Ann: Major New Contracts and Retail Sector Expansion, page-9

It’s their forecasted earnings so I doubt they would make such a claim if it was not achievable or a likely outcome, as this would be misleading, so it is reasonable to include it. They stated they have contracts for this new division and the $500k is what they forecast it will generate, however as this is a new division I would expect a greater level of potential variance.

If you go through the financial provided in the prospectus there are a number of items to strip back, including small impairments, which gives a higher underlying NPAT margin. Revenue for FY15, prior to the new contracts, was explicitly forecasted as $14.2m (Preso & Prospectus), which on NPAT of $1.92m is a margin of 13.52%. The question that will be answered in time is whether the incentivised NPAT level requires renewals and new wins to meet which implies a lower margin level and would be the only mismatch/issue in my figures.

Revenue is down but NPAT is up on FY15, however the FY16 revenue numbers assumed no renewals of contracts that rolled off earlier in the FY (i.e. not charged for a full year). IMO, the only way to expect revenue of $19m in this FY is to assume all renewals are completed (in which FY15 revenue level is carried forward) and to add every dollar mentioned in the latest update plus some.

As the business is built on shorter dated rolling contracts, I think the valuations levels I applied are fair and its best not to overdo it as companies like this don’t generally get valued at a premium. If all deals were made on 4 or 5 year plus then a higher valuation level could be justified.

But as you said: “As long as get renewals and keep winning some new contracts they seem very cheap” which I can’t disagree with.