Ann: Record FY21 results deliver positive EBITDA, page-84

"Don't get me wrong: I don't hate it as an investment idea.
At a sub-$50m EV, it certainly isn't priced for anything like a hill of beans of success.
It addresses a market which is certainly big enough to see it become a multi-hundred million dollar business'; it's just that the path to get there is not sufficiently obvious to me."


I don't mind saying that I have been buying PYG in recent weeks because - despite the soggy SH2021 result - soggy not because of the top-line; that was actually strong, but soggy because of the big cost investment being made in the core PayAsia business (one trusts that these are "good costs", the ones that will drive future revenue growth, as opposed to "fatcat costs", but given the skin management has in the game, I'm going to assume it's the former).

Having re-visited the company after the release of the SH2021 result, it occurred to me that one of the things I might have got wrong in my assessment of the business model was that I saw it as a commoditised technical process business (i.e., payroll processing) - which is what it currently mostly is.

But what I missed is the bit about what PYG is aspiring to become, namely a software service business, should it be successful in cross-selling ancillary HR services to its existing (and very sticky) client base,on a SaaS basis.

If it can achieve this then the upside - both from accelerating earnings as well as the multiple the market will apply to those earnings ('specially if they have the "SaaS" flavour about them - will be significant.

Because, for a company which is more than adequately funded, likely to finish the current financial year with ~$7m cash in the bank, is EBITDA profitable and OCF break-even (it consumes a some capital in investing in Intangibles, mind) an Enterprise Value of $40m is not at all a big number for a business expected to beat a $37m pa recurring revenue at the end of March.

The rough calculus to determine current pro forma operating earnings is something like:

Revenue = $37m
Gross Profit = $20.5m (@55% GP Margin)

Less: CoDB = $12m
=> EBITDA = $8.5m

Less: D&A = $3.5m
=> EBIT = $5m


So that's EV/EBITDA of ~7 x and EV/EBIT of 16x


Not much priced in at all for the growth optionality... especially if the company is able to be evolved along the SaaS path.

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