profit projections understated

The Board has projected an 80% increase in revenue for 2007/08 and a 50% increase in profit.

These profit projections are grossly understated.

Consider:

Revenue last year increased from $1.931M to $3.291M - an increase of $1.360M

Profit before tax went from a loss of $387 to a profit of $398 – an increase of $785,000

So every extra revenue dollar contributes 57 cents to profit.

In the Investor Presentation the Board is projecting ORGANIC** growth rates for 2007/08 of :

1. 80% in revenue over last year – in dollar terms this is $2.632M
(or about 70,000 extra UUM at $3 a month. Sounds reasonable as the business added 17,000 UUM in the last quarter.)

2. 50% in profit of $199,000 – this being $398,000 times 50%

For some reason every extra dollar earned now generates 7.5 cents in profit ($398,000 divided by $2.632M )!!!!!!!!!

Now I know that the Softlog business does not have the same margins or cost structure as Fleetmanager, but even with a dilution of contribution margin to 50% I come up with a 2007/08 profit of :

($2.632M X 50%) + $398,000 = $1.714M

Assuming a tax rate of 30% you arrive at a theoretical profit of $1.2m which is EXACTLY the figure used in the investor presentation (11/9/07) to value the business.

(And with carried forward losses of $3,099,620 they have a tax holiday for the next 18 months.)

If you take the before tax profit of $389,000 you are looking at an increase in profit of around 300%.

With the after tax figure of $689,000 its around 100%.

No wonder they were confident enough to start paying dividends. And note that they would have only paid it if first quarter trading results were on target..


**not growth through acquisition.