"a simplistic calculation has them at about 15% of the terminals Tyro have in the market if they operate on similar margins then I have them on $300 m market cap net of nz sale"I came at it from a first-principles, bottom-up approach and said to myself, for the stock price to double from here, what kind of revenues would need to be generated?
The (very basic) scenario analysis, which is intended to provide some rough idea of the upside potential for the share price, makes the following basic assumptions:
1. GP Margins of 75% (much lower than the >90%-odd GP Margin levels that are achieved by SMP in the NZ market, to provide for a more competitive business landscape in Australia
[*])
2. Fixed Costs of $14m (which is ~15% higher than FY2019's Cost of Doing Business of $12m, despite the FY2019 result including the NZ business, so a conservative assumption, I like to think),
3. Depreciation of $2.5m pa ($4m pa in FY2019, including the NZ business, but NZ accounted for 90% of Non-Current Assets, so $2.5m is, again, considered conservative).
4. Amortisation Expense of $2.0m (currently $2.5m, including NZ, so assumes continuation of ~$1.5m pa of software development costs and halving in customer contract amortisation charges from $1.om (incl. NZ) to $0.5m ex-NZ).
5. No material change in the capital structure (i.e., assumes all earnings get distributed to shareholders).
6. Assumes full taxation expense at the corporate rate of 30% (despite the company having around $9m in carried forward losses available for tax reduction potential within Australia... see Note 19a of the FY2019 Annual Report).
7. Considers a range of annual Australian Revenue scenarios, from $40m, to a base case of $50m (which would represent around a single percent share of projected industry Revenues in 3 years' time based on current trends), through to bull case scenario of $60m.
The outworkings of this scenario analysis are summarised in below, in the valuation matrix with revenue scenarios arrayed against various share prices/market caps:
View attachment 1972744As can be seen, on the $50m Revenue Base Case - and applying the broad assumptions discussed above - this would result in a near- $19m EBT and ~$13m NPAT business.
On that basis, the current share price is implying a P/E multiple of 10.7x and EV/EBITDA of 5.6x. Which is unambiguously cheap.
And even if the business can only reach Revenue of $40m, at the current price, that would not leave the company over-valued (17.8x P/E and 8.3x EV/EBITDA), in my opinion.
I think that even a share price of $1.00 ($200m Market Cap) applied to that Base Case would not be expensive (~15x P/E and ~8x EV/EBITDA), but at $1.25 (~$250m Market Cap) the valuation is starting to get a a bit elevated (19x P/E and 10.5x EV/EBITDA).
And at $1.50 (~$300m Market Cap) it would be overvalued (~23x P/E and almost 13x EV/EBITDA), in my view.
Of course, if the company is able to get to $60m of Revenues (corresponding to ~$30m of EBITDA and $26m of EBIT), then even the $1.50 share price would be reasonably supported by valuations of 16.4x P/E and <10x EV/EBITDA.
In closing, it warrants stressing that - due to the very nature of SMP's situation - the above analysis is far from an exercise in precision; rather, it is a first-pass ready-reckoner intended merely to offer some kind of broad view into what the market is currently pricing into the valuation of the stock, and what potential further upside there might be if the planets align the way shareholders hope.
And of course, this is all quite preliminary thinking, because the sale of the NZ business has not even been completed yet, so there still remains a lot of water that has to first pass under the bridge before we can even begin to start seriously considering Australian revenues amounting to tens of millions of dollars.
[*] Noting that Tyro's GP Margins is closer to ~50%, but that's not really a like-for-like comparison, because Tyro's business model is somewhat different to SMP's in that Tyro also acts as a short-terms lender to merchants, as well as offering other business banking products.
(20min delay)