Ok, it's worth updating the thread given we now have the 1H21 report and today BCC announced another 12.5k units were shipped to North America.
Let's just start with the 1H21 numbers and recent share price action. Broadly everything was in line with my expectations but this was a bit of a nothing result and is just not materially important - it feels a bit harsh to say that but it's true. I pointed out numerous times that due to the nature of the business model that these numbers would be somewhat weak and that GP margins would fall (see GP margins below)
Given the reaction to the 4C (i.e. a sell off because investors didn't understand the detail -
https://hotcopper.com.au/posts/50502525/single) I anticipated some weakness post the results
https://hotcopper.com.au/posts/50970714/singleThis weakness is not helped by the fact that this is not widely held, the accounts are very confusing and at face value the numbers didn't look great relative to the many positive announcements of new sales, product award wins, new retailers etc. It was totally understandable for this to go down and the recent market weakness hasn't helped either.
Unfortunately the poor disclosure on the JV is starting to and will continue to affect the SP. The company has heard from numerous shareholders regarding this disclosure but they want to minimise detail to not attract the attention of Garmin. While this is understandable, it really means that this is a medium term hold unless you're good enough to swing trade and scalp a few pips in between announcements - that's not my modus operandi btw.
As for the JV,
what they have disclosed is extremely confusing and I'm sure there is some accounting trickery going on (all IMO as I can't prove that). I'd be keen to hear from others if they've done a deep dive and can work this out as I can't and I do this for a living.
Exhibit 1: 2020 Annual Report:
Zoleo JV summarised accounts
Now it's worth mentioning that my previous detailed work on BCC's valuation will not match their accounts as I don't equity account for the JV. Instead I run the implied revenue & profit splits through the operating accounts of Beam. The reason I do this is there's not enough detail or information to understand how the JV works. In theory we should arrive at the same numbers but there is one material caveat and that is my DCF assumes that cashflow from Zoleo airtime comes to Beam in the corresponding period whereas for this to actually happen the JV needs to pay out dividends. This starts to get really messy quickly.
Anyway, back to the JV. We've been told the following by BCC:
My interpretation of the above is that Beam incurs direct costs for Zoleo through their accounts. My standing assumption is that costs from the 2020 annual report are costs that should be split.
We also know from announcements and this has been confirmed by BCC's IR that Zoleo Inc's COGS represent the JV buying the devices from Beam. If we cross check the numbers this makes sense. In FY2020 Beam sold 6276 units. At $350 per unit we get $2.196m, which matches the COGS in the JV. So in effect Beam sell the devices to themselves, or at least 50% of themselves.
But the really confusing part is the revenue line. We only have 1 data point, which makes it extremely difficult to understand what is in this. If that is airtime just by itself it doesn't make sense as that would imply $346 in sales per device and they only announced their first sale in Q3 of FY20. So my best guess at the moment is that revenue also includes rebates on the devices, which is common for these types of businesses. This would be a great way to confuse and misdirect anyone looking closely. Unfortunately this means that with very limited information in the 1H21 numbers, it's hard to get a read and accurately update the valuation as the most important valuation driver, i.e. zoleo airtime, is being hidden.
One way I do get comfortable though is reverse engineering the numbers to sanity check my thesis. If BCC do 43,500 units in FY21 (my forecast but Beam has already confirmed 37.5k in sales in various announcements so it will be close), that's gross profit of $2.3m based on a RRP of $350m and 15% GP margin. I'm assuming other equipment sales will be $6.6m at 36% GP, which provides another $2.4m in GP or $4.7m in total. My total opex estimate for FY21 excluding abnormals and tax is $4.6m. We know they've paid their debt down so if I just look at equipment sales, the business breaks even this year (note BCC has tax assets). But when you add airtime in then the economics change. As I've mentioned above, it's hard to get a read on what that looks like we know it's not nothing, we know it's high margin and we know it's incremental to this example, so that gives me confidence the buy thesis remains intact even though disclosure is poor/frustrating. GLTAH
(20min delay)