IOT segment is projected for massive growth wouldnt getting pole...

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Spekul8

2,639 Posts.

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08/10/19

08:20

Post #: 40766183
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Originally posted by mal85: ↑

if you know any fundamentals of valuation, incrementally improving ROIC (improving profitability) is much more important than chasing growth- if the ROIC<WACC then incremental growth actually destroys corporate value. The exception to this is in the few cases (in my experience very few, and we generally know who they are) where scale actually improves profitability (things like marketplaces) and these sorts of businesses need a LOT of capital to get up and running (generally a VC game).

Once ROIC>WACC the relationship is a bit more nuanced. In an industry with structurally low growth, it is better to invest in improving profitability and in high growth industries it is better to put the foot on the pedal.

Anyway what you have written above is fundamentally wrong (theoretically). Practically speaking, I agree with you that getting debt cheaper in the low end of town is very difficult and this isn’t a bad rate. However, there are quite a number of caveats which show that this is actually not a great deal. This is secured debt (1st ranking) with very high fees for early payment and additional granting of warrants (the actual debt is priced at 17%pa). I would definitely rather be owning the debt than be a shareholder of this business structurally (If things go well, get some of the upside and also get paid very well for the effort, if things go really bad won the business and recoup some costs along the way).

Moreover, experience (mostly earlier on in my investing career, thankfully) tells me that the looming debt mountain causes sustained weakness in the shareprice, typically ending in a more dilutive capital raising down the track (better case) or administration (worst case). At least in this situation the 4yr term actually gives them a fighting chance.

Anyway I don’t know where this will go, and your reasoning may turn out correct, but the odds are against you.

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IOT segment is projected for massive growth wouldnt getting pole position to stomp that pedal be a smart move ? don't worry rhetorical , your assumptions are based on a specific sector model not realising the transient development encroaching this space.

SE1 Price at posting: 8.0¢ Sentiment: Buy Disclosure: Held
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