Disclosure - Not held IRL, held in SM
As Andrew points out, Spectur have reported a strong result in terms of revenue;
“record with $1.42m in revenue -- a 45% gain from a year ago.” And “For the calendar year, the business did $6.1m in revenue, a 44% lift on CY20”
A breakdown of the revenue by ‘type’ can be seen below, with approximately 57% of revenue being recurring in nature.
The following trendline accentuates the growth of revenues (depicted by cash receipts). This growth been strong, especially when considering the impact that Covid has had on the businesses ability to deploy sales people & sell product.
Keep in mind, Spectur may be marketed as high-tech surveillance but they still need to physically manufacture and drive around and install these camera systems and there is lot of actual labour needed to run the business.
The problem I’ve had with this business in the two years I have followed it – what is the plan to reach self-sustaining commerciality?
We can observe that there seems to be no obviously-defined trend in terms of cash-burn, operating cash flow and free cash flow over the past three years.
On closer inspection I did note some similarities in performance in correspondence to seasonality.
Highlighted in green, the past three free-cash-flow results for the June quarter (Q4) have been there-abouts the best result. My theory is that this trend is caused by tax implications that come to surface at the end of financial year in relation to the depreciation of the camera units Spectur sells.
Given the temporary changes to the tax treatment of depreciation, namely; Instant Asset Writeoff (IAWO), Temporary Full Expensing (TFE) and Business Backing Investment (BBE), it becomes more attractive for businesses to purchase product that can be fully depreciated just a few weeks later after the EOFY.
To support my theory, I spoke with Gerard regarding the June 2021 (JQ21) 4C result and he mentioned that legislation changes to asset write-offs led to a “flurry of sales”, which we can see is the record for both cash receipts and free-cash-flow within a quarter.
The second trend that is noticeable relates to the aforementioned. To support the anticipated splurge in demand, Spectur makes noticeable investment into raw materials (etc) and produce enough supply to meet June-quarter demand. These investments are made in the March quarters and are highlighted in blue.
Given that the temporary changes to tax treatment of depreciation are all still applicable/valid in FY22, I anticipate that my theory will hold to be the case again in the coming two quarters.
As a result, I anticipate that the March quarter will be weak in terms of financial performance due to seasonal investment being made to support demand towards the end of the June quarter. The share price may well fall further off as well, presenting an adequate buying opportunity to those that believe June quarter 2022 will be the strongest result yet.
In saying all of the above, the ‘trends’ I have spoken about may not really be trends at all and just random alignments of dates and financial results. We are yet to see & hear this confirmed by management.
To link back to my original point, the business is not adequately on a path to financial self-sustainability and then comes the hole in the ground; funding.
At 31 December, the business had $1.018m in cash and $1.1m in debt funding available through the EGP facility. $400k of the debt was drawn in the last quarter. It’s worth noting that the debt is relatively cheap for a business of this risk; 7% p.a on the $1.5m and a 3% line fee. (all up the cost of servicing the debt assuming it is fully drawn-down is $150,000, I believe). There is also the cost of dilution through the 2.25m in options that were issued to EGP, however these options are exercisable at 0.12 and thus their fair value would be low considering the probability of them becoming in-the-money.
For a manufacturing business that has a high demand for upfront capital to produce units, the funding situation is of major concern to me. Based on the large downswings in free-cash-flow performance, the business is only two or three quarters of cash-burn away from seriously needing to consider a capital raise.
At this point in time and based on the anecdotal evidence I am observing; it is more likely than not (>50% chance) that the company will need to raise capital again in the next 2 years.
September Quarter Result Analysis
(Disc, held in Strawman and NOT irl)
It’s a disappointing performance from Spectur when taken at pure face value. Luckily there is a lot more to talk about than meets the eye.
It was the companies second biggest quarter in terms of received cash receipts, which represented 67% growth on the Previous Corresponding Period (SQ20).
Note that last quarter was a bumper month in sales due to the changes made to Instant asset write off tax rulings in the period leading to the end of financial year. Management confirmed this.
Because of the external short-term influences, I think its fair to say that that SQ has been the company’s best sales month yet.
And then we need to consider that Q1 & Q3 represent the ‘out-of-season’ period hence making the result look stronger.
Cash Flow
In terms of the cash flow performance, the company burned through >$600k in cash in the quarter.
Managed had cited (& listed) the business incurs a lot of annual costs in the first quarter and that such costs are not repeated until next year thus the rate of burn in Q1 is not likely to continue.
Once the annual costs have been stripped out, the cost of operations remains fairly similar to recent quarters.
Funding
The outlay of cash in this quarter really highlights the concerns regarding whether company is adequately funded to continue its operations.
With just over $900k on the balance sheet, it looks certain they are going to have to take up EGP Capital’s debt facility - $1.5m @ 7% p.a.
Spectur are also incurring a 3% fee for the facility to simply be available, so it is already costing shareholders a dime to have access to this cash.
Safe to say, I think it’s likely that the company will need to raise capital again.
Valuation
I think reality really does bite with SP3.
Given the uncertainty around cash flows, funding, equity on issue and sustainability it makes for one rough and therefore possibly pointless exercise in trying to derive what the intrinsic value for the company is.
Gun to my head:
If by FY23, the company issues a further 15 million shares @ 10 cents to raise $1.5M to secure the balance sheet. (Or keep the lights on).
The options totalling circa 6m are also exercised raising the share count to total 127m.
Hypothetically speaking, the company will generate sustainability in cash flows that normalise at $1.5m p.a (Conservative talk).
Given an 18x MC-to-free cash flow multiple, the company has a $27m mc and a share price of 21 cents.
Discounted back to PV @ 10% p.a gives fair value of 17 cents.