Claude Walker's take on Nearmap's results here
I tend to agree with most of this.
When looking at the bear arguments, the issue of outright accounting fraud isn't one i give a high probability to. So i'm going to assume the reported numbers are accurate.
Bear's say NEA is guilty of capitalising way too much capture and development costs to the balance sheet, and being pretty optimistic with amortisation rates. That was definitely true at one stage.
But after agitation from shareholders this policy has been greatly improved. Although, I admit that it could still be a lot better.
Practically, i think it just means that it's sensible to heavily discount the true value of intangibles on the balance sheet, and to increase the true operating costs of the business when making an assement. And given the reported growth and increasing margins, these costs are more comfortable.
Overall, I thought the response to the short attack was reasonable.
At a point, unless you have real first-hand experience with NEA's offering and that of its competitors, it's a bit of 'he said, she said' in terms of product strength and market fit.
But the very decent rate of ACV growth, especially in North America, certainly offers a lot of solace.
I tend to remain favourably disposed towards Nearmap, but as you'll see on my valuation I dont think it's any great bargain.
NEARMAP RESPONDS TO ERRONEOUS SHORT SELLER REPORT
Nearmap Ltd (NEA:ASX) is aware of a recent report by short-seller firmJ Capital Research Limited (“the Report”). The Report contains many inaccurate statements and makes unsubstantiated allegations of a very serious nature.
The Report was created without prior consultation or discussion withNearmap and follows a pattern of overseas domiciled funds making speculative claimsin order to generate uncertainty through adverse publicity and directly profit fromsuch claims. Nearmap has reviewed and rejects the Report.
The consistency and fullness of Nearmap’s market disclosures ensures market participants have a great deal of information against which to assess the merit, or lack thereof, of claims such as those in the Report. Nearmap is in compliance with its continuous disclosure obligations and the Company remains highly confident and committed to its long-term strategy and outlook.
Nearmap does not wish to engage in detail with each individual erroneous, self-serving and unsubstantiated opinion contained within the Report and therefore will only focus on addressing the Report’s key factual misstatements(“False Claims”)
Nearmap Ltd (NEA:ASX) is aware of a recent report by short-seller firmJ Capital Research Limited (“the Report”). The Report contains many inaccurate statements and makes unsubstantiated allegations of a very serious nature. The Report was created without prior consultation or discussion withNearmap and follows a pattern of overseas domiciled funds making speculative claimsin order to generate uncertainty through adverse publicity and directly profit fromsuch claims. Nearmap has reviewed and rejects the Report. The consistency and fullness of Nearmap’s market disclosures ensures market participants have a great deal of information against which to assess the merit, or lack thereof, of claims such as those in the Report. Nearmap is in compliance with its continuous disclosure obligations and the Company remains highly confident and committed to its long-term strategy and outlook. Nearmap does not wish to engage in detail with each individual erroneous, self-serving and unsubstantiated opinion contained within the Report and therefore will only focus on addressing the Report’s key factual misstatements(“False Claims”)
Nearmap Ltd (NEA:ASX) is aware of a report published yesterday which commented on aspects of the Group’s performance.
Nearmap will provide a response to this report on Monday, 15 February 2021. As such, Nearmap will also bring forward its 1H FY21 result to Monday, 15 February 2021 (from Wednesday, 17 February 2021 as previously announced) and will hold a result briefing at 09:30 AEDT.
Participants wishing to attend the briefing will need to pre-register at the webcast link below
Webcast link: https://event.webcasts.com/starthere.jsp?ei=1421321&tp_key=7ad9530070
The report is quite scathing. I've been a long time, and at times frustrated invesor, and was waiting for this weeks report to decide whether or not to hold or exit this holding. The share price is going to be smashed when it comes out of the trading halt. NEA will scramble to make this sound better. Their results better be strong to overcome a report of this nature. I hold shares in SEK and it was scalded by a shorters report a short while back, but it replied to the charges and since then has seen it's shares rise from $20-$30. Fingers crossed, but I've been concerned with company for a while now. I'm not feeling positive. Fingers crossed is not a good investment strategy.
Trading Halted til Mon 15th Feb
The Trading Halt is requested in connection to a report released by J Capital Research USA LLC (Report)
Heads up to Rapstar for posting "The Report"
JCAp Short report is here. You have to click not Australian resident to see it.
Report claims include these:
1) Nearmap technology inferior to Eagleview (spookfish tech), resulting in higher imagery costs.
2) Eagleview has 44% of US market share vs Nearmap's 5% and lack scale to compete.
3) Former chairman selling 50% of shares over last 12 months.
Nearmap is a leading player in a fast growing industry, with some meaningful competitive advantages in historic data sets, capture efficiency and analytics.
Revenue has been growing at ~27% in recent years, aided by a successful push into the US market. And there's a long way to run here.
That being said, the business is still loss making having ramped up costs to accelerate growth. Something that has taken another step change with a recent capital raise.
Personally, I think they capitalise too many costs (although have recently accelerated the amortisation of capture costs from 5 to 2 years), and think investors are better off focusing on NPAT as opposed to EBITDA.
Nevertheless, the business is now very well capitalised (will have >$100m post raise) and has an attractive model. Provided NEA can eventually stablisise costs and unlock some operating leverage, while maintaining strong top line growth, i think there's a good long term opportunity here -- although i'd hardly call shares cheap.
Capital raising - 10 September 2020
The stated purposes are the usual accelerating growth. Of particular note is the rollout of HyperCamera3 which allows higher & faster flying meaning increased coverage, in their words "geographical expansion". Unclear if they are teasing new geographies, or if they mean simply greater coverage around their existing territories.
Overall I'm comfortable with this raise, mostly based on my history with Rob.
In context, they raised $20m @ 70c in late 2016, $70m @ $1.60 in late 2018, and now $2.77.
They have been clear and consistent in their stated use of funds, ramping up sales & marketing each time and allowing STCR to get back to 100% before going some more. I think that's as prudent as you can get -- basically apply more capital for as long as you can keep accelerating growth.
The one blip in their track record was December 2019/January 2020 period when they had the 3 big churn events in the US, and also increased churn in AU. There wasn't a lot they could have done about the US and I believe they've addressed the AU (loss of focus) issue.
As with previous raises, some smaller shareholders are frustrated that no prior indication was given of an upcoming raise. In particular the business was on track to running to "proper" cashflow breakeven and many interpreted that as "no need to raise capital". But as explained above with the STCR, if you can apply capital to accelerate growth, and the TAM is huge, you should do it.
This same pattern occurred in the 2018 raise. The business had pretty much reached cashflow breakeven and they tried to point that out in the halves following the raise by splitting out costs pre-raise vs the increase in costs post-raise used to accelerate growth.
I understand the frustration of a lot of shareholders because new funds are always being applied so it's never been possible to compare like for like and see that the business has been or is clearly profitable. Superficially it looks like costs keep growing and therefore the business may never actually reach profitability, necessitating perpetual capital raises, when (at least in my mind) the reality is the other way.
Capital Raising to keep the business going WOW what a suprise here. hence I now got myself 2 share accounts (wife and I) for such SSP like NEA and APT every year.
Nearmap is raising $70m through an institutional raise, and up to a further $20m through a shareholder purchase plan (SPP).
This will involve the issue of at least 26m new shares, or 33m if the SPP is fully subscribed. That's a ~7% increase to the total share count.
The reason is to "accelerate growth opportunities" which basically means increased Sales & Marketing (especially in North America) and development costs. With a minimum of $105m in cash post-raise, NEA also said the raise will give them a lot of strategic "opportunities in a dynamic market", which I assume means potential acquisitions.
It's worth noting that Nearmap capitalises a lot of development and capture costs, and last year reported negative $37m in free cash flow. That's a deterioration from the previous year due to a 47% lift in operating expenses. So although it wasnt highlighted in the announcement, i dare say a good portion of the capital will be used for working capital.
To wit, Nearmap said the cash balance at the end of FY21 is expected to be between $32-35m. Put another way, the total value of the institutional raise will be spent in less than a year.
As always, whether this is a good or bad move depends on the Return on Investment (ROI) they can get on this capital. The business has achieved 27% compound annual growth in Annualised Contract Value (ACV) in the past couple of years, and US subscription revenue is already twice what it was in Australia & New Zealand at the same stage of maturity. There's defeinitly very solid sales momentum, and the market opportunity is large and growing. Nearmap appears to be very well placed competitively.
I like the tech and the offering and think top line growth will remain strong for a good while yet. But although the scalability of the business model has been touted for many years, we're yet to really see that realised in the financials due to an ever growing cost base. Granted, these increased costs have helped underpin very solid top-line growth, but at some stage -- hopefully sooner rather than later -- we really need to see expenses stablise and the operational leverage of the business unlocked. At the very least, it'd be good to see them move much closer to a positive free cash flow position.
It's also worth noting that a good deal of growth is already assumed by the market. Based on the raise price of $2.69, the company is valued at $1.3 Billion -- over 12x the ACV.
Still a bit too rich for me.
[disc. I don't hold on Strawman, but have a small parcel in my real portfolio that was purchased in 2015 and mostly sold down in 2019]
Details of the raise here.