollout opportunities spread across six regions, 21 countries and five industry sectors - totalling over $50+ million in potential total contract value."

Positives

• Significant director ownership, with Directors and executives owning ~46 million shares (note this is mainly the chairman). Two Directors purchased significant volumes of shares on market during past 12 months. There are 235 million shares on issue so directors and executives own ~20% of company.
• Gross margins are growing with more sales in higher margin areas
• Low margin services are seeing economies of scale and growing to profitability
• Cashflow growth aligns with profits growth - this is great, it means it is not all accounting bullshit
• Current assets are >250% of current liabilities AND cash balance alone is greater than current liabilities

Negatives

• Services business is historically (and still is) low margin. Revenue grew by ~75% to over $25 million but EBITDA is still <10%
• Significant portion of revenue is non-recurring (sales of fibre technologies, lock and access technology), which means they need new customers just to stand still let alone grow revenue

Risks

• FFT only accounts for 36% of revenue but makes up 57% of EBITDA. This is non-recurring revenue so needs continual new sales to keep revenue going.
• In the services division one customer accounted for $9.8 million revenue in FY20 (39% of this division’s revenue). 

Opportunities

• FFT: The Indian Military Project accounted for ~$4.5 million of FFT revenue in FY20, or about 29% of total revenue for FFT for FY20…
  • this leaves ~$11.7 million revenue from this project to be delivered in FY21
  • Assuming the business maintains the same level of “non-Indian military revenue” in FY21 (~$12 million) then revenue in the FFT segment will double in FY21.
  • Assuming margins remain constant under the above assumptions then the FFT EBITDA could (conservatively) grow to ~$8.5 million….this means EBITDA from this segment alone could be 15% higher than total group earnings in FY20
• Services: services revenue grew by 58% in FY20. Assuming growth halves to 30% in FY21 and that increasing scale means they are able to continue to increase EBIT margin to 15% (FY20 was 9.5%) then EBITDA could double to $4.9 million 
• BQT: they are talking up big deals (deal done in May for ~$3 million with aus Government) and recent agreements for distribution in North America and Europe. Most of Aug Gov deal is to be delivered in first half of FY21…so potentially not unreasonable to expect an uplift in Revenue from this segment in FY21 of ~50% (FY20 revenue was $4.3 million)

Valuation

• At closing price of $0.275 and with 235 million shares on issue the market capitalisation is $64.7 million
  • The earnings multiple based on FY20 EBITDA is 8.7
  • The earnings multiple based on assumed FY21 EBITDA is 5.35
  • Assuming continued revenue growth and the cyber thematic as a tailwind an earnings multiple of 20x would not be crazy - this would create a valuation of $1.03 per share

How will I know if I got the thesis wrong?

• Need more large FFT sales on the back of the Indian Military win - if no more of these then this is not a long-term opportunity
• The mining tech needs to convert from pilots to recurring sales - there are multiple of these on the go
• Need to see continued strong growth in services division and BQT as these need scale to be profitable
• 1st half of FY21 should show all of the above to be true - if not consider selling

FINANCIAL MODEL

My financial model is attached (detailed assumption are on the far right). Here is a high-level summary:

• Valuation applies a 7.9x EBITDA Multiple (as derived from Canaccord, by comparing it to its peers)

• Forecasting Revenue growth (30% in H1 FY21):

• I expect the stable fixed cost base to deliver EBITDA growth of 40% in H1 FY21

• I have not included any revenue from Aura IQ (so this is upside)

• I have kept the logistics business in the forecast, but I feel like it will be sold prior to Feb-21

• As it is profitable, I do not expect any capital raising (subject to any M&A).

• I have not considered any dividends, but this is a real possiblity

RISKS:

• Beyond FY21, AVA will need something to replace the IMOD contract (hopefully it’s the successful commercialisation of Aura IQ)

• SP growth could be supressed by a further sell-off from Alkasab

• The CEO that drove a lot of this positive change has just left (I’m speculating that he was head hunted)

*Just a quick note, I am actually bullish on the stock however i'm trying to highlight some of the potential risks this business has.

September 11th, 2020;

After digging into the breakdown of AVA & their subsequent division earnings I have found a concern highlighting their quality of earnings, in particular - customer concentration

For AVA global, 39% of earnings came from a single customer and for FFT approx ~29% was from another single customer.

This high concentration of customers effectively puts AVA's earnings-at-risk as the loss of one of these customers will leave a massive dent in the overall earnings. 

I believe a lot of current valuations are not pricing this risk in and getting results closer to ~0.70c of intrinsic value. 

Just my thoughts, and it will be interesting to see the direction of AVA in the near future with the supposed sale of the AVA Services side of the business. 

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.  

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 $5M in 2021, and would be worth more than $35 million going by the valuation multiple Brinks paid.

Services division update

Further 5 new clients
2 mining
2 precious metals refining
1 banking

Unaudited July revenue >$3M with gross margin improvement and EBITDA >15%

https://asx.api.markitdigital.com/asx-research/1.0/file/2924-02271226-3A548023?access_token=83ff96335c2d45a094df02a206a39ff4

17 Aug 20: AVA up +8% today and makes a new 12 month high ($0.265) overcoming the selling in the last 2 weeks.  Closed at $0.26. 

Wow! - what a doozy of a business.

These operate in a market that will be ever-expanding over time as long big businesses exist.

It seems they have developed a nice economic moat across the 3 sections of their business offering. It will be nice to see some of these turn into ARR (recurring revenues).

The major risks at these stage are potential contract related issues due to COVID. In contrast, the instability of the global political landscape may prompt the need for nations to use AVA to protect key assets. (such as the deal signed in India).

Definitely one for the watchlist

"Great quarter, guys." But seriously, a fair effort, that.

I was going to write the other day about possible reasons for the market's coolness toward Ava Risk, but it seems the market just had no inkling of today's mostly very predictable good news that was also foreshadowed in a market-sensitive update only a few weeks ago. Blame Ava Risk's management for not launching a loss-making division in online retail, SaaS, COVID vaccines or unsecured BNPL loans.

But one interesting question remains. Unless I'm mistaken (which is quite possible!), Technology did not have a good Q4. Ava has been cagey about this but the guidance in early July mentioned $2.5m in delayed orders and alluded to difficulties. You, or at least I, can see this when putting all the numbers together. I get about $1.2m in non-IMOD revenue for Q4, which is down from $3.8m in Q3. Even if you add in the delayed orders it's still flat. While I haven't double-checked, I think the $4m in FCF is pretty much coming from Services, which Ava Risk wants rid of, and IMOD, which is lumpy and finite. IMOD also flatters margins (albeit there were signs of non-IMOD operating leverage in Q3). 

The lure of Ava Risk has been a value stock with growth optionality and there are several ways for it to do well. But the preferred way is for Technology (chiefly FFT) to grow organically at a good clip, helped by Aura IQ and Defence tailwinds, and for Services to be sold at a good price. Neither of these things is looking compellingly likely to me just at the moment. I'm hopeful that will change but given the ramping and self-congratulation I thought a note of caution might be in order.

Disclosure: hold a tiny amount.

30 Jul 20: Diary of an Investor: AVA on 4Q20 4C Release

The AVA 4Q20 was released around 8:30am and I realised that it was a really good result and will most likely cause a spike in the share price.  I wanted to average up the holding so I made a mental note to put an order on open.

However, a whole heap of other 4Cs came out.  I made the decision to sell my holding MOB based on it's 4C.  I also happened to be listening in to the Coffee Microcaps call (talk about multi tasking!). 

So when it  close to the open, I was focused on making sure that the MOB sale went through as it is a fairly illiquid stock.  But then the price trigger went off for AVA pricing through $0.20.  Then I released I forgot to put the order on for AVA (doh!).  

After the MOB trade went through I went to the put on the order for AVA but it had already gone from $0.20 to $0.22.  I normally would hesitate to chase a stock up especially when it had popped 25% already on the day but even at $0.22 I considered the stock undervalued on the fundamentals so I bit the bullet and when through with the order.

To my disappointment, the stock then started dropping to below $0.20 and to $0.19 and I was starting to doubt my decision.  Had I made a mistake?  I knew that AVA had burnt shareholders previously so that there would be selling pressure but I didn't know how much. 

I left for meetings and didn't follow what was happening (probably a good thing).  

In the end, the buyers won out and the stock ended on it's 12 month high of $0.255.

Not sure if all the sellers have been flushed out yet, but it is a possible fort he stock to have ended on a new high. 

Fundamentally, the stock is not expensive, based on today's forecast for FY21.

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.   

https://arichlife.com.au/ava-risk-group-asx-ava-may-offer-asymmetric-opportunity/

A very good post about AVA by Steve McCarthy from DMX capital. A must read before investing in this company. 

•Strong management team surpassing expectations in a short time

•Management has 5.8% stake with significant increased insider buying recently

•Provide a number of different products, servicing multiple markets and customers in multiple countries

•Possess a strong moat/competitive advantage with their patented products and tech

•Strong balance sheet and fundamentals – gross margins of 19% (services division) and 79% (tech divisions), trading at 1.1x annual revenue and 2.6x gross profit with an EV of $34,858,000.

•Zero debt

•Profitable

•High-quality B2B customers - recent contracts with Australian DoD and Indian Ministry of Defence and other current customers including NATO, US Dept of Homeland Security, Lockheed Martin

•Strong tailwinds with cyber terrorism on the rise and the U.S. implementing strict cyber security measures, rolling out as early as next year, for anyone along the supply chain dealing with defense contracts

Having so quickly reached positive cash flow and profitability under new management, Ava Group appears to be hitting an inflection point. High growth potential and undervalued.

Disclaimer: I hold a small position in AVA

About Ava Risk Group

The Ava Group is a market leader of risk management services and technologies, servicing industrial, military and government clients globally.

The Group features a range of complementary solutions including intrusion detection and location for perimeters, pipelines and data networks, biometrics, card access control and locking as well as secure international logistics, storage of high value assets and risk consultancy services.

Ava group is made up of 3 divisions:

Services division consisting of Ava Global

Technology divisions consisting of BQT solutions and Future Fibre Technologies (FFT)

Future Fibre Technologies

FFT has developed a portfolio of products designed for intrusion detection and location. FFT delivers enhanced signal processing and event discrimination, while offering strong integration capabilities. 

What they offer is fibre optic cables that can be:

Strung along any type of fence to detect and pinpoint the location of disturbances including cutting, climbing, and lifting.

Buried underground above any critical infrastructure (think pipelines or internet cables) allowing real-time detection of any drilling, digging etc preventing damage. FFT Covert buried solution can detect even the smallest vibration for example walking, crawling, digging or vehicle movement.

Used in data network infrastructure protection as cyber security. “Dark cables” are applied within network cables to detect and locate disturbances, intrusion attempts, tampering, and data tapping activities to within 5 metres along data networks and can be applied anywhere from local data centre LANs to long-distance WAN transport. Detection can extend anywhere in parallel to the sensitive cable to include cable trays, conduit, pathways and cable distribution systems. The system can monitor copper, fibre and even physical adjuncts such as racks and trays for similar disturbances.

FFT’s Data Network Infrastructure Protection solutions can work stand along or in conjunction with customer’s existing Network Management System.

With numerous international patents, FFT’s technology is unique and proven.

Their cables have a lifespan of 20 years, require little to no maintenance, require no power, and are not susceptible to electromagnetic interference.

Incorporates Artificial Intelligence (Ai) Analysis – maximising discrimination between intrusions and environmental nuisance sources including wind, rain, traffic, machinery and aircraft.

Future Fibre Technologies products are deployed by some of the most security conscious sectors in the world including, military, oil and gas, extractives and energy, transportation, and utilities.

Clients using FFT for their critical infrastructure protection:

Australian DoD, NATO, Exxon Mobil, Dow Chemicals, Kennedy Space Center, Lockheed Martin, US Marine Corps, Woodside Petroleum, US Air Force, US Army, US Border Patrol, US Dept of Homeland Security, US Marine Corps, Siemens, Shell and the list goes on.

BQT

BQT Solutions PTY LTD is a specialist in the development, manufacture and supply of high quality, high security card and biometric readers, electromechanical locks and related electronic security products.

They have a breadth of solutions and product ranges to tailor solutions to individual customer’s needs.

Products include a range of:

Biometric readers - BQT’s line of Biometric Readers combines our traditional line of readers with leading-edge bio-verification technologies including finger and Iris reader technologies for secure options right up to Military grade encryption.

Locking - physical

Access Control – smart cards readers and contactless smart card technology

Ava Global

Ava provides international secure logistics, through a partner network of independent service providers, of high value cargo on a fully insured door-to-door basis. This includes armoured vehicle collection and delivery at origin and destination, secure storage, commercial and chartered air and sea freight and customs brokerage services.

Servicing the following markets:

Bullion traders, Governments and central banks, Refineries, Financial institutions, and consulting services.

Management

On March 11 2019 Ava Risk Group appointed Scott Basham as CEO. Not long before that they hired a new CEO for their services division (C Fergus), a new Non-Executive Director (M McGeever) and a new Chairman (D Cronin). In this short period of time new management has been quietly achieving as well as buying up shares.

Achievements:

Invested $19,000 on PPE in first quarter of 2020

Improved margins and grew cash from operating activities from negative $535,000 to positive $712,000; achieving their first 3-month period of positive cash flow.

Achieved net income $1,202,000 (Dec 19) up from previous half -$2,299,000

Services Division (Ava Global) $6.2M Q3 Revenue

                •client spend increased 26% to circa A$145m

                •gross margins averaged 19%

Technology Division (BQT Solutions and FFT) $6.1M Q3 Revenue
                •backlog exceeds $16m

                •gross margins averaged 79%