Given the price action of the past month I needed to update my valuation. My conclusion is that the price drop has gone way too far with a downside valuation of $0.76 updating my base case valuation of $2.70 done in March.

Compared to previous valuations this is a Bear view, but others may see it as a low-end Base view (take it as you like and DYOR). While I concerned with some recent updates, the optionality and scope of application of DTC’s product range across different industries and globally provides sufficient opportunity for this to remain a favorably asymmetric bet.

Significant adjustments made:

·       Sales growth pulled back, sales by 2030 about half previous forecast

·       Margins improved, creeping up 1% a year to reflect continued software and SAAS growth, this flowed into better EBITDA%

·       Terminal value multiple dropped from 20 to 10 time EV/EBITDA is the most significant impact and reflects lower long term growth assumptions and higher risk.

Announcement: DAMSTRA SIGNS CONTRACT VARIATION WITH CPB CONTRACTORS

This just adds $550k pa (ARR +$550k) revenue to an existing customer (CPB Contractors, part of CIMIC) through to 2024...

Not sure why this is price sensitive info, adds 2% to revenue. Smells like desperation!

Disc: I own DTC (RL + SM)

Guidance downgrade in AGM today: ouch...

Damstra has delivered a very strong Q4 (attached) and as Chagsy points out this is in contrast with a week H1 and ok Q3 which has seen the share price come off significantly.  This has restored my faith in the company as I now expect it to exceed my FY21 forecast and underpin my current valuation of $2.70 which I will update once we get the annual report.

Q4 & FY Key Take Away:

·         Revenue: $9.1m for Q4 (+32% QoQ, +75% PCP), giving a FY of $32m (+55% YoY) is exceptional, driven by User growth (7% QoQ, +76% YoY) and Client growth (+7% QoQ, +13% YoY if you exclude Vault acquisition, +122% if included).

·         ARR: Now at $35m (+6% QoQ, +65% YoY) with 85% of revenue recuring which is down -2% YoY and down -7% QoQ, I expect the jump in total revenue in Q3 was in the Hardware and Implementation areas from new customers, so the %ARR will lift going forward as Licence fees come online.  We will find out when the annual report is released.

·         Gross Profit: 78.4% for Q4 (-7.1% QoQ but +7% PCP), as per ARR I think this is due to higher Hardware and Implementation revenue which is lower margin but necessary to tap into long term, high margin Licence fees.  Full Year margin of 78.4% is up 10% from 68.4% last year, which validates the business model and high operating leverage it can achieve as it onboards customers and increases its proportion of Licence Fee ARR.

·         EBITDA: $2.0m or 30% for Q4 is not a level I expected them to get to until 2024 and testament to the successful integration of Vault with $6.2m in synergies.  It looks like full year EBITDA is going to be $5.7m or 17.9%, a hell of an improvement on FY20 $1.1m and 4.6%. 

·         Cash & FCF: Cash receipts of $10m are up 39% QoQ, Operating cash flow of +$513k is good but continued IP investment leaves FCF negative at -1,019k.  They have drawn down 12m on the loan facility so have $9.8m cash on hand, but net cash is negative -$2.2m.  The takeaway is they have a good cash run way to grow to positive FCF and are spending to grow and develop products such as Damstra Digital Forms and Damstra Solo products.

·         Outlook: there is a pipeline of large UK and North American customer additions in the offering and a contract extension with the NBN (worth about $1m per year for 7 yrs).  Also, several partner wins including achieved Partner status with Amazon Web Services (AWS).

Up 18% as I write this to 0.94 and now at my average buy price (RL) it seems the market liked the announcement as well.  I had been a little concerned about how the business was going over the last 6 months, but my fears have been wiped away by this update and I look forward to continuing to hold DTC long term, seeing it break into the UK and US markets is the critical next step

DTC has just announced (can't attach for some reason!!!) the refinancing of it’s $20m 2 year facility with Westpac which was only announced in April with “Partners for Growth VI, L.P. (PFG), a well-known San Francisco Bay Area-headquartered specialist provider of growth funding solutions to technology companies”.

The first tranche will be to pay off the $3.7m currently drawn down from the Westpac facility at a fixed rate of 7.85% (3 yr) which is higher than the Westpac rate of 6.5% (2 yr).  In addition PFG will get Warrants to buy shares at various exercise prices shown below.  One set on the initial tranche draw down then next on a second and final tranche.

The Warrants have a weighted average exercise price of $1.22 with a 7 year duration which requires a 5.6% compound growth in share price from yesterdays closing price of $0.83 to be in the money.  Not a particularly demanding hurdle, but the market likes it has given the first years required growth of 6% to the share price today…

Total dilution is less than 1% at 1,603,884 ordinary shares covered by the warrants on 186m shares currently on market.

The debt is more expensive, but longer in duration and probably better placed with PFG than Westpac in terms of having a debt provider that is aligned to a growth business, so pro’s and con’s leaves me neutral on this announcement with little to no change in my valuation of the company.

Warrants Issued: Expire 30/6/28

2 x 34,564 shares at $1.05

2 x 31,905 shares at $1.14

2 x 59,252 shares at $1.23

2 x 73736 shares at $1.32

I own and continue to hold DTC

Strong update today (27/4/21) from Damstra (full detail attached), YOY growth for the quarter includes a lot of inorganic growth from the Vault acquisition, but still very strong and on track in terms of organic growth.  My key takeaways from the activities report and investor presentation are:

·         Growth back on track, both customer numbers and sales growth are solid.

·         Gross Margins at 81% is very impressive, above what I have valued for.

·         Vault integration successful, synergies $6m Vs $4m anticipated at acquisition.

·         FCF still negative, but introduction of $20m debt facility provides a long cash runway as they focus on growth.

·         Growth focus is very welcomed, as is the moved to ARR reporting.  I hope they will look at LTV soon, which should be very high based on ultra low churn and high margins.  This also will provide a justification for investment in growth.

·         Development of Enterprise Protection Platform (EPP) last quarter provides a strong customer proposition to sell the vast array of functions and products Damstra offers.

·         US market growth strategy is focused and calculated.  This is critical to long term growth and upside share price value, if done well this is a 10x opportunity.

·         Outlook: Damstra is now forecasting for FY21, revenue of between $28.5 - $30.5m.

“The Company is focused on executing its long-term growth strategy and continuing to develop its EPP platform, while continuing client acquisition and converting opportunities in South East Asia and North America.”

I will continue to hold DTC and see my last valuation as potentially a little light, but will not update until full year results are available.  I am most interested in seeing traction in the US market but also ROW growth is important, leadership is looking solid so far on this, so just a case of watching and waiting.

Updating my valuation for the H1 FY21 result and also with a format change and methodology enhancements incorporating learnings from Aswath Damodran’s (check it out: (43) Session 1: Introduction to Valuation - YouTube).

H1 FY21 results had higher operating cost base than I was expecting with the Vault acquisition.  I expect this to improve and be compensated by faster top line growth as customer acquisition improves post Covid and the benefits of Damstras products and services have more relevance in a post Covid world.

The valuation has increased from $2.21 to $2.70, the principal driver of the change is extending the growth out to 2030 from 2027 previously which increased the PV of the terminal value.  My view of the company’s future is little changed, I see a lot of opportunity.