New Broker Report on AVA: 30c Price Target, page-2

This did hit my inbox the other day and it looked interesting enough for me to take a closer look. Obviously given cannacord are hugely conflicted as they’ve been paid with options for ‘investor relations,’ all the analysis should be taken with a grain of salt but it’s still useful - I was able to go back and look at the initiation report and all the updates since. The analyst has over estimated profits and performance in every update so just be wary on their forecasts.

Anyway back to the business - as a non holder that’s done fair bit of DD to form a view this has made my watch list but I still have a few concerns.
1. The lumpy contracts and timing impacts seem to have impacted profits in the past and I try to avoid businesses exposed to these risks but there doesn’t seem to be a way to avoid this for now for AVA, even though they’re trying to get more recurring revenues.
2. Exposure to oil and gas won’t be great in future periods but it looks like they’ve tried to diversify. From what I could work out O&G accounted for ~45% of sales in 2018. Even with diversification it will still be 20-35% which is still material and not great given where the oil price is. This increases the risks associated with point (1)
3. Revenue growth looks strong but it’s being heavily influenced by low margin part of the business
4. I may not know the business well enough but is ~$3m going to be enough to fund working capital? The Indian contract is on very generous 4 month terms so a cap raise feels like a risk particularly after this recent run in the SP
4. Finally, going back over many annual reports and investor presentations it looks like management have missed forecasts on a fairly regular basis.

On the flip side, I do like the move to profitability, the valuation looks fairly undemanding and if they sell one of the divisions as previously stated it would free up capital and let them concentrate on the higher margin part of the business. Anyway, I’ll keep watching for now.