Reverse Engineering Expectations of the Q2-FY20 Result and Beyond

Hi Team,

Helping out @Vmk Research as he is short on time.

"When and if I get time to write again, it will be to explain how one should be looking at the sum of expectations for your ARR forecast by reverse engineering from the valuation. At 28 cents the sum of investors have a different forecast than some here. The seller (aside from the tax loss seller) doesn’t think the stock will get above 30. The buyer thinks it can get to 56. So what rate of growth gets you to 56? What rate of growth gets you to 30?" (VMK_Research, 2020)

Reverse Engineering the Q2-FY20 Result

• The current share price is 28 cents, which correlates to a market cap of $236m
• What we know is that as of end of Q1-FY20, ARR was $42.9m, having grown from $40.1m at the end of Q4-FY19.
• The current market cap of $236m is a multiple of 5.5x on the Q1-FY20 result
• For a share price of 56 cents, this is a market cap of $480m (860 million SOI)

As shown in the below chart (which is for SaaS companies), there is a strong correlation with ARR growth rate and the ARR multiple:



So let's get back to the question at hand? What rate of growth gets you to a share price of 30 cents and what rate of growth gets you to a share price of 56 cents. We will do this on a yearly basis because the movement in revenue will be volatile across a quarterly basis:

• End of FY19 ARR was $40.1m
• If end of FY20 ARR comes in at $50m, then LVT has grown at 25% YoY. As shown in the blue trendline, a 25% CAGR on revenue growth is deserving of a 6x multiple. A 6x TTM multiple on revenue of $50m is deserving of a market cap of $300 million, which is a share price of 35 cents.
• If end of FY20 ARR comes in at $60m, then LVT has grown at 50% YoY. As shown in the blue trendline, a 50% CAGR on revenue growth is deserving of a 9x multiple. A 9x TTM multiple on revenue of $60m is deserving of a market cap of $540 million, which is a share price of 63 cents.
• If end of FY20 ARR comes in at $70m, then LVT has grown at 75% YoY. As shown in the blue trendline, a 75% CAGR on revenue growth is deserving of a 11x multiple. A 11x TTM multiple on revenue of $70m is deserving of a market cap of $770 million, which is a share price of 90 cents.

So, to answer the question, the sellers think that across FY20 growth will come in under 25% YoY. Buyers who think that a share price of 56 cents is likely are running on the assumption that LVT can achieve growth of more than ~50% YoY.

If you think growth of more than 25% YoY is likely across FY20, LVT is a strong buy.

Cheers,

T.E.P.