"The key risk from here, is whether SP3's management will be able to generate a satisfactory return on the capital that is raised. So basically, it comes down to execution risk. "
We meet again!
I've been using this liquidity event to establish a position in this company.
The way I figure is that, at a mere $6m-odd market value [*], not much has to go right for the company to be worth a great deal more than it currently is.
My simple investment thesis goes something like this:
Instead of making an explicit forecast for earnings (which would have very little value because it is little more than a crap shoot at this stage), what I've done is I've reverse-engineered the problem to solve for the level of Revenue that would need to be reached in order to justify the current market value for the business.
So, a case of starting from the bottom of the P&L and working backwards, all the way up to the top line.
I'd be happy to pay 10x P/E for the company, which means it would need to be generating NPAT of around $0.6m
Which works out to Pre-Tax Profit of $0.8m; same as EBIT given there is negligible interest expense.
Depreciation charge runs at around $0.4m pa, so EBITDA is $1.2m
Its a business with a $5m fixed cost base, and it generates 60%-63% GP Margins
So, $1.2m in EBITDA and $5m of fixed costs, meaning Gross Profit of $6.2m.
Grossing-up $6.2m for 60% GP Margin yields required Revenue of around $10.3m
This compares to the current Revenue level of around $5m which is double what it was in FY2018.
For context, SP3's Revenue trend over recent years has been as follows:
FY2016: $0.9m
FY2017: $1.3m
FY2018: $2.5m
FY2019: $4.8m
FY2020: $4.8m (Covid-impacted JH, DH was 19% higher than pcp)
Based on that trend, the large market opportunity that exists, and the differentiated offering in the form of the STA6 platform, I have no doubt that Revenue in excess of $10m is easily attainable.
In fact, it would not surprise me in the least if Sales of $20m were not reported some time over the next few years.
[*] It really has no place being a publicly-listed company, and I suspect that if the execution is poor, those $6m in Revenues $3m in Gross Profit and $2.0m in Net Current Assets will be worth more to someone else!
.
Expand
