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Capital Raise In October, DUG successfully completed an institutional placement to raise approximately A$30.0 million3 , at A$1.90 per share, which represents a 12.8% discount to the prevailing share price4 . We were delighted that the placement was strongly supported by both existing shareholders and new investors. The capital raised will be used to accelerate DUG’s growth across three key growth opportunities: o Data centre infrastructure for Elastic MP-FWI Imaging projects.
The capital raising knocked the wind out of DUG!!!
Return (inc div) 1yr: 3.83% 3yr: 33.42% pa 5yr: N/A
Red flag for me. Current CFO is leaving after only joining DUG in November and taking over the role in December. See previous revolving door post for more info.
There have now been a number of outsider CFOs that have come into the business and then left relatively quickly. The last CFO had a "long" tenure of around 2 years by DUG standards. "Insider" and previously long term CFO, Louise Bower still remains on the board. There is obviously something wrong within this area of the business that is causing the outsider CFOs to quit.
The wording of the announcement was "mutually agreed to part ways on 29/8". All happened very quickly by the sounds of it... Right after results as well...
The temporary new CFO is Daniel Lamont. While no relationship to founder Mathew Lamont is clear from the announcement, would be more than a coincidence if they are related... Not a great look on top of the CFO revolving door.
While I only just sold out of DUG so have no current position, this was a red flag sell condition that I had as part of my thesis.
Overview Comment:
Sold out on results. While the numbers present as a great FY24. I believe DUG is overvalued and showing some signs that the revenue growth of the past year is slowing down. Off to the sidelines to see how this plays out over the 6-12 months. Will be more than happy to jump back in. I think the key to further growth will be the ability to sign large Middle Eastern client's, which the CEO admitted they haven't worked out how to win these contracts yet.
General notes:
Positives:
Negatives:
Has the thesis been broken?
Valuation:
Unchanged at 20X FCF of $10m USD. Approximately $2.50 a share.
What are you expecting and what do you need to see over the next reporting season or generally into the future?
Note: All amounts in USD unless specified.
DUG chart:
What generation is AMD Genoa?
AMD 4th Generation EPYC™ Processor Platform (Genoa) AMD's “Genoa” microarchitecture is the first to support DDR5 for servers and features world-class performance while being energy efficient to meet the demands of today's data centers.
DUG's announcement today attached, from my earlier post's looks like my thesis is intact, demand for High Performance Computing is strong and their cost base shouldn't rise proportionally with revenue. Good growth is 2 of the 3 business lines with revenue up 39% and EBITDA up 24%. US$5.6M FCF for the quarter isn't bad either, so nice to see the EBITDA translating to cash flow. Having said that I was more impressed with the operational leverage last half (profit rose faster than revenue last quarter which is always preferable). This dip in leverage is explainable. They are still being weighed down by having to hire compute power, so hopefully with the new install done by June this will improve, but maybe not full impact till Q1FY25 from what this announcement says. So I'll be looking for that October update to see if the thesis really remains true. Still has net cash on the balance sheet (c. US$5m), which is always a plus...and management maintain a strong holding, another plus.
Hold IRL and SM.
Director disclosed ~90k shares purchased on market yesterday.
That is a significant purchase and I note that previous announcements have disclosed that they expect to finalize the installation of new compute in April.
good signals
Overview Comment:
Cash from operations looks good while profitability down. Extra costs throughout the half due to the ordering of new compute and cost of 3rd party compute appear to be temporary issues. Revenues and order book continue to grow as expected so the growth narrative is still there.
General notes:
Positives:
Negatives:
Has the thesis been broken?
Valuation:
What are you expecting and what do you need to see over the next reporting season or generally into the future?
Note: USD used for all figures except share price.
Very very rough numbers..
FY23 NPAT of $4.9m from $50.9m revenue (Note these are in USD). So assuming around 10% net margins in the long term.
Q1FY24 update was an increase of revenue of 15%. If we assume this long term for 5 years then NPAT in FY28 will be around $10m USD or around $15m AUD (based on current exchange rates).
Assuming a terminal PE of 30x and SOI of around 120m gives us an FY28 share price of around $3.75. Discounting this back 10% pa gives a valuation of $2.32.
Again, these are very rough numbers for a company which has just past its inflection point in profitability. Also a company which is quite hard to read in what it actually does.. From what I understand, they process large data sets using their supercomputers.
Disc: Not held.
Could someone with more time than I have available at the moment have a go at a valuation?
Lots of positive things one can deduce from this announcement!
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02768862-6A1192491
note: Hold IRL
Alot of selling occuring in DUG over the past 3-4 days.
Wilsons (WMI). Who had listed themselves as a significant shareholder since values of ~$1.50-60. They have sold down and are no longer a significant shareholder. They have also listed DUG as a top 20 holding over the same period, which probably equates to about a 5% position for them, at a minimum.
Sheila Lamont, who is the spouse of the founder and MD has sold off 2.5m shares. Together they still hold a significant # of >21m shares. By my calculations they together still own around 20% of the company.
However. This has seen some significant downside to the share price, falling ~20%.
So the question is..... Is now a good time to buy
Trading notes after AGM.
Image from presentation of "DUG Nomad":
General notes:
Positives:
Negatives:
Has the thesis been broken?
What are you expecting and what do you need to see over the next reporting season or generally into the future?
Note: All figures in USD.
Been watching DUG for a while and started a position IRL this week.
By Bull/Bear case below:
Positives
In an interesting niche, assisting mainly Oil & Gas companies to examine propects, using data analytics on large data sets.
Just coming into profitability in FY23, on the back of really strong revenue growth, particularly in the US.
If (and it's an if) trajectory continues the PE at 23 does not seem particularly high.
Nice operating leverage - employee and operating expenses only up about 10 to 12% in FY23 on 50% higher revenue - obviously hoping they can continue with that ratio!
Minimal debt and starting to get to good ROI, cash flow was strong.
Negatives, things to watch
Stability for CFO, looks like there's been quite a few through there in last 2 years - would be looking for that to not change again anytime soon.
Was this year's revenue recurring or one off - looks to be spread across multiple contracts at least which is encouraging, but hard to tell on my skim of the annual report.
Long term, will there continue to be demand for the core product? - not sure, but they are looking to take their skills into other areas.
Overall, the positives and valuation got me across the line, that and High Performance Computing is an area I've been working with recently and I believe there's some very interesting applications to come (particularly in the Quantum space). The SP is up 100% over the course of this year, but still more to go IMO.
Rich
Again, another CFO gone. This time they held the role for just under two years. While this is a yellow flag given DUG's history of being unable to maintain someone long term in the role, this appears to be an orderly transition with the new CFO starting on 6th November and current CFO leaving at the end of the year. This announcement was made on 2nd October for reference to the dates above.
Aug 23 - $2.42
Very rough upper valuation to ensure I am not overpaying. I think it is possible of DUG achieving a FCF of $10m (USD) this FY. With the potential for growth, I think a 20x multiple is still reasonable at the top end to find the upper end of valuation. Also going to assume AUD to USD of 70c.
Therefore, upper valuation of $2.42 per share (AUD).
Feb 23 - $1.20
Very rough valuation using 20x a FY24 FCF of $5mil (USD). This assumes some growth in revenue and profitability as a result of operating leverage from the growth in revenue.
Overview Comment:
Very positive results for DUG. Order book is looking very strong already for FY24 so hopefully results can continue to improve from here. Seems like a step change has occurred driven by oil and gas exploration.
General notes:
Positives:
Negatives:
Has the thesis been broken?
What are you expecting and what do you need to see over the next reporting season or generally into the future?
NOTE: All values in USD unless otherwise specified.
Value proposition quotes in company presentation:
Expectations:
Questions to be Answered:
Note all values in USD unless specified otherwise.
Notes below are reference this announcement
Summary
DUG announced on 18/7/23 that they will receive $5mil AUD worth of grant funding from the WA state government. The funding from the "Investment Attraction Fund" will be used by DUG to build its first data hall at DUG's Geraldton High Performance Computing Campus. The funds will be dispersed as milestones are achieved. A lease has been signed for the 44.5-hectare site which will include space for onsite sustainable energy solutions.
Data Centre Size
The first data hall will have a capacity of 400 petaflops of compute, enabling 13x growth in DUGs compute power once fully established. This will make it one of the largest super computers in the world. The campus could accommodate ten data halls with a potential 4 exaflop capacity. The latency from Geraldton to Perth is only 3ms so the location isn't an issue.
Other Funding
The company will fund the remain cost of the build through operating cash flows.
My Comments
Announcement below... Another recently highly charged tech stock with pretty significant exposure to SVB. I will expect this craters pretty hard on opening.
Buying back into DUG with a small starting position as a result of recent turnaround in the momentum.
Main Thesis:
A HPCaaS provider that has carved out a niche. The PUE of its computers if very low which allows them to be competitive on cost. On top of the efficiency of their HPCs they run, they provide services on top to allow companies to gain the insights they require from raw data without requiring the know-how of the ins and outs of HPC.
Recent years have been poor for DUG, however, fortunes seem to be turning with increases in revenue that I believe will provide a point of operating leverage for the company to become sustainably profitable, especially after the cost cutting in recent years. There have been multiple recent announcements stating new/improving revenues and increased profitability. The balance sheet is in a much better position. Tailwinds of the oil and gas industry exploration and new FWI imaging will help improve revenues further.
Risks:
Definitely a company to watch closely while holding to make sure recent momentum continues. Will also have a personal stop loss level as a soft check point as to whether the momentum I think the company and/or share price has will be maintained.
DUG announced today the extension of CBA term loan facility until 1 July 2024. The facility will be reduced to US$4.5 mil and US$7 mil will be repaid. The working capital facilities of a A$1 mil overdraft and US$1 mil bank guarantee facility will continue. DUG will be able to obtain funding from alternative lenders for purchase of new equipment.
DUG provided some guidance, stating the company expects to be operating cash flow positive over the second half.
Still very much watching from the side lines but this is a positive development in reducing the likelihood of a capital raising being required. While operating cash flow positive I doubt the company will be FCF positive over the half reading between the lines.
DUG has some favourable tailwinds caused by current environment with regards to oil and resource companies. If DUG cannot significantly increase revenues over the next 1-2 years this will be a telling sign of the long-term prospects in my opinion.
General notes from Q3FY22 Quarterly activity and 4C reports (all amounts in USD):
Overall, very happy to be sitting on the sidelines still with DUG for the following reasons:
Burning cash with revenues flat. The current debt is an issue, but I am sure they will be able to refinance a smaller amount by the end of the FY. DUG almost has the required cash to pay off the debt.
The reason to buy DUG shares is because of the potential for growth in the HPCaaS services they offer, with the services business driving underling revenues and profitability. Traction is not yet there and the grand plans for growth won't be implemented with current revenues or profitability issues. The lack of investment currently in the oil and gas industry is impacting DUG significantly as these revenues provided the baseline of revenue for the business to expand on.
Continuing to watch on the sidelines until there is consistent revenue growth and capital structure improvements. DUG needs to become operating cash flow positive to thrive.
Overall comment:
Burning cash and all very negative besides the free option on the hydrogen technology. Another raise will be required if debt cannot be refinanced. HPCaaS needs to really take off or this company is going nowhere, even with the grand plans they have. One to watch from the sidelines until HPCaaS shows significant growth
Summary of Capital Raising Announcement
DUG has announced a capital raising consisting of a $15m institutional placement and up to a $5m share purchase plan for all shareholders. The issue price is $0.90 with approximately 22 million new shares issued if all of the SPP is taken up.
DUG plans to spend the cash on:
Most of the placement shares will be issued on 13th September with the issue of SPP shares and tranche 2 of placement shares on 19th October.
Personal Thoughts on Capital Raising
I expected a capital raising to take place and is the reason I sold DUG. This capital raising is approximately the amount I expected they would need to raise to fund their plans, especially considering the poor 2HFY21 result. While DUG produced a list of items I see the majority of the cash going towards paying of debt, working capital and purchasing equipment. I do think management has timed the raise correctly, waiting would have put them in a position of weakness and DUG appears to have some strong institutional investors who backed the raise. I think the share price will be subdued at under $1 until at least the end of October given the quick free cash available for current holders with an offering price of 90c.
A re-entry into DUG still requires the sales growth to recover after the poor 2HFY21 result. I will need to see at least one set of sales numbers before considering re-entry, more likely two. I will be waiting to confirm the company is actually gaining the traction required to grow and that an additional capital raising will not be required before re-entry is considered.
Overall view: HPCaaS, signings and future looks good but how do they get there? Looks like a gap that needs to be bridged unless revenues suddenly improve, so a capital raising is likely. Due to these risks I will be selling but waiting on the sidelines to reenter when these issues are resolved.
These notes cover FY21 results presentation and preliminary report plus some recent announcements. All amounts in USD.
General Notes
Positives
Negatives
Has the thesis been broken?
Sarngin agree i feel there is much upside with little downside.
Growing market and a product (protected) that has much appeal in the market it operates.
I opened a positin over the past month and will await results examine in more detail the ability of DUG to monetise the technology.
Positives:
Negatives:
General Notes:
Has thesis been broken?
All figures in USD if not stated otherwise.
DUG grows revenue across all segments as it continues transition to Software and HPCaaS
Note all figures are in US$ million unless otherwise stated.
H1 FY21 highlights (vs H1 FY20):
Presentation
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02344223-6A1021302?access_token=83ff96335c2d45a094df02a206a39ff4
DUG Technology enters UK university research sector
Providing Imperial College London with key High Performance Computing infrastructure and expertise
High performance computing technology company DUG Technology Ltd (ASX: DUG) (DUG or the Company) is pleased to announce that it has signed its first ongoing university research sector client in the United Kingdom, providing high-performance computing as a service (HPCaaS ) to Imperial College London.
DUG will initially provide Imperial College London, consistently rated one of the world's ten best universities, with HPCaaS including compute cycles and all-flash storage using DUG McCloud and associated lecturing expertise for its MSc. Advanced Computing postgraduates. As part of the ongoing contract that is now underway, DUG will provide initial lectures on HPC and the DUG HPCaaS set and ongoing HPC support. Students will then complete individual research projects using DUG’s state-of-the art HPC systems.
This new agreement will play a key role in supporting Imperial College’s MSc. Advanced Computing post-graduate students with some of the largest and greenest specialist HPC installations in the world, giving them direct access to world-class HPC facilities and support.
DUG Founder and Managing Director Matt Lamont said: “The DUG McCloud platform infrastructure is perfect for meeting the advanced security and system integrity needs Imperial College requires for its multidisciplinary, collaborative approach to research. DUG McCloud is highly secure, operating on a private cloud with reduced attack surfaces that can only be accessed through heavily firewalled, individually issued Virtual Private Network [VPN] accounts anywhere in the world. Jobs are run on bare metal, rather than virtual machines [VM] meaning jobs run traditionally within an operating system on the hardware directly with a VM emulating the hardware. As such they are engineered to be exceptionally reliable, interchangeable and fault tolerant – perfect for the advanced research faculties of the tertiary sector.”
DUG Technology is a high-performance computing as a service (HPCaaS) company based in Perth. DUG started as a company focused on geoscience processing and related services but is now leveraging their HPC knowledge to provide HPCaaS in the cloud. Most revenues still flow from the scientific expertise within DUG that use HPC to provide the client with the solutions they require.
DUG's HPCaaS is different to many other data centres in that they have a modular system of immersion of the computing power into dielectric fluid rather than using air and fans for cooling. Their modular system design has focussed on removing any losses of power (at all stages) and reducing capital costs to a minimum. The design allows for maximum density of computing power which helps reduce costs. The modular design also saves on costs as it is able to be installed "just in time". If you are interested in the details this video presented by DUG's CTO best explains how DUG's computers waste so little power compared to other data centres: High Performance Computing Conference - Phil Schwan.
What makes them different from the big tech clouds/other supercomputer providers?
Positives:
Negatives/Risks:
When to get out:
Expected outcomes/valuation:
My base thesis for DUG is that I see the potential for massive growth due to the exponential requirement for high performance compute and storage in the modern world to solve problems with greater accuracy. I expect DUG to maintain profitability and be operating cash flow positive during growth. DUG's ability to combine specialist knowledge and efficient HPC systems gives them a niche to work in. I feel confident making an investment knowing that management is heavily invested alongside me and some of Australia's best performing managers are also along for the ride. I like that management has built this business from a shed to an international HPC provider and have done this through reinvesting in the business rather than relying on external capital.
Disclosure: I hold a position and waiting of 1H figures before considering further buying.
Would be very interesting in hearing any other views especially negative through a forum discussion.