Ann: Appendix 4C - quarterly, page-4

Tony Featherstone uses STG as an example for discussing IPO on Swtzer Report website. Here are his interesting comments about this company:

Straker Translations (STR) could be one of them. The translation-services platform sought $21.2 million through an IPO on the ASX in September 2018 at $1.51 a share.

The stock popped to $1.85 soon after listing, before tumbling to $1.20 during the fourth-quarter CY18 market sell off. Straker now trades at $1.17 on low volume.

There wasn’t much news to warrant the fall. In its November half-year presentation, Straker re-iterated it was on track to meet prospectus forecasts, as expected. The company’s actual pro-forma revenue slightly exceeded prospectus forecasts in the nine months to March 2019.

Perhaps the market expected more: some IPOs leave a little earnings “wriggle room” so they can under promise and overdeliver soon after listing to pump up the price. I prefer companies that play it straight and do what they say they will in the prospectus.

In February, Straker acquired Com Translations Online, a Spanish audio-visual translation company, for NZ$742,500 and an earn-out. The deal takes Straker into the video translation market and I like that it is an all-cash transaction; there was no dilutive equity capital-raising issue to buy the business.

The NZ-based Straker is an interesting business. Founded in 1999, it has developed a cloud-based, hybrid language-translation platform. Known as RAY, the platform helps human translators deliver faster and more accurate translations, and bigger margins for Straker.

RAY uses artificial intelligence to produce a first-draft machine translation, then uses one of its 13,000-plus human translators worldwide for the next review, then another human review. Essentially, Straker uses advanced technology to speed up human-led language translation.

The market for language translation was estimated at US$43 billion in 2017 and is expected to grow to US$67 billion, according to forecasts in Straker’s prospectus. Globalisation, the boom in online content, e-commerce and regulation are driving growth in language translation.

Consider a mid-sized Australian company that wants to expand overseas. It needs to replicate its website across ASEAN countries and in China and India. Website content, marketing materials, press releases, contracts and so on must be translated for those markets. It might also have explanatory videos that need translation.

Although translation technology is rapidly improving, it’s likely we’ll need a mix of human/AI translators for some time, particularly with important corporate documents – hence Straker’s hybrid translation model. Google translation services won’t be enough for this market segment.

Straker is no Appen, a star AI provider of language-technology data and services. Capitalised at $2.66 billion on ASX, Appen’s three-year annualised total shareholder return is 132%. Speculators hoping Straker is the next Appen will most likely be disappointed.

But the $62-million Straker looks well run and governed and has benefited from having venture capitalists as investors and on its board. ASX-listed Bailador Technology Investments was an early investor and reduced its holding from 20.4% to 14.1% after the float.

Straker is growing organically and through small acquisitions offshore. Europe, the world’s largest translation market, now contributes the largest share of Straker’s revenue. The business has 122 employees in 10 offices in Europe, the US, Asia and Trans Tasman, and a genuine, expanding global footprint – usually a feature of high-growth small-caps.

Slide 14 on Straker’s latest investor presentation caught my eye. It shows Straker’s business model and operating leverage in action. The company charges clients by the word and pays its translators an hourly rate. As the AI technology learns, it is capable of translating more words each hour, but the hourly rate for human translators has been mostly flat for the past few years.

Straker averaged 1,023 English words translated per hour into French in CY18, up from 469 words in CY15. Over time, this higher word count boosts Straker’s volumes and margins, potentially supercharging profits.

I suspect the market has underestimated other aspects of Straker. First, the value of having a relationship with 13,000 translators worldwide and being able to draw on translators in lower-cost markets.

And second, the immense distraction of an IPO and how small-cap management teams have so much more time for the business after the listing is done.

To be clear, Straker suits experienced investors who understand the risks of micro-cap IPOs and lower-liquidity stocks. This is not a stock for conservative investors or those who cannot tolerate volatility, short-term price falls or recover from capital loss.

Straker made a small loss in the first half of FY19 and there are always potential landmines when emerging ventures try to grow rapidly in global markets. The stock should be considered speculative and receive a portfolio allocation that reflects the risks.

Moreover, there is no obvious catalyst to re-rate Straker in the next few months, excluding a takeover. Straker looks like a neat bolt-on acquisition for a larger global tech firm but buying companies solely on the basis of takeover speculation is dumb.

Also, 27.6 million Straker shares were subject to escrow in the IPO and cannot be released until the company’s half-year FY20 results in November 2019. That could trigger selling if early investors decide to exit, but much will depend on Straker’s price at the time.

Either way, Straker is worthy of a spot on portfolio watchlists for investors who like to track promising micro-caps. The stock’s early performance has disappointed IPO investors, but prospective investors would be buying it 22% below the issue price.

Straker looks to have more substance that many micro-caps with similar valuations. The company has almost $20 million in cash and a high proportion of repeat revenue growth, meaning it should be able to fund small acquisitions internally – another good sign.