PART 2 - Building the Profit & LossIn the first post I detailed my key revenue assumptions and drivers for
Equipment Sales and Airtime. I've set it out in a way that if you have a different view you can plug and play with your own assumptions. Remember, it's very early in the Zoleo journey and we don't have a baseline for ANZ sales, so further calibration will/may be required. Despite that I still have a high degree of confidence that this is on or very close to the mark as I've set my assumptions very conservatively.
To build out the P&L we need a view on margins and cost but we also need to understand how BCC report and what is included and excluded. For instance,
BCC's gross profit margin is not clean and is factually inaccurate. Why is this? Well, let me show you why. Here's BCC's gross profit margin based on reported data. Looks fairly standard right?
The above is technically correct but if we dive into the FY2020 annual report to see what the cost of sales actually is we get this...
As you can see from the above screen shot, BCC's cost of sales
ONLY INCLUDES THE COST OF SALES FOR EQUIPMENT SALES. It does not include the cost of sales of airtime revenue i.e. the carrier costs, which I highlighted in part 1. This is fairly significant and needs to be accounted for in any model.
To do this we need to account for airtime cost of sales separately. I've also reconstructed the cost of sales between Zoleo and Other Equipment, which I estimate generate gross profit margins of 15% (my estimate) and 40% (FY2020 Hardware Sales/Cost of Sales = 36%. Note: This will include some high cost of sales Zoleo produt so I've rounded it up to 40%) respectively
I break down all my numbers into half years so I can track performance regularly and look for changes. Here's the annual view, which is probably more interesting and relevant for HC'ers. The revenue numbers come directly from my table in Part 1.
It's worth noting that Airtime "revenue" is actually Airtime Gross Profit. I've accounted for carrier costs upfront so that my model is in line with how the company reports. Even if I did it differently it will still wash through but it's worth noting.
The absolute most important point to note is the sharp reduction in margins that will happen this year. This is largely a function of the high growth in Zoleo. Remember equipment sales at LOW margin are upfront. The high margin Airtime revenue lags and initially is dwarfed by equipment revenue. As a rough example, at $350 for a Zoleo it will take 8.2 months in Airtime at $42.50 ARPU to make the equivalent in revenue. This is why GP will drop sharply this year but keep trending higher in later years. Once you understand this concept your set.
Other very small things to note. I haven't accounted for JV profits or loss even though they're in BCC's P&L. BCC incurred a ~$400k loss in FY2020 from Zoleo Inc. It will probably break even this year and be profitable after that. Because it's difficult to estimate and I've set conservative parameters I've left this at $0 when the actual value will probably be a profit from FY2022 onwards. Other income represents R&D income. BCC report this slightly differently and I try to take these costs 'below the line' to get a clean EBITDA.
Finally, it's worth calling out that
BCC have $1.2m in deferred tax losses. As a rough proxy the FY2021 profit will eat up all or most of that so BCC will start paying tax from FY2022.
While the above has a valuation output,
it is not a valuation. I'll cover that off in Part 3 but you can see that in
FY2022, based on my analysis at the closing price of today and with shares fully diluted, BCC could generate EPS of 7.7c, which would generate a PE of 4.6x.
That would also be the second consecutive year of profitability and the outlook from then would be positive, so I also expect them to start paying DIVIDENDS. They could pay them in FY2021 but again, I'm being conservative. I've applied a 25% payout ratio, which will represent a DPS of 1.9c per share or a yield on today's price of 5.5%.
It's worth noting that this business is not capital intensive. It does not manufacture products. It's essentially a working capital business with very high operating leverage. This means that there is no need for the business to sit on a pile of cash, so the capacity to have a HIGHER PAYOUT RATIO is very high. I've set it at 50% but could set it higher as my balance sheet shows cash piling up. (Note: I don't assume any M&A).
So based on FY2021 data, by my numbers I have sales roughly doubling, the business moving to profitability, and with shares fully diluted (options are out of the money until 50c) I get a PE of just 12x. I'll leave it to you to decide if that is expensive or cheap...
Oh yeah the market cap today is $23.5m and the EV about $18m when you take into account $5m being raised recently. It will not take much for this to be a multi-bagger.
PART 3 COMING SOON...
(20min delay)