This is an interesting tiddler of a business which has been around for around two decades, the overwhelming majority of that time frame being a period of massive value destruction for its owners.
But that looks like it is changing.
The ABV story is best told graphically.
Starting with the all-important number of shares on issue, which has been a very ugly picture over the company's history, rising inexorably each year to end up a massive 22-fold rise between 2004 (which is as far back as I've researched the company's financials) and 2020:
But then, as can be seen, in 2020, something changes.
No more increase in number of shares outstanding.
Here's why: The company finally grew up.
After torching millions of dollars in cash over the preceding years (a whopping $34m, cumulatively, between FY2004 and FY2019!), since FY2020 the company has been cash flow positive, not just at the Operating cash flow line, but even after payments for PP&E and Intangibles:
(Note: Those figures include R&D Incentives of around $0.7m pa, but even without them, the company has been more than washing its face. The FY2023 bar is a forecast, with the first half FCF already coming in at $0.55m (unaided by any R&D incentive receipts))
And this inflexion point hasn't come about through mercenary cuts to the cost base; instead, it has come about due to clear traction being achieved at the top line:
With the company looking definitively like it has turned the corner to become investment grade, all that remains is to derive some sort of valuation for it.
Starting with my preferred valuation metric of EV/EBIT (P/E multiple is overly conservative given the company's net $2.4m net cash position (equivalent to 15% of its market value):
And, with the MQ23 Appendix 4C report, we learnt that YTD NPAT is $1.275m, so annualising gives a full-year NPAT figure of around $1.7m,which is basically the same as EBIT given the company has no tax expense (accumulated losses from all the bad years is $50m, so they won't be liable for tax for a long time) and limited finance charges (no debt and no lease liabilities).
So Market Cap of $15.2m and Net Debt of $2.4m, for an EV of $12.8m.
On EBIT of $1.7m.
=> EV/EBIT multiple of ~7.5x (D&A is around $0.2m, so EV/EBITDA ~6.7x).
Hardly demanding starting multiples for a growing, 25%-30% ROE business, even if it is a nano-cap.
And if the growth - which has been demonstrated over the past few years - continues, then those valuation multiples will quickly become compressed to rather silly levels.
Yes, I know its a maker of widgets, and yes I know it has a highly concentrated product suite and reasonably high customer concentration, with order flow that is likely to be lumpy, so it will never be a 15x+ EV/EBIT stock.
But I think 9x to 10x EV/EBIT is not an unreasonable valuation multiple for this kind of business operating in the current favourable business environment.
Assuming an EBIT milestone of $2.0m at some point in the foreseeable future, 9x EBIT would result in an EV of $18m; and assuming ongoing modest increase in the net cash balance (dividends are unlikely given there are zero franking credits currently and none are going to be generated for many years) to, say, $3.0m, that yields an Equity Value of $21m
Which is ~40% higher than the current share price.
Conclusion:
Undervalued; even at the current standing start.
Meaningfully undervalued, should the organic growth continue.
(I strongly suspect that if the market doesn't re-rate the stock, then some corporate acquirer will come along at some point to make it happen)
(That's the easy bit; the challenging bit is getting stock.)
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ABV Price at posting:
4.0¢ Sentiment: None Disclosure: Held
(20min delay)