Why AVA is a strong buy

At the current share price, AVA has a market cap of just $76m post the 16c capital return. The Technology division alone (i.e., excluding services earnings) will generate $6.7m consolidated profit before tax in FY21. And because of $21m in carried forward tax losses over previous years, it is likely that AVA won't have to pay tax on this profit, or indeed FY22 profit.

In the recent earnings call (especially the last 5 min), the CEO emphasised that he strongly expects top line and bottom line growth to continue in FY22 in the technology division (i.e., growth in both FFT and BQT). Earnings in the tech division grew by 64% in FY21. Assuming 20% earnings growth in FY22 (we can expect slower earnings growth in FY22 than FY21 because of the end of the Indian MOD contact), that suggests a technology NPAT figure in the region of $8m for FY22. (one caller in the conference call pressed the CEO multiple times on the whether covid slowdowns would lead to a decrease in earnings in FY22 and the CEO repeatedly said "no", earnings will continue to grow in FY22 and beyond. Other callers asked the CEO if the growth seen in Q4 FY21 was sustainable, and the CEO said "absolutely". He also said that FY21 earnings growth was in no way an aboration or one-off).

The three year confirmed sales pipeline for FFT alone (i.e., without BQT) is $70m+. And most (if not all) new Aura IQ contracts will involve and open-capex split that is likely to see a massive increase in recurring (or annualised) revenue. Evidently, the CEO is confident that most (if not all) of this pipeline will be converted into actual sales.

Additionally, the Company expects to convert at least 10% (and probably much more) of its installed (legacy) base of 2500 FFT systems into support/maintenance contracts. This 10% figure alone will see $5m/year in recurring revenue.

The Company is presently in discussions regarding more Indian-MOD type contracts (technology licensing contracts ), with a value of around $20-$30m (that's $20-$30m going straight to the bottom line with almost no costs).

Additionally, it looks like there will be a 1q contribution from Services in FY22 because of the time it takes to formally complete the sale. So group NPAT in FY22 could well be in excess of $10m. Assuming 20% earnings growth in FY23, the technology division profit for FY23 is likely to be in the region of $10m also.

On the basis of the above, AVA is presently trading on an FY21 PE of around 11.5 and an FY22 pe of around 7.6. Comparable technology ASX tech stocks typically trade on PEs of 15-20.

Also, post services divestment and the $1m buy back, AVA will have approximately $18m in cash, with no debt. Since only a tiny fraction of this cash is required to generate FY22 earnings (the Company is likely to finish FY22 with a similar or larger cash pile, assuming no acquisitions or additional larger share buy backs) , so probably the most accurate way to value AVA at present is with the enterprise value to EBITDA ratio.

AVA's current enterprise value (post the capital return) is just $58m. FY21 EBITDA for technology alone is $8.3m, so that's an FY21 EV/EBITDA ratio of just 6.9, which is incredibly cheap. And AVA is currently trading on a forward (FY22) EV/EBITDA ratio of around 5, or possibly below 5. There are no other growth companies on the ASX with an EV/EBITDA ratio that even comes close to this. AVA is a rare find. On these numbers, AVA's post capital return enterprise value could double tomorrow and the Company would still be undervalued.

Assuming a forward p/e of 20, AVA should be trading (post capital return) at around of around $200m market cap or 83c/share. As I see things, all the market is waiting for in order to believe the CEO's strong growth thesis over the next few years is for one or two of the new Aura IQ contracts to be announced. Once one or two of Aura IQ contracts are announced, shareholders buying at current levels are likely to see 16c/share capital return plus at least 36c/share in share price growth over the next 6-12 months. That's a return of well over 100% in 6-12 months, in a Company that is likely to keep growing for years.