In the wake of the rout in bond markets, like many small technology stocks, PTG has been caught in the downdraft of the general sell-off of long-duration growth securities.
I like it when business I like go No-Bid off for extraneous factors that are unrelated to the fundamentals of those businesses.
Accordingly, PTG is one of the stocks I have been buying over the past few weeks.
When I first started buying PTG shares it was also the optionality around the international element that appealed most to me.
But over the past few months I’ve changed my mind completely about that; now I think the real shareholder value creation is going to come from them getting their tech. ecosystem to live inside the majority of Australian & NZ real estate agencies, and to leverage off that.
And signs of that embedding success are there to see: after just a short corporate life (both unlisted and listed), they are already ensconced to at least some degree in as much as 41% of real estate agencies which, in turn, control 51% of residential real estate transactions in Au and NZ.
From this springboard, my investment thesis envisages three discrete drivers of shareholder value creation:
The firstis the textbook technology play of:
- On-boarding of more individual accounts
- Selling more products per individual account
- Once fully embedded into the client, flexing pricing power
(i.e., the classic “trapdoor moat” model, a la Technology One and Data#3; i.e., once you become so deeply integral to the client’s mission critical workflow, it is near-impossible for you to be disengaged. And when the cost of your service is an immaterial part of your client's cost base, it means there is significant upside headroom in which to increase prices over time.)
They’ve only just started on that journey, which involves just the sales CRM and property management CRM opportunities within the real estate agency client itself.
(In fact, to date most of the focus has been on the sales CRM; the property management CRM bit – which is twice as large a TAM opportunity compared to sales CRM – only really kicked off late in CY2021.)
The seconddriver of value (and by far the most significant one, I reckon) relates to all the stuff that happens in the property market that is external to the real estate agent’s offices: i.e., all the auxiliary activities (home loans, referrals, conveyancing, insurances, utilities connection).
That’s the really big prize here.
As someone I respect cautioned, accessing auxilliary revenue streams is seldom as successful as it is pitched in company presentation slides, but PTG just needs to jag only a thin sliver of the very large revenue velocity that occurs in this auxiliary sphere, and it will result in PTG’s Revenues and Earnings being more reflective of a business valued in the several hundreds of millions of dollars, as opposed to the current mere several tens of millions of dollars.
In this regard, the key takeaway commentary to me from the CEO’s presentation to the recent ASX Small and Mid-Cap Conference 2022 was the following:
“We know that when we are searching for a property, the discovery phase is typically performed on a real estate portal, realsetate.com or Domain, which are the two biggest in Australia. We know that both of those companies are trying to offer additional auxiliary products and services. But in reality, what we see is that consumers are just in search mode when they are searching for a property. Once they’ve enquired on a listing, from that point on, every communication between the agent and the potential purchaser goes through Proptech software. So there is goodwill that is being established for every time an e-mail is being opened, every phone conversation, indeed, when they go to an open-for-inspection in the physical world (or due to Covid in the digital world); that goodwill is being built between the consumer and the agent. In fact, we know that when a contract for sale has been signed, at that point in time there are basically four parties that have knowledge of that signature or that transaction: the vendor, the purchaser, the agent and, indeed, our software solutions. Leveraging off that moment in time, we are in a unique position to offer additional products and services such as home loans, insurances and conveyancing in particular… all time sensitive services the we believe over time Proptech will be able to provide, distributed by our real estate agency network.”
Sure, it’s still early days on this element of growth and I suspect it won’t be for another 18 to 24 months that it becomes evident.
But the market, while totally discounting it now, will start to see leading indicators of it well before 24 months’ time.
The thirddriver is the International opportunity.
But that’s just the jam; I’m not even thinking about it at this stage.
PTG is currently at EBIT breakeven, with Revenue of around $20mpa and Operating Costs plus D&A at around that same level.
It is easy to envisage PTG's Revenue reaching well over $40m over the next two to three years, possibly even as high as $50mpa. To get there will not require much flexing of the cost base; maybe a further $5m or $6m needs to be invested to support the growth.
Heck, even of the cost base needs to flex upwards by a full $10m (which is a whopping 50% higher than the current cost base, so it would be extremely disappointing) to $30m over the next two or three years, and even if the Revenue line only gets to $40m, it still translates into EBIT of around $9.0m or $10mpa for an EV/EBIT of around 6.0x-6.5x (or below 5.0x if the accumulated surplus capital that gets generated over the next thee years is left to sit in the company's bank account).
Even if I'm not 100% accurate with those prospective figures, I am supremely confident that I will be at least directionally right.
It's a highly asymmetrical investment opportunity, in my view, with limited downside but very meaningful upside, even if the execution is only half decent (which, given the individuals doing the strategic executing, I think it will be.... at the very minimum).
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