Ann: Quarterly business update, page-6

This company is a mere baby; as recently as 3 years ago, just after it IPO'd, its issued capital was a mere $8m.

It often strikes me that that, when it comes to investing, most people devote almost no time to thinking about the stage of corporate evolution of a business.

Often, when founder-led businesses list in order to access capital, the pre-IPO shareholders want to limit the degree to which they have to sell stakes in their company, so many small businesses start listed life either still under-capitalised (necessitating follow-up capital raisings) or they are run with unsustainably-low cost structures. And in a great many cases, both of these.

PYG is no exception, based on my observation:

After the initial $8.5m IPO raise, the company has issued an additional ~$21m in Equity.

And this has been coupled with an element of catch-up on the opex front, some of which is evident in the financial results over the past 18 months, including today's update.

One salient feature from today's update was the $7.8m cash receipts in the Dec quarter.
For context, for the full 6m to March 21, Cash Receipts amount to $10m.
(So the Revenues being booked are real.)

But this sharp jump in Receipts did not translate into Free Cash Flow, given the cash position fell by a large $1.5m during the quarter.

The increased cash opex (and investment in intangibles, no doubt) is, I expect due to a combination of four factors:

1.) Addition of resources front-office resources (i.e., Sales & Marketing, business development, account management, that sort of thing)
2.) Investment in development of new products/applications
2.) Increase in working capital as a result of the rapidly growing revenue
4.) Some opex catch-up to sustainable back-office cost base (as discussed above)

Of those, 1.) to 3.) are what I call "good costs", i.e., they are intended to drive increased future revenue and cash flows, while 4.) is what I call "essential costs", i.e., they don't translate directly into increasing revenues but are required to support the enterprise in being able to deliver the services behind the revenues.

So while the capital consumption in the quarter is higher than I would have preferred, reading between the lines of the announcement my clear sense is that the business is expanding at a rapid clip, so a capital draw at this point in the company's evolution is not overly surprising.

Of course, the important thing is that there will come a point at which the Cash-In/Cash-Out jaws open up again.

I suspect PYG is not far from that point (it got there in SH2020, but that was presumably a function of self-imposed austerity with the onset of Covid).


So while the capital consumption is an aspect on which to maintain a watching brief, the real valuation upside lies in the optionality around accelerating the monetisation of ancillary products such as the Payments product, Superannuation choice product and the Access Wages Earned product.

While it is still relatively early in the piece, in this "monetisation" respect I feel the company is executing well.

PYG is by no means a slam dunk investment proposition, but today's update represents a de-risking milestone in my book.

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