Thesis broken, red flags, still hope, but moving to sidelines

OK, following my recent straw which was a "first glance" response to SSH's recent update, I've now dug deeper into SSH's latest update, and I still don't like what I see, so I'm swallowing some losses, revising valuation down and will wait to see if they can rebuild my faith.

The thesis behind my previous valuation for SSH Group at $0.83 was based on $120m rev in FY22 with ongoing growth of 20% pa. Coming off H1 FY22 rev of $52m and 84% growth over pcp, those numbers seemed conservative. But I believe the picture has changed substantially.

My valuation is now at $0.13, with assumptions given below.

In their latest update they didn't mention any overall revenue figures, or growth for the overall business, but heavily promoted predicted FY22 growth of 50% and 25% across their two main divisions. Sounds great on the surface, but as mentioned in my earlier straw, suggests their incredible run of growth across halves has ended and started to retreat. As calculated in my recent straw, their guidance suggests revenue around $91m total in FY22 across their main Safety and People divisions. And given they reported $52m for H1 and $26m for Q3, that means Q4 revenue is around $13m. And a lot (although we don't know how much) of this $13m is dependent upon a contract with WA Health that they announced only has an "extension for a further 2 months". But they also confessed "The easing of isolation requirements for unvaccinated international travellers will significantly reduce the State's requirements. Consequently, SSH Group's Safety division is reducing its physical security services at State operated quarantine facilities." So it is unclear how much of the $13m quarterly revenue will be sustained. In hindsight, it seems their mega growth over the last 2 years might have been a short-lived sugar hit from temporary Covid initiatives, and they haven't found many new contracts to fill a big Covid-sized hole that is emerging.

Their third division is Equipment which had essentially zero revenue in FY21 but they have recently acquired Karratha Machinery Hire generating $6m pa in rev. And in their latest announcement said they have launched Tru Fleet, a fleet hire business, with $4m in vehicles, although provide no details about revenue or whether this new business is an offshoot of the recent acquisition. But let's be generous and say this new Tru Fleet business adds $4m pa in revenue. So at best, the Equipment division is looking at an annualised $10m in revenue, or $2.5m per quarter.

So, across their 3 divisions, we are looking at quarterly revenue of (at best, with downside risk) $13m + $2.5m. So despite them likely to report something like $90-$95m in revenue for FY22, with likely fanfare of 35% growth over FY21. It seems like their annualised run rate, based on latest quarter, is more like 4 x $15.5m = $62m which would be an 11% drop (and even that might be generous for reasons mentioned above). This is a long way off the base I assumed for FY22 of $120m revenue in my earlier valuation.

Given the headwinds, I'm going to drop my forecast for ongoing growth to 15% and NPAT to 2%, which would get them to $125m in FY27 with NPAT of $2.5m. With a conservative PE of 10, that's market cap of $25m in FY27. Given their volatile history, I'd be looking for 20% return, so discounting by 20% and assuming some dilution in shares along the way (to 75m shares), that gives current market cap at $10m and share price valuation around $0.13.

Given the current share price is around $0.21, I don't see any bargain here. Maybe there is still the foundation for a sustainable, growing business here, but it looks like it is going to be off a much smaller base. And if my calculations are right, then management has gone to great lengths to sugar coat some bad numbers, which erodes my trust. So I'm moving to the sidelines to see how things play out over the next 6-12 months.

@nessy Thanks for providing the SSH update. Have to admit my first reaction is one of concern. I'll need to dig into this deeper but my back-of-the-envelope calculations suggests a big slowdown in growth, perhaps even a coming contraction. I'd value your thoughts on this, and see if my early calculations are incorrect. But this is what I'm seeing:

1. They did $70m in revenue in FY21. They don't report actual revenue figures in their update (which is odd), and don't even report % change for overall group (also odd) but are saying 50% growth in People division (which was about 20% of their business) and 25% growth in Safety division (which was 80% of business). If I do the math on that the revenue for FY22 is looking like (70 x 20% x 1.5) + (70 x 80% x 1.25) = $91m.
2. They reported $55m rev in H122, and $78m rev for the 9 months to Mar, so that would mean only $13m in rev for Apr to Jun '22.
3. And if I'm correctly understanding their latest update, that $13m rev in current quarter is heavily dependent upon a contract with WA Health for Covid isolation security arrangements which is only in place for 2 more months.
4. So while their latest update focuses on values such as 50% growth and 25% growth for a couple of their divisions, if my above assumptions are correct, they could dry up in revenue really quickly.

What are your thoughts on this? I think I'll move to the sidelines and watch for a while..

@nessy Thanks for raising the profile of SSH Group in Strawman. I've found it a really interesting new opportunity. Have to confess it is not unlike another strong conviction of mine, Stealth Group, that also plays in the B2B market with heavy industry, also a microcap, also growing quickly and dependent upon careful management of margins. I'll have to reflect on what that says about my investing preferences/biases!

I'm copying my research notes here for Strawman members, and afterwards I'll post a valuation. Here goes:

Business: A services and equipment supplier to heavy industry, with three divisions of Safety (road safety, security services, crisis support services), People (temp workforce supply), and Equipment. Currently 80%+ of revenue is from the Safety division. IPO in Sep 21, so only 7 months old as listed company.

Market cap around $16m with share price at time of writing around $0.25.

Last half financials as reported in financial reports and audited (not including recently announced acquisition):

- $52m H122 revenue (huge 84% growth over pcp; prior halves of $42m, $28m, $10m, reflecting 147% growth CY21 over CY20)

- EBITDA $1.74m (3.4% of rev, 51% growth on pcp)

- Normalised NPBT $1.2m (if excluding IPO costs of $2.9m; up 71% on pcp; NPAT of $0.9m)

- Gross margin of 11%

- Strong balance sheet with NTA of $6.7m, all debt exceeded by current assets, cash at bank $6.7m

Recent acquisition of Karratha Machinery Hire announced 20/4/22

- First significant acquisition for the company and essentially establishes the Equipment division which previously had negligible revenue

- Funded through share issue, cash and equipment finance facility

- Equipment asset value of $10m

- Reported as EBITDA, EPS, and margin accretive

- Rev $6.3m, EBITDA $3.8m

- Acquisition cost $15m

○ $10.5m in cash, financed through new equipment finance facility

○ $3.4m cash

○ $1.1m in shares valued at 20-day VWAP (so existing issued shares will increase to 64.7m, approx 8% dilution of prior existing shares)

- Subtracting $10m in equipment from acquisition cost, purchase price was 1.3 x EBITDA

Management:

- CEO Daniel Cowley-Cooper owns 15.4m shares, approx 24% of shares

- COO Stefan Finney, owns 5.1m shares, approx 8%

- There isn't a lot of information to assess management quality, other than kudos for large growth in the business over the last couple of years.

Market:

Reported TAM $50b (unclear how this is derived), they say roughly 90% is fragmented, with industry predicted to grow roughly with GDP.

Not clear who the main competitors are (any suggestions from other Strawman members?)

Targeting growth through:

- Organic with existing projects and clients including synergies across divisions

- Geographic expansion

- Acquisition

- New offerings (no detail about what this might look like)

Reported extensions of existing contracts suggest reasonable customer satisfaction.

Share options:

- In addition to the 64.7m issued shares, there are a large number of 25m options in the accounts, that's a very high proportion compared to existing issued shares

- Although the latest HY investor presentation shows 25m options, only 18m options are detailed in recent H122 financial report

- A protection for existing shareholders is that for the 18m options listed in the most recent HY financial report, exercise price is $0.35 and expiry Sep 24. To be valuable and exercised, these require an increase of share price by at least 40% in the next 2.5 years.

- I haven't yet been able to work out what/where the other 7m options are.

Risks:

- No targets or guidance on future growth, so we're left with pure guesses based on recent growth (which has been huge)

- Not a high growth market, so reliant on fast growth within existing fragmented market 

- Low margin business, so heavily influenced by management of those margins

- Looming wage increases may impact margins if unable to pass on to customers

- Planning acquisitions but untested on acquisition quality or ongoing capital management (although first acquisition of KMH at 1.3 x EBITDA looks attractive)

- Unclear how concentrated their customer base is. They say they have 96 customers but don't indicate what proportion of revenue comes from largest customer or top 10 customers.

- Limited information available on the company and management

- No recorded presentations to judge quality of management (@Strawman a possibility for a CEO presentation?)

Valuation: See my separate post

@nessy Can you share any more info about SSH? It looks interesting. I can't find any financials or news on the company on SelfWealth or SimplyWallSt as of 24/9, all that I can access is prospectus from the company site. SelfWealth shows 37m of shares issued but prospectus suggests there could be 60m in shares and 25m in options. Any insight into current market cap? And who are the major competitors and similar organisations that could be used as comparison?