ICU to IOU: sketchy past, a bright future

Hi fellow IOUers,

Given there are quite possibly a number of new investors on the IOU shareholder list (myself included, post the recent Capital Raise), I thought it would be useful to take a bit of a trip back in time to look at the previous results of iSentric. This will undoubtedly help inform us not only about where the company has come from, but how our future prospects might look. Apologies to proper LTH’s if this is all old news to you, but I am seeing plenty of new entrants on the threads who will not have gone through this information.

Also, why the new thread? I’m aware 1) people don’t like new threads and 2) there is already a thread on ‘valuing IOU’ however I haven’t put this under the latter as the intention of this thread is not to place a (future) dollar value on IOU (personally, I don’t think this can be done yet, but others have tried and good on them). It’s hopefully somewhere to have a sensible discussion about IOU’s prospects with a more conservative slant on things, rather than the hype that can be found elsewhere.

For this exercise, what I’ve done is go back through the Annual Reports from 2016 to 2020 to read the introductory comments/letters (if present) as well as run a quick rule over some of the basic financial data. I’ve summarized this in the below table. I only went back to 2016 because that’s as far back as the ASX announcements go (without having to dig through archives) however the 2016 report provided some high-level figures for the two years’ prior so I have included those for reference. Why do I think this exercise is important? Well for any company – regardless of a change in management/strategy – past results are the most reliable indicator we have towards future prospects. Peer comparison is simply not as straightforward, especially if there are very limited peers. That is especially true in the case of IOU. We are presently attracting a lot of attention (here and in the media), as a junior BNPL player yet there are numerous posters who like to correctly remind us that we are first and foremost a digital payments provider. I agree (and as an EML Payments holder I’m familiar with the industry/model). That side of the business is the iSentric bread-and-butter, so it makes complete sense to run the rule over how the digital payments (and associated divisions) have actually performed in the past, recent management change notwithstanding.

So with that introduction / explainer, here is what I found:


OK, a few *dispassionate* and *general* observations on these figures

1. Revenue: Considering the business divisions have remained fairly constant, revenue has seesawed around, with no consistent growth one year to the next. 2020 is probably forgivable given Covid-19 (perhaps on a revenue basis it’s actually a success story, down just 3%?). But overall it’s not a great story - let's not kid ourselves. Revenue for the seven years from 2014 to 2020 has declined 22%. That’s not the outlook that previous management have been promoting in the annual reports.

2. NPAT: Net Profit After Tax speaks for itself – very volatile. Profitable in only two years out of the past seven, with considerable swings in between. Note that 2017 included a $13,000,000 write down on the goodwill ‘Arte Mobile Technology Pte’ which the year before the company had commented on very favourably on the first page of the annual report. Whoops.

3. Net Cash: in serious decline from 2015 ($18.4m) to 2020 ($2.4m). That’s down 86.6%.

4. Working Capital: had been whittled right down by 2020, down almost 92% from 2016

5. Number of shares issued (highlighted) significantly increased in the past couple of years.

6. Market Cap has also varied widely per highlighted part. Consider that at one point in 2019 our MC was just 17% of our annual revenue! (You could have purchased the entire company for $1.1m). The next year, the MC was 93% of revenue, or 5x the value (and the revenue had actually decreased 3%!). The point of caution for myself here is that (some) people are looking at our current Market Cap compared to established BNPL peers and deducing that we are undervalued. That *may* be possible but the chart above should lend some serious caution to our thinking. As of today’s date, our market capitalization has increased from FY 2020 by 4,619%. Meanwhile, the underlying historic business divisions are largely unchanged. Future digital payment / BNPL success is already being seriously priced in.

7. Annual Reports: Finally, a word on the reports themselves. Looking through these from 2016-2020 there have some serious deviations in style and substance. The early reports (2016, 2017 and 2018) were branded, had a tidy introduction explaining iSentric and its business divisions, letters from the Chairman, CFO and CEO with FY highlights provided before the report began proper. The more recent reports (2019 and 2020) were spartan at best – 2019 was basically the standard Appendix 4E template without even a logo in sight. 2020 was the same, although I can probably understand this approach – by the time this report was prepared the new management were on board and they would have already been planning for a re-brand, so no point through the iSentric name/logo everywhere. Overall, picking on their branding/layout on an annual report might seem petty, but this is literally the most important investor document of the year! When they vary in quality and substance it seems like a half-decent indicator of how the business is operating at head office. Thankfully since the IOU rebrand we’ve seen a considerable improvement in this space.

So what’s the point of going through old numbers?

Well, to be completely frank, if we were to detach ourselves from all the ‘qualitative’ information we receive via shiny investor presentations, and merely judge this company by past financial performance, the likelihood is that not many of us would be in it. Why? Consider the summary. The last seven years indicate a small operation…

- of less than $10m revenue, with swings of +/- 30% some years,
- with revenue trending downwards 22% across a seven year period,
- that is generally unprofitable (5 out of 7 years has provided a loss, some quite steep),
- that required new shares to be issued on a relatively consistent basis,
- where net assets were trending sharply downwards ($18.4m in 2015 to just $2.4m in 2020).

Like it or not, that’s the reality of those numbers. From another perspective, if you were given that table above with no other information, and you had to judge this unknown company purely on its past financial performance, would any sensible investor choose to pour his or her hard-earned dosh into it in 2021?

OK, enough history. Time to look forward!

To my mind the future looks a lot better than the past. Why? There will need to be some significant changes to turn around what has been a small company with lumpy revenue and a very volatile earnings profile.

Since FY21 began the company has undergone a significant transformation with a new Board of Directors, significant rebranding, and a new strategic direction. There have been plenty of recent announcements to demonstrate to investors that even at this early stage the Board are speedily delivering on their goals. I am reminded of a great post by 612 regarding “FACTS” which summarized the hugely positive turnaround story we have to date. I won’t repeat here as most have probably read it, but just going by the ASX announcements falling in this financial year:

- 30 September 2020: New directors nominated for appointment; $3,583,575 capital raised in July and September; rebrand with 97.57% shareholder approval
- 09 November 2020: $10,055,300 capital raised from soph/insto investors
- 26 November 2020: new board member, Datuk Khairul Idham Bin Ismail (LLB, King’s College London)
- 15 December 2020: Merchant agreement with payment gateway and two Malaysian banks announced
- 11 January 2021: new board member, Byung Moo Shin, (LLB, University of Sydney)
- 19 January 2021: Malaysian money lending license acquired
- 09 February 2021: partnership with EasyStore
- 18 February 2021: opportunistic/oversubscribed capital raise of $50,000,000 from soph/insto investors
- 02 March 2021: partnership with iPay88
- 08 March 2021: key leadership appointments (past work history with iPay88 and NTT Data Corp)
- 12 March 2021: entry into S&P/ASX All Technology Index

On the whole, these announcements have driven an appreciation in the Market Cap of over 4,000% when comparing end of FY20 to today. Now think about that again. Remember the previous financial results across a seven-year period, and now remind yourself that the Market Cap as of today’s date is ALREADY up over 4,000%.

An efficient market theorist would state that yes, the past results are nothing to get excited about, but the market has re-priced the company based on future prospects. This is clearly true. I’m a holder, so I believe in the turnaround story. But I think it’s also enough to give us pause when considering the various $1 party, $2 party, $3 party posts one sees on HotCopper, and all the comments about us hitting $XX by July, or Christmas, etc.

To borrow a really great quote from Jason Zweig’s commentary in ‘The Intelligent Investor’:

Great expectations lead to great disappointment if they are not met; a failure to meet moderate expectations lead to a much milder reaction. Thus, one of the biggest risks in owning growth stocks is not that their growth will stop, but merely that it will slow down. And in the long run, that is not merely a risk, but a virtual certainty.

I am by no means a downramper – I believe in this company’s prospects and below the CR price my sentiment has been ‘buy’. (For various reasons, the $50M CR at $0.50 represents a bit of a safe floor to me – as I suspected, whilst the SP has yo-yo’d around, it’s generally stayed within spitting distance of the CR, and/or retraced there after testing lows of $0.42).However upon researching and reflecting on the company history I’m probably now sitting at a ‘hold’. I’m keen to purchase more but I think in reality we need to see some quarterly numbers (perhaps two lots) coming out before we can really determine if the BoD’s new direction is making an financial impact verses past historic performance in the digital payments space.

As all financial disclosures love to say: “Past performance is no guarantee of future results”. And certainly in this case for IOU I hope that IS the case! However by understanding where they’ve come from, and the challenge (and opportunity) ahead of the new management, we can set more meaningful expectations about this company’s future prospects.

So why did I write all of this? (quite an essay, sorry). Well, mainly to allow the all-important financial historical context of ICU/IOU to help set myself optimistic yet still realistic expectations about short-to-mid-term SP targets. I try to apply Warren Buffet’s maxim of “if you want to own a share of the company, would you want to own the whole company?”. And extrapolating that out a bit, I think that if I was a majority owner, I think about the kind of shareholders I want on my register. This is what I get:

1. I don’t want day traders sniffing around, plunging our price up and down on any given day and making us just another volatile tech stock.

2. I don’t want people obsessively checking the depth chart and emotionally bailing out when they don’t get +30% in a week (like some anonymous boffin on Reddit promised them).

3. I want people who buy and hold. We’re called Shareholders. Funds and bot trading notwithstanding, retail investors buying and holding helps dry up the sell side, and that only does one thing to the buy side when quarterly results flow through, and demand builds.

4. I want shareholders who have rational investment timeframes and who want to hold till $5.00 (Market Cap: $2.7billion ) or till $10.00 (Market Cap: $5.5billion) which may be years and years down the track.

5. In short, I want this company to be taken seriously, so it’s not a sideshow on some badly-written SMH column about speeding tickets, but a success-story write up in the AFR end of this year or end of next.

Those are my views based on my own research. I’m more than happy to hear from others, particularly if you disagree – listening to someone who disagrees with you is the best way to learn something!

So good luck to all shareholders, and… please shareHOLD!

Cheers,
mondy