The Not So Good
What To Watch
Valuation Update (24/10/23)
Review of valuation based on todays update.
· $7.7m Q1 sales order intake (in line with prior year)
· $14.2-$15.2m H1 guidance but “substantively stronger” second half expected
· Access segment strong due to initial stocking orders (ie pipe fill not end sale)
· Lower Detection (Aura Ai-X) segment due to significant opportunities slipping to Q2
Take Away: FY23 Full year revenue guidance of $36m - $45m seems to remain achievable provided the second half strength materialises, but I maintain my bottom end of range assumption for revenue forecasting.
· Small tweak on sales, and slight uplift in 2026 operating costs with little value impact and offset by reduction in capex assumption from $3m to $2.5m for FY23 (10%pa growth).
· Apply a 0.85 risk adjustment multiplier to terminal value – main impact on valuation, done to provide a margin of safety on value attributable to year 5+ results.
Value = $0.45 (down from $0.56 done at 28/8/23)
Disc: Own in RL & SM
Have been away from me desk all morning, but I got an alert while I was on the go that Ava's first quarter update was out. A quick check of the price (as you do) and saw it was about 5% higher -- "must be good news", I thought!
Anyway, just got back in the saddle to have a look at the update and noticed the price is now down 7%.
Not sure how many times I need to be reminded how irrelevant the market price signal can be for small, illiquid stocks. In this instance (at the time of writing) we're talking about a price move that has been affected by less than $50k worth of trades, and where the high and low of the day ranges from 19c to 21.5c
Anyway, having now read the actual update, and thought for myself (as opposed to letting the market tell me what to think), I think the news is respectable.
I'll let you read the finer details yourself, but the big picture takeaway for me is that although sales order intake was basically flat ($7.7m vs $7.8m in the pcp, and $7.7m in Q4 FY2023), the Access segment (locks) finally saw a good bump as product certification was received for their Cobalt Lock range and Ava's partner Dormakaba stocked up, and the contraction in the Detect segment (fibre optic perimeter detection) was seemingly a timing issue with new orders expected to close in the current quarter.
(The illuminate segment was again disappointing with AVA again citing difficult economic conditions in the UK. The expectation is for FTY growth here -- we'll see i guess)
So adding that all together, the revenue outlook for the first half is for $14.2-$15.2m, an 8% lift on H1FY23 at the midpoint.
What we really need here is for all the segments to fire at the same time -- But it seems one always seems to zig when the others zag. As Mal told us earlier this year, this is a lumpy business.
Nevertheless, Ava seems to be winning new customers in the detect segment, they now have new products and distribution in America and Europe and, for what it's worth, management remain very optimistic for the full year:
"..management expects that second half revenue will substantively exceed the first half."
Take from that what you will, but given the margin assumptions AVA have previously released, it looks very likely that they will at least double FY23's EBITDA. Frankly, with FY revenue of $35m and a 14% operating margin, EBITDA could grow by 150% or so.
Anyway, thesis seems to still be on track.
In general speaking, not a terrible update.
The reason behind the 36% drop in FFT sales is not clear. It sounds like the company is trying to get some really big deals but failed to close them. If those deals are going to increase the revenue substantively, as claimed by the company, we should hear about it in the next two months.
Personally, I don’t like this kind of communication. It reminds me of how AVA was talking about Aura IQ years ago.
AVA should probably stop talking about any growth projections, start with the 3 year $100M plan. It’s very unlikely that the revenue will exceed $36M. The 2nd half will have to be phenomenal to reach the target.
I’m sure Mal will have to answer many tough questions this week at AGM. Will follow up after that.
$AVA has announced a new contract by its Access segment.
BQT Solutions secures orders with key distribution partner dormakaba for new Cobalt series locks
Ava Risk Group Limited (ASX: AVA) (“Ava Risk Group” or “the Company”) is pleased to advise that the Access division has secured the first major order for the supply of its new Cobalt series locks to dormakaba AV under its global framework agreement. The Company will supply over $1.3m of the new Cobalt 2 locks into North America with delivery expected to occur during Q1 and Q2 FY24. These orders demonstrate the market opportunity for the Cobalt series locks and highlight the strength of our key distribution partners. Cobalt locks deliver unmatched performance, outstanding durability and address two of the biggest issues in door locking - the ability to align a misaligned door and to release when requested, even with excessive load on the door.
Ava Risk Group CEO, Mal Maginnis commented: “We are pleased to expand our relationship with dormakaba to the North American market and appreciate their continued confidence in our products and our company. We view these orders as a testament to the quality and superior performance of the Cobalt series locks and are confident of further orders from our global distribution partners.”
Another not-strictly-material announcement from $AVA, who are clearly making sure the market is aware of every significant sale.
That said, the Access segment is the smallest of the three segments with FY23 sales orders of A$3.9m, so the announced $1.3m order is a decent piece of business for the year for this segment, and you'd expect a similar quantum of new business each quarter if this segment is going to pull its weight.
Other positives are that the sales order is for the new Cobalt series of locks launched earlier this year, and the sale is via the dormakaba distribution partner into North America, demonstrating that the partner has got into action with the new product line.
So good news; however, as someone else here has commented, with the appearance being that any significant sales order is getting an ASX annoucement, periods of radio silence may generate concern with some holders. So that potentially puts $AVA on an announcement treadmill.
Disc: Held in RL and SM
I spotlighted them in my article this week (https://www.goforgrowth.co/p/10-growers-in-fy23-part-3). For the strawman community most of the article will be common knowledge. I'll just paste here want I think is important over the next 12 months:
New contract announcement.
Not strictly material, so an annoucement wasn't required, so I guess management consider the value of the business isn't recognised in the SP. Text of announcement follows:
Ava Risk Group secures multiple EU Airport detection contracts for Aura Ai-X Ava Risk Group Limited
(ASX: AVA) (“Ava Risk Group” or “the Company”) is pleased to advise that it’s new Aura Ai-X fibre optic sensing technology has been selected to protect a critical group of European Airports.
With a total value of approximately US$0.5 million (A$0.8 million), the contracts for Satu Mare and Sibiu Airports in Romania and another Western European hub are for the supply of detection software and equipment as well as a five-year contract to provide software upgrades and support. Delivery of the detection software and equipment is expected to occur during Q1 FY24.
These contracts confirm the market opportunity for Aura Ai-X, which features an embedded deep learning engine to enhance system performance by referencing algorithm upgrades backed by the Company’s global data library.
With unrivalled performance and exceptional event classification accuracy, Aura Ai-X delivers a leading Probability of Detection (POD) combined with the lowest Nuisance Alarms Rate (NAR).
Ava Risk Group CEO, Mal Maginnis commented: “Securing these contracts is a vote of confidence in what we believe to be the most advanced perimeter intrusion detection technology on the market. We are confident that Aura Ai-X will fast become the solution of choice for the smart protection of critical infrastructure worldwide.”
Disc: Held RL and SM
I went to update this valuation too but on re-reading it, I don't think my view has changed much, other than the recent results acting to strengthen my conviction a little.
Normally, I'd be tempted to increase some of the estimates, but given the current price (18.5c!!), the fact is shares are already well below what I think is fair value.
So I'm basically going to hit 'update' and leave it at 30c, again.
Original text from Feb '23:
11 months ago i gave AVA a valuation of 30cps, which assumed FY25 revenue of $40m and a 20% EBITDA margin as key inputs.
Last month AVA provided this as a "pathway" for the next three years
.. aspirations are great and all, but it's worth remembering that things don't always go to plan. But, as an exercise, I took the lower end of all assumptions (and the higher end of cost estimates) to get this:
Note that this gets you to only a 17% EBITDA margin, vs their target of 25%.
Still, IF they do that, you'll get a 15% annualised annual return from current prices (20.5c) so long as shares trade on at least an EBITDA multiple of 7x (that'd roughly be a PE of 15 or so) in 3 year's time.
(If you wanted to take the upper end of their forecasts, you get a FY26 EBITDA of $41m -- but I wouldn't be comfortable basing any valuation on that)
My point is that there's good value here even if they come in at the very bottom of targets, and the market only gives shares a very low multiple.
At the same time, $70m in FY26 revenue is still 37% CAGR in top line growth for 3 years. If they get more like 15% CAGR, EBITDA would remain pretty close to par if costs rise as outlined.
So even if you try and be ultra conservative when using their provided targets, you still need to be confident of some very good growth.
So trying to take all of this into account, as well as the new reality of higher rates and lower growth multiples, i'm going to go with a FY26 revenue target of $60m, and use the midpoint of their gross margin and operating cost targets (62.5% and $27m, respectively) to get a FY26 EBITDA of 10.5. Let's call that $5m in net profit and assume 260m shares on issue -- so EPS would be 2cps. Let's apply a 20x PE and discount back by 10%pa to get a valuation of 30c.
Back to where we started!
Like I said last time, the true intrinsic value is probably 20% either side of that (assuming things don't really fall apart, which I doubt). But under this scenario there's way more upside than downside.
You can watch the recording for today's briefing here (passcode: B3@&hDEJ)
Some notes from the call
Just bought another 50k shares on market.
Solid result and dropped share price on the same day, can't ask for more.
With the current growth rate, reaching $36M revenue in the next 12 months is quite realistic. A 25% growth rate will do the trick.
Not so sure about the 14% margin although David was quite confident about achieving this goal during the Q&A. David also mentioned about distributing dividends in the next 3 years which could be another plus.
During the presentation, Mal mentioned that the company was underperforming in European market and it will be fixed with the new local-based sales team and executive. The 214% growth in Europe is a good starting point (not sure about the rate excluding GJD though).
One thing I picked up is that Jim Viscardi (EVP) is now one of the Key Management Personnel, replacing Matthew Nye-Hingston, COO of BQT. Mal did mention how much he value the employee performance during the Strawman interview. With 81% growth in U.S., it looks like Mal kept his word and rewarded Jim, who has only been with the company for two years, with the proper position within the organisation. I really like this kind of restructuring and hopefully it will be motivating to everyone working at AVA.
Another interesting thing is that, the performance of Mal, the group CEO, is only measured based on the share price. I suspect that there was some sort of agreement between Mal and the board prior to his appointment. I guess people are getting a bit inpatient and dissapointing with the share price movement in the past three years. But still, we haven't seen Mal doing any kind of suspicious maneuver to pump the share price since joining the company. Instead, he has been very patient with the process, and passionate about the products and services, which is respectful. As a long term shareholder, I can't ask for more from a CEO.
The company is at a very good position at the moment (a little bit less debt would be ideal though). There is a good chance that the company will reach the $70M goal (not sure about the EBITDA margin) if everything is done correctly. The shareholders are in good hands and let's see what Q1FY24 will look like.
Ava's FY23 results seem good to me. The market disagrees :)
The highlights from their results update:
If you look only at new revenue from the detect segment (an additional $3.8m in revenue), and ignore Illuminate which added $6.8m in revenue following the acquisition of GJD which was acquired in August last year, you still have a 20% lift in revenue. Indeed, around a third of orders for Detect came from North America, which saw a 20% lift in orders received over the year.
In fact, sales orders were up 36% if you ignore the GJD acquisition (up 71% in total). This is a great leading indicator for revenue growth.
Access was disappointing as the company awaits key product certification for the Cobalt 2 locks. Once received, the company expects that to open high quality distribution channels. We'll see.
Gross margins were essentially flat, which ain't bad given the shift in product mix (Illuminate products are lower margin), but the operating margin (ex restructure costs) was up 3% to 7%. A good demonstration of the operating leverage potential. They maintained their slide that highlights ambitions to growth the EBITDA margin to 14% next year, and up to 25% within 3 years. Also had the $100m sales target, which Mal talked about when we chatted with him recently. Very bold aspirations, but not unreasonable in my view.
At the bottom line there was a $1.1m net loss for the year due to higher depreciation and interest charges associated with GJD purchase. (compared to $0.7m in the prior year, ex discontinued operations).
Cash flow was negative for the full year as the business bulked up its inventory in response to supply chain issues. But op Cash flow was positive in the second half of the year. The company has $3m in net cash, but given receivables from recent orders, non-cash depreciation charges and working capital movements, I don't see a big risk of a capital raise.
At a current enterprise value of $46.8m, the EV/EBITDA ratio is 23.4x. That does not strike me as high given the pace of growth in revenue, sales order intake and the demonstrated scalability of the business.
I missed the briefing this morning, but will try and track down a recording and post here.
Full ASX presentation is here.
The Not So Good
What To Watch
Strawman Meeting Notes:
It can be really hard to walk away from these CEO meetings without wanting to put everything into the company I have just heard being interviewed. It is so easy to get caught up in the hype. While Mal's obvious enthusiasm for technology (and even more so for his new role) came across very clearly it does make me wonder why none of this new found focus on Sales Orders / boots on the ground expansion hasn't been obvious in the past. Did he disagree that much on the focus on R&D and acquisition? - Or is he just wanting to make his stamp on it and turn the ship? Don't get me wrong as a shareholder I love what I heard and for all the obvious reasons want to see it happen - I am just extremely aware of not getting caught up in the hype. Was that just me or did anyone else feel that way?
Some notes from the 4th quarter update today
Looks like AVA will deliver revenue bang in the middle of guidance, somewhere between $28.4 and $28.7m (guidance in April was for $27.6m - $29.6m.)
That means the second half has delivered about $15m in revenue -- 10% up on the first half of FY23 and up 50% on FY22 H2 result.
Sales orders also growing OK -- excluding the GJD which was acquired last August, sales orders increased 13% for the last quarter and were 36% higher over the full year. (up 71% if you include GJD)
Breaking things down across the various segments:
The Detect segment (this is the area that does the fibre optic sensing tech) saw $5.1m in new order intake. For the year, the order intake was $20.7m (an increase of 55%) which was in part driven by the new Aura-AiX product. Still, order intake was $6.4m in Q3, so that's a drop quarter on quarter.
The Access Segment saw a 50% lift in new orders from Q3 to $1.1m, but was down 17% for the full year. Not great, but apparently things have been held up by attaining product certifications in various channels.
The Illuminate segment was very "meh", generating just $1.5m in new sales orders in the last quarter and $6.3m for the full year. The company blamed challenging conditions in the UK.
Sales orders tend to be pretty lumpy, as can be seen above, but I am encouraged to see the Detect segment -- by far the largest -- making some progress. There's been a real dearth of announcements, so it seems this is a story of a lot of small wins, rather than any single large contracts.
If AVA are to hit the lower end of their 3 year aspirational target ($70-100m), they'll need to do at least 35%pa top line growth from here. We need to see increased momentum on an organic basis if they have any hope of doing this. We're speaking with the new CEO tomorrow, so it'll be good to get some more detail. And the full year results will be out in another month, and I'm pretty keen to get a sense of what margins look like.
First things first, the management team of AVA does hate releasing anything on ASX.
The new deal is to protect a 30km double decker conveyor syetem, probably a direct result from the first Aura IQ deal with the, as quote, global leading conveyor manufacturer.
As usual, we do not know how profitable this deal is. But still, a 30km conveyor system is way larger comparing to the previous one.
Another interesting thing is, although the location of the project is in Far East, the news was posted by AVA's sales director in Europe.
Maybe Robin took over the conditioning sales after Pietro left the company recently. Again, we don't know anything since the company is super quite when it comes to communication.
It's definetly a good sign seeing more Aura-IQ deals coming in. At one point I almost thought this tech was a total flop and I was probably wrong on this one. It may not be a huge sucess as everybody expected, but it does make a solid addition to the FFT product portfolio.
Also, I would be super pissed if this is actually part of the first Aura-IQ deal, which was only $300k.
Anyway, more and more questions should be asked on AGM. Let's see what the company has to say.
A post on LinkedIn from yesterday got my attention and lead me to this quick research about AVA's footprint in Ukraine. I found it quite interesting and could be a nice piece of info for the good folks on Strawman.
A distributor named Fortisec, founded in 2020, prepared a 17-page official brochure in Ukrainian with details of the following products:
This is quite interesting since we've never heard of anything about AVA in Ukraine. I do know they have people looking after Eastern European market and that's it.
This got me thinking, if GJD is heading to Ukraine during the war, what about FFT? So I digged deeper and found that FFT was actually one of the first partners of Fortisec, according to the official website, and the distributor involved GJD as one of its brands and signed a distribution agreement back in Dec. 29th 2022. That was about 6 months after AVA bought GJD so a good example of synergy right here.
I didn't stop there because I wanted to know more about what FFT has been doing in Ukraine. I couldn't find any contract or detain about specific clients, dut to the nature of the security business.
What I did find, is some figures from the website Import Genius.
Since I don't want to pay $USD99 per month for the full acess, I made some some educated estimations using the limited information.
According to this website, Fortisec has been importing FFT products directly from Australian in the past 2 years. I found 33 shipments on the websites, and the value of each shipments varies from $10k to $50k in USD. Based on the descriptions of of products, it looks like FFT has been protecting some sites in Ukraine from theft and fire. They also imported instruments for measuring ionizing radiation, which I found quite odd. I have no idea FFT makes such type of products.
Since the records were not consistent and ended at Oct. 2022, I suspect the actual number of shipment being much bigger than 33. The inclusion of GJD product lines directly proves that AVA and Fortisec have continuous coorporation.
I know the company has been very quite when it comes to releasing nformation to the shareholders as a treat. The management of AVA only make material changing anouncements and they took it seriously. I'm not sure if it's a good thing because as a long term shareholder, I would love to know more details behind the numbers from trading update and answering my questions twice a year is just not enough. The footprint in Ukraine would've made a great news feed, even without mentioning names or locations of the site.
This kind of research shows that the company is continuously sending real products to real customers, solving real problems and making real cash while remaining absolutely silent. It helps me sleep well at night knowing that I'm not holding some nonsense like Brainchip.
This is more a note to myself.... but i thought i'd share the research on the sales / bd new hires:
I've started looking into Ava in the last week or so and I noted that there was mention in various communications, particularly in the Strawman presentation, that R&D investment is sufficent and that further emphasis on global business development was required.
Based on my research on LinkedIN / Sales navigator I see only 4 new Sales / BD headcount in this FY:
Sketch Mohan - National Account Manager - BQT - 2 months
David Macey - Federal Sales - FFT - 10 months
Andrew Holysz - National Sales Manager - FFT - 3 months
Mark Glasser - Regional sales Manager - BQT - 8 months
On the one hand, these new hires will not have a signifcant impact on COGS assocaited with the various 'good-news' reporting we've seen over the last 6 or so months, on the other, it will be interesting to learn how they continue to both penetrate better into existing markets and start to leverage the complementary elements of their various offerings as a differentiator as time goes on.
Disc: Not held
During Mal's presentation on H1 results, he mentioned that he's been working on improving the global sales capacity of AVA. Mal wanted to have a head of sales placed in each time zone, with himself coordinating everything in the heart of the world, Singapore. The clients will then have easy access to someone who can actually make the call and everything will be processed in an efficient way.
Here's some information I gathered from LinkedIn.
(MENA stands for Middle East & North Africa)
Clearly, Mal kept his promise and we now have a director/VP accessible to clients across all time zones. Significant personnel changes have happened in the past 6 months. Florent and Robert are from Rapiscan executive team, which was lead by Mal himself. Robin and Ali have been working at FFT/AVA for years. Robin used to cover Europe and North Africa and Ali was in charge of sales in Turkey (maybe he was the one behind the mysterious Istanbul Airport deal, which we still don't know the exact figure). Appearantly, Mal reassigned their responsibilities, which makes a lot more sens now, and promoted them. I'm sure there are way more changes and additions to the sales team that I couldn't find from public resources.
We also have Sanjay Oberoi covering India, James Viscardi who is now the Executive VP of Global Security, promoted from the position of VP Americas in Jun-22, and Pietro Corsaro, joined AVA in Nov-22, focusing on boosting condition monitoring business (basically Aura-IQ) in Germany.
Those changes are in line with the company's strategy of boosting sales capacity first mentioned back in 2021 if I remembered correctly. At that time, the company was focusing on expanding the team in North America. In two years of time, the company now have propraetors placed around the world. Maybe we all underestimated the ambition of the company after all.
So let's just wait and see how the upgraded sales team perform in the next 12 months. In the most ideal dream-come-true kind of scenario, H1FY24 will be amazing with new orders flying in from every corner of the world taking more than 15% of the intrusion detection market with the most advanced systems. (The market share for FFT was 4% back in 2015 according to the prospectus).
In a much more realistic scenario, I'm expecting the FFT sales in H1FY24 to grow by 10-12%. Not quite enough to reach the $70M goal but very achievable.
Ava’s update has been covered by the community so these are just some notes for myself
The Not So Good
What To Watch
Latest update is at the bottom (scroll down):
19-Sep-2022: My 2 year price target for Ava Risk Group (or Ava Group as they now call themselves) (ASX: AVA) is $0.38 (38 cents per share), so by mid-September 2024.
They are naturally worth less since the sale of their services division and the return of capital and the special dividend that returned a fair chunk of those sale proceeds to shareholders as cash.
However, what they have now, their three divisions, and their upside potential, is being undervalued by the market down here below 25 cents/share.
I should point out that the vast majority of what I'm going to base this price target on now is the recent (7th September 2022) meeting in which Andrew spoke to Ava Group's MD, Rob Broomfield, which can be viewed in its entirety on the Strawman.com Meetings page - see here: https://strawman.com/meetings
Its important to note that the GJD acquisition, while clearly being well within Ava's wheelhouse and entirely complimentary to their other two divisions, also gives them instant access to major clients across Europe, a geography in which they had limited penetration previously.
I think the best way to frame why I like Ava Group so much is to simply have a look at some of their key clients and business partners across those three divisions:
FFT above, BQT below, followed by GJD:
Ava have all of the clearances and certifications required to enable them to provide security solutions for some of the largest and most sensitive government departments across the globe, such as the US Department of Homeland Security, the US Border Patrol, the US FAA (Federal Aviation Authority), the US Army, Navy and Air Force, the Australian Government Department of Defence, the Home Office of the UK, etc. who can all be found on the FFT "High Quality Customer Base" slide above.
Their potential TAM (Total Addressable Market) is absolutely massive. In fact it's damn near infinite as far as I can see.
This is also a management team that I can get behind. I had previously been an AVA shareholder and made money from the investment (as you can see by looking at my AVA trades here - which aren't too far away from my real life trades, although the number of shares was obviously a lot larger IRL, as was the profit) however I sold out because I thought they'd run up too high and I was concerned about the so-called "earnings cliff" that the end of the IMOD contract might represent, as well as what the sale of the services division might mean for the business initially.
Fast forward to now, and in light of Rob Broomfield's discussion with Andrew on the 7th, it's clear to me now that they recognised very early on that the IMOD contract could easily be a company killer, in that it was so big that if they tried to service it themselves out of Australia, the rest of their business and their business plans would suffer as a result, so they licensed their IP to an Indian company who did all of the manufacturing there in India, but the software was installed remotely from Australia, and at each step in the installation process the Indians needed an electronic key to unlock the system and continue with the next phase, which was supplied to them from AVA's HQ in Australia - as long as all of the required payments to AVA were up-to-date - so that's how they ensured that they always got paid in full and on time.
Basically, the Indians took on all of the risk in terms of securing component suppliers, and continuity of supply, the actual manufacturing and the hardware installation, and AVA just clipped the ticket from Australia because they owned the IP, and that's why the contract was SO profitable, because there was almost zero outlay by AVA, just someone managing the process from Australia and ensuring that all the invoices got paid and the security keys were issued as required.
That offshoring of manufacturing of large contracts or more specifically setting up the manufacturing centre in the home country of the customer, particularly when the customer is a government department, has other advantages, as Rob discussed.
In the IMOD (Indian Ministry of Defence) case, the Indian government provides assistance to Indian companies who manufacture there in India and that is commonplace; Governments of Countries always prefer to award contracts to companies who are domiciled there in their home country and better still if the manufacturer is owned by residents and citizens of their country, so Rob has realised there are multiple benefits to that approach of partnering with a local company in another country to provide the manufacturing and installation for large contracts in that country - where the vast bulk of the purchasing and manufacturing is done there, but using AVA's IP, which is charged for by AVA.
The only thing that is always 100% Australian/AVA is the software and all of the software aspects of the security systems, plus other IP (Intellectual Property) related to the systems, and the software can usually be delivered securely electronically, or they can fly someone in as required to do physical installs from memory sticks or portable hard drives or whatever I suppose - if they need to.
That IMOD contract has finished now but they still get recurring revenue from the servicing and updating of the hardware and software that has been installed over there in India, and it has also opened up doors to further contracts with both the Indian Government and private enterprise in India.
And that's just one example. But it's an important one, because that contract COULD have been a company killer, and it wasn't, because they identified the risks and were very smart about how they set the whole thing up.
That is not something that the wider market is either aware of, or that they attribute sufficient weight to in terms of the quality of the management at Ava Group.
Another thing I like about Rob Broomfield and the rest of the management at AVA is that they see their own potential, however they are approaching these vast opportunities in a measured and systematic way, not trying to expand in all directions, as fast as possible, and all at once.
Rob says that their customers tell them that their stuff is the best stuff on the market, and one of the things that they do that gives them a competitive advantage is that they have teams dedicated to improving systems through machine learning. As just one example, Rob explains that false positives (or “false alarms” as many people call them) are a big problem within the industry, particularly with remote locations where sending somebody to investigate an alarm can be problematic because the facility is very large, or unmanned, or for a variety of other reasons, but in essence false alarms are just a waste of time and energy, and are annoying for everybody. So AVA's systems have gotten so good that many of them have reported zero false positives in the last 12 months, or during calendar 2021, and that includes remote locations where their clients are very keen to pick up stealth incursions but where the winds often reach hurricane force levels and stuff like tree branches and other debris blows around regularly.
Rob says that if a new client wants to buy a new system, he won't offer them a zero false negatives guarantee up front, but instead they will say: If you sign a 5 year plus agreement with us, we can pretty much guarantee you that by some time in year two, we will have trained your system to disregard all or 98% to 99% of false negatives. These are not direct quotes by the way, so forgive me if my memory of Rob's exact words differs from what he actually said - but the recording is up on the site now, so you can watch it and check on exactly what he said - point being that this is the gist of it. I'm giving you my impressions of what I watched.
Every situation and system is different, but they all present the same types of opportunities, and that's the big difference, that AVA stand behind their systems and they constantly improve them, mostly remotely - although some customers don't allow that remote access for security reasons - and they always try to enter multi-year agreements where they are paid a fee to keep the security systems in the best possible working order and constantly improve them over time. Ava Group's focus on improving the reliability and usability of their installed systems is, in my opinion, a clear competitive advantage that they have over the bulk of if not all of their security system competitors.
One of their goals is to build up as much recurring revenue as possible from installed systems, and of course their systems are very sticky, so once they're in, they're in, there is almost zero churn, and it's just a land and expand scenario.
It's very clear to me that despite their phenomenal success to date, they've barely scratched the surface in terms of their addressable markets. Rob believes that they have all of the staff they need now to keep their systems evolving and improving and so forth, i.e. to keep them at the forefront and cutting edge of their industry, and he sees future investment to be mostly in sales and marketing to get the word out there and get their systems installed in new industries and sectors.
I also liked his take on the Aura-IQ system and the slow uptake by the mining industry. While this has clearly taken much longer than he had expected, he admits that this is mostly due to their prior lack of understanding of the way the industry operates. He had not initially realised that when a mining engineer gives you a timeframe that looked achievable, it was rarely reliable, because there are so many additional stakeholders in mining where the majority usually just want to keep producing, they don't want to stop conveyors to install stuff, and you can only install stuff when the conveyors are shut down for other reasons that are unavoidable. And you don't always get advanced notice of when those stoppages are going to occur.
So the Engineer is giving you a logical timeframe, but not a realistic one, because even mining engineers can't foresee how many people will over-ride them and not give them access to the equipment that they are ultimately responsible for maintaining and keeping in optimum operating condition.
This resonated with me because I spent almost a decade working on large (up to 32 kilometres long) conveyors, maintaining their drive ropes, pulleys and conveyor belts (at Worsley Alumina, now owned by South32, on their overland conveyors that run for over 55km from their Boddington Bauxite mine to their Worsley Alumina refinery, which is near Collie in WA's south west) and I know exactly how difficult it could be at times to get access to the conveyors to do critical repairs, and how they would ring us up in the middle of the night to come up and do rope inspections because they'd had an unexpected stoppage such as a belt derailment that was going to take hours to fix. While that was over 20 years ago, I'm in regular contact with people in the mining industry, including my brother, and I know that if anything the focus on production has only got worse (i.e. stronger) over the past two decades with preventative maintenance and process improvement activities always having to fit around production. Production always comes first.
It was refreshing to hear Rob say "Enough Proof of Concept" now - we all know it works, and if they want it, they can order it and pay for it, or words to that effect. And he is confident that as this plays out, Aura-IQ will be in demand because those who have the system installed will have a clear competitive advantage and mining is so competitive that nobody wants to be at a competitive disadvantage - so as soon as other miners see one of their competitors using the Aura-IQ system and it providing clear benefits in terms of conveyor monitoring, they will demand to have it as well.
While Rob is confident that it will work through like that, I don't think he's too worried about it either way because it's just one of so many products that they can roll out across so many industries. But in essence I reckon Rob feels that AVA have spent enough time and money on Aura-IQ already, and now it's time for the industry to decide if they want that competitive advantage or not, and who wants it first. He knows there are sales coming through in calendar year 2024, but he's comfortable with however long that takes now because the company has so much else on, so many other great products to roll out in other industries. Aura-IQ is certainly not their main game. It's significant, but not THAT significant.
In summary, the reasons why I sold out of AVA previously no longer exist, they're now back below my original buy price (which was 32c/share), and despite them no longer owning that Services Division, I believe Ava Group now has the potential to grow into a company within the next 5 years that will be worth more than what they were worth when I sold them for over 60c/share (between 61c and 68.5c IRL, between 36.5c and 62c here on SM). And they're now back under 25c/share, so I've bought back in, and I'm a happy AVA shareholder again.
I'm setting an initial 2 year PT of 38 cents/share, and I think they're worth that right now, but I think they're going to over 70c/share within the next 5 to 10 years.
10-May-2023: Update: OK, this one was marked as stale, and I am lowering my price target by 10c to 28c/share, because while I still believe in the upside and the potential, it is taking longer than I had anticipated for this investment thesis to play out. Still on track, but I was clearly too optimistic expecting them to be trading at 38c/share sometime in the latter half of next calendar year (2024). It could still happen, but realistically - it's going to take longer. I do see them going up there and beyond given time, but I reckon I do need to give them MORE time.
Good company. Good gear. Reasonable Recent Update: Q3-FY2023-Trading-Update.PDF
Not shooting the lights out today, but they'll have their day. I hold this one both here and in real life. I like AVA Group a lot!
Progress. Slower than I would have liked, but still progress. They're moving in the right direction. The pace of growth will increase at some point, but I don't know when. Yet. I guess I'll know it when I see it.
The FY2023 revenue guidance of $27.6M to $29.6M really got me thinking. The revenue for H1FY23 was $13.6M, which means the revenue for H2FY23 is expected to fall between $14M to $16M. So they are either expecting a terrible Q4 or only part of the $8.7M is contributing to the Q3 revenue.
Also, it looks like the company is trying to settle a contract worth $2M.
The order intake of FFT grew by 68% into $6.4M impressively. It would be nice if AVA could communicate with the shareholders a bit more during the process.
Again, no further Aura IQ contract mentioned. I'm not sure if it's because the company couldn't land any new deal or Aura IQ deals aren't ann worthy anymore in the eyes of management.
In general, this performance is not bad, especially for Q3, which is usually a sad quarter for the company. A bit dissapointing seeing the FY23 guidance though, not sure what's going on here. $27.6M is still far from the $70M benchmark set by the company. Based on the public information, reaching that benchmark within 3 years seems to be very challenging.
I know the liquidity of this stock is very low, but still, let's see if the market likes this update or not.
Btw, I think the chances of the management selling BQT and giving away another stupidly large, unfranked special dividend is getting higher and higher. The division kept sinking after signing the global distribution agreement with Doormakaba and the management doesn't seem to be very excited about this division.
I was thrilled to see the first Aura AI-X deal happened so soon. When I first heard of this new product, I was worried about going through this Aura IQ drama all over again.
A$2.2m is reasonable for such a contract. There is a good chance that the profit margin is a bit larger comparing to the energy facility contracts. I was hoping to see some recurring revenue from Aura Ai-X deals. Unfortunately we have to wait longer for that.
But still, this contract does give me more confidence and I will be less of a cynical shareholder when I hear phrases like "most advanced", "market leader", "high profit margin" from the management of AVA.
I am forecasting total cash flow from operating activities of 2.5m for FY23, with Capex at 1.8m, and FCF coming in at 700k for the year.
With scale, I think they can achieve improvements to FCF over the next few years, so I am forecasting 1.5m FCF in FY24 – with 1.5m increases annually thereafter until FY27.
With interest rates at higher levels, I am increasing my discount rate from the standard 8.4% I use to 10%. I reach a company valuation of 71m – divide this by shares outstanding and I land at a current valuation of 0.28c.
Positive results for AVA as outlined over the past 72hrs on the platform
Revenue lines and EBITDA margin expansion a real highlight as is the consistency of the growth across detect and access segments as well as positive first full half contribution by the illuminate segment.
Business momentum overall feels positive and view my holding in AVA to some degree as a defensive play in the current environment.
Two other areas caught my eye on the call and presentation
Something to watch especially in driving to meet the aspirational results outlined of 25% plus EBITDA margins.
Disc. Top 5 positions held in RL and SM
….and yet shareholders sell and SP is down 6% on these results !
Makes little sense to me.
Pleased with the latest from AVA.
The number of new sales orders was 47% higher, thanks in large part to the acquisition of GJD. However removing this still shows a 15% jump in the sales intake for continuing operations.
Statutory revenue was up 50% to $13.6m (looks like about 16% higher without GJD). And EBITDA margins rose to 9% to $1.2m (the pcp was messy due to divestment of Services division and IMoD contract, but excluding these the EBITDA margin was 2.5% for continuing operations last year).
All segments delivered growth. And the business seems to be scaling well.
Operating cash flow was -$2.2m due mainly to changes in working capital (increased receivables and inventory due to increased orders and recently completed projects), and also added R&D. There's still a bit of padding on the balance sheet with net cash balance of $4.4m, after subtracting $2.7m in borrowings.
AVA reiterated that over the next 3 years they expect $70-100m in revenue at 25% EBITDA margins. Even at the lower end of that range, and assuming 20% EBITDA margins, that's $14m in EBITDA, or 6x higher than the current annualised level.
If they do that, you'd get a 10% average annual capital gain so long as AVA trades at a EBITDA multiple of 6x or above at that point. At the upper end of guidance, EBITDA comes in at $25m.
Anyway, aspirations are one thing, delivery is another. As of this point, shares are trading at roughly 26x annualised EBITDA.
But i see a business that is growing well, with improving operating margins (and stable gross margins), industry tailwinds, and that is likely to be self-funded (in the absence of an acquisition).
Here are a couple things I found interesting from this report.
The company is no longer debt free due to the GJD acquisition.
Although it hurts a bit to know the fact that AVA is no longer a debt free company, this is still a reasonable move.
When I first read about the GJD acquisition, I was amazed by how cheap the price was. For the first time, we can have a look at the balance sheet of GJD pre-acquisition and it explains a lot. If you had $1.6m in receivables but $19k in your bank acount, you kinda need someone to bail you out. The balance sheet shows a business with good product but just needs a bit more sophisticated management.
Upside here could be 15%+ growth in sales over the long term, but will be a little lumpy. I think even worse case scenario would be at least half that, say 7.5%. Split the difference at 11% gives me about current value.
Without repeating what other straws have posted I remain bullish with AVA risk.
Key reasons :
Add the rock solid balance sheet and dividend payout ratio of min 35% of EBITDA remains a top 5 position in my RL and SM portfolio
Decent result from AVA it seems.
Revenue from continuing operations expected to be up 50% to $13.6m (guidance was for $13-15m)
Sales order intake up 16% if you exclude orders from GJD acquired in August 22, but 47% if you include. Existing FibreOptic and access control businesses saw sales grow 15% and 21%, respectively. Good momentum into north American energy sector with more sales expected. New CEO says they expect continued growth and operating leverage in second half. Received "strategically" important orders for AuraIQ.
Next half we'll get a full 6 month contribution from GJD, but on a pro-rata basis AVA is on 2x sales.
Growth continuing, strong balance sheet, CF positive, undemanding valuation and doesn't seem to be facing any real headwinds. Valuation, undemanding.
AVA Risk Group - Trading Update
Based on their guidance of 70-100m revenue in 3 years I have assumed 70m revenue by 2027 so taking the lower end and giving them longer to get there (this corresponds to a CAGR of ~30%).
Assuming constant GP margin of 65% and a 20% CAGR in operation expenses (to 29m which is 50% higher than their estimate) gives $17m in EBITDA (works out to be 24% of revenue)
Applying a 10x multiple to EBITDA and assuming 270m shares in 2027 gives:
2027 share price: 0.63
Discounting back at 10% ->
2023 price: 0.43
So it is at a good price IF they can achieve what they say.
Doing my due diligence on AVA Risk and feel the need to illustrate this from their last investor presentation. Yep, it is old news from the end of August, but as it had not been explicitly mentioned I thought I should add it in.
They are only barely profitable when you factor out the IMoD contract - which makes any valuation based on their current P/E questionable.
Saying that I still chose to add them to my RL portfolio, but I will be keeping an eye on their profitability (with large contracts like IMoD factored out) going forward.
$300k to install Aura IQ in combination with a fire detection system at a iron ore terminal in Brazil. Due to occur first half of calendar 2023.
Client is a joint venture between Anglo American and Prumo Logistica.
Again, not overly material, but good to see some orders coming through and that the sales pipeline remains strong.
AVA risk group just announcing another contract for aura IQ in Brazil
This isn't overly material in it's own right (in dollar terms), although new deals are always welcome.
Where it's noteworthy is that this is the third implementation for this facility, and is replacing another system. That is, the customer gave it a go, found it superior and is extending its use -- all after only a few months since the first system was installed.
And, as the statement says, more sales are expected down the track.
We know from speaking with Ian Olson from Pointerra that the energy sector is very cooperative in the US (they don't directly compete and there is a large sharing of ideas and solutions). I can imagine this will become an important reference site for AVA in the US utility sector.
AVA delivering on their promise of fibre optic expansion.
I have just been doing some numbers based around them executing and meeting their 3 year target of achieving $70-100M in revenue, whilst increasing their costbase at a much lower rate. At the recent AGM they said they expect this to be a fairly linear increase year on year and not a dramatic step change in any period. See straw for my assumptions and workings but my value for the next three years comes in at
June 2023- 18-26c
June 2024- 40c
June 2025- 50c
These values are based on the increase in EPS that I expect will occur if they successfully execute their plan and hit their targets. I have not incorporated a multiple expansion in this value and are using a PE multiple of 8, which is what I think the company is on currently.
Looking further out these price targets might be a bit high but they all depend on AVA meeting their revenue targets and keeping their cost base constrained. AVA management seem enthused and confident that they can achieve these goals and I am backing them to do this until they prove otherwise!
I am using this basic model as an semi-annual guide to check against to ensure they are still hitting their marks.
I first came across AVA through strawman, and really only got properly interested after the recent company meeting a month or so ago. My interest and valuation revolves around this slide and the associated commentary from management about their buisness units. They think they can increase revenue by 2-300% while only increasing the costbase by 50-70% over the next 3 years, if they can do that then they should be worth a lot more in the future than they are now. But the question is how much more!
So far for FY23, they have upgraded guidance for H1 for revenue to be between $13-15M and have said that Q2 was better than Q1 and H2 is expected to be better than H1. So I am running a high and low scenario for FY23 - Low: $30M revenue and High $40M (probably a stretch but possible). Projecting further out I just guess $60M for FY24 and $80 for FY25 to be a bit conservative, but these are really just ballparks for now.
I am assumming a Gross margin of 65% (historically ranges between 65-75%) and their cost base to increase from $10-12M currently to $18M in FY24 and $24M in FY25. Closer to a 100% than the guided 50-70% increase to be conservative.
I have struggled to find what proportion of their EBITDA falls though to NPAT. From the 2022 annual report they have:
-$2.5M of debt and I am assumming 5% interest- so repayments come in at $125K/yr, largely immaterial to the calculation
-$17.5M unutilised tax losses are available for use. Based on them making $10-15M EBITDA then the tax bill will be around $3-4M, so will take a few years to use up the previous tax losses. They also have some foriegn tax credits ($10M) but I have ignored these for now.
-Depreciation and amortisation in 2021 and 2022 for the continuing operations was $1.8 and $1.7M respectively. I am assumming these will be similiar in FY23 and will scale at a similiar rate but will revisit this when the next report is released.
So from my best estimates in FY23 the ITDA should add up to be around $5M, based on what I think EBITDA will be means that to get from EBITDA to NPAT is between 50-70% conversion rate give or take, so I will just work with 60% for all years.
The numbers look pretty reasonable for 2023 and value really depedns on whether they hit the low or high side of revenue numbers. Going forward I don't have high confidence in these numbers but I think the ballpark they re in is about right and if they keep delivering in there day to day buisness units and also get a few more of the 90% margin licence deals to come in like they have spoken about then the 2025 numbers don't seem to crazy.
Maintaining costs and scaling revenue what a combo!
I would appreciate people tearing this apart and telling me why some of my assumptions or what I have done is garbage
The value of this business can easily go beyond $100m once everything starts to roll.
The company has been accumulating all sort of capacity to build an business model with high margin, low working capital requiement, and potential of rapid growth.
I see a lot of faith, not from retail traders, but the insiders in the current situation. I'm sure the management of AVA has the option to tell stories to the public that will bring the share price to the moon and dump their shares and move on. Instead they choose to communicate genuinely, be patient and focused while making progress that seems to be baby steps.
I am confident that $100m valuation is only the starting point of a bright future.
Hey guys, I recently discoverd Strawman. I think it would be worth it to bring my other post on Hotcopper regarding to Aura IQ here to have a discussion. Please let me know what you guys think.
As we know, the development of Aura IQ is partialy funded by ACARP. Therefore, Mining 3 is obligated to submit reports regularly to ACARP and you can actually purchase those reports.
Based on those Mining 3 reports I found, the development of Aura IQ has four phases so far. The first three ones are:
Phase 1: Feasibility demonstration
Phase 2: Demonstrate proof of concept on site
Phase 3: Improve the classifier of the system.
After the first three phases, Mining 3 received many feedbacks from the industry. The industry really wanted Aura IQ to be a near-real-time system and made it very clear that this feature would add significant commercial value to the system. So the main focus of Phase 4 was to optimize the system and enable it to run continuously.
Phase 4 was planned to take a year, starting from Dec. 2019. From the management's perspective, they would have a system that satisfied all the industry's commercial need by the end of 2020. That's probably why they were extremely confident of having their first Aura IQ deal in 2021.
Then the COVID hit. The lock down delayed the testing and made certain parts hard to be accessed, which slowed down phase 4 by 4 months. After that, the lead scientist stepped down and paused the project for 3 months until they found a replacement. Eventually, Mining 3 concluded phase 4 in Jul. 2021.
According to the same report, phase 4 was quite a sucess and the feedback from the industry, as I quote, "positive and informative" and they've been conducting further development to handle customers' unique features. The fire detection system integration is probably on of those unique features.
Another thing I found interesting was Strata Worldwide anounced their partnership with AVA about the same time when they were running field test for phase 4. I think it is a strong indicator of the sucess of phase 4.
My conclusion is, after the completion of phase 4 in mid 2021, Aura IQ became a completed product that was finaly ready to be deployed to the market. in the past 12 months, the company was probably being busy modifying the product according to all the specific requests from each client. It's very hard to estimate when the clients will be absolutly satisfied but my guess is a good deal from the mining industry should be around the corner.
I do have some concern about the IP ownership. It looks like all the core AI algorithm related patents are owned by Mining 3 because they mentioned at the end of the report that they planned to use the same algorithm on other applications. FFT is more like a sensor suppliers to get raw data. I don't know the details of the agreement between FFT and Mining 3 but it does look like FFT could be replced with other sensors. Even if Aura IQ did become a huge sucess, we should still keep our eyes open.
Looks like Rob Broomfield is retiring.
I'm not sure of his exact age, but he started his degree in 1978 so i'm guessing he'd be around 65. He's staying on for a further 3 months, will be doing consulting for a further 12m and the Chairman had a lot of nice things to say about Rob in the announcement -- so it all seems very amicable. He also said he remains a "committed shareholder"
Given they already had a replacement lined up, I'm assuming the board knew this was coming.
Rob will be replaced by Mal Maginnis, formerly the president of Rapiscan Systems, an airport security firm which did close to A$1b in revenues in FY22. Mal has 35 years experience in the security sector.
It seems the team at AVA have some history with Mal, having known him for some time. I've also heard from a broker that Mal was the person who recommended the recently appointed global head of sales Jim Viscardi -- whom he worked with at Rapiscan. So the chemistry between sales and Chief Executive is well established
The remuneration package seem appropriate for the role and size of the company. $330k pa fixed (Singapore dollars, which is about $360k AUD). Plus he gets 1,000,000 shares vesting annually in 3 tranches over 3 years -- about $185k at today's share price.
He'll get another 500,000 shares per year for 3 years, if the share price is 20%, 40%, and 60% higher from his start date.
ASX announcement here
Let's see if he can kick some goals.
Really enjoyed the meeting with Rob. I find him a well-considered person and enjoyed hearing the insights into the progress of the company.
I think with the AURA IQ product, if it works like it's promoted to work, then the sales will come from word of mouth. The professionals at the mine, like the engineers, need annual CPD and they usually go to an annual conference somewhere to get it. The conference organisers usually ask the delegates for papers to present and, sooner or later, someone will present how AURA IQ has increased productivity at their mine. I think that will be the catalyst for a flood of enquiries. A successful proof of concept trial is key, but it sounds like they've almost cleared that hurdle.
I also see massive potential coming from the databank of information they have to mine and train their systems.
Happy to keep my toe in the water with AVA both IRL and SM.
A few notes from the management call:
AVA reported revenue of $19m, in line with what they suggested at the last quarterly update. That's a 25% drop from last year, even when you exclude the now sold services division, but it's a 12% improvement when you take out the license fee revenue for the Indian Ministry of Defence (IMoD) and covid grants.
nb: We shouldn't easily dismiss the IMoD revenue from previous years, but this type of (extremely high margin) license revenue is always going to be lumpy. So stripping them off does offer some insight into 'core' operations, which pretty much seem to be chugging ahead nicely. Hopefully we see a few more significant license fee deals -- and in fact there's one due to start in Latin America this year -- but we shouldn't extrapolate too much from them.
It was also good to see the gross margin lift to 65%, especially in light of the current macro backdrop. This was a feature of more sales from the higher margin FFT segment. So overall, again focusing on core, continuing operations, gross profit was 14.1% higher.
Moving further down the income statement, added expenses saw EBITDA drop 10.4%, with the operating margin moving from 5% to 4%.
This was because R&D, sales and marketing, office and travel costs were all higher -- about 63% higher to almost $3m for the full year. That feels like a lot, but all told it's an extra $1.2m and this expense is to help penetrate into new markets and underpin future growth.
Indeed, revenue for North America, which is the stated priority region, saw revenue double for the year.
Operationally, the business is investing further in machine learning processes to help improve the efficacy of detection systems, and increase the attractiveness of long-term support contracts. Indeed, AVA has 52 support contracts signed -- up from just 4 last year. This will hopefully become a good source of recurring revenue and improve client retention by ensuring they are getting the most out of installed systems. In fact, they have 2,500 customers in their existing install base, so there should be a good deal of low hanging fruit here.
There wasn't much on the new Dormakaba agreement, other than there was "significant momentum" in performance as of the end of FY22.
Management did warn that although they had navigated global supply chain issues successfully, they expected the situation to remain challenging in FY23.
Although the company distributed $38.8m back to shareholders during the year (due to the sale of the services division), the balance sheet remains in excellent shape with $15.2m in cash and no debt.
All told, we have a business that looks to be at a decent inflection point. With the company now firmly in the commercialisation phase, and with some encouraging momentum, there's good potential to scale from here -- something that should multiply any top line growth. And, importantly, this is cash flow positive, with a strong balance sheet.
$66m market value (at time of writing) gives a 3.5x sales multiple, or EV/EBITDA of 64.
I'll dial into the results call and update on any insights.
disc: held here and in real life
AVA has announced that it has secured 2 new contracts to supply and install its Fibre Optic Intrusion Detection system within the US Energy sector. In total, these contracts are worth US$800k and will be fulfilled in the current quarter.
For context, these sales represent about 6% of total technology sales for FY22.
The first contract is for US$500k and is a rollout for a second site from an existing customer. When the first order was announced in June, it represented a record energy sector sales order.
The second is for US$300k, and is for a new customer.
Always good to see an existing client deepening their relationship -- it's a strong signal they are happy with the value prop.
Also encouraging to note that AVA reckons it has identified other critical assets in this space and are currently pursuing these. Here's hoping the expanded resourcing in North America continues to pay off.
AVA has acquired UK based GJD Manufacturing, a security equipment designer and manufacturer focusing on intruder detection systems.
The equity value of the deal is A$7.82m, of which 60% will be paid in cash ($4.7m using the current cash reserves of $15.2m), and 40% in AVA shares (11.8m shares worth $3.13m, or 26.5c per share, with shares being in escrow for 12-24 months).
in FY21, ending September 2021, GJD did A$7,95m in revenue and A$1.6m in EBITDA. So the purchase price was 4.9x EBITDA.
You can dig into the details here, but it looks like the idea here is mainly to gain access to GJD's distribution and customer network, with AVA able to compliment the existing product set with FFT and BQT products.
At a high level, it seems a reasonable multiple was paid, there's less than 5% dilution, and no discount to the market price for shares. It's hard to get a clean read on AVA's normalised EBITDA after the divestment, and while the business is still driving towards scale, but a simple pro-rata of the first half results would suggest there's a significant multiple arbitrage here, and so using equity to fund 40% of the deal seems like a prudent move. Especially to help align the incoming management team, and it helps keep the balance sheet in a very sound position.
The real question is just how much sales of AVA products are boosted through the improved access to the UK and European markets.
AVA has *finally* secured its fist Aura IQ contract with a "leading global manufacturer of conveyor systems" (this is the product that monitors conveyor belt systems -- see here)
The contract, however, is tiny, clocking in at $300k, although noteworthy in the sense it is commercially ready and something of a milestone.
CEO Rob Broomfield said "Additional contracts...are progressing through procurement processes and are expected over the remainder of calendar year 2022".
The company has previous said that this is a $50m pa opportunity (annual sales are presently around $20m).
Interesting to see this news being released the day after a 10% spike in the share price..
Full announcement here
I just watched their presentation on coffee microcaps and in the Q & A they said that the first commerical order for the Aura IQ fire integrated product is now in the final stages and they are hopfeul that it will be signed before the end of the financial year. They also said that they had a good pipeline of orders for Aura IQ that are at various stages. Nothing really knew was mentioned but commentary was fairly positive for the 4Q numbers.
Ava has won a $0.7m contract to supply its intrusion detection system to a major US energy facility (see here). It should be fulfilled this year, and I estimate it represents roughly 4-5% of pro-rata sales wins for FY22.
So, relatively, it's fairly material in size, and also noteworthy for being the largest win in the energy sector -- an area the company is targeting and has so far won $1.8m in sales year-to-date.
Excluding divested operations, the company remains on track to generate in excess of $21m in revenue this year with 66%-odd gross margin -- a roughly 20% lift from FY21 when ignoring the IMoD contract -- and is presently being valued at $46m by the market.
On the eve of the approval of the 0.03114c capital return and what i assume will be a quarterly business update i continue to top up at prices of 26-27cents.
Looking forward to see business updates and whether long awaited revenues are materialising.
Growth in revenue of 20%+ per annum will no doubt revalue AVA as the year unfolds and the fact its profitable goes well in these turbulent times.
Having endured the pull back in MP1 today the markets across the globe have no tolerance for subpar growth when prices of companies reflect growth targets of 20% plus.
AVA isn't valued in the same way and thus upside on positive news may occur as a result.
Ava last week released a trading update (see here)
Q3 FY22 sales orders were $2.8m, and on a year to date basis were $13m, which is 17% higher than a year ago (excluding Indian Ministry of Defence). Seems pretty good, but the 3rd quarter itself was underwhelming -- but by exactly how much is hard to say. For reference, they reported $3.2m in Q3 revenue last year...but revenue is not sales orders.
What I've found confusing is the switch between reported revenue and confirmed sales orders in different quarterly updates. I really can't stand it when companies lack any consistency in their reporting -- at least not without good reason, and clear explainers! Plus we have the divestment of the services division, and the Indian Ministry of Defence license fee to try and account for.
For example, in the recent first half, AVA had sales order intake of $10.2m (the addition of the latest quarter's $2.8m is what gives them the $13m YTD figure). But in the first half, revenue from the technology division (ex IMoD) was $9.1m. Similar, but not exactly the same.
In this 3rd quarter update, they only discuss order intake, and make no mention of revenue. And certainly nothing that gives us a clear Q3 FY22 vs Q3 FY21 comparison. Maybe I'm missing something (?) so let me know if anyone else has a clearer read!
Anyway, moving on...
AVA has a confirmed sales backlog of $5m, of which $2.6m is expected to be realised in the 4th quarter. So that's $15.6m in confirmed sales order for the full year. Plus whatever else they can win and book during the quarter.
Again, not sure how that compares on a like-for-like basis with last year, in terms of sales orders. In terms of actual reported revenue, AVA did $16.9m the Technology segment in FY21 if you strip out the IMoD.
So i'm finding it hard to get a read on the nitty gritty here. Any help would be appreciated!
The BQT segment did show a good lift in sales orders in Q3, but this should be expected as their partners bulk up inventory. FFT, on the other hand, showed a big decline -- something they explained by a seasonal slowdown and timing of orders, with the 4th quarter expected to return to the first half run rate. Still, this was the weakest quarter for FFT we've seen for some time, roughly 1/3 lower than the previous corresponding quarter (but that's just guessing by squinting at the provided chart -- no actual figures provided!).
Zooming out, Ava reiterated guidance for $31.3-33.3m in FY22 Revenue. BUT, some of the FY revenue is from the now divested services division. Revenue related to the remaining technology segment is expected to come in at $20.2-22.2m, and that compares to $24.7m in FY21 (a 14% drop at the midpoint). HOWEVER, no revenue is expected from the IMoD license this financial year, so if we normalise for that, and treat FY21 revenue as $16.9m, we have a like-for-like revenue growth of 25%.
That being said, management did insert a pretty big disclaimer, saying "forecast revenue is contingent on the fulfilment of orders expected to be received during Q4 and that supply chains remain unimpeded."
So, yeah. A lot of if's and but's there, and it's all pretty muddy to my mind. I definitely think there's a lot of improvement that could be made in terms of shareholder communication. (Or maybe i'm just not smart enough to tease it all apart better)
Still, if I'm right (and i may be way off base here), we have a business whose core operations are experiencing very solid growth, which have a very decent runway, and with the potential for some other big kicks -- such as another license deal similar to the IMoD (which is essentially 100% margin), the dormakaba agreement, and the long touted AuraIQ product..
Indeed, the company said it was confident of receiving their first order for Aura IQ "in the near term" -- but as others have noted, this has been promised before... Supposedly there were some delays as the company looked to integrate this system with existing fire control fibre, and this work has been finalised and the approach validated at the end of the quarter. Ava says that "based on the successful integration, purchasing approvals within the global mining company have recommenced and are expected to be completed within Q4.
We will see!
Based on what Rob told us at during the Strawman meeting, we can expect the cost base to remain unchanged, and that we'll get something like a 66% margin on core technology segment operations. So if we see continued growth, the current 3%-odd EBITDA margins have the potential to expand considerably. And, unlike a lot of growth companies, the business is cash flow positive with a strong balance sheet.
You're looking at a business currently on a forward price to sales of 2.6x -- which is a pretty crude yard stick. But my valuation of 30c still feels about right given what i think are reasonable assumptions.
As I'm currently unable to view the ex capital return date would someone be kind enough to tell me the last day we can purchase to be eligible for the return?
I hope you found the discussion with Ava's CEO Rob Broomfield useful (recording here if you missed it).
Some key takeaways for me:
I might have missed a few other things, so please feel free to add any observations.
Full disclosure, i own AVA on SM and in real life and I plan on adding to my position. So I'm biased, and would really welcome any bear case arguments.
Overall, i think this is a business with an outstanding, long-standing and aligned management team, with a strong balance sheet, growing sales, capital light structure and attractive economics.
Sales will be lumpy though, and given covid, the IMOD contract and Services divestment, this full year probably wont be that exciting. But in the years ahead i see significant growth opportunity. I have a conservative valuation of 33c (20% above the current price), but there's more upside over the next 3-5 years if they execute well.
Moving average down price range:
Buy at $0.42
Sell at $0.49
market cap at 37c is about $90m. But this one is clearly a case for enterprise value - profitable and with loads of cash after the divestment. Shareholders net 42m from the services division divestment, plus the remaining business will still have ~15m cash on hand after the capital return. So the EV is approximately 90m - 42m - 15m = 33m. Some risk on the tax implications given they did make a great profit on services division (but held 21m in carried forward losses)
Even without much future from IMoD (they only have about A$4m left in revenue, but there might be upside in maintenance, extension etc) I think this is good value for a company with no debt and two mature technologies, in good spaces with proven demand.
Say the business loses all revenue from IMoD and the new entity is roughly breakeven. They have a cash cushion and can weather any COVID supply chain issues if they post another weak Qtr (potential buying opportunity?). No need for dilution, no threat from debt, all equals solid downside protection - tick.
From there they will need to defend the base and continue making sales (its not SaaS I have to remind myself), but I could easily imagine this plus sales picking up from pipeline of mining clients for Aura IQ, their data cabinet security system etc. My 75c valuation is based on some of this occuring, seeing NPAT of roughly 3m and a PE of 30x (which they'd get with that sort of growth). Enough for the stock to double, second tick.
I like that the chairman holds 32m shares (~15%), not a lot of options outstanding, they're responsible with the register. What does smell a little is the CEO and now CFO leaving in past 12-18 months. But then the CEO retired and CFO could easily have left after missing the promotion, but will watch in case they were the driving force of success.
The real question for the strawman is what will happen to our strawman portfolio holdings upon capital return :) will you return the cash to holders portfolios? If so I will start reversing the virtual truck :)
Finally an update from the ATO on AVA's proposal to return $39.2m back to shareholders.
Unfortunately, the ATO was only prepared to treat $7.567m of this as a capital return (a mechanism that would allow shareholders to defer any tax). That's equivalent to $0.03114 per share. They will seek shareholder approval for this at a special meeting on the 22nd April.
As such, AVA will distribute the rest of the money as a special dividend of 13c per share. Sadly, this will be unfranked (they simply don't have any franking credits to distribute given they have barely had to pay any tax due to the use of carried forward losses).
The record date for the dividend payment is 28th of February, which means anyone on the share register at that stage is eligible. Given the settlement period, that means you need to buy shares no later than the 26th to be eligible.
Obviously, a full capital return would have been the most tax effective method of returning excess money given AVA's situation, but there's little they can do if the ATO isn't going to play ball. Still, the fact they are returning this capital, and are not tempted to invest it on an acquisition or new capex shows a good bit of discipline to my mind.
This was a solid result from Ava (see here)
The group's technology division -- now the core focus after the divestment of the Services business -- received confirmed sales orders of $4.9m, a 63% improvement on the previous second quarter despite some covid related impacts. Year to date, Ava's tech division has generated $10.2m in the first 6 months of the year, a 42% improvement.
The FFT segment was the key driver of the improved result, with significant growth in the US market, up 150% year to date. Military installations and solar farms were called out as especially strong.
The company also has a confirmed order backlog (awaiting fulfilment) of $4.2m -- the majority of which is expected to be realised in FY22. Note that this excludes the Indian Ministry of Defence (IMOD) contract, which the company doesn't expect any material contribution from for the remainder of the year.
The new Dormakaba agreement came into effect at the start of 2022, and an initial order is expected before the end of January. I expect the blue part of the chart above to become more meaningful as this starts to ramp up.
The balance sheet remains insanely strong with $55m in cash and no debt, although $39.2m of this will be returned to shareholders (about 16c per share) as soon as they (hopefully) get a favourable ruling from the ATO. As a business delivering free cash flow, even after the return of capital, the balance sheet will be in very good shape.
The company also reaffirmed guidance of $20.2-21.2m in H1 revenue and EBITDA of $2.2-2.5m. This will include 3.5 months contribution from the divested Services segment. Still, removing this and accounting for the 16c cash return, you have a high margin, fast growing, profitable, well funded technology business, with an attractive market opportunity, that's probably on a Price to Sales of roughly 3x.
Will be good to get a "clean" set of results, but the business just seems good value to me.
While there was already an agreement in place, it was limited to just a few countries and generated less than half a million per year. This new agreement opens up all the markets that Dormakaba operate in, including new ones in Europe and the US. (Dormakaba's website says they operate in 130 countries)
Details of the revenue share weren't disclosed, but obviously AVA is taking a cut to gross margins in order to leverage Dormakaba's distribution. In principle i think that's a smart move. As management have said, they expect operating expenses to remain steady, and will only need to fund extra working capital for production and inventory.
The alternative would have been a big ramp up in new offices and staff costs, higher risk and a longer timeframe.
Sales are expected to start as soon as next month.
AVA Risk Group ASX:AVA
Q1 FY22 update:
Watching for any updates closely:
Disclosure: Not a holder at the moment, technically looks like it may struggle to hold the $0.425 support level, so I am watching for an entry closer to $0.365.
It wasn't a great quarter for Ava, with revenue for the first 3 months of FY22 down 7.7% on the 'normalised' first quarter of last year (removing impacts of large contracts, FX and covid impacts) to $15m.
That's down ~12% from the statutory Q1 result from last year, which came in at $17m (73% higher than Q1 FY20).
Group EBITDA, including the now divested services division, was just $2m, compared with $7.7m last year. That's in part due to the gross margin dropping from 49% to 38% as a result of Indian Ministry of Defence (IMOD) license fees, and weaker margins in the services business.
Looking ahead, the company gave first half guidance for $20.1m-$21.2m in revenue and $2.2m-$2.5m in EBITDA, that's compared with $35m in revenue and $12m in EBITDA for the previous corresponding period.
It's a BIG drop, but there's a bit of nuance needed here.
The current quarter will only include 18 days worth of contribution of the services division -- a segment that delivered ~$10m in revenue for Q2 last year. So on a like-for-like basis, completely stripping out the services division for the first half of last year and the current year, the first half revenue guidance represents first half sales in the remaining technology segment of $7.6m, down from $16.6m last year.
That's still a big drop, but the first quarter included zero licensing fees from the IMOD (last year it generate $7.8m in total for the group). Big deals like this and the Australian Department of Defence will naturally lead to some lumpiness.
The good news is that the order intake for the core Future Fibre Tech (FFT) business was up 53% on last year and up 8% on a strong 4th quarter of FY21. The order backlog was also up ~50%. Again stripping out the IMOD contract, FFT quarterly revenue just reported was up 40% from a year ago, and 23% above last year's quarterly average.
The BQT segment was impacted with site closures due to covid, but here the outlook is also encouraging -- especially with their licensing agreements. This model gives them less revenue per sale, but is much more scalable and yields 100% margins, and allows them to leverage of partner networks.
Overall, i can't see any structural issues with the business and in fact see AVA as well positioned to capture further growth. They have a strong position in a large and growing global market, with long-standing, top tier blue-chip clients, a highly scalable business model, with an expanding use case, aligned management a rock solid balance sheet.
All that being said, we need to see some good sales momentum build in the coming year.
AVA Completes Divestment of Services Division
Sale price of US$46.4 million (A$62.6 million) with anticipated net cash proceeds of US$31.1 million (A$41.9 million) after closing adjustments, and payment of management incentives and FY2021 accrued bonuses
Net cash investment return to Ava Risk Group of circa 587%
Ava Risk Group now comprises of leading security sensing solution provider Future Fibre Technologies, and high security access control and electronic locking provider BQT Solutions
As announced on 30 August 2021, following the completion of the Transaction 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
1. Capital Return to Shareholders: $39.7 million (circa 16 cents per share); and
2. On-Market Buy Back: $1.0 million, which has commenced (refer to ASX announcements
In addition to GavCo's straw on AVA FY2021 results, the following here compares the final results to the trading update provided on 5 July 2021.
- Revenue of $65m, above the 5 July 2021 forecast of $64.8m, and above the $60-64m guidance provided on 12 May 2021.
- EBITDA of $16m, above the 5 July 2021 forecast of $14.8-15.8m, and above the $13-15m guidance provided on 12 May 2021.
- Net cash of $17.3m and no debt, above the 5 July 2021 forecast of $17m and no debt.
AVA Risk Group reported FY2021 results:
• Revenue increased by 41% to $65.0m
• EBITDA improved by 116% to $16.0m ($8.3 million from FTT and BQT technology)
• NPAT improved by 178% to $13.7m
• Net operating cash flow increased by 195% to $17.6m
• Cash as at 30 June 2021 of $17.3m with no debt and divestment of Ava Global Logistics for ~A$42.4m in Oct 2021
Following up on Ricks post below regarding AVA Risk Group divesting its services division.
The services division is why the company is valued with low multiples in the market.
They seem to be on the right track to creating a more lean and tech-centric business.
Although, the services division generates a huge chunk of revenue for AVA; 18m but this only translates to a 3.8m EBITDA. We expect revenue to decrease in the upcoming year which would make the company look unatractive at first glance.
PE for 1H21 is ~6.8x (includes service division)
Estimated PE for FY21 would be ~12-14x (excluding service division)
Current market cap 104M
For FY2021, 17.2m in cash plus upcoming sale of services division of 42.4m after adjustments.
Bad Half, Good Year:
AVA’s trading update today focuses heavily on PCP and YOY comparatives which look good but hide a very poor Half on Half comparison. None the less they have landed very close to the forecast in my valuation and without further information on a likely sale value of the Service Division, I will leave my valuation as is for the moment but would like to shout out @Rapstar for his valuation thoughts which are quite sound. Any variance to my IV is about future growth potential which is guess work.
Update Key Points: (unable to attach announcement due to file size…)
· FY21 Sales $64.8m (+41% YOY), EBITDA ~$15.3m (+107% YOY), EBITDA Margin ~23.5% (+46% YOY), 17m cash and no debit.
· Tech Division (FFT + BQT) $24.7m (+17% YOY), but this means that Q2 revenue was $8.0m Vs Q1 revenue of $16.7m (-52.5%). $5.8m in Backlog and Delays were cited, of which if added still leaves H2 sales down 17% on H1. FY22 success will be based on the up and coming Aura-IQ system revenues which is going through proof of value programs. $50m of sales pipeline over 3 years is expected to start contributing in FY22… We will see.
· AVA Global Logistics Division (Service Division) $40.1m (+60% YOY), Q2 revenues of $21.7m Vs $18.4m in Q1 show QoQ growth of +15.7% and save the year. However this is the division that is up for sale and management incentives to sell (about 1/3 of the net proceeds) it have been extended until 30 June 2022. After management incentives and cost of sale AVA will probably realised around $30m for this division or about 1/3 of current market value.
· Cash position of 17m is an increase of 4m on the end of H1 which shows the business remains FCF positive but again H2 generated about half the FCF than H1.
The bull case remains that they get a good price for the Service Division, Aura-IQ system revenue takes off and grows strongly and they are able to replicate the IMoD licence fee revenues to some extent going forward.
The bear case is mostly that the bull assumptions don’t happen, which means AVA’s Tech Division becomes competitively week and fails to grow.
The market likes the news (+12% as I write), but an update is always welcome and AVA may have been beaten down a bit with tax loss selling… I continue to hold
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.
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
$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:
Disc; I hold....
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:
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:
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?
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
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
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.
INVESTOR PRESENTATION INCLUDES PRELIMINARY H1 FY2021
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
DISC: I hold in strawman and TRW
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.
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:
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.
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 $50-70 M in captial returned........18- 26 cents per share.
Management are hoping for sale by June 30, 2021, as per DMX September monthly report.
If anyone wants to find out why AVA is trending down, one of the subs is selling heavily
They are a little known company in Dubai called "Alkasab United Company"
I couldnt' really find much about this company though.
I hold but the selling by the substantial holder is getting me a bit worried. I did top up recently around 0.53.
30-Oct-2020: IMOD Project Update
Indian MOD Data Network Protection Project Update
Ava Risk Group Limited (ASX: AVA) (Ava Group or Company) today provides the following market update and clarifications with respect to the large-scale supply of FFT’s SecureLink technology to protect data communications cables for the Indian Ministry of Defence (IMOD):
Q1 FY2021 (unaudited):
Historical A$ 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.
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)
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.
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.
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.
•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.
•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