COMPANY OVERVIEW:
DDT is a provider of asset-based identification and authenticationsolutions for the government, police, insurance, and major automotive players (SubaruVolvo etc) across the world. Its primary product is DataDotDNA, which is a polymer& metallic microdot (developed by the CSIRO) that has a unique code that isused to identify automotive and other industrial assets. Other solutions includeDataTraceID (authenticity tracking solution in supply chains and consumerproducts), Asset Registers (e.g. Property Vault to search for lost / stolen items)
Note: There was a management overhaul in March 2019 and this new management is responsible for the recent turnaround. Prior to this, DDT's history was very unflattering and driven by a lot of poor (self-interested) management decisions. Thankfully, these days are now behind them.
MY INVESTMENT THESIS:
- After years of underperformance (previous management was shocking!), anactivist takeover and some restructuring has led this business to profitability,with a debt-free balance sheet and a positive cash outlook.
- Historically had some big-name automotive customers (e.g. Holden, Subaru, Volvo,Fiat).
- Geographically diverse with sales in Africa, Europe, North America, Australiaand Asia (decreasing order of size)
- Product was designed by the CSIRO. DDT know have all the IP related toit. CSIRO are still on the register.
- CEO has been actively buying the stock (at 0.8c) and is now the largest shareholder(17%).
CONCERNS:
- This is a punt – Its turnaround story that is still unfolding. So, it is still a bit to early to be fully confident that management have fully turned company's fortunes
- This product had its ‘Day in the Sun” In the mid-to-late 2000s and Early 2010’s (based Google articles). It will be interesting to see if they can bring it back. It has already been on ‘The Block’ this season!
P&L MODEL:
Detailed assumptions are in the image. The highlights include:
- Revenue is growing (I estimate 13% HoH for DataDotDNA and 5% HoH for DataTraceID)
- Cost base has been significantly reduced from prior years. It is hard toforecast as there is no track record under this new cost profile
- Forecasting positive and growing earnings ($0.26m in H1 FY21)
- $10m in deferred tax benefits (not tax payments over the next 2 years)
CASHFLOW MODEL:
Detailed assumptions are in the image. The highlights include:
- Positive Operating Cashflows as FY21, resulted in all supplier paymentsbeing reset to agreed payment terms and no further restructuring costs
- Limited investing expenditure (only a small amount on PPE additions)
- No further Capital Raising required (unless to accelerate growth)
VALUATION:I have chosen to try two valuation methods to estimate a Fair Value Estimate (See image).
Based on these I estimate Fair Value Estimate of 1.1c to 1.6c
Approach 1: PE Ratio (Fair Value Estimate = 1.1c to 1.5c)
- Revenue growth = 5% (TTM H1 FY21 = $3.9m)
- Earnings = TTM H1 FY21 = $0.5m
- EPS = $0.0005 (assumes no share dilution)
- Target PE Ratio = 25-35x (Comparative set =25x, Industry average ** St = 35x)
Comparative set includes PCK, ADA, COO, CCG, CXZ
(Characteristics are Tech Business, Market Cap<$200m,Revenue<$40m, Positive Earnings)
Approach 2: Discounted Cashflows (Fair Value Estimate = 1.6c)Assumptions:
- WACC = 9.9%
- Beta = 1.46 (Investing.Com)
- Debt Free
- Cost of Equity = 9.9%
- Terminal Value = $18m
