FYI All
You may have seen earlier in the week, Novatti Group (ASX: NOV)announced $10.5 million in funding, which we believe may be linked to theirbanking licence application.
Part of the process to obtain a banking licence is capitalrequirements so it makes sense for them to strengthen their balance sheet inpreparation for the launch of their banking business.
What is probably most significant about the $10.5 million is themethod that Novatti secured - issuing a corporate bond, allowing for thepossibility of secondary market trading via the Austraclear system. This is anunusual way for small cap companies to secure capital, and we believe it is oneof the very few instances where financiers issued one to a company that is notyet cash flow positive.
The reason Novatti was able to do so is largely thanks to their19.9% stake in Reckon, which is effectively a ‘lazy’ asset sitting on Novatti’sbalance sheet. Upon issuing of Reckon’s expected special dividend and interimdividend, it will take Novatti’s total collect from Reckon dividends in thelast 18 months to more than $14 million. On top of that, the stake has achievedits initial purpose of opening dialogue between Novatti and Reckon whereNovatti now provides merchant services to Reckon’s 118,000 SME cloudusers.
The interest rate payable on the $10.5m is the BBSW rate + 6.5%.Right now it's about 8.8%. This will mostly be paid from the ongoing dividendsNovatti will be paid from dividends. With the funding, it takes their cash to$16.5 million while there is a further $12m in Reckon dividends expected tocome their way in the coming months too.
One of the other elements of the funding, has been Novatti’sdecision to secure it via non-dilutive means. This shows a lot of respect totheir shareholders which have been patient over the past 12 months around theirbanking licence application which shouldn’t be far away. The alternative wouldhave been to raise funds via a capital raise but having done so previously withpoor post-raise performance, this deal makes a lot of sense. Raising capital ata discount to their current price would have not only diluted shareholders, butalso undervalued NOV shares.
We expect the funds to primarily be used as collateral fortransactional purposes where Novatti is the middle man for digital payments. Byincreasing their collateral (normally 24-48 hour hold time), Novatti ispreparing to processing much higher transaction volumes, of which they wouldretain a margin on as their revenue, which already increased 97% in FY22.
