Ann: Court Approves Scheme of Arrangement, page-4

Being a shareholder in WOTSO, I today received WOTSO's Financial Report for DH2020

Taken from the report, I though this is really quite something:




Current Revenue run rate isin excess of $16m pa, based on 71% occupancy of existing desks.

The current cost base of this business is around $20m (all-in, including lease payments).

My sense is that business is able to do well over $20m pa in Revenue off the current asset base, so when it gets to capacity over the next 12 to 18 months, it would become profitable, to the tune of maybe $1.0mpa or thereabouts.

At the same time it has has ample scope to increase capacity in other suburbs/regions which would add an extra $10m in Revenue, without at all cannibalizing the short-term capacity in-filling at its existing venues.

With leases dominating the cost base (~60% of Opex), scale advantages are not massive, so adding $10m pa in new capacity will involve, say, $7m in additional cost investment.  (And that, I daresay, is a conservative figure given WOTSO has 900 "expansion" desks which can be installed within existing sites, so a >20% uplift on the existing 3,950 desks, without incurring any additional lease costs)

So, upon expansion, you would have a business generating over $30m in Revenue on a $25m or $26m cost base, so generating some $4m in PBT, and $3m in NPAT.

Which makes BWF's stated Enterprise Value for WOTSO, namely $30m, look decidedly light-on.

(And that scenario would correspond to around 6,500-odd desks, which is a long way off WOTSO's potential market size which might be double that, if recent industry trends continue.)


Referencing this back to BWF's valuation

Valuing WOTSO at a fairer valuation, which I think is at least $40m, results in BWF's NTA calculation looking something like this:

BWR Stake (11.5m shares) = $16.3m  (25.5c per BWF share)
WOTSO (13% of $40m value) = $5.2m (8.2c per BWF share)
Cash (Last Reported, @ 30 June 2020) = $2.7m  (4.3c/share)
Receivables = $1.5m (2.4c/share)
PP&E =  $0.7m (1.1c/share)

Less:
Current Liabilities = $1.6m (2.5c/share)
Non-Current Liabilities = $4.2m (6.7c/share)

Equals:
Net Tangible Assets = $20m (32.3c/share)

This implies that the market is currently valuing the operating business - i.e., the management company - at less than 7cps (or around a little more than $4m in total).

The management business has made profits ranging between $1m (in Covid-impacted FY2020) and $5m in the good years, when decent performances fees are banked.  

So even if we take $2.5m as some kind of "normalised" level of management company operating earnings, it means the market is effectively capitalising the management company earnings at a P/E of less than 2 times.


If one capitalises just $2.0m of management company NPAT at modest multiple of 12 times, it results in a valuation for that part of the company of $24m (or ~38c/share).

Add that 38c to the 32c of NTA (and one can do that because the management business could operate totally independently of the parent company with negligible NTA impact), and you get a fundamental value for BWF of 70cps.

That represents some 80% upside from the current share price.

Even if I am merely approximately right, it is difficult to see an investment made in BWF today not being a profitable one.

(Heck, even if I say the sustainable earnings of the management activity is just $1.0m pa, and I apply a heavily discounted 8x multiple to that business, it still results in a fundamental value for BWF of around 45c. So the "scorched earth" scenario throws out 15% upside to the current share price.)

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