This is not investment advice. Do your own research before taking a position in any of the securities mentioned in the post below.
Firstly, for those who have noticed a general drop-off in of posts… apologies for that. A collection of factors have meant I have not written for a few weeks but hopefully the quality & brevity of content today can make up for this.
Audinate – so what do they do?
Audinate Group (AD8) develops/sells digital audio-visual networking solutions predominantly to manufacturers (e.g. Yamaha, Bose etc) with its major product line being Dante
Put simply; they don't make the sound and video devices you use as a customer, they make the hardware/software that the manufacturers use for both consumers (e.g. soundbars) and enterprise (e.g. stadiums) products
Their model is AV software and hardware over fibre-optics/computer instead of over those big old switchboards you used to see
The point of difference is a) they allow multi-channel audio-visual (important for video) and b) they have longer-term relationships with manufacturers (e.g. Yamaha; which owns >8% of the company and has been a customer since inception)
Without addressing the fact that it is difficult to know what future competition will emerge in this technical AV-space, the major competitor is AVB (an IEEE subsidiary) and the general point of view is
Dante covers the most amount of manufacturers but has a complicated system
AVB is simpler and has ties with companies with large brand loyalty (e.g. PreSonus or MOTU)
It is also worth noting that IEEE, owner of AVB is more of an association than a company
AD8 – it's 22x Revenue; why would I take the risk?
AD8 has traded down >10% from its highs to be at $9.3. Amongst other things, this could be attributed to a more pessimistic outlook on the company due to chips shortages and sentiment towards the Silex acquisition (Belgium video-focused company acquired for 2.5x revenue)
Overall, to buy in at such high levels you must believe that AD8:
Networked AV and fibre-optics led AV is the future. Arguably - the trend is towards multi-channel given take-up in video and the optionality their product provides vs. old-school products
AD8 is in a "winner takes most" position in the chips/hardware space. The TAM of simply providing the chips to AVs is "relatively small" (e.g. $1-2bn) however the real growth story is if:
AD8 is the software/manager of choice for AV with a +45% market share
They make headway into the more competitive & growing video space
IMO, the chip shortage and high backlogs are probably going to push shares to lower not higher. I would consider a reasonable base assumption for AD8 to deliver:
30-40% YoY Rev growth (not the >70% achieved this year)
>70% margin (broadly in line with historical levels)
Break-even 2023 & minor profitability in 2024; and ultimately believing that there is a ramp-up beyond that point
Extrapolating out future cash flows I reach closer to a $6.5-7.0/share valuation noting that for an early business like this a pure DCF is probably not the sole way to look at things
So you think it is >40% overvalued. A lot of ppl disagree - why might I be wrong?
Generally speaking; most brokers have a medium-to-high P/Sales multiple (e.g. 10-12x ) and a lot of the "hope value" is in the video business (which is growing like crazy) and AD8 is well placed to crack given its role in the audio space
Their Dante-video business has only recently launched and generates negligible revenue so far, however, making significant in-roads in the video would have a dual benefit:
AD8 could justify its lofty revenue multiple given its market share in a quickly growing business
Sowing up the software business, generally more competitive & where AD8 does not have a meaningful advantage, would be easier
AD8 - So I'm bearish on >20x revenue but there are LT prospects for this business
I think AD8 is an amazing Aussie tech success story operating in an esoteric space with meaningful market share. Given the structural shift towards video & their operational advantage in audio, there are many reasons to get excited about this business. Nonetheless, I think:
LT, their audio business is safe but chip shortages will compress the revenue multiple (which I think is lofty)
Video revenue will take c.4yrs to exceed $10m organically unless Silex really ramps things up
Their Software division which is a good little money spinner is not a huge contributor
M&A may structurally shift their foray into video but for now, I consider there to be more risk to the downside than up
From pricey tech to unloved consumer credit - Thorn Group
When most people think of Thorn Group they think of Radio Rental and they think of this kind of track record...
Many possible reasons can be attributed to this share price capitulation, however, an oversimplification would be:
Radio rentals, like Humm, did not properly adjust their business to a change in consumer tastes
Their business was less scalable (ie bricks & mortar) vs. the Afterpay/Zips of the world
What about Somers; where do they come in?
So Somers, the parent company of Resimac, has been buying up shares in Thorn Group following the offloading of its troubled consumer business
Whilst some may think "wahoo - takeover bid", I think the better takeaway from this is general support of their strategy which is
Reduce impairment losses on loan book
Run-off the equipment financing business where margins are razor-sharp
Grow their new invoice financing business (similar to EarlyPay etc)
With a mere $95m market capitalisation and a subscale loan book, the growth here is not exciting at all (see below) but conversely - you are not paying much for it at all
Note - 2021 Rev/CF is impacted by the sale of retail business to CreditCorp
What is my opinion?
This is a deep-value play, whereby you are paying $95m for $100m of assets (most cash and receivables)
Without proper access to management - I think their big focus on loan recovery and running off non-core business will spin out relatively strong dividends
Nonetheless, Thorn Group's lack of origination success from their current broker network and start-up of the fraud-rich invoice financing sector means there is plenty of scope for future error
Overall - I think there will be continued share price growth for Thorn Group as it reverts to NAV and recoveries increase. However, I currently do not see it growing into a competitive SME lender and the Somers takeover might be something that falls away. If this margin to NAV widens more heavily... even an 'ok' company can start to get very compelling.
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