COO results analysis

When I first saw COO’s headline numbers I was disappointed and yes, these are not great results, but I don’t think they are as bad as they first appear. The CEO/Chair have certainly not gone out of their way to help us understand them, however here is my take from the disjointed information they provided.

EBITDA (before the loss on asset sale) was $2.3m, and given COO shouldn’t be paying interest or tax anytime soon, this should be sufficient to comfortably cover future investment in R&D. At standard tax rates, this would have translated into a EPS of (EBITDA ($2.3m) less depn (.6) less tax (.6) of about $1.1m NPAT) 0.425 cps;

The segmental analysis is very opaque, but interesting. It appears to show that the health segment EBITDA actually improved year on year, and when you look at the half on half comps, the improvement was significant during the second half of FY 2017 (up about 44%). However, there is always a catch and there is something unusual going on with the non-allocated costs, so I suspect the improvement may have been boosted by some cost reallocation. That said, it appears that almost all of the EBITDA decline year on year was due to the Ecommerce business (down about $0.6m YoY). Accordingly, the decision to stop investment looks sensible given its rate of decline (although shame they can’t find a buyer);

The revenue erosion slowed across both segments in the second half. COO noted that they have recently lost a customer accounting for about 4% of sales, which represents sales of $600K (and could be less if their 4% comment related to the health segment only). Given they have identified cost savings of $1m, there is potential for EBITDA growth in 2018 if they don’t lose further customers and margin pressures are abating. Either way, take-up of the new product suite remains key;

Cash showed a headline decline of $1.5m : They have a tax refund due of $550K, so cash is actually about $8.6m. Further, they have a tax asset of $1.4 comprising an R&D tax incentive that should further support future cash-flow.

Overall, at 4c per share, you are still looking a company with an EV/EBITDA of less than 1x which is cheap in anyone’s language. COO should clearly be buying back stock now.

Overall, COO appears to have gone out of its way to talk this company down in these results. I know revenues remain under pressure, but they are not going to win any awards for spin doctoring. Overall, I still think we are where we were pre results. The R&D investment has/is being made, the company is still generating cash, and the valuation is compelling. Maybe the major shareholder wants to privatise this before the upside comes, so is keeping the positives to a minimum.