Windlab

One of the more interesting companies to launch an IPO in the last few years is Windlab, a windfarm development company that was founded in 2003 to commercialise software developed at the CSIRO. Windlab’s proprietary software Windscape overlays atmospheric modelling on geographical features to identify and evaluate potential windfarm sites. In their prospectus they claimed this software gives them a significant advantage over other windfarm development companies, as it enables them to identify sites with high wind resources without conducting costly and lengthy on-site testing. As evidence of this claim, the two windfarms that delivered the highest percentage of their maximum output throughout 2018 are on sites found and developed using windscape, Coonooer Bridge and Kiata both in Victoria. 

The company listed in August 2017 on the ASX at $2 a share, www.gilclendinnenpsychology.com.au equalling a fully diluted market cap of $146.3 million. While initially results were promising, with the company making a profit of $9.5 million in 2017, 2018 has seen a complete reversal of that progress, with revenue dropping from $23.1 million to $3.5 million, and the company making a loss of $3.8 million. As a result, the share price has declined steeply, and is now trading at around $1.04, or a market cap of $77 million.

While for the average company a decline in performance of this magnitude would suggest that something is seriously wrong, I don’t think this is the case for Windlab. Like any company that gains most of its revenue from developments, significant swings in profit from one year to the next are inevitable. The company went from reaching financial close on two windfarm sites in 2017 to one in 2018, and while the failure to reach financial close on a single project was disappointing, it is not surprising given the long timeframes required for most wind farm developments.  It is my belief that the market has overreacted to Windlab’s 2018 results due to a misunderstanding or mistrust of the companies operating model, and that at the current share price the company is significantly undervalued.

The Case for Windlab

 Renewable energy is going through a difficult time in Australia, with little cohesion between federal and state governments, and new connection requirements making connecting a renewable energy plant to the grid more expensive. However, if you believe that climate change is real, then renewable energy should be one of the fastest growing industries over the next twenty to thirty years. While growth in the efficiency of solar tends to get more attention, Windfarm technology is also improving in efficiency, and nearly all renewable energy experts see wind farms playing a significant role in the transition to renewable energy. On a much shorter time scale, if Labor wins the upcoming federal election the domestic market for renewable energy should improve markedly. Labor has a policy of 50% renewable energy by 2030, and to achieve this the level of investment in wind farm projects in Australia will need to increase exponentially.

Windlab is ideally placed to take advantage of this, as the development of windfarm sites is perhaps the most profitable part of the wind farm industry. From 2014 to 2017 the company managed an average Return On Equity of 42%, in a time that included significant growth and the cost of listing on the ASX. 

.	2017	2016	2015
Revenue	$                                          24,515,379	$           18,101,100	$         10,012,006
Expenses	-$                                          10,098,372	-$           13,023,113	-$           8,524,804
Profit before income tax	$                                          14,417,007	$             5,077,987	$            1,487,202
Income tax	-$                                            4,912,534	-$             1,779,491	$                 14,687
Profit	$                                            9,504,473	$             3,298,496	$            1,501,889
Equity at the start of the year	$                                          13,404,230	$             9,207,680	$            7,699,065
ROE	71%	36%	20%
Average	42%

The company is able to achieve this sort of ROE as windfarm developments are sold once all approvals and agreements signed but before construction begins, meaning developing multi-million dollar projects does not require significant capital. For example, take the site of the Coonooer bridge wind farm, a 19.8 megawatt wind farm in North Western Victoria with a total development cost of $48.6 million. After identifying the site with Windscape, Windlab spent only $300,000 in acquiring the land, then spent $2.2 million or research and planning applications for a total investment of only $2.5 million. Windlab then sold 96.5% of the equity in the Coonoer Bridge to Eurus Energy for just over $4.7 million who then funded the construction of the site with help from grants from the state government. In total, Windlab walked away from this transaction with over $4.7 million in cash and a remaining 3.5% stake in the project, a return of over 111% on the initial investment. 

Valuation

While historically Windlab has sourced most of its revenue from wind farm development, the company also has a growing asset management arm of the business, where they provide asset management services to Wind and Electricity farms, in addition to significant equity in operating and soon to be operating Windfarms. Although historically insignificant when compared to the companies development fees, these sections of the business are quickly growing, and seems to be the managements way of ensuring cashflows are a little more predictable in the future.

In order to accurately value Windlab, I have therefore broken down the company into three separate areas.

Inventory (wind farm development projects)

The book value Windlab gives to its inventory as per the 2019 financials is $9.69M, though this is overly conservative as projects are valued at the lower of their cost or net realisable value.  In order to get a more accurate picture of the actual value of Windlab’s inventory, I have tried to assign individual value to some of Windlab’s larger projects.

Lakeland Wind Farm

Lakeland is a 106 megawatt project located in Northern Queensland. While Windlab does not give a breakdown of inventory values, due to its size and stage in the development cycle the Lakeland Wind Farm is probably the single project with the largest value in the companies inventory.  Lakeland is also one of the main causes for the decline in share price over the last six months, as the project was scheduled to reach financial close in 2018 until the primary investor pulled out at the last minute. This delay has meant the project is now subject to new requirements to connect to the electricity grid, which will mean significant additional costs to increase the stability of the connection (this is a change to the nation-wide connection criteria for renewable energy plants designed to address unstable supply).

While these setbacks are undeniably concerning, Windlab claims that the delay has also allowed them to re-tender for more efficient turbines and they have not yet impaired the inventory value of the project, something they have done in the past when projects are compromised. As per their latest announcements Windlab are still confident of reaching financial close on this project in 2019.

If successful, Lakeland will be the largest project brought to financial close by Windlab to date, at 106 Megawatts. For Kennedy, a 56 megawatt project, Windlab received a financial close payment of 5.4 million, while keeping 50% equity in the project. If Windlab is to acheive a similar margin and equity structure for Lakeland, this would result in a payment to Windlab of $10.2 million, with the remaining 50% equity in the project worth at least $10.2 million as well, for a total value of $20.4 million. Given the uncertainty around the project though, a 50% discount would seem appropriate, which gives the project a total value of $10.2 million for our calculations.

Miombo Hewani

Another late stage windfarm project for Windlab is the Miombo Hewani windfarm in Tanzania. This 300-megawatt, $750 million project is Windlab’s first foray into East Africa, and is undoubtedly the companies most ambitious yet. The project received approval from the Tanzanian government in July 2018 and will receive partial funding from the Government of Finland. Windlab have not committed to achieving financial close in 2019 for Miombo Hewani which is understandable given the uncertainty of operations in Africa, but as development approval is already in place as well as some funding arrangements, financial close can’t be too far off. Demonstrating the significant potential value of Miombo Hewani and Windlabs other East African investments, Eurus Energy, a Japanese sustainable energy company that has partnered with Windlab in the past recently bought a 25% stake in Windlab’s east African projects for $10 million USD, valuing Windlab’s remaining stake in their East African portfolio of development projects alone at $30 million USD, or $42.2 million AUD. While this may seem excessive, Windlab stated in their prospectus that their target development margin for Windfarm developments is $250,000 per megawatt of capacity, and from 2015 to 2017 the company had overachieved this, with margins of $260,000 to $490,000 per megawatt. If Windlab was to successfully reach financial close on Miombo Hewani at their target development margin, this would result in a payment of $75 million alone. As a result, adopting the value assigned by Eurus Energy of $42.3 million for the companies East African projects seems reasonable.

Greenwich

The last late-stage development project worth noting in this section is the Greenwich Windfarm in the USA. Windlab officially sold the project in 2018, but will only receive the bulk of their payment of $4 million USD (5.6M AUD) when construction begins. While Windlab have stated they expect to receive this payment in 2019, a group of neighbours have mounted a challenge to the project to the Ohio Supreme Court seeking to dispute the approval given by the Ohio Power Board. . Given the uncertainty of the case, it is probably prudent to discount this payment by 50%, which would mean a value of $2.8 million for Greenwich.

While the projects listed above are the most likely to result in some form of payment in the next 12 to 18 months, Windlab has numerous other projects earlier in the development cycle. These include:

• 640 megawatts of approved potential capacity across multiple projects in South Africa. (While South African Renewable Energy projects have been on hiatus, it does seem the projects are about to get up and running again after a recent change of government 
•       250 megawatt project in Northern Queensland that Windlab is intending to submit a development application for in 2019
•           230 megawatt project in Vedigre USA that Windlab no longer has control over, but is eligible for up to $4.6 million in success payments if the project reaches financial close.

While an exact value for all of these projects is difficult, I have assigned a value of $15 million for the remainder of Windlab's projects.

Excluding Windlab’s asset management business, which I will cover separately, Windlab spends around $6.4 million a year on project expenses, administration and employees. The projects I have listed above are predominantly expected to reach some form of financial close in the next three years, so it seems logical to assign a cost of $19.2 million, or three years of costs to the above calculations. Once a tax rate of 30% is factored in, you are left with a total inventory value of $35.177 as per the below table.

Project	Value
Lakeland	$   10,200,000.00
East African projects	$   42,300,000.00
Greenwich	$     2,800,000.00
Other projects	$   15,000,000.00
Total	$   70,300,000.00
Book value	$     9,690,000.00
three years of annual costs	$   19,200,000.00
tax on projected profit	$   12,423,000.00
Value after tax	$   38,677,000.00

Operating Wind Farms

Currently Windlab has significant equity in two large operating or soon to be operating Wind Farms, Kiata, in Melbourne’s North West which has now been operating for just over a year, and Kennedy Energy Park in Northern Queensland that has completed construction and will be connected to the grid in the coming months. Both projects were originally found and developed using Windlab’s proprietary technology Windscape, with Windlab then subsequently selling down equity in the project to help fund development. Windlab owns 25% of the Kiata wind farm and 50% of Kennedy, and combined these two projects have a book value of $43.6 million on the Windlab balance sheet.

Kiata is a 30 megawatt 9 turbine windfarm in Northern Victoria that had its first full year of operation in 2018, with a total profit of $4.57 million for the year. Wind farms are thought to have a useful life of roughly 20 years, after which significant refurbishment costs are needed in order to continue operation. If we discount these future cash flows at a rate of 7%, (which seems reasonable given the relative low risk of an established wind farm) we get a total value for Kiata of just under $43.9 million. This values Windlab’s stake at $10.97 million.

To value Kennedy is a little more complex, as it has not yet begun operation. However, we know that the project is a 56-megawatt project, combining 41 megawatts of wind with 15 megawatts of solar. The plant also has 2 megawatts of battery storage to help modulate supply and allow storage of excess energy in non-peak times. If we extrapolate the annual profit per megawatt of capacity of Kiata in 2018 of $152,353 and assign the same discount rate, we are left with a value for Kennedy of $83.6 million, or $41.8 million for Windlab’s 50% ownership.

Combined, this gives a value of $52.86M for these two projects. 

Asset management

Windlab’s asset management arm is perhaps the easiest to understand and value. Windlab leverages its expertise by providing ongoing management services to existing wind and solar farms, both that the company has an equity stake in, and to third party independent energy farms or resources. This side of the business is quickly growing, with revenue increasing by 27% in 2018 to $2.97 million, with profit before tax of $610,000, or $427,000 after tax assuming a 30% tax rate. The company signed a significant asset management contract in early 2019 for a solar farm, indicating that they are continuing to grow this business. Given both the significant growth of this area and the broader growth potential of the industry, a P/E ratio of 20 seems coservative, which would value Windlab’s asset management division at 8.5 million.

Software

Lastly, As Windlab has demonstrated ability to use Windscape to develop high-performing Windfarms, it seems only fair to give a value to the Windscape software itself. Windlab is continuing to use this software to identify projects into the future, and the company has proven that this software can provide the company with a significant edge on development projects.  While this is a difficult thing to do, $10,000,000 seems like a conservative valuation, considering both Windlab’s historical performance and the likely growth of the energy sector in the future.

Putting it all together

Area	Value
Development Projects	$   38,677,000.00
Operating wind farms	$   52,770,000.00
Asset Management business	$     8,500,000.00
Windscape software	$   10,000,000.00
Cash	$   14,622,414.00
Liabilities	-$   10,755,130.00
Total	$ 113,814,284.00
Shares outstanding (diluted)	73848070
Price	$                     1.54

If we add together the values as per the above calculations, we are left with a total value of $113.8 million for the company, or $1.54. As the company is currently trading around the $1.02 mark, this suggests the company is significantly undervalued at its current price. 

Aurora Labs

Aurora Labs is one of a long list of ASX pre-revenue IPO’s that achieved massive gains before crashing when the much-hyped revenue failed to materialize.  Listing in August 2016, the stock peaked at just under $4 in February 2017 for a nearly 20X return and then lost 90% of its value over the next year. Recently though, Aurora has been staging somewhat of a comeback. Their shares were trading at around 36 cents in September of this year when they began to release announcements regarding progress with their Large Format Printer. The market reacted with predictable over-exuberance and within a few weeks the stock was back over 90 cents. That investors have willingly jumped back into bed with a company like Aurora is a pretty sad indictment of the Australian small cap market. Aurora’s brief history on the ASX is a tale littered with failed targets, unclear communication and a steadfast refusal to own up to any of their mistakes. It is also a story worth knowing for anyone interested in investing in pre-revenue stocks.

Aurora labs was founded in August 2014 by David Budge, an engineer and product designer from WA when he posted on Facebook that he wanted to start a rocket company. The rocket idea didn’t last long, and the company quickly switched to 3D printing. If you are to believe the official company version of events, within 18 months of that Facebook post Aurora labs developed three separate revolutionary techniques for 3D metal printing with major implications for reducing costs, increasing speed and managing 3D printing software. What exactly these inventions were has never clearly been articulated, but with a message as enticing and marketable as this a public listing was inevitable and by June 2016 Aurora had launched their prospectus to raise $3.5 million.

While the prospectus was largely focused on returns far in the future, a key point in their initial pitch was their Small Format Printer. This printer was designed to be substantially cheaper than their competitors and was apparently already in beta testing with 31 secured pre-sales. The Small Format Printers price was listed in in the prospectus at between $40,000 and $43,000 USD each, so this was a significant amount of sales for such a young company.

The shares listed on the 12^th of August 2016 at $0.20 cents and shot up in value quickly. In December 2016 they announced that they were shipping their first unit of the Small Format Printer to customers and by the 10^th of February 2017 the share price had reached a staggering $3.93, representing returns of just under 1,900% since listing and a market capitalization of over $216 million. 

As is the story with many pre-revenue companies though, it was when the revenue was supposed to materialize that the wheels fell off. On their quarterly activities report on the 28^th of April 2017 the company announced that they were now ready to focus on sales, as they had completed the necessary certifications and testing to sell the Small Format Printer internationally. Despite these assurances, cash flows from sales for the March to June period was only $103,000 and dropped to $6,000 for the next quarter. For a company whose product was apparently market leading with a strong order bank of pre-sales this made no sense. How could a company selling 3D printers for $40,000 USD each take revenue of only $6,000 a quarter when they apparently had an order bank of 30 pre-sales to fill?

Investors looking for an answer had to wait until November 2017, when the company finally admitted via a market update that the much-vaunted pre-sales had been sold at a fraction of the current prices. Instead of the $40,000 USD listed in the prospectus, the pre-sale prices were for prices between $7,000 and $9,000 AUD. Given the retail price had now risen to USD $49,999, Aurora labs was now deciding to cancel their pre-sales and refund the prospective customers their deposits.

It is hard to understand how Aurora got away with this announcement without a slap on the wrist from the ASX. Until this announcement Aurora had given no indication that their pre-sales were for anything less than their current proposed price, if anything they had worked hard to give the opposite impression.

The below is a direct screenshot from the prospectus, these two sentences come one after the other:

Any investor reading the above sentences would have naturally assumed the pre-sale prices were somewhere around $40,000 USD. In addition to this quote the pre-sales are mentioned on 6 other occasions in the prospectus, and not once is the fact that the pre-sales were sold at heavily discounted prices disclosed.

After listing, the company continued to mention pre-sales in their announcements. In a January 2017 announcement the company stated that:

For a product that’s main selling point is its cheapness compared to its competitors, how does a sale at less than 25% of the current market price indicate demand from “all corners of the globe?” It is the equivalent of a new phone company using sales of $200 smart phones as evidence for demand of an identical model at $800.

Another obvious question is why Aurora waited until November to dishonour their pre-sales. At the time of their prospectus their retail price was already considerably higher than the pre-sale prices, yet the company waited more than 12 months before deciding to cancel the pre-sale orders. The obvious explanation that they were keeping their pre-sales on the book as long as possible to maintain their share price is hard to overlook.

Even leaving the pre-sales aside, Aurora has made some dramatic promises regarding their Small Format Printer that have failed to materialize. In April 2017, the CEO David Budge gave a speech at an investors conference where he said:

“we’ve pre-sold about 32 machines, andwe’re looking to get up to around about 30 machines a month in the next 3 to 6months at about $50,000 USD a machine.”

A lot of investors took notice of this statement, as if true it meant the company was close to achieving annual revenue of $18 million USD a year from the Small Format Printer alone. 

However when their annual report for 2017 was released more than 15 months later, revenue was only $329,970, indicating sales of not even 1 device per month. In typical Australian small cap fashion, not only does the annual report fail to explain why sales were so far off this forecast, it doesn’t even acknowledge that this forecast was made.

You might be wondering at this point why I’m bothering to write about this. Another Micro Cap company played the PR game and managed to pump the share price to a ridiculous valuation with a bunch of promises that they never delivered on. Hardly a unique occurrence for the ASX. It matters because too often the companies getting funding on the ASX seem to be bad companies with good PR departments.  A central promise of capitalism is that money can be efficiently allocated from those with money to those who need it. At it’s best, the share market is an effective vehicle for getting money from investors into the hands of companies with great ideas and limited funds. The reality is every dollar spent funding or purchasing a stock of a hype company is a dollar not going to a legitimate pre-revenue company, and there are a lot of legitimate pre-revenue companies out there that desperately need money.

The tendency of companies to make wild predictions also puts pressure on other small business owners looking for investment to be equally optimistic. A friend of mine owns a growing business that has achieved impressive growth of around 40% a year for the last couple of years. Their latest forecasts for 2019 increases this growth to nearly 100% for FY18, yet investors so used to seeing forecasts like Aurora’s remain unimpressed and have asked if there are any ways to increase this. For the industry my friend is in, growth at more than 100% would likely have serious affects on his margins and risk profile, but this is a difficult point to make to investors habituated to start-ups promising multi-million dollar revenues in years.

As investors, we have a responsibility to be more critical when presented with the next slick presentation light on detail but big on promises. If this is asking too much then at the very least we need to ensure that executives of small companies are held accountable for their promises. When a CEO says that he is intending to sell 30 devices a month, he shouldn’t be able to release an annual report 15 months later showing total sales of less than 10 for the year without even bothering to address what went wrong.  And when that same CEO starts making chest beating announcements about their latest product, the market’s reaction should be a little more suspicious.

Cannabis and Cobalt

In terms of top performers, last year was a pretty great year for Australian IPOs. At time of writing there are five companies that listed in 2017 that are more than 500% up on their listing price. The companies provide a good insight into the current zeitgeist of the Australian micro-cap sector. There are two infant formula companies, one exploratory mining company, one medicinal cannabis company and one 3D printing company.

Company	Listing price	Current price	Return
Wattle Health	$                           0.20	$                 2.26	1030%
Cann Group	$                           0.30	$                 2.75	817%
Bubs	$                           0.10	$                 0.72	620%
Titomic	$                           0.20	$                 1.22	510%
Cobalt blue	$                           0.20	$                 1.40	600%

While initially you might think trying to find common ground between such a diverse set of companies would be difficult, there is one thing that all these companies share; low or nearly non-existent receipts from customers. The five companies listed above have a combined market capitalisation of 960 million, yet their combined receipts for the first six months of FY18 is only 2.8 million.  That’s an annualised price to revenue ratio of 172, a ridiculous metric by any stretch of the imagination.

To be clear, each company has their own, potentially legitimate reason why revenue is currently low or non-existent. Cobalt Blue is still in the exploratory stages of assessing mining sites, Titomic is in the process of setting up its operations centre in Melbourne, CannGroup has multiple regulatory and legislative hurdles to pass before it can start selling cannabis and Bubs and Wattle Health are both waiting on their CFDA licenses that will allow them to sell their products in China. 

A cynical explanation for this coincidence is that it is much harder to disappoint shareholders when you are pre-revenue. A pre-revenue company is all possibility: When you are pre-revenue there are no pesky questions about profitability, client retention, or growth rates. No pre-revenue company was ever caught giving misleading statements about new customers or cooking up elaborate schemes to artificially inflate their quarterly cash flows. A company that is already making money usually needs actual growth to cause an increase in share price, all a pre-revenue company has to do is make vague claims about massive potential market sizes.

While the initial returns may be spectacular, history suggests the ASX can tire pretty quickly of these sorts of companies. You only need to look back at the best performing IPO’s from 2016 to confirm this. Interestingly enough, there are six IPO’s from 2016 that have at some point traded at over 500% return, but as of today only Afterpay Touch is still trading above this benchmark. Get Swift’s problems have been well publicised, but there are others whose drop in value have been nearly as dramatic.

Aurora Labs, a 3D printing company at one point reached a high of $3.93 before additional capital raises and elusive revenue growth pushed the share price down to it’s current $0.55. Creso Pharmaceutical, another cannabis related company (whoever said the ASX is too predictable) has dropped from its high of $1.36 to $0.70

Even without the benefit of history it seems at least some of the 2017 IPO's are pretty overvalued currently. To take Wattle Health as an example, the current market capitalisation is around $210 million vs current sales of $329,000 a month. If Wattle Health was a mature company with normal growth prospects you would expect it to be trading at around 10X gross profit (keep in mind this does not include administrative, marketing or interest costs), which would require sales of $3,017,248 a month at current margins  This means they would need to grow their revenue by 817% just to justify their current share price.  It seems safe to assume a stock with an 817% revenue growth already priced in is a perilous place to have any capital invested.

In summary, I predict the next 12 to 18 months will see a pretty steep decline in the average share prices of these five companies. But the next time you get offered shares in an IPO selling 3D-manufactured cannabis-infused baby powder you can be sure that for the short term at least you are in for a ride.

Buy My Place

In December 2015, Killara Resources, an unsuccessful Indonesian coal mining company announced they would be relisting on the ASX as the online real estate sales company Buy My Place. The backdoor listing involved an offer of up to 25,000,000 shares at a price of 0.20 each to raise $5,000,000.  

Unlike some of the more speculative backdoor listings that the ASX is known for, Buy My Place was an actual established business. Launched in 2009, Buy My Place let Australians sell their house cheaply without spending thousands on real estate commissions. For a low fixed cost, they gave you an ad on Domain and the other major property sites, photographed your property, and sent you a billboard for the front of your house. It was a simple model, designed to demonstrate just how overpaid real estate agents are in an age of inflated house prices and increased reliance on online research.

BMP re-listed on the ASX on the 15^th of March 2016 at a Market capitalisation of just over $11 million, roughly 11.5 times their pre-IPO annual revenue. In the January – March quarter the company achieved revenue of $288,000, and by the July-September quarter this had grown to $514,000. Not long after that, the share price hit a high of $0.44 on the 28^th of October 2016, a 120% return on investment for IPO investors in just over seven months.

While investors didn’t know it at the time, 44 cents was as good as it got. Over the next few months the share price dropped steadily, reaching an all-time low of 15 cents in July 2017. There was no defining moment that can explain this slump in price. Throughout this period updates from the company continued to be positive, promoting record cash-flow numbers with nearly every quarterly report. Reading back through the company announcements, there is nothing to suggest that this is a company losing 65% of its value.

It is only when you look at the Prospectus in more detail though, do you get a sense of how Buy My Place has failed to live up to its own expectations. While there were no forecasts in the Prospectus, the three tranches of performance rights for senior Buy My Place employees gives us an idea of what the company, and by extension shareholders, were hoping for. The three tranches vest if the company achieves 8,000 property listings, $10,000,000 in revenue or EBITDA of $3 million in one financial year by July 2019. As it stands, these goals seem completely out of reach. If you annualize their last quarter numbers, Buy My Place is on track for annual listings of 1676, revenue of $3,668,000 and so far away from profitability it’s probably not even worth discussing. Whether a 10x increase in revenue over three years while retaining profitability was a realistic goal or not, somehow it seemed that this became the standard the company has been judged against.

A slightly more charitable way to look at Buy My Place’s lukewarm first couple of years on the ASX is that convincing someone to sell their own home without a real estate agent is a harder transition than both investors and the company initially realized. People may resent the huge amounts of commission Real Estate Agents pick up with relatively little work, but the step from resentment to taking the pressure of selling a house on yourself is another matter entirely. In February 2017 the company seemed to acknowledge this fact, and launched a full-service package, where for a higher fee of $4,595 home sellers gain access to a licensed real estate for advice, who also manages the whole process. This strategy seemed to be part of a broader re-positioning that happened throughout 2017, where the company sought to increase its revenue per client. In July, Buy My Place announced the Acquisition of My Place conveyancing, an online conveyancing firm they had referred business to in the past. A few months later in September Buy My Place announced a partnership with FlexiGroup, allowing customers to finance both Buy My Place fees and other costs associated with selling their property.

To cap off these changes, in October Buy My Place announced the departure of Alan Heath and the appointment of Colin Keating as CEO, a younger executive who had spent time at American Express and more recently at an investment administration company. The new strategy seems to have also involved a re-focus on revenue growth above all else. For the last two quarters, revenue growth has increased to an impressive 20%+ per quarter, but expenses have grown just as quickly.

Buy My Place - Quarterly cash flows since listing (thousands)

For a company running at this sort of deficit, the obvious concern is how much runway they have before they will run out of money. At the end of December, the company had $800,000 in cash, plus an unsecured, zero interest credit facility with the investment/bankruptcy firm Korda Mentha of $1,000,000. Given they are currently running at a deficit of roughly $750,000 a quarter, it seems highly likely the company will need to go through another capital raising round in the next six to twelve months.

While normally the knowledge of an impending capital raise is enough to make me lose interest pretty quickly, the current share price seems close to the floor of any potential future equity raise. In December 2017, Buy My Place raised $400,000 from sophisticated and professional investors at a price of $0.16 each. In addition, the company secured a zero interest credit facility with the finance firm Korda Mentha of $1,000,000 in return for the issuance of 6,250,000 options with an excise price of 16 cents. With this in mind, It is unlikely these investors (Korda Mentha is also a major shareholder) will allow any future equity raise at less than $0.16 cents a share, given that announcements since then have generally been positive. With shares currently trading around the $0.16 mark, future equity raises should be at or above this price.

The competition

Although there are a number of online sites offering online house sale services in Australia, the elephant in the room in any discussion of Buy My Place is Purple Bricks. The UK low cost real estate agent expanded to Australia a couple of years ago, and with revenue of more than double Buy My Place in Australia and a market capitalisation of over $900 million pounds internationally, they represent the biggest competition by a few orders of magnitude. With this in mind, I thought it might be useful to compare the two companies’ latest half year reports for Australia only.

Buy My Place and Purple bricks H1FY18 (Millions)

	Purple Bricks	PB costs/revenue	Buy My Place	BMP costs/revenue
Revenue	6.8		1.57
Cost of sales	-3.2	47%	-0.53	34%
Gross Profit	3.6	53%	1.04	66%
Administrative expenses	-3	44%	-2.97	189%
Sales and marketing	-5.7	84%	-0.87	55%
Operating loss	-5.1	75%	-2.80	178%

The thing that immediately jumps out is Buy My Place’s much higher administrative expenses as a percentage of revenue compared to Purple Bricks. This can partially be explained by some one-off costs Buy My Place had regarding the appointment of their new CEO and acquisition of MyPlace Conveyancing, but it does look like these are costs that need to be reined in. You would also expect this ratio to improve as Buy My Place’s revenue grows. However, the overall picture suggests that these are two companies operating in broadly similar ways. The fact that Purple Bricks has managed to hit profitability with this model in the UK should be seen as a positive for potential Buy My Place investors. Purple bricks entrance to the Australian market should also help familiarise people with low cost real estate agent options, opening up more potential customers for Buy My Place.

Valuation and Verdict

At its core, Buy My Place is an idea that I really believe in. There is no reason for a Real Estate Agent to take in tens of thousands of dollars in commission to sell a house, in an age where buyers are increasingly comfortable doing their own research and the same handful of online sites are used by everyone when searching for a house.

With a market capitalization of just under $10.8 million dollars at time of writing and annual revenue of $1.53 million as per their latest half year accounts, Buy My Place is currently trading at 3.53 times annual revenue. For a company that has managed to sustain 20%+ quarterly growth for the last six months this seems like a pretty enticing deal. While some of this can be chalked up to the Buy My Place’s rather precarious cash position, it seems that at least part of the companies relatively cheap price can be explained by the short attention span of the market. Micro-cap investors are quick to move onto the new thing, and after failing to live up to their initial hype, it seems many investors have simply lost interest in Buy My Place.

I bought a relatively small investment in Buy My Place at $0.155 cents each last week. I will be watching the coming 4C closely due in just over a month’s time, and if they can start reducing their loses I will likely add to that position.