@SteveSage. The structure of the P&L (in which a lot of fixed...

@SteveSage.

The structure of the P&L (in which a lot of fixed cost is embedded in GoGS), combined the break neck speed of the delta in Revenue, full-year numbers are misleading, and it requires looking at shorter time frames in order to get a proper bead on what the exit P&L will look like.

Looking at half-years, it can be seen that the GP Margin reached 15% in JH2023, up from 3% in the first-half.




So, clearly, for this business and the manner in which it accounts for its operating expenses, "Gross Profit" is a somewhat different animal to conventional understanding. The outworking of this is that the level of operating leverage does not only pivot off the normal sources, i.e., CoDB and Operating Leases, but also off the CoGS line! i,e.,

Gross Profit Margin is not independent of Revenue but is a non-linear function of the level of Revenue.

I suspect few people are aware to which this is the case for this business.

Which means one can create one's own adventure with this stock.

For example, at $70m of Revenue, the GP Margin could quote possibly come in somewhere between 20% and 25%, which- at the CoDB of $6.5m (was $6.0m in FY2023) - would yield EBITDA of ~$10m.

At the current EV of $50m (which is overstated by an significant working capital bloat required to fund the growth), that's 5x EV/EBITDA (and 8.3x EV/EBIT, based on $4.0m D&A). Hardly undemanding multiples at all.

And if we get to $90m Revenue, not exactly a stretch target, which could yield a GP Margin north of 25%, and even if CoDB rises to say $7.5m (which it probably will) then - do the math yourself - it implies valuation multiples of <3x for EV/EBITDA and 4x on EV/EBIT basis.

What's more the current EV is overstated to the extent the tailwinds for the business end up being multi-year ones, because the business is pregnant with a significant cash flow windfall as the Working Capital cycle normalises.

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