Copy + paste of a post on another forum:I wrote a post on Sequoia noting some interesting movements in the business a few weeks ago. Noting thatAcorn Capitalhas become amajor share holderand the company is preparing itself for large acquisitions that will be funded via a $15m debt facility.
Sequoia's misread AGM results
The business held their AGM today, which saw the share price crash 10% to around 48c, despite giving what was a really positive profit guidance (Normalised Dec 22 NPAT UP 38% on Dec 21).
Unfortunately the way the profit guidance and results were presented gave the impression of a poor result - which is beyond bizarre - leading to a price crash.
"The firm noted client remediation payments from a 2019 remediation matters against an adviser who had been terminated in 2019 had been settled for $2.5 million, an abnormal expense incurred by the licensee services division." Disallowed/news/financial-planning/sequoia-seeks-acquisitions-%E2%80%98stem-bleeding%E2%80%99-industry
The above $2.5m expense doesn't impact their current and ongoing operations, and therefore should have no impact on a share price that's valued on the present value of future cash flows - In addition Sequoia noted they are seeking to recover this charge via insurance. However markets are often stupid, and when it's a microcap, a few investors can create amazing buying opportunities when they dump shares.
Historic results and profit guidance are below:
Analysis
Dec 22 Normalised reflects their expected Dec 22 results removing the $2.5m historic 2019 expense. Jul 23 Normalised forecasts the full year results based on conservative forecast and their FY22 margins.
The market doesn't appear to understand Sequoia's business which is a mini financial conglomerate. The one sector that is responsible for reduced revenue (structured products) reports the full revenue from a product sale (for example investors pays $10m for a financial product - SEQ books $10m revenue - but it's not real revenue and a matching expense of $10m is also recorded. This is the reason for the apparent "fall" in revenues, but increased EBITDA and margins.
Sequoia's share crash today and over the last 6 months has seen their shares fall 34% to a real PE of 9.5 despite expected 23% improvement in NPAT in FY23 vs FY22. Therefore if SEQ meets a conservative guidance (removing the historic 2019 abnormal) the shares should return to around 74c at a 14 PE - around 54% growth from today through to Aug 23. If PE reaches 15 this would be an 80c share price.
This conservative analysis is ignoring that SEQ has $15m funding for low priced acquisitions that would boost the share price (seeWTL.AX) or potential for a larger competitor to buy them out due to their current PE of 9.5.
TLDR:
Small investors misread AGM profit guidance, shares crashed, despite positive profit guidance, based on historic PE of 14-15 shares should increase around 60% to be 75c to 80c by Aug 2023.
Some recent articles:
AFR notes Sequoia is busy with a number of IPOs:PAC, Sequoia drum up bids for pre-Christmas IPOs (copyright link)
(20min delay)