My valuation has dropped ($0.17 from $0.23) principally from pushing out growth by a year due to the impact on the real estate market in the US from rates continuing to remain high offset in part by trimming operating costs due to restructuring to a lower cost base.

Observations on YTD key events/issues:

·        Management Change: CEO out the door in Feb24 after 5.5 years and a new US based CEO has just joined (Apr24) with a prop tech background. LTI details are pending but equity is expected, but insiders already have 36% of shares so shareholder alignment is solid. Part of a company reset to focus on US growth and capital efficiency – sounds great, lets see if they walk the talk.

·        Cash: With $3.2m cash at the end of Q3, YTD -$3.3m FCF but Q3 was -$794k and included $392k of redundancy costs. I expect them to be at or better than break even FCF in Q4 excluding any additional redundancy costs due to reduced costs and Q4 being the strongest cash inflow month. The company is at a FCF tipping point, but Q1 FY25 will probably be negative FCF even with increased sales, because Q1 has $600-700k of additional admin costs from seasonal factors which happens each year. Beyond that FY25 should be FCF positive, probably not by much but the adjusted cost structure and very modest income growth the current cash balance should be adequate. Not ruling out a capital raise and would even expect it if there is an opportunistic price spike, but looks like they can get buy without it.

·        Market: The big issue for RMY is interest rates in the US, due to the fixed interest rate nature of the market, homeowners on low fixed interest rates are trapped in their current house because to move to a new house would result in changing to much higher current interest rates. Hence, no one is moving unless they have to and the property sale market is down 19% YoY, which is nominally a 19% revenue drop for real estate agents – no surprises RMY is challenged growing in the US currently. If rates remain unchanged then it will gradually improve, but it will take several years to dilute meaningfully and probably close to a decade to fully wash through as a lag factor.

·        Q3 Sales: Q3 sales were down from the prior quarter, the amount was not stated, but the graph shows it to be subscription revenue in the US and by deduction promotions in ANZ. Seasonality makes sense as a key factor but interest rates are headwinds that are making any type of growth difficult. The stalling in growth has forced a strategic rethink in the company which is very welcomed, with leadership changes now done it will likely take the rest of CY24 to implement, by which time they may be heading into more favourable interest rates environments.

·        Growth Opportunity: The half year shows the situation, 9% growth YoY was almost entirely US driven (+34%), with a little NZ contribution (+11%) and next to nothing from AU (+2%). AU is relatively mature/exploited, NZ is a few years behind but small so offers limited overall growth, US is the growth opportunity and what can take RMY from a marginal business to a cash machine. There is a $310m opportunity if RMY can penetrate and monetise the US at the same rate as they do in Australia – but can they? It’s not an apples to apples comp.

Investment Thesis Notes:

·        Can RMY exploit that $310m US opportunity they think they have given differences in the market and competition compared to AU? Key element of thesis to monitor.

·        Leadership is switching to the US, the growth is showing in the US but in the face of high interest rates causing a very challenging real estate market.

·        Recuring subscription fees have been and continue to be the majority of revenue (75%) under pinning cash flows, but as the real estate market improves in the US, I expect to see promoter revenue increase faster, having been held back over the last couple of years.

·        The company looks stable with enough cash to grow, but until it can break out on a profit and FCF basis on a sustained quarterly basis and the new CEO proves himself, the market is going to remain sceptical.

I think holding my small position at the current price is fine, but the risk/return pay off is too uncertain to add more.

Disc: I own RL

Growth remains evident (6% QoQ, 17% YoY), but understandably impacted by market conditions and likely to continue to be hamstrung, BUT: Davey went on to say, “We have experienced a number of cash flow positive months and are on track to becoming cash flow positive on a consistent basis.”

I see this as believable given cash operating costs have remained relatively stable over the last year and if customer receipts hold up or grow the currently -A$465k FCF for Q3 could well become neutral or even positive. Which would be fine with A$6.8m cash on hand to protect the business from temporary cash issues.

Valuation (A$0.21-0.33): Base case

The AU and NZ business are reaching maturity with growth dropping to single digits it’s the US business that is scaling from a low base that will provide a double-digit growth opportunity for several more years. I have curbed my sales growth expectations from a year and a half ago (and valuation down from $1.01) given the obvious change in market and economic expectations since, but still retain an expectation of growth driven by the US and opportunity presented.

Cost control (growing at half the rate of sales) and improved margins from a higher proportion of subscription revenue are assumed with operating break even by FY25 may be justified by the above expectations of cash flow positive on a consistent basis. If it can reach a disciplined balance of pursuing growth and controlling operating spend we may have a good business in a few years.

The valuation range is EPS in FY28 discounted as the lower value and DCF the higher. It’s a base case with plenty of up and downside opportunity to get back to my $1 valuation or down to Zero.

Disc: I own – only a small holding, willing to let it run but not willing to add to it at this time.

This is the first time I have looked in detail at RMA Global (RMY) who operates the Rate My Agent website, and I have taken a small position because as I outline below, it looks promising.

The business: RMY is the leading online digital marketing business for residential real estate agents in Australia and New Zealand with a fast-growing US market position.  Transaction data and reviews can be used by agents to build their profile to market themselves, or by vendors to compare agents and find an agent to sell their property. The product offering also allows for the rating of agencies on leased properties as well as mortgage brokers.

Revenue: It’s primary revenue stream is agent Subscription (69%) which gives the agent a prominent profile and access to marketing products and services.  In addition, Promoter revenue (28%) comes from enabling agents to promote their digital profiles through various third-party platforms (Google, Facebook, Instagram, etc).  The company classes both of these as recurring revenues, which I can accept for subscriptions but is a bit of a stretch for the promoter revenue. 

Margins: Subscripts are 100% margin, because there are no direct costs allocated at this stage but even if some was it would be 90%+ so very good.  The Promoter revenue is around 40% margin, so less attractive but an important value add service for agents and growing quickly.

Growth: Following a flat FY20, revenue grew 52% in FY21 with the AU market up 22% for subscription and 144% for promoter revenue.  Added to this was NZ +185% and US +489% revenue off very low bases.  The key metric to track is what they call “Claimed Agent Profiles”, all agents get a profile but it’s only when they “claim” them that they can become a paying customer and may then take up a subscription or participate in promoter activity.  US Claimed Agent Profiles grew 121% to 125.8k.  Customer reviews are also an important measure of engagement and value, these were up 344% to 132.8k in the US with a solid 60%+ of customers providing reviews when prompted.

US Market: RMY is doing well in ANZ but it’s hitting growth limits and needs US growth to get to scale and become profitable and cash generating.  However, the US market is different to ANZ in many ways so the go to market is different and Mark Armstrong (Co-founder) stepped down as CEO to focus on the US strategic growth which involves engagement of key Multiple Listing Services (MLS) and Brokerage partnerships which cover most agents in the US.  Traction appears to be occurring and dwarfs the ANZ market – see the chart at the bottom of the attached valuation.

Risks: The cash position is solid with over 1 years cash burn available, but expect additional capital raisings and for it to remain FCF negative for several more years.  Beyond the normal risks with a business like this is the issue of REA and similar going head to head with RMY, could this become a feature product?  Possible, also possible that someone like REA buys out RMY especially if they gain a significant foothold in the US

Valuation: The IV of $1.01 in the attached DCF is a bull case based on the following assumptions:

·         Revenue: Solid ANZ growth, doubling FY21 by 2025, 3.5x by 2030.  With 73% of active agents claimed the growth will mainly be via expanded use and services. The real drive is US growth with only around 10% of the 1.3m agents claimed to date.  I expect it will represent 50% of revenue by 2024 and 85% by 2030 as US market penetration increases to 60%.  In total sales reach 20x the FY21 sales by 2030, taking into account market penetration and product expansion such as Mortgage broking which has already started.

·         Margins: I assume they stay around the low 80% mark due to product mix between subscription and promoter, but opportunity exists to lift margins with scale.

·         EBITDA, NPAT and FCF positive by 2025 on the assumption that operating costs grow at half the rate of sales.

·         Sharecount: Allowing for a 10% increase in FY22 for a capital raise then 1% each year for ESOPs, note that share based compensation is small and the board own 44% of the company so its in their interest to be anti-dilutionary and move to profitability.

Summary: I see this business at a key turning point as it grows it’s US presence, this should see the parabolic growth in the US start to dominate and accelerate total company growth.  The market is yet to recognise this due to it being hidden by the more mature slow growing Australian business.  The company is strongly motivated to drive US growth and address competition with the board holding 44% of the company and the two co-founders still very active.  I class my valuation as a probable bull case, the base case is probably around current market value and not worth the risk adjusted return