Firstly to be clear I hold a long position in BIG that represents 4% of my capital. I am not looking to short the shares and have no intention to purchase more however I felt that there had been quite a bit of misleading statement made especially by some non-holders whom I suspect really have only glanced at the announcement and haven’t really read through it a few times to piece it all together.
My philosophy with investing and trading has always been to focus on the business and the numbers themselves and block out the ramping and noise that surrounds it. If you are just looking for a post that is going to cheer on the stock then you may want to stop readingbut if you are like me and like to get into the nuts and bolts of a company and try and build a deeper understanding on the potential risks and factors affecting it then hopefully the points I note below might assist you with your own analysis and get you thinking about something that may not have even crossed your mind at this point.
As always if you have anything constructive to add or if you think I have missed something then always happy to be corrected and share thoughts. With that said I will go through my understanding of what the announcement means for us holders.
1. FC Capital and the ‘sponsorship’ agreement
Whilst I didn’t have any issue with BIG offering finance to their clients to finance the package I feel that the comparisons to Harvey Norman type scenario aren’t a realistic reflection. Based on the information under point 20 in their response dated 20th February I made a flowchart to visually show exactly what is happening.
Legend:
BLUE: Activities undertaken by BIG
YELLOW: Activities undertaken by Customer
BLACK: Activities undertaken by FCC
As you can see where customers are not accepting videos the company ends up in a loop where the only way out is to find a customer that accepts the video or they pay the cancellation fee. To date given their growth in customer numbers they have been able to replace these customers that do not take the video and haven’t had to pay any cancellation fees. The issue here is that the whole time they are looping through steps 6-9 they are not generating any extra income and are having to wear the expenses of going through this loop.
1.1 The potential liabilities to FC Captial
We know now that if a customer isn’t replaced that BIG will have to pay FCC back any amount of the offer amount paid as well as 24% of the offer amount as a cancellation fee. I have outlined 2 scenarios here since it doesn’t specify the treatment of the commission paid to FC in this situation. Both these scenarios assume that no clients accept the video nor are replacements found. This is a near impossible outcome but the goal of this exercise isn’t to look at the most likely outcome (I do that later on) but rather look at the disaster scenario to see what the worst possible case looks like. Common sense would lead you to think that if the finance is ‘cancelled’ and money returned that FCC would not be entitled to a commission hence this would form part of the money already paid back to FCC by BIG but it doesn’t state either way so feels more responsible to consider both possibilities.
The following table lists the total offer amount outstanding, this is jobs where BIG has not yet reached Step 10 as once this happens we know that FCC then transfer within 2 days the amount held as a security deposit to BIG so this can be reversed engineered to work out the other amounts.
Column 1
Column 2
Column 3
1
Money Held as Security Deposit
$ 19,859,416
(Noted in point 25b 22nd Feb Response)
2
Money Transferred to BIG
$ 16,953,160
(19,859,415.85 / 0.41 x 0.35)
3
Money Paid to FCC in Commission
$ 11,625,024
(19,859,415.85 / 0.41 x 0.24)
4
Total Offer Amount outstanding
$ 48,437,600
5
Potential Cancellation Fee
$ 11,625,024
Scenario 1:
The first scenario considers that the 24% commission isn’t applicable where the finance is cancelled and hence already forms part of the funds returned to FCC.
Column 1
Column 2
1
Cash on Hand
$31,369,428
2
Less: Return of 35% provided to BIG
$16,953,160
3
Less: Return of 41% security deposit
$19,859,416
4
Less: Payment of 24% cancellation fee
$11,625,024
5
Cash Balance
-$17,068,172
6
Total Potential Liabilty
$48,437,600
In the event that every single customer choose not to accept their video then BIG would have to pay FCC $48.4m including cancellation fees which would put it in a position where it would be short 17m in cash.
Scenario 2:
In this example which considers the wording in the announcement that they have to return the paid offer amount which technically would include the commission as this is paid to BRTV which is then forwarded to FCC.
Column 1
Column 2
1
Cash on Hand
$31,369,428
2
35% provided to BIG
$16,953,160
3
41% security deposit
$19,859,416
4
24% commission
$11,625,024
5
Less: TOTAL of Offer Amount
$48,437,600
6
Less: Payment of 24% cancellation fee
$11,625,024
7
Cash Balance
-$28,693,196
8
Total Potential Liability
$60,062,624
In this event BIG would have a maximum liability to FCC of $60m which leaves it at a $28m shortfall.
On the surface these figures don’t look great however again it needs to be remembered this is the worst possible case scenario and would be just as silly as considering the best case scenario where every single client accepts their video.
Some notes to add to this potential liability is that FCC only have security over BRTV assets which is noted as having $4,194,577 so technically the $7,315,435 held in the account of Big Un is out of reach of FCC.
Overall though the worst case scenario liability isn’t too extreme and could easily be plugged with a capital raising pending the overall business is chugging along well.
1.2 The amount of videos that they would need to undertake to wind down the agreement
I have seen some people saying that BIG should move away from the finance and per BIG’s announcement they are well in their rights to wind down the financing structure should they desire, they only need to get sufficient customers to accept enough videos to clear out the existing security deposit funds at which point their liabilities to FCC would end.
The question is just how many videos would it take to unwind the financing giving the amount of outstanding offer amount that has been financed.
Well we know that they are not going to have all customers accept so for this exercise we need to make some assumptions. For this I have used the table provided by big to try and get a gauge of the video acceptance rate.
I have taken as accepted 791 (point 16 22nd Feb response) + (3264 Non-FCC – 468 US Sponsorships) = 3,587 accepted videos. Against this I have factored total number of non accepting as 7,955 so we end up with a rate of 3,587 / 11,542 or 31% as a justifiable figure. For the sake of comparisons I have included a 40% acceptance rate as well as the 46% acceptance rate they noted on their table (however it is misleading as this 46% also includes customers that have not completed step 6-10 yet (see flowchart for reference) so I have excluded them completely.
Scenario 1: 31% of FCC financed clients accept their video
Column 1
Column 2
Column 3
Column 4
Column 5
Column 6
Column 7
Column 8
1
Production Cycles
Balance of Security Deposit
Value of Videos in Production
Total value of videos produced
Value of Videos Accepted (31%)
Security Deposit Released
Total Security Deposit Released
Total Received by BIG
2
Now
$19,859,415.00
$48,437,598
$48,437,598
$15,015,655.24
$6,156,418.65
$6,156,418.65
$23,109,577.80
3
Cycle 2
$13,702,996.35
$33,421,942
$81,859,540
$10,360,802.12
$4,247,928.87
$10,404,347.52
$27,357,506.66
4
Cycle 3
$9,455,067.48
$23,061,140
$104,920,680
$7,148,953.46
$2,931,070.92
$13,335,418.44
$30,288,577.58
5
Cycle 4
$6,523,996.56
$15,912,187
$120,832,867
$4,932,777.89
$2,022,438.93
$15,357,857.37
$32,311,016.52
6
Cycle 5
$4,501,557.63
$10,979,409
$131,812,276
$3,403,616.74
$1,395,482.86
$16,753,340.24
$33,706,499.38
7
Cycle 6
$3,106,074.76
$7,575,792
$139,388,068
$2,348,495.55
$962,883.18
$17,716,223.41
$34,669,382.56
8
Cycle 7
$2,143,191.59
$5,227,297
$144,615,364
$1,620,461.93
$664,389.39
$18,380,612.81
$35,333,771.95
9
Cycle 8
$1,478,802.19
$3,606,835
$148,222,199
$1,118,118.73
$458,428.68
$18,839,041.49
$35,792,200.63
10
Cycle 9
$1,020,373.51
$2,488,716
$150,710,915
$771,501.93
$316,315.79
$19,155,357.28
$36,108,516.42
11
Cycle 10
$704,057.72
$1,717,214
$152,428,129
$532,336.33
$218,257.89
$19,373,615.17
$36,326,774.32
12
Cycle 11
$485,799.83
$1,184,878
$153,613,006
$367,312.07
$150,597.95
$19,524,213.12
$36,477,372.26
13
Cycle 12
$335,201.88
$817,566
$154,430,572
$253,445.33
$103,912.58
$19,628,125.70
$36,581,284.85
14
Cycle 13
$231,289.30
$564,120
$154,994,692
$174,877.27
$71,699.68
$19,699,825.38
$36,652,984.53
15
Cycle 14
$159,589.62
$389,243
$155,383,935
$120,665.32
$49,472.78
$19,749,298.16
$36,702,457.31
16
Cycle 15
$110,116.84
$268,578
$155,652,513
$83,259.07
$34,136.22
$19,783,434.38
$36,736,593.53
Scenario 2: 40% of FCC financed clients accept their video
Column 1
Column 2
Column 3
Column 4
Column 5
Column 6
Column 7
Column 8
1
Production Cycles
Balance of Security Deposit
Value of Videos in Production
Total value of videos produced
Value of Videos Accepted (40%)
Security Deposit Released
Total Security Deposit Released
Total Received by BIG
2
Now
$19,859,415.00
$48,437,598
$48,437,598
$19,375,039.02
$7,943,766.00
$7,943,766.00
$24,896,925.15
3
Cycle 2
$11,915,649.00
$29,062,559
$77,500,156
$11,625,023.41
$4,766,259.60
$12,710,025.60
$29,663,184.75
4
Cycle 3
$7,149,389.40
$17,437,535
$94,937,691
$6,975,014.05
$2,859,755.76
$15,569,781.36
$32,522,940.51
5
Cycle 4
$4,289,633.64
$10,462,521
$105,400,212
$4,185,008.43
$1,715,853.46
$17,285,634.82
$34,238,793.96
6
Cycle 5
$2,573,780.18
$6,277,513
$111,677,725
$2,511,005.06
$1,029,512.07
$18,315,146.89
$35,268,306.04
7
Cycle 6
$1,544,268.11
$3,766,508
$115,444,233
$1,506,603.03
$617,707.24
$18,932,854.13
$35,886,013.28
8
Cycle 7
$926,560.87
$2,259,905
$117,704,137
$903,961.82
$370,624.35
$19,303,478.48
$36,256,637.63
9
Cycle 8
$555,936.52
$1,355,943
$119,060,080
$542,377.09
$222,374.61
$19,525,853.09
$36,479,012.23
10
Cycle 9
$333,561.91
$813,566
$119,873,645
$325,426.26
$133,424.76
$19,659,277.85
$36,612,437.00
11
Cycle 10
$200,137.15
$488,139
$120,361,785
$195,255.75
$80,054.86
$19,739,332.71
$36,692,491.86
12
Cycle 11
$120,082.29
$292,884
$120,654,668
$117,153.45
$48,032.92
$19,787,365.63
$36,740,524.77
13
Cycle 12
$72,049.37
$175,730
$120,830,399
$70,292.07
$28,819.75
$19,816,185.38
$36,769,344.52
14
Cycle 13
$43,229.62
$105,438
$120,935,837
$42,175.24
$17,291.85
$19,833,477.23
$36,786,636.37
15
Cycle 14
$25,937.77
$63,263
$120,999,100
$25,305.15
$10,375.11
$19,843,852.34
$36,797,011.48
16
Cycle 15
$15,562.66
$37,958
$121,037,057
$15,183.09
$6,225.07
$19,850,077.40
$36,803,236.55
Scenario 3: 46% of FCC financed clients accept their video
Column 1
Column 2
Column 3
Column 4
Column 5
Column 6
Column 7
Column 8
1
Production Cycles
Balance of Security Deposit
Value of Videos in Production
Total value of videos produced
Value of Videos Accepted (46%)
Security Deposit Released
Total Security Deposit Released
Total Received by BIG
2
Now
$19,859,415.00
$48,437,598
$48,437,598
$22,281,294.88
$9,135,330.90
$9,135,330.90
$26,088,490.05
3
Cycle 2
$10,724,084.10
$26,156,303
$74,593,900
$12,031,899.23
$4,933,078.69
$14,068,409.59
$31,021,568.73
4
Cycle 3
$5,791,005.41
$14,124,403
$88,718,304
$6,497,225.59
$2,663,862.49
$16,732,272.08
$33,685,431.22
5
Cycle 4
$3,127,142.92
$7,627,178
$96,345,482
$3,508,501.82
$1,438,485.74
$18,170,757.82
$35,123,916.97
6
Cycle 5
$1,688,657.18
$4,118,676
$100,464,158
$1,894,590.98
$776,782.30
$18,947,540.12
$35,900,699.27
7
Cycle 6
$911,874.88
$2,224,085
$102,688,243
$1,023,079.13
$419,462.44
$19,367,002.57
$36,320,161.71
8
Cycle 7
$492,412.43
$1,201,006
$103,889,249
$552,462.73
$226,509.72
$19,593,512.29
$36,546,671.43
9
Cycle 8
$265,902.71
$648,543
$104,537,792
$298,329.87
$122,315.25
$19,715,827.53
$36,668,986.68
10
Cycle 9
$143,587.47
$350,213
$104,888,005
$161,098.13
$66,050.23
$19,781,877.77
$36,735,036.91
11
Cycle 10
$77,537.23
$189,115
$105,077,120
$86,992.99
$35,667.13
$19,817,544.90
$36,770,704.04
12
Cycle 11
$41,870.10
$102,122
$105,179,243
$46,976.22
$19,260.25
$19,836,805.14
$36,789,964.29
13
Cycle 12
$22,609.86
$55,146
$105,234,389
$25,367.16
$10,400.53
$19,847,205.68
$36,800,364.82
14
Cycle 13
$12,209.32
$29,779
$105,264,167
$13,698.26
$5,616.29
$19,852,821.97
$36,805,981.11
15
Cycle 14
$6,593.03
$16,081
$105,280,248
$7,397.06
$3,032.80
$19,855,854.76
$36,809,013.91
16
Cycle 15
$3,560.24
$8,684
$105,288,931
$3,994.41
$1,637.71
$19,857,492.47
$36,810,651.62
So as you can see if 31% of the clients that have a video done are converted into accepting clients then they would need to produce $155,652,513 worth of videos to clear the security deposit and be rid of the liabilities it brings with it. In consideration for producing all these videos big will have received ~36.7m from FCC after accounting for their 24% commission. Their gross margins would need to be over 75% to make this sustainable over a long period of time.
At 46% the figures look somewhat better where they only need to produce videos to a value of $105m but they would still only receive 36.8m after 15 production cycles meaning that they would need to get gross margins around 65% to cost the costs of those that have videos made but don’t become paying customers.
This situation factors in winding down the financing structure, in a real world situation they are obviously having acceptances on a continual basis and are not winding it down so for every acceptance they receive they are adding another new client. However this brings me to the next point which looks at the limitations on their financing model and why the length of the production cycles is important.
1.3. Limitations of the Financing Model
We know that BIG have a cap on their sponsorship deal of 20m as disclosed by their announcement and that at the end of December they were at 19.8m of this being utilized. For BIG the challenge now is to get those acceptances happening.
From their website they have noted the following information;
So it would seem BIGs production cycle is running between 8-11 weeks. Why is this important you might think? We presently BIG is at a point where they can only really add a new client via FCC financing for each one they manage to convert into an accepted customer. At the lower end of 8 weeks that allows for approximately 1.5 cycles of production which per the tables in 1.2 we know would produce video content of approximate 74-81m and free up between 10.4-14m of security deposit depending whether you use 31% or 46% acceptance rates.
This is important as this would give them between 6-9.7m in the deposit which at 41% of the offer amount would translate to between 14.6-23.65m in potential FCC sponsored sales at max for this quarter. We know from last quarter that 18m was sponsored via FCC so this will impede further growth in the company. Of course this assumes that the production cycle is 8-11 weeks. If the company is able to improve the turnaround times this would give them more flexibility.
Another way BIG could get around this would be to get ‘backup’ clients on-boarded but not put them through FCC until acceptance of the video is received for the video and that way they could bring down the turnaround time to as low as 4 days. (2 days for FCC to transfer in the money and 2 days for the funds to be released)
1.4 Final Thoughts on FCC Sponsorship Deal
As noted earlier I didn’t have any issue with them using finance to help with cashflow but this is certainly not a conventional way of doing is and is extremely high risk. I would really have liked BIG to be more upfront about this structure prior to being prodded by the ASX. Alternatively I would have preferred even more that clients were only referred through to FCC after the video was done and the client had accepted it and signed the contract. This would have been much cleaner and simply would have been a way for BIG to realize the 12 months of cash upfront on a completed deal instead of receiving it from the customer over 12 months. Even with the commission on this I would have been fine as BIG would have the benefit of those customers default risks being passed onto the financier whom would have effectively purchased the outstanding debt from BIG.
Comparing it to the Harvey Norman example that gets thrown around it would be like you walking into the store and instantly the salesperson putting through a claim to GE Money for the purchase of a TV. If you buy the TV all is well but if you don’t then the salesperson is left chasing their tail to try and find someone else to buy the TV instead.
The deal also seems very one sided as well, BIG makes notes that the deal is comparable to SME financing out there but where is BIG benefiting from introducing FCC to all these SME. That has value to FCC but it seems that we don’t get any benefit out of it. I imagine some of these clients have signed up for more than a 12-15k financing package with FCC after being introduced via BIG as well. Can’t help but feel the terms of the sponsorship agreement shouldn’t be comparable with normal SME financing deals but superior to them since we are provided a service and value to the finance company itself.
2. There were some more things I was going to post about but its getting late and HC is saying that this is already over 2000 words so I am going to get some sleep and maybe post some thoughts I had about other things I noted in the announcement tomorrow. Hopefully this helps other holders with their own analysis and valuation of the company.
