Editor’s note: This is the latest edition in the “Company Notes Series”, where we periodically share our notes on companies we’ve studied in the recent past but currently have no vested interest in (we may invest in or sell shares in the companies mentioned at any time). The notes are raw and not updated, and the “as of” date for the data is given at the start of the notes. The first seven editions in the series can be found here, here, here, here, here, here, and here. Please share your thoughts on the series through the “Contact Us” page; your feedback will determine if we continue with it. Thanks in advance!

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Start of notes for Ossia International

Data as of 6 September 2023

Details of Ossia International

• Established in 1982 as a footwear manufacturer
• HQ: Singapore
• Listing exchange: Singapore Exchange
• Ticker: SGX: O08
• Employees: 227 at end of FY2023, fiscal year ended 31 March 2023.

Business of Ossia International

• Ossia International distributes and retails lifestyle, outdoors, luggage, and accessories products. Ossia International has a subsidiary in Taiwan which has exclusive distribution rights for Kangol, True Religion, Tumi, Columbia and Sorel. Ossia International also holds an effective 19.8% stake in Pertama Holdings Pte Ltd, a leading retailer of consumer electronics and home furnishings trading under Harvey Norman retail stores in Singapore and Malaysia. Ossia International’s stake in Pertama Holdings Pte Ltd comes from a 40% stake in Harvey Norman Ossia (Asia) Pte Ltd, which in turn owns 49.4% of Pertama Holdings Pte Ltd. 
• Kangol is a headwear brand, True Religion is a fashion apparel brand with a focus on denim, Tumi is a luggage brand, Columbia is an outdoor wear brand, and Sorel is a footwear brand.
• Ossia International has a subsidiary in Malaysia which ceased operations since Jan 2019 and is currently dormant. 
• The Pertama Holdings Pte Ltd business is accounted for by Ossia International under “Share of results of associated company – net of tax”. Over the past decade, Harvey Norman Ossia (Asia) Pte. Ltd – and in turn Pertama Holdings Pte Ltd – is the sole associated company of Ossia International; Pertama Holdings Pte Ltd’s business also did not change over the past decade, being focused on running Harvey Norman retail stores in Singapore and Malaysia. Ossia International’s effective ownership of Pertama Holdings Pte Ltd has not changed too.
• The lion’s share of Ossia International’s profit in recent years (see Table 1 below) comes from the share of results of its associated company (the 40% interest in Harvey Norman Ossia (Asia) Pte Ltd, and thus, 19.8% effective interest in Pertama Holdings Pte. Ltd). Ossia International also receives dividends from Harvey Norman Ossia (Asia) Pte Ltd (see Table 1).
• The non-Harvey Noman retail business of Ossia International currently comes solely from Taiwan. In FY2023, 100% of Ossia International’s S$30.2 million in revenue was from Taiwan. See Heading 3, “Change in Ossia International’s non-Harvey Norman retail business over time” for how the non-Harvey Norman retail business has changed over time.

Change in Ossia International’s non-Harvey Norman retail business over time

• FY2014: Ossia International operated in 4 regional markets (Singapore, Malaysia, Taiwan and Hong Kong), with a distribution network of more than 1,400 channels/outlets, spanning 50 cities. It had more than 40 specialty stores, more than 101 shop-in-shops, 4 franchise stores, and 8 consignment counters in fashion apparel, bags, footwear and golf products. Ossia International had exclusive distribution, licensee and franchise rights of over 40 well-known international brands. Of the 5 brands that Ossia International has distribution rights today (Kangol, True Religion, Tumi, Columbia, and Sorel), it had Kangol, Tumi, and Columbia.
• FY2015: Ossia International operated in 4 key regional markets (Singapore, Malaysia, Taiwan and Hong Kong), with a distribution network of more than 1,400 channels/outlets, spanning 50 cities. It had more than 40 specialty stores and more than 68 shop-in-shops in fashion apparel, bags, footwear. Ossia International had exclusive distribution, licensee and franchise rights of over 30 well-known international brands. Of the 5 brands that Ossia International has distribution rights today (Kangol, True Religion, Tumi, Columbia, and Sorel), it had Kangol, Tumi, and Columbia.
• FY2016: Ossia International operated in 4 regional markets (Singapore, Malaysia, Taiwan and Hong Kong) with a distribution network of more than 1,400 channels/ outlets, spanning 50 cities. It had more than 40 specialty stores, and more than 68 shop-in-shop, in fashion apparel, bags, footwear. Ossia International had exclusive distribution, licensee and franchise rights of over 30 well-known international brands. Of the 5 brands that Ossia International has distribution rights today (Kangol, True Religion, Tumi, Columbia, and Sorel), it had Kangol, Tumi, and Columbia.
• FY2017: Ossia International operated in 2 regional markets (Malaysia and Taiwan). It had exclusive distribution, licensee, and franchise rights for 11 brands. Of the 5 brands that Ossia International has distribution rights today (Kangol, True Religion, Tumi, Columbia, and Sorel), it had Kangol, True Religion, Tumi, and Columbia.
• FY2018: Ossia International operated in 2 regional markets (Malaysia and Taiwan). It had exclusive distribution, licensee, and franchise rights for 12 brands. Of the 5 brands that Ossia International has distribution rights today (Kangol, True Religion, Tumi, Columbia, and Sorel), it had Kangol, True Religion, Tumi, and Columbia.
• FY2019: Ossia International operated in Malaysia and Taiwan. It had  exclusive distribution, licensee and franchise rights for 10 brands. Of the 5 brands that Ossia International has distribution rights today (Kangol, True Religion, Tumi, Columbia, and Sorel), it had Kangol, True Religion, Tumi, and Columbia.
• FY2020: Ossia International operated in Taiwan, and ceased operations of its Malaysia business in FY2019. It had exclusive distribution rights for 5 brands. Of the 5 brands that Ossia International has distribution rights today (Kangol, True Religion, Tumi, Columbia, and Sorel), it had all 5.
• FY2021: Ossia International operated in Taiwan. It had exclusive distribution rights for 5 brands. Of the 5 brands that Ossia International has distribution rights today (Kangol, True Religion, Tumi, Columbia, and Sorel), it had all 5.
• FY2022: Ossia International operated in Taiwan. It had exclusive distribution rights for 5 brands. Of the 5 brands that Ossia International has distribution rights today (Kangol, True Religion, Tumi, Columbia, and Sorel), it had all 5.
• FY2023: Ossia International operates in Taiwan and has exclusive distribution rights for 5 brands (Kangol, True Religion, Tumi, Columbia and Sorel)

Pertama Holdings’ business

• Table 2 below shows how Pertama Holdings’ business has changed over time, in terms of (1) the growth in the number of Harvey Norman stores in Singapore and Malaysia, and (2) growth in the revenues of the Harvey Norman stores in Singapore and Malaysia. The key takeaways are: (1) Singapore’s store count has been flat, but revenue has been steady; (2) Malaysia has seen steady growth in store count and strong growth in revenue
• Pertama Holdings Pte Ltd was once a listed entity on the Singapore stock market but was privatised in January 2014.
• Harvey Norman Holdings (the parent company of Pertama Holdings, listed in Australia) management thinks Malaysia can have up to 80 Harvey Norman stores by 2028.

Financials of Ossia International

• Ossia International’s business quality was poor from FY2013-FY2019 as seen from the mostly negative operating profit. There’s been a recent turnaround, which has coincided with the massive streamlining of the brands that Ossia International distributes (see points under Heading 3, “Change in Ossia International’s non-Harvey Norman retail business over time”)
• Share of results of associated company – the Harvey Norman stores in Singapore and Malaysia from the 19.8% effective interest in Pertama Holdings – has mostly been positive and has been increasing over time.
• Operating cash flow (includes dividends from Harvey Norman Ossia (Asia) Pte Ltd) and free cash flow have both improved markedly since FY2018, demonstrating strength of the Harvey Norman business, and a turnaround in fortunes of the Ossia International operating business.
• Balance sheet has improved markedly over time.
• The dividend payout ratio for FY2023 is reasonable and suggests that Ossia International is not over-reaching. 
• Some explanations of Ossia International’s financials in FY2023:
  • Reason for revenue growth: Ossia International’s revenue for FY2023 was up by 27.6%. The increase in sales is mainly due to travel restrictions being lifted, an influx of tourists and travellers has resulted in increased foot traffic and consumer spending in retail establishments. This uptick in retail activity has led to improved sales performance and enhanced profitability for the group’s retail operations.
  • Reason for better associated company performance: Ossia International’s share of results of the associated company has increased from $5.54 million to $7.88 million due to increase in the in sales performance of the associated company during the financial year.
  • Improvement in balance sheet: Ossia International’s bank borrowing has been reduced to zero as the group recovers from the effects of the COVID-19 pandemic, it has successfully managed its financial position and generated enough cash flow to meet its operational and financial needs. This positive development has led to a reduction in the utilization of bank facilities.
  • Reason for slight decrease in operating cash flow: Net cash from operating activities decreased due to income tax payments and a change in payment method to suppliers, resulting in lesser utilization of bank facilities.

Management of Ossia International

• George Goh Ching Wah, 64, is the executive chairman of Ossia International. George and his brothers (Steven Goh Ching Huat Steven and Joe Goh Ching Lai) are experienced entrepreneurs who cofounded the Group. George Goh is also the Executive Deputy Chairman of Pertama Holdings Pte Ltd. George Goh and his two brothers have more than 35 years of experience in distribution and retailing of lifestyle/sporting/ outdoors products in footwear, apparel, sporting /outdoors goods, bags and accessories under the Group. George Goh also tried to contest in the 2023 Presidential Election in Singapore but his application was rejected by the Presidential Elections Committee.
• Steven Goh Ching Huat, 58, is the CEO and an executive director of Ossia International.
• Joe Goh Ching Lai, 64, is a non-executive director of Ossia International. He was appointed as a director on 1 September 1990, re-designated as a non-executive director on 1 May 2009, redesignated as an executive director on 17 June 2016, and re-designated as a non-executive director on 1 July 2021. Joe Goh is also a non-executive director of Pertama Holdings Private Limited.
• Alan Hsu Chin Tung is the managing director of Great Alps Industry Co., Ltd, Ossia International’s wholly-owned subsidiary that is responsible for Ossia International’s business in Taiwan. Alan is responsible for the product development, brand management, marketing and distribution of footwear, apparel, bags, accessories in Taiwan. Alan joined as a brand manager in 1996 and was promoted to Managing Director in 2001.
• The three Goh brothers collectively controlled 190.25 million Ossia International shares, or 75.3% of the company’s total shares, as of 20 June 2023. George Goh controlled 75.395 million shares (29.84% of Ossia International’s total shares). The Goh brothers’ Ossia International shares, are worth S$33.1 million at the company’s S$0.172 stock price as of 6 September 2023. This is not significant skin in the game – and it’s also unclear what George Goh’s Ossia International stake is as a percentage of his overall net worth. In the run-up to the 2023 Presidential Election, George Goh mentioned that he manages five companies with a combined shareholders’ equity of S$507 million when averaged over a 3-year period. Ossia International’s FY2023 shareholders’ equity is only S$54.9 million.
• The Goh brothers’ salaries, shown in the table below, are not egregious compared to Ossia International’s business.

Risks associated with Ossia International

• The Goh brothers call the shots, and minority shareholders have no say
• There’s a chance that Ossia International’s operating business, and the Harvey Norman stores in Singapore and Malaysia, are over-earning at the moment because of COVID pull-forward. Harvey Norman’s comparable sales in Malaysia for the 6 months ended 30 June 2023 was a negative 9.8%, and the total profit before tax for the Singapore and Malaysia stores for the 12 months ended 30 June 2023 was down 11.7%. 

Valuation of Ossia International

• S$0.172 stock price as of 6 September 2023.
• Trailing EPS and FCF per share of S$0.04 and S$0.033, thus PE and PFCF ratios are 4.3 and 5.2 – this is a low valuation if Ossia International’s operating business and the Harvey Norman stores in Singapore and Malaysia are all not over-earning at the moment. 
• Attractive dividend yield of 9% given trailing dividend of S$0.018 per share.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have no vested interest in any company mentioned. Holdings are subject to change at any time.

Editor’s note: This is the latest edition in the “Company Notes Series”, where we periodically share our notes on companies we’ve studied in the recent past but currently have no vested interest in (we may invest in or sell shares in the companies mentioned at any time). The notes are raw and not updated, and the “as of” date for the data is given at the start of the notes. The first six editions in the series can be found here, here, here, here, here, and here. Please give us your thoughts on the series through the “Contact Us” page; your feedback will determine if we continue with it. Thanks in advance!

Start of notes

Data as of 26 October 2024

Details on company

• Stock ticker: ICAD
• Listing exchange: NASDAQ
• HQ: Nashua, New Hampshire, USA
• Employee count at end-2023: 69 (67 full-time; 24 in sales and marketing; 16 in R&D)

iCAD’s business

• iCAD is a global leader in AI-powered cancer detection whose laser focus is to create a world where cancer can’t hide.
• iCAD provides the ProFound Breast Health Suite, which is a  solution for breast cancer detection, breast density assessment, evaluation of one- or two-year breast cancer risk, and evaluation of cardiovascular risk based on breast arterial calcifications. The ProFound Breast Health Suite is cleared by the US Food & Drug Administration (FDA), has received CE mark (for European regulations), and has Health Canada licensing. It is available in over 50 countries and iCAD estimates that it has been used for more than 40 million mammograms worldwide in the five years ended 2023. The ProFound Breast Health Suite contains four solutions: (1) ProFound Detection, (2) ProFound Density, (3) ProFound Risk, and (4) ProFound Heart Health.
• ProFound Detection is clinically proven to improve breast cancer detection and radiologist performance. Currently at V3.0, ProFound Detection is built with the latest in deep-learning and 3rd generation artificial intelligence. It is used for 2D and 3D mammography screening. ProFound Detection rapidly and accurately analyzes each individual image or slice to identify potentially malignant lesions. Analyzing for masses, distortion, calcifications, and asymmetry, it localizes, segments and classifies lesions giving them a score and a case score for the overall exam. ProFound Detection is FDA cleared, CE marked, and Health Canada licensed. V4.0 of the solution is under review with the FDA.
• ProFound Density provides an objective and consistent breast density assessment, helping clinics align to the new FDA-MQSA (Mammography Quality Standards Act) notification requirement to patients, which took effect in September 2024. Using mammographic images, ProFound Density analyzes a woman’s breast anatomy, measuring the adipose and fibroglandular tissue dispersion and texture, and categorizes her breast density within the appropriate BI-RADS 5th edition density category. ProFound Density gives clinicians an integrated workflow for identifying and reporting breast density, allowing for personalized patient planning with supplemental screening and customized schedules when needed. ProFound Density is FDA cleared, CE marked, and Health Canada licensed. The newest ProFound Density, V4.0, is under review by the FDA.
• ProFound Risk reads 2D or 3D mammogram images to provide one-to-two year risk assessments for breast cancer. It is the first tool of its kind. ProFound Risk uses a new model for predicting breast cancer during an annual mammogram screening that has been found to be 2.4X more accurate compared to traditional life-time models based on family and medical history. By evaluating several data points in a patient’s scanned image, ProFound Risk calculates a more accurate short-term Risk Score for developing cancer in one or two years. ProFound Risk is CE marked, Health Canada licensed, and available for investigational use only in the US; ProFound Risk is under review by the FDA.
• ProFound Heart Health measures the presence and extent of breast arterial calcifications from the same mammogram used to identify breast cancer, breast density and breast cancer risk. From one mammogram, clinicians assess the patient’s risk of heart disease and recommend further surveillance or review by other care teams. Breast arterial calcification assessment is pending regulatory licensing and available for investigational use only. iCAD’s Heart Health solution is under review by the FDA. Starting in October 2022, iCAD and Solis Mammography have been collaborating to develop and commercialize AI to evaluate cardiovascular disease based on breast arterial calcifications. Multiple studies have shown a correlation between the amount of breast arterial calcifications, which are visibly detectable on mammograms, to cardiovascular risk. iCAD and Solis are working together to use AI to quantify the amount of breast arterial calcification in mammograms, correlated to the risk of disease, and define meaningful clinical pathways for high-risk women.
• iCAD has historically offered its solution as perpetually licensed software, primarily pre-installed on and sold with an iCAD configured, off-the-shelf computer, capable of optimally running the software. In 2022, iCAD began offering its full suite of breast AI solutions as a software package, without customers needing to purchase hardware; in the same year (in the first quarter of the year to be precise) iCAD also launched an on-premise, subscription model for its software. In the first quarter of 2024, iCAD began offering its solutions under a cloud-based, software-as-a-service (SaaS) model; iCAD’s SaaS product is powered by Google Cloud’s cloud computing infrastructure. Management’s current focus is on transitioning iCAD’s business model from a perpetual model to a recurring revenue model (this includes on-premise subscriptions and cloud-based SaaS).
• iCAD is a US-centric business, with the USA making up 87% of total revenue in 2023. The remaining came from Europe (10%) and other geographies (3%).
• In North America, iCAD sells its ProFound Breast Health Suite solutions solutions through a direct regional sales force and channel partners including OEMs, Radiology Picture Archiving and Communication System (PACS) vendors, AI Platform vendors, and distributors. In Europe and the Middle East, iCAD’s solutions are sold through a direct sales force and 22 reseller relationships with regional distributors:
  • iCAD’s OEM partners include GE Healthcare (focused on the manufacture and distribution of diagnostic imaging equipment), Fujifilm Medical Systems (a subsidiary of Fuji focused on the manufacture and distribution of X-rays and other imaging equipment) and Siemens Medical Systems.
  • iCAD’s PACS partnerships include Change Healthcare (a leading independent healthcare technology company focused on insights, innovation and accelerating the transformation of the US healthcare system) and Sectra (an international medical imaging IT solutions and cybersecurity company).
  • iCAD’s AI Platform vendors include Ferrum Health (works with global leaders of AI applications to provide a robust catalog of AI applications on a single, secure platform serving clinical service lines across healthcare enterprises), and Blackford (a wholly owned subsidiary of Bayer AG that provides a platform for integration of multiple disparate AI applications and algorithms with existing systems). 
• iCAD has customer concentration risk. GE Healthcare is a major OEM (original equipment manufacturer) customer of iCAD, accounting for 22% of iCAD’s total revenues in 2022 and 2023. iCAD’s cancer detection products are also sold through OEM partners other than GE Healthcare; in total, all of iCAD’s OEM partners accounted for 32% of iCAD’s total revenue in 2023 and 29% of total revenue in 2022. iCAD also had one major direct customer that accounted for 8% of total revenue in 2023 and 4% in 2022. iCAD’s end-users appear to be radiologists working in facilities that conduct mammograms.
• Prior to the third quarter of 2023, iCAD had two reporting segments: Detection and Therapy. The Detection segment houses the ProFound Breast Health Suite while the Therapy segment housed the Xoft business. On 23 October 2023, iCAD completed the sale of Xoft. Xoft was sold for US$5.76 million, and it is an electronic brachytherapy platform designed to deliver isotope-free (non-radioactive) radiation treatment in virtually any clinical setting without the limitations of radionuclides. So iCAD is currently left with only one reporting segment (Detection) and one product suite (ProFound Breast Health Suite).

Market opportunity

• Incidences of breast cancer are growing. According to the World Health Organization, breast cancer is the most common cancer worldwide, with 2.26 million new cases diagnosed worldwide in 2020. One in eight women will get breast cancer in her lifetime, and every 14 seconds, a woman is diagnosed with breast cancer world-wide. When diagnosing breast cancer, early detection matters, as the cancer is more likely to respond to treatment and can result in greater survival rates.
• According to the American Cancer Society, the relative 5-year survival rate from breast cancer is 99% when it is detected early, when the cancer is localized (no spread outside of the breast). When detected later, the 5-year survival rates drop, to 86% when the cancer has regional spread (to nearby areas outside the breast such as the lymph nodes), and to just 31% when it has distant spread (to areas such as the lungs, liver, and/or bones). iCAD calculates if diagnoses were shifted one stage earlier for 20% of the 280,000 women in the US diagnosed with breast cancer each year, there can be savings of approximately US$3.7 billion across 2-years of patient treatment and healthcare costs. But the problems with early-detection are:
  • 59% of women in the US miss their recommended screening mammograms, and for those who regularly screen for breast cancer, 20%-40% of cancers are missed in mammogram screenings with up to 50% missed in women with dense breast tissue.
  • Traditional risk assessment models have also relied on family history of the disease as a leading risk factor when in fact, and most surprising, 89% of women diagnosed with breast cancer have no direct family history of the disease and 90-95% are not related to inherited gene mutation.
• AI can help radiologists spot cancer faster, with greater accuracy and save more lives. With the continuing migration from 2D FFDM (full-field digital mammography) reading systems to 3D DBT (digital breast tomosynthesis) systems, radiologists are spending twice the amount of time reading hundreds more images per 3D case compared to the four images captured with 2D (two images per breast). As a result, 50% of radiologists are overworked – and burnout is reported to be 49%. Simultaneously, false-positives and unnecessary recalls for suspected cancers have continued at similar rates while hard-to-detect interval cancers are being missed or diagnoses are delayed, leading to poor patient-experience.    
• 40.5 million annual mammograms are conducted in the US across 8,834 certified facilities, as measured by the FDA Mammography Quality Standards Act (MQSA). Yet, only 37% of facilities are using a CAD (computer-aided diagnosis) or advanced AI mammography solution, according to Research & Markets United States Mammography and Breast Imaging Market Outlook Report 2022-2025. Of the 3,268 facilities using AI, iCAD has an active customer base of 1,488, or approximately 46% of the AI market, and approximately 17% of the total US market. Moreover, if more countries adopt the practice of each mammography exam being read by a single radiologist using AI, rather than the current practice in most countries of having two radiologists read each exam, this could be a tailwind for iCAD. Furthermore, some western European countries have already implemented, or are planning to implement, mammography screening programs, which may increase the number of screening mammograms performed in those countries.
• iCAD’s large enterprise customers include Solis, Radiology Partners, SimonMed, Ascension and Cleveland Clinic, who collectively serve about 15% of the US mammography screening market. Some of them are in the early stages of rolling out iCAD’s solutions and continue to expand into more sites and markets each month. 
• Globally, more than 31,000 mammography systems serve approximately 250 million women in the age range recommended for annual mammograms. Expanding to the 63% of the market that is not using AI, plus additional wins in the segment using AI but not ProFound, results in significant opportunity for new business for iCAD. The company has strengthened its sales team to take advantage of these opportunities.  
• Data is the key to training robust machine learning and AI. In this regard iCAD is well positioned.  iCAD’s algorithms for ProFound Detection are trained on over 6 million images, including one of the largest 3D image datasets gathered from over 100 sites from around the globe. The training data includes the highest amount of sourcing from the US, providing diverse data that is ethnically, racially, and age representative of the US population. 
• As it stands, iCAD’s ProFound Detection already performs better than the competition as shown in Figure 1. What’s missing in Figure 1 is that ProFound Detection also positively finds or predicts more cancers up to 2-3 years earlier by circling and scoring suspicious lesions for radiologists. As mentioned earlier, the latest version of ProFound Detection, V4.0, is under review with the FDA. V4.0 is built on the newest deep-learning neural network AI for breast cancer, density and risk. Per regulatory test data, iCAD has observed V4.0 will deliver significant improvements in specificity, sensitivity, and the highest AUC (area under the curve) for Specificity and Sensitivity for breast cancer detection at 92.5%.

• iCAD appears to have strong partnerships. It has been partnering GE Healthcare for more than 20 years; in 2017 iCAD became the only integrated AI breast cancer detection solution in GE Healthcare’s systems; in November 2023, ProFound Detection and other iCAD solutions were integrated in GE Healthcare’s new MyBreastAI Suite offering. In November 2022, iCAD announced a strategic development and commercialization agreement with Google Health to integrate Google’s AI into iCAD’s breast imaging portfolio; iCAD expanded its partnership with Google Health in 2023 and signed a 20-year research and development agreement for the co-development, testing, and integration of Google’s AI technology with the ProFound Breast Health Suite for 2D mammography for worldwide commercialization to potentially ease radiologist workload and reduce healthcare disparities for women. iCAD is also working with Duke University, Indiana University, University of Pennsylvania and Karolinska Institute on artificial intelligence advancements and clinical testing. 
• iCAD’s solutions are also interoperable with more than 50 PACS (Radiology Picture Archiving and Communication System) solutions worldwide. 
• Early performance results from the first 30,000 ProFound cloud cases delivered an impressive processing time that’s over 50% faster compared to many traditional on-premise deployment solutions.

Management

• Dana Brown, 59, was appointed president and CEO on 6 March 2023. Brown has been Chair of iCAD’s board since January 2023, and a director of iCAD since January 2022. Prior to being iCAD CEO, Brown was Strategic Advisor to Susan G. Komen, the world’s leading nonprofit breast cancer organization, and served as the organization’s Senior Vice President, Chief Strategy and Operations Officer from November 2018 to April 2022. Prior to Susan G. Komen, Brown served as Senior Vice President and Chief Digital Officer at United Way Worldwide, a global network of over 1,800 nonprofit fundraising affiliates. Brown was a founding member of several successful ventures; she co-founded and served as Chief Marketing Officer for MetaSolv Software (acquired by Oracle), and served as Chief Executive Officer of Ipsum Networks. Her background makes her well-qualified to lead iCAD’s transition from selling perpetual software licenses to on-premise subscriptions and cloud-based SaaS:
  • MetaSolv was an ERP (enterprise resource planning) system for telecom, media and internet providers. Brown helped MetaSolv become a category killer, consistently winning deals against many of the larger players of the time, including Lucent and Telcordia. MetaSolv was initially developed for a mainframe computing environment, and later became client server, and then SaaS. 
  • After MetaSolv, Brown became CEO of Ipsum Networks, a network performance management software company credited with pioneering route analytics technology. Ipsum Networks went on to be acquired by Cisco in its early stages.
  • After Ipsum Networks, Brown was on the turnaround teams of technology companies in the content delivery and mobile space, until 2011 or so, when she shifted to non-profit work by joining United Way Worldwide, then a US$5 billion global nonprofit. At United Way, Brown was its first Chief Digital Officer. She architected a co-development partnership between United Way and Salesforce to build a new cloud called Philanthropy Cloud, a platform that empowers corporations to put their values into action. Philanthropy Cloud extends each company’s reach by engaging its customers and employees in philanthropic endeavors, enhancing brand reputation and awareness, attracting and retaining top talent and delivering greater impact.
  • As of early-2023, Susan G. Komen has invested more than US$3.3 billion in groundbreaking breast cancer research, community health outreach, advocacy and programs in more than 60 countries. At Susan G. Komen, Brown led efforts to create MyKomen Health, the first patient care team and researcher engagement platform designed to guide patients through the end-to-end breast cancer journey with access to experts, resources and aid, as well as ShareForCures, the first ever patient-powered breast cancer research registry, storing information ranging from determinants of health, risk profiles, health status, including documentation of care deliveries such as diagnosis and interventions, all gathered from digital and nondigital EMR, EHR data as well as genomic data.
• Brown has successfully led iCAD on a 3-phase transformation plan since becoming the CEO:
  • Phase 1 was to realign iCAD’s base. iCAD reduced cash burn which helped it to end the year in a strong cash position of US$21.7 million with no debt. In addition, iCAD made progress in its transition to a subscription-based recurring revenue business model.
  • Phase 2 was to strengthen iCAD’s foundation. iCAD’s brand changed from being product-focused into patient-focused, and the new branding was introduced at the annual, global Radiological Society of North America meeting in November 2023. Other parts of the Phase 2 transformation included iCAD’s aforementioned deals with Google Health and GE Healthcare in 2023, and the sale of Xoft.
  • Phase 3 is to invest in iCAD’s growth opportunities, where iCAD has a three-part, overlapping approach. The first part is to expand existing accounts; the second is to grow both direct and indirect channels; and the third is to enter new markets with new solutions, with an example being the ProFound Heart Health solution, which is currently available only for investigational use and is under review by the FDA.
• Under Brown’s leadership, iCAD’s Total ARR (Total ARR stands for total annual recurring revenue and it consists of Maintenance Services ARR, Subscription ARR, and Cloud ARR) has steadily grown as shown in Table 1, especially Subscription ARR and Cloud ARR. The earliest data goes back to the third quarter of 2023, when iCAD started breaking down Total ARR.
• Brown has also steadily grown the number of deals iCAD has signed for the subscription and cloud models for the ProFound Breast Health Suite, as shown in Table 2.

• A major downside to Brown’s leadership of iCAD is lack of skin in the game. As of 22 April 2024, Brown controlled merely 238,334 shares of iCAD (and this includes 198,334 exercisable options under Brown’s name), which is worth just US$0.47 million at the 26 October 2024 stock price of US$1.96.
• Another downside to Brown’s leadership is her compensation structure. It consists of (1) an annual base salary of US$400,000, (2) a cash and/or equity-based annual bonus of up to 30% of the annual base salary, and (3) options to acquire 250,000 shares of common stock, subject to a 3-year vesting schedule and 10-year expiration period. Brown is not incentivized on the long-term business results of iCAD.
• The other senior members of iCAD’s management team are:
  • Chief Technology Officer, Jonathan Go. He joined iCAD in 2006 and became CTO in February 2019.
  • Chief Financial Officer, Eric Lonnqvist. He joined iCAD in February 2021 as Vice President of Financial Planning and Analysis, and became CFO in April 2023.

Financials

• Given iCAD’s sale of Xoft in October 2023 and its ongoing shift to a recurring revenue business model from a perpetual license model, the company’s historical financials are not important. What is important is the growth of iCAD’s Total ARR, in particular, its Subscription ARR and Cloud ARR. As mentioned earlier, iCAD’s Total ARR and Subscription ARR have grown steadily in recent quarters, with Subscription ARR being a particular standout. It’s still early days for Cloud ARR with only one quarter’s worth of data, but management’s commentary in the 2024 second quarter earnings call is positive:

“While early days, the adoption of our SaaS offering has been going better than planned…

…There was conversations in Q1 even before cloud was readily available. But that being said, I do think the deals close quicker and the performance that Dana mentioned of the product has helped. Some of the customers want to test the product in the environment, and they did, and the results were positive. So some of the bigger deals were sped up and closed quicker.

And then other deals in that 10 count, those were some migrations that we want the customers that weren’t even thinking about cloud and their subscription — or their service contract ended and they go, “Well, this sounds interesting.” It moved kind of quickly some customers that wanted to get rid of hardware that they’re tired of buying these boxes every 3 years and they’re ready to move the technology forward and it just kind of clicked. But some of the bigger ones have been — there’ve been talks in Q1 also before these came together.

But going forward, I think that just because of all the positives Dana mentioned in the opening remarks, there’s going to be a natural push and it’s with how the product is performing and the excitement in customers when you talk to it and just the ease to use it compared to the perpetual model. We’re feeling a lot of pressure that it’s moving quicker in this direction…

…Yes. I do believe that cloud is going to grow faster than subscription. At what point in time its growth rate overtakes subscription is still a little bit TBD since we’ve only had it commercially available for one quarter. But the early indicators are positive. So yes, we do see that as where the future is, right, for iCAD and for our customers.”

• iCAD’s balance sheet is strong; as of 30 June 2024, there was cash of US$20.4 million, zero debt, and total lease liabilities of just US$0.27 million. Management believes this level of cash is  sufficient to fund iCAD’s operations with no need to raise additional funding.
• The company’s cash burn has also stabilised materially as shown in Figure 2.

Valuation (as of 26 October 2024)

• 26 October 2024 stock price of US$1.96.
• As of 30 June 2024, iCAD had issued shares of 26.540 million, and stock options issued of 3.048 million, for a fully diluted share count of 29.588 million. At the 26 October 2024 stock price, this gives a fully diluted market capitalisation of US$57.99 million.
• iCAD’s Total ARR as of 30 June 2024 is US$9.2 million. This gives a price-to-ARR ratio of just 6.3. Assuming a 15% net profit margin at maturity, we’re looking at an implied price-to-earnings ratio of 42. Is this high or low? Total ARR has been growing pretty rapidly, and should grow even faster in the coming years with the very recent introduction of the cloud model. 

Risks

The important risks are, in no order of merit:

• Customer concentration (discussed earlier in the “iCAD’s business” section of the notes)
• Competition: Many competitors have significantly greater financial, technical, and human resources than iCAD and are well-established in the healthcare market. iCAD currently faces direct competition in its cancer detection and breast density assessment businesses from Hologic, Inc. (Marlborough, MA), Volpara Solutions Limited (Rochester, NY), ScreenPoint Medical (Nijmegen, Netherlands), Densitas Inc. (Halifax, Nova Scotia, Canada), Therapixel (Paris, France), and Lunit (Seoul, South Korea). I couldn’t find first-hand information, but recent research on iCAD done by an investment writer stated that GE Healthcare and Hologic are the two most important companies manufacturing DBT (digital breast tomosynthesis) machines, and that iCAD’s software is compatible with Hologic’s machines. The research also stated that Hologic accounts for nearly 70% of installed mammography units, so if Hologic removes iCAD’s compatibility, iCAD’s business could take a major hit. 
• Near-term decline in financials: iCAD’s shift to a recurring revenue model will create temporarily lower GAAP revenue and negative cash flow because (1) revenue from subscription-based licenses are recognised ratably, and (2) cash is collected ratably compared to all up front in the perpetual license model. If iCAD’s financials decline at a time when financial conditions are tight in general, it could cause distress for the company. 

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have no vested interest in any company mentioned. Holdings are subject to change at any time.

Editor’s note: This is the latest edition in the “Company Notes Series”, where we periodically share our notes on companies we’ve studied in the recent past but currently have no vested interest in (we may invest in or sell shares in the companies mentioned at any time). The notes are raw and not updated, and the “as of” date for the data is given at the start of the notes. The first five editions in the series can be found here, here, here, here, and here. Please give us your thoughts on the series through the “Contact Us” page; your feedback will determine if we continue with it. Thanks in advance!

Start of notes

Data as of 24 July 2023

Notes on Azeus

Place of listing and timing of IPO; Location of HQ

• A leading provider of IT products and services, Azeus was listed on the Main Board of the SGX-ST in October 2004.
• Principal office: 22/F Olympia Plaza 255 King’s Road, North Point Hong Kong

FY2018 annual report

• Azeus was the first company in Hong Kong to be appraised at the highest level (Level 5) of the CMMISW model in November 2003.
• Azeus Products segment more than doubled revenue in FY2018 (financial year ended 31 March 2018), from HK$11.9 million in FY2017 to HK$24.4 million. Growth was due to the Azeus Convene” and AzeusCare SaaS (software-as-a-service) products, as well as professional services. 
• At the start of July 2017, Azeus was awarded the Standing Offer Agreement for Quality Professional Services 4 (SOA-QPS4), enabling the company to tender for various Hong Kong government IT professional services contracts of up to HK$15 million for the fifth consecutive term. Following which, Azeus successfully clinched a series of governmental IT projects from the Hong Kong Government, which amounted to over HK$133.4 million, which will be progressively recognised over the next two to ten years following their implementation in FY2019 and FY2020. 
• In the course of FY2018, Azeus saw its investment in the expansion of its global product sales team pay off. Azeus made good headway in acquiring new customers for the Azeus Products segment, which resulted in higher sales for Azeus Convene and AzeusCare. Azeus Products accounted for 23.8% of Azeus’s total revenue, compared to 12.1% in FY2017. 
• The Maintenance and Support Services segment was Azeus’ largest revenue contributor in FY2018, accounting for HK$46.0 million, or approximately 45.0% of total revenue. The segment registered a 13.7% decline in revenue from HK$53.3 million in FY2017 due to the expiry of a major maintenance and support outsourcing contract in the beginning of the year.
• The IT Services segment, which recorded a lower revenue of HK$31.9 million in FY2018 compared to HK$32.7 million in FY2017, was 31.2% of Azeus’s total revenue. This was due to a decrease in sales of third-party hardware and software by HK$0.8 million in FY2018. Excluding the third-party hardware and software sales, Azeus was able to achieve the same amount of IT Services revenue as compared to FY2017.
• Entering into FY2019, management believed that Azeus’ core business fundamentals remain sound and the company is in a good position to grow its business by building on the progress made last year, particularly for the products business which is an integral growth engine for Azeus in the years ahead. 
• Lee Wan Lik (managing director and founder) and his wife, Lam Pui Wan (executive director), controlled 24.73 million Azeus shares, or 82.44% of total shares, as of 30 May 2018.

FY2019 annual report

• In FY2019, Azeus delivered total revenue of HK$147.8 million, a 44.4% increase from HK$102.4 million in FY2018. The growth was mainly supported by increased sales of Azeus’s two proprietary SaaS products – Azeus Convene and AzeusCare under the Azeus Products segment – as well as professional IT services arising from the completion of higher value implementation service projects.
• Revenue for the Azeus Products segment more than doubled to HK$49.9 million in FY2019 from HK$24.4 million in FY2018. As a result, the segment was 33.8% of Azeus’s revenue in FY2019, up from 23.8% in FY2018. 
• In September 2018, Azeus signed a contract valued up to £1.42 million with a local council in the United Kingdom for the supply, support and maintenance of a Social Care Case Management System with AzeusCare. The amount was progressively recognised over the next seven years of the contract. The contract win added to Azeus’s track record of public sector projects in the UK, signifying Azeus having been chosen as the preferred suite of IT solutions for social care in the country.
• Professional IT Services revenue expanded 25.6% from HK$78.0 million in FY2018 to HK$97.9 million in FY2019. This segment is made up of two core business areas, IT services and Maintenance and Support Services, of which both performed well. Revenue from IT services increased 48.7% from HK$31.6 million in FY2018 to HK$47.0 million in FY2019 from the completion of higher value implementation service projects – its contribution to Azeus’s total revenue for FY2019 increased to 31.8% from 30.9% in FY2018.
• Revenue from Maintenance and Support Services increased by 7.5% from HK$46.0 million in FY2018 to HK$49.5 million in FY2019, due to an increase in the number of projects in production and under maintenance period. The segment represented 33.4% of Azeus’s total revenue in FY2019.
• IT Services is project-based and revenue can be lumpy; Maintenance and Support Services is a stable earner.
• Entering FY2020, management was focused on growing stable recurrent revenue from the Azeus Products business segment. Management wanted to aggressively build and strengthen sales and marketing capacity to secure greater market share, as they saw Azeus Products business will increasingly serve as the growth engine of Azeus.
• Lee Wan Lik (managing director and founder) and his wife, Lam Pui Wan (executive director), controlled 24.73 million Azeus shares, or 82.44% of total shares, as of 31 May 2019.

FY2020 annual report

• Azeus’s flagship product, Azeus Convene, is a leading paperless meeting solution used by directors and executives in various industries, across more than 100 countries. Through its user-friendly and intuitive functionality, Azeus Convene has enabled organisations to conduct meetings in a convenient and efficient manner, by eliminating the time and cost required for printing large amounts of hardcopies. To ensure data security, Azeus Convene is equipped with advanced security features and end-to-end encryption. In addition, Azeus Convene offers 24/7 support to all its customers worldwide. The Group has also introduced a virtual AGM solution, AGM@Convene, in response to the shifting trend towards eAGMs as a result of the COVID-19 restrictions.
• Azeus’s proprietary social care system, AzeusCare, has also been adopted by various local councils in the United Kingdom. AzeusCare is an integrated case management system that provides a wide range of solutions for supporting the delivery of services for managing and delivering social care for both children and adults. In particular, AzeusCare supports the delivery of the requirements of the UK Care Act 2014 with a comprehensive set of tools to manage both the case management and finance requirements under a fully integrated system. 
• Towards the end of FY2020, COVID-19 pandemic impacted countries across the world. Amidst the pandemic, management identified opportunities to boost the adoption of Azeus Convene and launched the electronic annual general meeting (“e-AGM”) product which is designed to enable listed companies to hold annual general meetings from multiple sites, while ensuring that the shareholders’ rights remain protected. Azeus experienced a very encouraging response from listed companies, enterprises, business associations and nonprofit organisations with the launch of e-AGM. In June 2020, approximately 60 customers conducted their AGMs using Azeus’s e-AGM solution. 
• Azeus achieved another year of record-high revenue in FY2020, mainly driven by the Azeus Products segment, which gained strong momentum during the year. Azeus Convene and AzeusCare continued to contribute a steady growing stream of recurring income as these products and their associated professional services were increasingly adopted and implemented by our customers. Azeus’s total revenue was HK$181.2 million, up 22.6% from FY2019. Notably, revenue for the Azeus Products segment surged 68.1% to HK$83.9 million in FY2020 from HK$49.9 million in FY2019, accounting for 46.3% of Azeus’s total revenue, up from 33.8% in FY2019.
• As part of its expansion strategy, Azeus bolstered its sales force in the year to ramp up customer acquisition and increase penetration among existing customers. As a result, Azeus incurred higher selling and marketing costs of HK$23.4 million, an increase of 30.0% from HK$18.0 million in FY2019.
• Professional IT Services revenue was largely unchanged at HK$97.3 million in FY2020. The segment comprises three business areas, System implementation and enhancement; Sale of third-party hardware and software; Maintenance and Support Services. For FY2020, System implementation and enhancement decreased by 22.9% to HK$36.2 million mainly due to fewer projects and enhancements secured during the year, while Maintenance and Support Services, which contributes a stream of recurring income, decreased by 8.5% to HK$45.3 million due to a decrease in the number of ongoing maintenance projects. The decreases were partially offset by a higher sale of third-party hardware and software of HK$15.8 million in FY2020 as compared to HK$1.5 million in FY2019, mainly attributable to the delivery and acceptance of an implementation project completed during the year.
• In FY2020, approximately 70% of Azeus’s revenue was recurring in nature. Management wanted to build and expand sales and marketing capacity to secure greater market share and address the growing demand for IT solutions amid the accelerating rate of digitalisation globally.
• In Azeus’s FY2020 AGM in August 2020, it showcased several key functions of the e-AGM solution, including live voting and an interactive video question and answer session.
• Lee Wan Lik (managing director, chairman, and founder) and his wife, Lam Pui Wan (executive director), controlled 24.73 million Azeus shares, or 82.44% of total shares, as of 31 May 2020.

FY2021 annual report

• Azeus’s flagship product, Azeus Convene, is a leading paperless meeting solution used by directors and executives in various industries, across more than 100 countries. Through its user-friendly and intuitive functionality, Azeus Convene has enabled organisations to conduct meetings in a convenient and efficient manner, by eliminating the time and cost required for printing large amounts of hardcopies. To ensure data security, Azeus Convene is equipped with advanced security features and end-to-end encryption. In addition, Azeus Convene off ers 24/7 support to all its customers worldwide. The Group has also introduced a virtual AGM solution, AGM@Convene, in response to the shifting trend towards eAGMs as a result of the COVID-19 restrictions.
• Azeus’s proprietary social care system, AzeusCare, has also been adopted by various local councils in the United Kingdom. AzeusCare is an integrated case management system that provides a wide range of solutions for supporting the delivery of services for managing and delivering social care for both children and adults. In particular, AzeusCare supports the delivery of the requirements of the UK Care Act 2014 with a comprehensive set of tools to manage both the case management and finance requirements under a fully integrated system.
• Azeus recorded a 1.7% decrease in revenue to HK$178.1 million in FY2021, from HK$181.2 million in FY2020.
• Azeus started to market AGM@Convene internationally and achieved success in Singapore, the Philippines and Hong Kong.
• Revenue from Azeus Products increased by HK$29.3 million, or 34.9%, from HK$83.9 million in FY2020 to HK$113.2 million in FY2021, as Azeus made good progress in expanding its customer and revenue base.  Azeus Products accounted for 63.6% of Azeus’s total revenue, compared to 46.3% in FY2020. Revenue from Azeus Products came from three proprietary SaaS products – Azeus Convene, AzeusCare, and AGM@Convene – and associated professional services.
• IT Services, which includes three core business areas, System implementation and enhancement, Sale of third party hardware and software, and Maintenance and support services, recorded a 33.3% decrease to HK$64.9 million as a result of fewer projects and enhancements secured in FY2021. Revenue from Systems implementation and enhancement decreased by 47.7% to HK$19.0 million in FY2021 while revenue from Sale of third party hardware and software decreased by 96.2% from HK$15.8 million to HK$0.6 million, as the majority of the projects completed in FY2021 required Azeus’s customisation services. Revenue from Maintenance and support services remained flat in FY2021 at HK$45.3 million.
• As management continued to invest in Azeus’ Products business segment, Azeus’s total research and development costs increased to HK$36.8 million in FY2021, 49.0% higher than in FY2020. Likewise, as Azeus pursued subscriber growth by expanding the sales teams, selling and marketing expenses increased by 36.3% to HK$31.9 million in FY2021 as compared to HK$23.4 million in FY2020.
• Azeus’s management team respects shareholders’ rights. During Azeus’ AGM in August 2020, the company was probably the first Singapore-listed company to hold a virtual meeting in 2020 with a live Q&A and live voting. Exiting FY2021, management expected more listed companies to progressively follow its lead and improve their engagement with shareholders. 
• Management was cautiously optimistic about the outlook for FY2022.
• Lee Wan Lik (managing director, chairman, and founder) and his wife, Lam Pui Wan (executive director), controlled 24.73 million Azeus shares, or 82.44% of total shares, as of 31 May 2021.

FY2022 annual report

• Azeus’s flagship product, Convene, is a leading paperless meeting solution used by directors and executives in various industries, across more than 100 countries. Through its userfriendly and intuitive functionality, Convene has enabled organisations to promote and uphold governance through a single secure technology platform to manage and conduct formal or structured meetings – physical, remote, or hybrid – and streamline the workflows around it. This results in a greater boost in productivity, accountability, and collaboration within and beyond the boardroom. To ensure data security, Azeus Convene is equipped with advanced security features and end-to-end encryption. In addition, Convene offers 24/7 support to all its customers worldwide. The Group has also introduced a virtual AGM solution, Convene AGM in response to the shifting trend towards eAGMs as a result of the COVID-19 restrictions.
• Azeus’s proprietary social care system, AzeusCare, has also been adopted by various local councils in the United Kingdom. AzeusCare is an integrated case management system that provides a wide range of solutions for supporting the delivery of services for managing and delivering social care for both children and adults. In particular, AzeusCare supports the delivery of the requirements of the UK Care Act 2014 with a comprehensive set of tools to manage both the case management and finance requirements under a fully integrated system. 
• In FY2022, Azeus secured its single largest contract of over HK$1.0 billion for the implementation and maintenance of the Hong Kong government’s Central Electronic Recordkeeping System with its product, Convene Records, which was expected to further enhance Azeus’s recurring income stream. This was a show of confidence from the Hong Kong Government in the capability of Azeus in delivering “All-of-Government” large scale projects, and in the software products designed and developed by Azeus. An expected 75% of the total estimated contract value would be for the license and maintenance fees of the Convene Records software. The design and implementation work commenced in May 2022 – management expected a majority of the revenue to be contributed from FY2023 until FY2037.
  • More details from other sources: The contract has a total implementation price of HK$633.9 million and the revenue from development, deployment and licensing would last from FY2023 till FY2027; the contract also has maintenance and support value for the system of HK$381.4 million and this maintenance and support revenue is expected to start in FY2027 and last 10 years. 
• Azeus recorded a 22.2% increase in revenue to HK$217.7 million, up from HK$178.1 million in FY2021, driven by strong growth from both its Azeus Products and IT Services segments.
• Azeus Products, the company’s growth engine, continued to make good strides globally, as it expanded into more territories and added new product features and modules. Revenue from Azeus Products increased by 23.1%, from HK$113.2 million in FY2021 to HK$139.4 million in FY2022, and accounted for 64.1% of Azeus’s total revenue.
• The IT Services segment grew revenue by 20.5% from HK$64.9 million in FY2021 to HK$78.2 million in FY2022, as Azeus secured more projects and undertook project implementation and maintenance work. More than 60% (HK$47.9 million) of this IT Services revenue was from maintenance and support services of existing systems which are long-term contracts. The recurring revenue from maintenance and support, which accounted for 22.0% of Azeus’s revenue in FY2022, increased by 5.7% to HK$47.9 million from HK$45.3 million in FY2021. Revenue from systems implementation and enhancement increased by HK$11.3 million or 59.5% to HK$30.2 million in FY2022. 
• Exiting FY2022, management thought Azeus was well-placed to capitalise on the opportunities ahead because of its strong product offerings and expertise in delivering sophisticated IT systems. Management also wanted to continue investing in and grow the Azeus Products segment. Management was excited about Azeus Products’ growth potential, with the growth of the flagship product, Convene, and new product offerings such as Convene Records.
• Lee Wan Lik (executive chairman and founder) controlled 24.73 million Azeus shares, or 82.44% of total shares, as of 1 June 2022 (the shares include those of Lam Pui Wan).
• Lee Wan Lik’s wife, Lam Pui Wan, passed way on 6 May 2022
• Lee Wan Lik stepped down as managing director and CEO on 15 March 2022 but remained as executive chairman.

FY2023 annual report

• Azeus has developed:
  • Convene – the board portal software that enables directors and executives with best-practice meetings to achieve better corporate governance
  • ConveneAGM – a virtual/ hybrid AGM platform with live voting, live Q&A, and zero-delay broadcast that transforms the landscape for shareholders and members’ meetings through physical, remote or hybrid AGMs
  • Convene in Teams (CiT) – a Teams-based meeting solution that seamlessly integrates with Microsoft 365 for a better leadership meeting experience in Teams,
  • Convene ESG – an end-to-end reporting software that digitises the Economic, Social and Governance (“ESG”) reporting journey of regulated companies to comply with the mandated local standards and global frameworks. 
  • Convene Records – a document management solution that automates the management of electronic records and documents, and facilitates information sharing in the organization; the product includes a configurable workflow management feature for approval process, and supports the filing, retrieval, distribution, archiving and version control 
  • AzeusCare – an integrated case management system that provides a wide range of solutions for supporting the delivery of services for managing and delivering social care for both children and adults. In particular, AzeusCare supports the delivery of the requirements of the UK Care Act 2014 with a comprehensive set of tools to manage both the case management and finance requirements under a fully integrated system. It has been adopted by various local councils in the United Kingdom.
• Azeus recorded a 16.2% increase in revenue to HK$252.9 million in FY2023, from HK$217.7 million in FY2022, driven mainly by growth from the Azeus Products segment. The Azeus Products segment benefited from Azeus’s marketing efforts, increased its presence in more countries, and expanded its product offering.
• The HK$1.02 billion Central Electronic Recordkeeping System (CERKS) project – lasting over 53-months – moved into the deployment phase in FY2023 and management expected it to contribute to the product business in the coming years.
• Azeus Products accounted for 69.3% of Azeus’s total revenue in FY2023. Revenue from Azeus Products increased by 25.8% from HK$139.4 million in FY2022 to HK$175.3 million in FY2023, mainly attributable to the revenue contribution from Convene and Convene Records under the CERKS contract.
• IT Services, which include two main core business areas, system implementation and enhancement and maintenance and support services, saw a marginal decline of just 0.8%, from HK$78.2 million to HK$77.6 million. Within the IT Services segment, revenue from systems implementation and enhancement declined by HK$0.7 million or just around 2.3% to HK$29.5 million in FY2023 from HK$30.2 million in FY2022, while the recurring revenue from maintenance and support increased by HK$0.2 million or 0.4%, to HK$48.1 million in FY2023 from HK$47.9 million in FY2022. 
• Exiting FY2023, management thought Azeus was in a favourable position to capture potential opportunities, given the company’s strong product offerings as well as the competency in delivering sophisticated IT systems. Management also wanted to continue investing in and growing the Azeus Products segment. Led by the flagship product – Convene – and the rollout of new product offerings such as Convene Records, management expects growth within the Azeus Products business. Coupled with the expected rollout of the secured service segment projects, barring unforeseen circumstances, management is optimistic on Azeus’s overall growth and outlook in FY2024.
• Lee Wan Lik (executive chairman and founder) controlled 24.73 million Azeus shares, or 82.44% of total shares, as of 20 June 2023 (the shares include those of Lam Pui Wan).

Segmental data (Azeus Products and IT Services)

• Recurring revenue comes from Azeus Products and Maintenance and Support (Maintenance and Support is grouped under IT services)

Historical financials

• No dilution as share count has remained unchanged
• Has always had earnings payout ratio (100% payout ratio in past two financial years)
• Balance sheet had always remained robust
• Net profit appears to have hit inflection point in the past 3-4 years

Geographical revenue

• Can see that all regions have grown a lot over time. Is this due to Azeus Products?

Product quality for Convene

• In all the rankings seen below, for board management software, Convene scores pretty highly (either a leader, or nearly a leader)

2021 ranking by Software Reviews

2022 ranking by Software Reviews

2023 ranking by Software Reviews

Board management software score by Software Review as of 2023-07-25

Competitive landscape by G2.com (Convene is in red circle)

User score by G2.com for Convene on 2023-07-25

Management

• Lee Wan Lik, 61, is the executive chairman and founder of Azeus. His late wife, Lam Pui Wan, was an executive director until her passing on 6 May 2022. 
• Lee Wan Lik controlled 24.73 million Azeus shares, or 82.44% of total shares, as of 20 June 2023 (the shares include those previously held by the deceased Lam Pui Wan)
• Michael Yap Kiam Siew, 62 is the CEO and deputy chairman of Azeus. Served on Azeus’s board since September 2004. Became executive director and deputy chairman on 20 April 2020; appointed CEO on 15 Mar 2022. Michael Yap does not have any meaningful stake in Azeus shares
• As shown in table below, management’s compensation is not egregious

Quick thought on valuation

• At 24 July 2023 stock price of S$8.20, Azeus has market cap of S$246 million.
• Azeus Products alone has trailing operating profit of HK$76 million, which is around S$12.9 million. Market cap of entire Azeus is 19 times operating profit of the Azeus Products business alone.

Questions on Azeus

• What was Azeus Products’ annual client retention rate from FY2017 to FY2023? Convene’s website mentions that “99% clients renew every year”, but no timeframe was mentioned.
• What was Azeus Products’ annual net-dollar expansion rate (NDER) from FY2017 to FY2023?
• How has Azeus Products’ customer count, or the customer count for Convene specifically, changed over time?
• How has the product-subscribed-per-customer ratio for Azeus Product changed over time?
• What does a typical subscription for Azeus Products look like? Specifically, (a) what is the average contract size, (b) for how long does a typical subscription term last, and (c) is the software charged based on usage, or the number of seats, or a mixture of both?
• What is the market opportunity for Convene and Convene Records?
• The CERKS contract value can be split into HK$633.9 million in the 5-year deployment phase, and HK$381.4 million in the subsequent 10-year maintenance and support phase. Is Convene Records a subscription SaaS (software-as-a-service) product such as Convene, and ConveneAGM?  
• What kind of margins (operating and net) will the CERKS contract have?
• Azeus does not have any significant concentration of credit risk through exposure to individual customers – but is there significant concentration of revenue risk through exposure to individual customers?
• The growth of Azeus’s revenue in the United Kingdom has been very impressive, rising from HK$11.9 million in FY2017 to HK$42.0 million in FY2023. Has this been mostly the result of growth in usage of AzeusCare, or has Convene or other software products played important roles too?
• For both FY2022 and FY2023, Azeus paid out all of its earnings as dividends. What are management’s thought processes when it comes to capital allocation?

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have no vested interest in any company mentioned. Holdings are subject to change at any time.

Editor’s note: This is the latest edition in the “Company Notes Series”, where we periodically share our notes on companies we’ve studied in the recent past but currently have no vested interest in (we may invest in or sell shares in the companies mentioned at any time). The notes are raw and not updated, and the “as of” date for the data is given at the start of the notes. The first three editions in the series can be found here, here, here, and here. Please give us your thoughts on the series through the “Contact Us” page; your feedback will determine if we continue with it. Thanks in advance!

Start of notes

Data as of 17 July 2023

Background

• HQ: Milan, Italy
• Founding: 2004 (idea for the company came in 1994)
• Main listing: In Italy on the Milan stock exchange
• IPO date: 19 November 2018
• Employees: Average number for 2022 was 1,055

Business

• Edilizi Acrobatica is the leading company in Italy and Europe in the field of operational construction using the double safety rope technique. The company’s main services include:
  • Securing and Prompt Intervention: Services that are provided urgently, such as removal of rickety objects on the outside of a building
  • Renovation and maintenance: Restructuring and maintenance of facades, balconies, ledges; ordinary maintenance of hedges as well as rebuilding
  • Building cleaning: Cleaning of walls and facades (glazing and/or cladding panels), roofs, solar panels and windmills, gutters and downpipes
  • Proofing intervention: Removal of localized infiltrations or the complete rebuilding of the waterproofing system that may concern balconies, roofs, ledges and hedges
• Founder Riccardo Iovino was previously a skipper (a boat captain) who was accustomed to moving at high altitudes to carry out maintenance on the masts of boats. In the 1990s, he had a friend who had a gutter to be repaired in a poorly accessible spot. Iovino decided to climb up the roof with the ropework technique and repaired the gutter in a few hours. The experience gave Iovino a great idea: rope works allow a person to intervene effectively outside buildings with enormous advantages in terms of time and money that traditional construction cannot offer. Figure 1 shows Edilizi Acrobatica’s employees in action. Edilizi Acrobatica’s management believes that the double safety rope technique has the following advantages over scaffolding:
  • Better safety for workers: In 2017, Edilizi Acrobatica conducted 222,577 hours of work, with only 2,872 hours of injury (16 injuries), corresponding to an injury frequency index of 1.14%.
  • No risk of theft
  • Less invasiveness for any works conducted: For example, Edilizi Acrobatica employees can work at heights on monuments and historical buildings without disturbing tourists (the company’s rope access technicians worked on Ponte Vecchio in Florence, on the Roman Forum and the Rocca Salimbeni in Siena)
  • Greater cost- and time-effectiveness
  • Better accessibility to areas on buildings that are not reachable with traditional techniques
  • Better for the environment: The Life Cycle Assessment conducted in 2021 showed that of the four main types of techniques used for building-interventions, the double rope technique allows a reduction of between 45% and 76% of the global warming potential by means of a reduced number of journeys; double rope technique allows uses an estimated 51% to 68% of energy consumption and between 7% and 40% of water consumption compared to other techniques.

• Edilizi Acrobatica has more than 130 branches in Italy, France, Spain, Monaco, United Arab Emirates, Saudi Arabia, Nepal. In Europe, it has more than 120 branches, which includes 30 franchises; majority of the branches are in Italy (83 company-branches and 30 franchise-branches at end-2022). The branches in Dubai come from Edilizi Acrobatica’s March 2023 acquisition of 51% of Enigma Capital Investments, which is active in the Middle East in the construction sector, rope access, cleaning services for residential and commercial buildings, and some facility management services; Enigma performs cleaning work for the exterior of the Burj Khalifa, Dubai’s iconic skyscraper. Edilizi Acrobatica offers its services through its wide network of operating offices – both directly-owned and by franchises – which allow for a strong commercial presence at a national level. Edilizi Acrobatica’s branches look attractive and inviting (see Figure 2):

• Edilizi Acrobatica customers come from the residential sector (the company receives orders from private individuals, condominium administrators, or technicians), public administration sector (where the company works on buildings owned by public administration, such as schools, universities, public offices, and hospitals), corporate sector (where the company works on industrial sites, company headquarters, hotels, wind farms, and photovoltaic plants), and religious sector (where the company works on religious structures including churches, monasteries, and convents). In 2017, residential was 80.9% of Edilizi Acrobatica’s revenue from direct operating offices; public administration was 5.3%; corporate was 8.6%; religious structures was 5.1%. Unclear what the split is like in 2022.
• In 2022, Edilizi Acrobatica earned €134.5 million in revenue, of which 89.9% was from Italy, 3.6% from France, 5.9% from a new business called Energy Acrobatica 110 (involved with energy efficiency, anti seismic interventions, installation of photovoltaic systems), and 0.6% from Spain. In 2022, 6.1% of Edilizi Acrobatica’s revenue came from franchises. The average order size in 2022 was €7,000.

Market opportunity

• Edilizi Acrobatica is active in the field of external restructuring of buildings. This market represents over half of the entire construction sector. There’s been a trend toward professionalization in external restructuring in recent years with the growing presence of professionals in the management of buildings, including condominiums both in Italy and abroad, as has already been the case in France for several years. Management believes this market evolution is a tailwind for Ediizi Acrobatica, since it is increasingly a point of reference for large customers who demand fast execution and high-quality standards. Moreover, external restructuring using rope access is gaining popularity with condominium owners and administrators since there are no installation costs for scaffolding or aerial platforms and rope access guarantees the possibility of conducting external restructuring of the buildings through medium small interventions planned in several phases of time, with completion of the works also in a wider period.
• Figure 3 shows the size of the renovation market in Italy for 2007-2016 where renovation interventions include demolition operations, removal and construction of partitions, plastering and smoothing, floors and coverings, painter works, plumbing works, heating system, electrical system, masonry assistance, air conditioning, fixtures and supply of materials. In 2016 renovation works in Italy amounted to €69.4 billion, up by 3.6% compared to 2015 (€67 billion), and giving rise to a 2011-2016 CAGR of 1.7 %. Around 71.5% of the total renovation works (€49.6 billion) were for residential buildings. Worth noting that the renovation market has been very stable, even during the Great Financial Crisis period. Steady growth in the market continued in 2017 and 2018; total renovation works spending was €71.0 billion in 2017 (€50.4 billion for residential buildings) and €72.6 billion in 2018 (€51.4 billion for residential buildings).

 

• In 2011, ISTAT (Italian National Institute of Statistics) compiled a study of buildings and complexes in Italy and found a total of 14.516 million, 13.3% more than in 2001. More specifically, there were 14.453 million buildings and 63,115 complexes, with an inter-census increase of 13.1% and 64.4% respectively. 84.3% of the total buildings surveyed were residential buildings, equal to 12.188 million, up by 8.6% in the decade between the censuses.
• In France, Edilizi Acrobatica’s market opportunity is about €60 billion, which consists of the following activities: Support the completion of new buildings with external and covering finishes, installation of panels in facade, installation of photovoltaic panels, installation of lifelines, and works aimed at improving and maintaining the exterior of buildings.
• Worth pointing out that Edilizi Acrobatica’s competitors (companies that offer similar services as Edilizi Acrobatica using the double rope technique) in Italy and Europe are tiny. Figure 4 show competitors in Italy and their revenues in 2016 and Figures 5, 6, 7 show competitors in France, Switzerland, Spain, and Portugal, and their revenues in 2016. Their revenues are all tiny compared to Edilizi Acrobatica – in 2016, Edilizi Acrobatica’s revenue was €13.3 million. Even in 2022, there are no major new competitors, and the trend of small competitors on a local scale remains unchanged.

Growth strategy

For growth, Edilizi Acrobatica’s management communicated the following in its 2018 IPO prospectus:

• Consolidate Edilizi Acrobatica’s presence in the Italian market 
• Strengthen the company’s commercial activity in the residential sector, through the opening of new operating offices, directly-owned and through franchising 
• Develop dedicated divisions to target Corporate, Public Administration and Religious sectors
• Acquire leading foreign companies operating in the construction market with rope access technique (Edilizi Acrobatica acquired a French company in 2018 and the aforementioned Dubai company in March 2023)
• Strengthen Edilizi Acrobatica’s brand image through the creation of promotional campaigns and promotional activities, through traditional channels and social media (the company now has a very fun social media presence – its FB page has 215,000 followers!)

Figure 9 below, from Edilizi Acrobatica’s 2021 earnings presentation, offers great insight into how it wants to expand into Europe (note the reminder again of the small size of peers):

Financials

• Very strong historical revenue growth. 2016-2022 CAGR of 47.0%; 2019-2022 CAGR of 47.7%; 2022 growth of 53.4%
• Profitable since at least 2016, but net income margin has fluctuated between 13.6% (2016) and 2.6% (2019). Net income margin was 11.3% in 2022. Edilizi Acrobatica’s net income has CAGR-ed at 42.6% for 2016-2022, 140.6% for 2019-2022, and 37.5% for 2022
• Operating cash flow data only available from 2017 and since then, operating cash flow has been mostly positive. But, the operating cash flow margin was meagre from 2017 to 2020, coming in between 1.0% (2017) and -6.6% (2020). Operating cash flow only inflected upwards in 2021, with a margin of 16.9%. 
• Free cash flow follows a similar dynamic as operating cash flow, with the difference being it was negative from 2017-2020.
• Balance sheet has fluctuated between low net-debt or low net-cash position.
• Not much dilution since IPO in November 2018, based on end-of-year share count.
• As far as I could tell, started paying a dividend in 2020. Dividend has increased substantially, but payout ratio is low at 27% for 2022.
• Worth noting that the Italian government introduced a “bonus facade” for 2020, which allowed Italian building owners to recover 90% of the costs incurred in 2020 for the maintenance of their building facades with no maximum spending limit. The Bonus Facade was applicable for 2021. In 2022, the Bonus Facade was reduced to 60% of the costs incurred. The Bonus Facade was not renewed for 2023. Edilizi Acrobatica’s strong financial performance in 2021 and 2022 may have been due to the Bonus Facade.

Management

• Edilizi Acrobatica’s founder, Riccardo Iovino, 54, is CEO. His mother (Simonetta Simoni) and partner (Anna Marras) are also on the board of directors; Simoni is the President of Edilizi Acrobatica. 
• Iovino and Marras control Arim Holdings (80-20 split), an investment vehicle which owns 74% of Edilizi Acrobatica’s shares as of 31 December 2022. This equates to 6.09 million Edilizi Acrobatica shares. At 17 July 2023 stock price of €17.15, that’s a stake worth over €104 million, which is significant skin in the game.
• During Edilizi Acrobatica’s IPO, Simoni also had a stake in shares of the company held by Arim Holdings that equated to 8.5% of Edilizi Acrobatica’s shares; unsure if this still holds true. 
• In 2007, when Marras joined Edilizi Acrobatica, it was a turning point in the company as she helped create a sales network, and an internal HR department focused on people and the continuous recruitment of talents. 

Compensation of Management

• Very little detail on compensation of management. Only data is the overall compensation to the directors of Edilizi Acrobatica. Besides  Iovino, Simoni, and Marras, the other directors are Marco Caneva and Simone Muzio. Cavena is an independent director and has worked in the financial services and strategic consulting sector for over 20 years, including 10 in the investment banking division of Goldman Sachs (London, Paris, Milan). Muzio is the Technical Director of Italy for Edilizi Acrobatica and joined the company in 2007.
• Overall compensation of directors vs Edilizi Acrobatica’s net income is shown in table below. Overall compensation used to be very high as percentage of net income and is now lower, but 2022’s level of 9.8% is still fairly high.

Valuation (as of 17 July 2023)

• 17 July 2023 share price of €17.15
• Trailing diluted EPS is €1.85, hence PE is 9.3
• Trailing FCF per share is €1.48, hence PFCF is 11.6
• Low valuations based on trailing earnings and current stock price. Looks likely that Edilizi Acrobatica can continue to win market share from a very fragmented space of direct competitors, and from facade maintenance companies that use scaffolding or other forms of machinery. But unsure how the company’s growth profile will look like in 2023 given the removal of the Bonus Facade.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have no vested interest in any company mentioned. Holdings are subject to change at any time.

Editor’s note: This is the latest edition in the “Company Notes Series”, where we periodically share our notes on companies we’ve studied in the recent past but currently have no vested interest in (we may invest in or sell shares in the companies mentioned at any time). The notes are raw and not updated, and the “as of” date for the data is given at the start of the notes. The first three editions in the series can be found here, here, and here. Please give us your thoughts on the series through the “Contact Us” page; your feedback will determine if we continue with it. Thanks in advance!

Start of notes for engcon

Data as of 31 December 2023

Background

• Year founded: 1990
• Listed in Stockholm Stock Exchange (Sweden) since 17 June 2022
• Headquarters: Stromsund, Sweden

Business

• engcon manufactures tiltrotator systems that turns excavators into tool carriers (see Figure 1). The hydraulic tools provided by the company include detachable grippers, stone and sorting grabs, combi grabs, and more. See engcon’s Youtube video for more.

• engcon’s tiltrotator solutions are developed, manufactured and subsequently fitted on new or existing excavators. Dealers serve as a link between excavator manufacturers (OEMs, or original equipment manufacturers), tiltrotator manufacturers, and end-customers. End-customers are contractors, companies that own excavators, and excavator rental companies. engcon has partnerships with OEMs that increase the reach of the company’s products and prepare excavators for faster and easier installations of tiltrotators; the partnerships also provide valuable insight into which technologies OEMs are developing for the future, and engcon contributes with knowledge of end-customer requirements.  
• engcon’s tiltrotator solutions are focused on excavators in the weight class of 2 tonnes to 33 tonnes.
• The production of engcon’s tiltrotator solutions happens in the company’s production sites in Strömsund, Sweden and Niepruszewo, Poland. engcon’s tiltrotator solutions consist of various components designed by the company. Some of the components are also manufactured at engcon’s aforementioned production sites but most of the components are purchased from suppliers in Sweden and Northern Europe. 
• engcon had sales in 16 markets across the globe in 2022 and its sales split by geographic region in 2022 and 9M 2023 is shown in Figure 2 below. The years in which engcon entered its various markets are:
  • Sweden: 1990
  • Finland and Norway: 1995
  • Denmark and Germany: 2003
  • UK: 2004
  • France: 2014
  • Netherlands: 2016
  • USA: 2017
  • Japan: 2018
  • South Korea and Australia: 2020
  • Canada, Belgium, Ireland, and Austria: 2021-2022

• The majority of engcon’s sales take place through a global network of dealers. Sales also take place through collaboration with OEM dealer networks. A limited amount of products, mainly buckets and tools, are sold through engcon’s website in Sweden, Finland and Denmark. 
• No single customer accounted for >10% of engcon’s sales in 2022, so there’s no customer concentration. But there may be supplier concentration for engcon: 10 of engcon’s largest suppliers in 2021 accounted for 58% of the company’s total purchases of raw materials and components.
• A tiltrotator had an average price (including engcon and competitors) of SEK 176,000 (around US$19,000) in 2021. Dealers typically earn 30% of the price of a tiltrotator.
• engcon released its 3rd-gen tiltrotator solution in May 2022. The 3rd-gen system is equipped with technology that has never been used on tiltrotators and that takes a clear step towards the electrified, connected and autonomous excavators of the future. The 3rd-gen’s load-sensing technology leads to reduced fuel consumption, improved precision, less wear and tear, and lower maintenance costs. The reduced energy need simplifies the use of alternative fuels for excavators, such as electricity and hybrid solutions. With help from a new sensor technology, the newly developed control system can precisely calculate the tilt and rotation of the tiltrotator, which means improved user-friendliness and greater potential for autonomous operations. Furthermore, the newly developed control system enables a more efficient remote connection, thereby improving remote support as well as the ability to remotely configure equipment.

Market opportunity

Newly manufactured excavator market for engcon

• Globally, 665,000 excavators were sold in 2021. Of these 665,000 excavators, a total of 181,775 excavators belonging to the 2-33 tonne weight class (engcon’s focus is on excavators in that weight class) were sold in the Nordics, Europe, Americas, and Asia/Oceania; these regions are engcon’s key geographical markets as shown in Figure 2, and are named as the Focus Markets by the company. In the same year (2021), 12,934 tiltrotators for newly manufactured excavators, and 1,750 tiltrotators for existing excavators, were sold. The value of the tiltrotators sold was SEK 2.6 billion (around US$285 million). 
• The number of excavators sold in the Focus Markets compounded at 6% per year for 2016-2019. COVID affected the market in 2020, but ultimately, the number of excavators sold in the Focus Markets still compounded at 2% per year for 2016-2021. The historical growth in the excavator market for each of engcon’s Focus Markets:
  • Nordic: 7,206 excavators sold in 2021, CAGR (compound annual growth rate) of 3% for 2016-2019, CAGR of 1% for 2016-2021,
  • Europe: 76,097 excavators sold in 2021, CAGR of 6% for 2016-2019, CAGR of 2% for 2016-2021
  • Americas: 62,972 excavators sold in 2021, CAGR of 10% for 2016-2019, CAGR of 4% for 2016-2021
  • Asia/Oceania: 35,481 excavators sold in 2021, CAGR of 2% for 2016-2019, CAGR of -1% for 2016-2021
• The number of tiltrotators sold in the Focus Markets had a CAGR of 11% for 2016-2021, including a 15% decline in 2020 because of COVID. The value of tiltrotators sold in the Focus Markets had a CAGR of 15% for 2016-2021.
• According to PwC, the value of the tiltrotators market is expected to compound at 19% from 2021 to 2026, driven by: (1) greater demand for productivity increases; (2) population growth and urbanisation; (3) lack of labour; (4) sustainability requirements; (5) excavators transitioning to becoming multi-purpose tool carriers and more autonomous; (6) and digitalisation and electrification of the construction market.
• According to PwC: (1) Excavators equipped with tiltrotators are able to replace 2.2 other construction machines on average; (2) a tiltorator can increase the productivity of an excavator by 25%; (3) the use of a tiltrotator can save 6,000 litres of diesel annually, thus reducing 16,200 kg of CO2 emissions per year; (4) excavators with tiltrotators have a better safety profile as operators can exchange tools from within the cabin. 
• The penetration rate of tiltrotators in newly manufactured excavators was 2% globally in 2021, 85% in the Nordics (92% in Sweden), and 7% in the Focus Markets. The penetration rate is closely connected to the maturity of the market, which can be divided into 3 phases: Development; acceleration; and mature. In the development phase, the penetration rate increases from 0% to 20%-25%. In the acceleration phase, the penetration rate has passed 20% and risen to 60%. The tipping point between the development phase and the acceleration phase is where the tiltrotator takes the step to becoming an established market standard. Authorities and clients, such as major construction and civil engineering companies, places requirements on excavators to be equipped with a tiltrotator for efficiency and safety reasons. Once the tipping point has been reached, the sales of tiltrotators to both new excavators and the aftermarket tends to gain momentum.
• The market for tiltrotator manufacturers has 5 major operators (see Figure 3) that account for 95% of sales. engcon is the largest, with a market share of 45%. Tiltrotator manufacturers can be divided into 4 groups: global manufacturers, local manufacturers, other operators whose core operations are not tiltrotators, and excavator manufacturers (OEMs) with in-house manufactured tiltrotators. The 5 largest tiltrotator manufacturers are all global manufacturers, 4 of which are Swedish. All 5 collaborate with OEMs and the product portfolio includes quick couplers, tools, and other advanced attachments for excavators. engcon’s market share has increased from 42% in 2019 and 43% in 2020.

Existing excavator market for engcon

• Number of newly-manufactured excavators in engcon’s Focus Markets that will not be equipped with tiltrotators for 2022-2026 is expected to be 960,000. This provides a large pool of retrofitting potential for engcon.

Management and major shareholders

• engcon has Class A and Class B shares. Class A shares carry 10 votes per share while Class B shares have 1 vote per share. The Class B shares are public-listed. At end-2022, engcon had a total sharecount of 151.788 million (35.34 million Class A shares, 116.44 million Class B shares.
• Stig Engstrom, 62, is the founder of engcon. He handed over the CEO role to Orjan Westerlund in 2003, and has been on the board of engcon since. Stig Engstrom controlled 29.04 million Class A shares and 24.74 million Class B shares at end-2022, which amounted to 35.4% of engcon’s total share count, but 67.1% of the total votes.
• Stig Engstrom’s ex-wife, Monica Engstrom, has been on engcon’s board since 2004. Monica Engstrom controlled 6.31 million Class A shares and 42.21 million Class B shares at end-2022, which amounted to 32.0% of engcon’s total share count, but 22.4% of the total votes.
• engcon’s CEO is Krister Blomgren, 58, who has been in the role since 2011. Blomgren controlled 1.259 million engcon Class B shares as of end-2022, which is 0.8% of the total share count. 
• Other members of engcon’s management team are shown in Table 1 below (some of them have long tenures, which is good):

• Remuneration of Stig Engstrom and Krister Blomgren for 2019-2022 is shown in Table 2 below. Not much details are given on how they are compensated beyond the total amounts. The big jump in compensation for Blomgren in 2022 bears watching, but is only a tiny percentage of engcon’s profit and cash flow during the year.

Financials

• engcon’s revenue has CAGR of 16% from 2012 to 2022, and EBIT margin has doubled from 11% to 2022% in that period. See Figure 4

• From Table 3 above, engcon’s revenue CAGR for 2019 to 12 months ended 30 Sep 2023 is 16.7%. Net income CAGR is 25.6%, and FCF CAGR is 44.8%. Average net income margin is 15.9%, and average FCF margin is 14.0%.
• engcon saw a large pull-forward of orders in 2021 Q4 and 2022 Q1, mainly in Nordic and Europe, due to price increases and uncertainty concerning delivery times, combined with an uncertain business environment and long lead times. So engcon expects 2023’s overall revenue growth to be just 8% (2023 Q1 growth was 55%, 2023 Q2 was -5%, and 2023 Q3 was -6%). Operating income also fell sharply in 2023 Q2 (12%) and 2023 Q3 (51%)

Valuation

• Stock price on 31 December 2023: SEK 93.30
• Trailing EPS = 2.33; Trailing PE = 40
• Trailing FCF per share = 2.80; trailing PFCF = 33
• For a company that is very likely going to post a further year-on-year decline in net income and FCF in 2023 Q4, those valuations look high.

Risks

• engcon protects its business via patents, of which the most important relates to EC-Oil, which is a quick coupler system that allows for the replacement of hydraulic tools from the excavator’s cabin without the mounting of hoses and electrical cables. The patent, which has a maximum validity up to and including 2024, is not assessed to be business-critical, but it still helps to distinguish engcon’s tiltrotator systems and make it more difficult for competitors to copy. When the patent for EC-Oil expires, it may be difficult for engcon to have a distinctive product offering. 
• The sale of excavators globally has been stronger than what I expected before researching engcon. But the overall construction market – including the sale of excavators – is probably sensitive to recessions. So future recessions are a risk.
• There’s the possibility that someone comes up with a superior tiltrotator or similar solution to what engcon has.
• In the shorter term, engcon has clearly been over-earning in 2021 and 2022, and is now suffering the hangover in 2023. Will the hangover last a long time? That’s a possibility, despite tiltrotators being a superior solution. 
• In June 2022, Rototilt Group filed a lawsuit against engcon that alleged that the company had infringed upon a patent. The adjusted damages claimed amounted to approximately SEK 200 million. The alleged infringement relates to sensor technology in the Q-safe locking system. In May 2023, the Swedish Patent and Market Court announced its verdict regarding Rototilt’s lawsuit against engcon. The court determined that no infringement had taken place and therefore dismissed Rototilt’s action. The court determined that no infringement had taken place and therefore dismissed Rototilt’s action. At the same hearing, engcon claimed that Rototilt’s patent should be declared invalid. However, the court determined that the patent was valid. Following appeals, both parties were granted leave to appeal by the Swedish Patent and Market Court. A ruling in the higher court is expected in spring 2024 at the earliest.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have no vested interest in any company mentioned. Holdings are subject to change at any time.

Editor’s note: This is the latest edition in the “Company Notes Series”, where we periodically share our notes on companies we’ve studied in the recent past but currently have no vested interest in (we may invest in or sell shares in the companies mentioned at any time). The notes are raw and not updated, and the “as of” date for the data is given at the start of the notes. The first two editions in the series can be found here and here. Please give us your thoughts on the series through the “Contact Us” page; your feedback will determine if we continue with it. Thanks in advance!

Start of notes for Golden Throat Holdings

Data as of 16 January 2023

History of Golden Throat Holdings and current management/major shareholders

• Current HQ: Guangxi Zhuang, China
• IPO date: July 2015, on Hong Kong Stock Exchange
• Golden Throat Holdings’ history dates back to 1956 when Liuzhou No.2 Sweet Factory (柳州市糖 果二廠), the predecessor of Golden Throat Company (also known as Guangxi Golden Throat), was established. Golden Throat Company today manufactures and sells lozenges and other pharmaceutical and food products.
• Golden Throat Holdings’ flagship product is Golden Throat Lozenges (OTC), which was launched in 1994. Wang Yao Fa contributed to the creation of the formula for the Golden Throat Lozenges (OTC) product and his portrait was historically used by Golden Throat Holdings on the product packaging; the portrait was changed to Jiang Peizhen in 2015.
• Golden Throat Company (the main operating entity in China of Golden Throat Holdings) was established in Liuzhou, Guangxi Zhuang, China, on 18 September 1998 by Jiang Peizhen as the original controlling shareholder. She has been involved with Golden Throat Holdings for over 60 years, since 1956.
• Jiang and her son, Zeng Yong, control 69.79% of Golden Throat’s shares (the 69.79% equates to 516.0137 million shares) as of 30 June 2022. At the 11 January 2023 share price of HK$1.98, their stake equates to HK$1.02 billion.
• Jiang, 76, is currently chairman and non-executive director of Golden Throat Holdings, while Zeng, 48, is an executive director and vice chairman of the board. Zeng has been involved with Golden Throat Holdings since 1995. Both Jiang and Zeng have been in their respective roles since February 2015.

Golden Throat Holdings’ business

• Revenue in 2021 was RMB 820.5 million, of which 99.6% was from Mainland China.
• The company reports its revenue by three product categories, which include Golden Throat Lozenges (OTC), Golden Throat Lozenge Series Products, and other products.
• Golden Throat Lozenge (OTC): A type of lozenge mainly designed to relieve symptoms of sore and dry throat and hoarse voice caused by acute pharyngitis. Golden Throat Lozenges (OTC) was approved as over-the-counter medicine by the National Medical Products Administration (NMPA), China’s version of the FDA in the USA. As such, Golden Throat Lozenges (OTC) can be purchased by the public in pharmacies without requiring the prescription of a qualified medical professional. As of 31 December 2021, Golden Throat Lozenges (OTC) were exported to the United States, Canada, Russia, the European Union, Australia, Southeast Asia, Middle East, Mexico and Africa, and Mongolia, a newly explored export country in 2019. For the year ended 31 December 2021, Golden Throat Lozenges (OTC) accounted for 90.1% of Golden Throat Holdings’ total revenue.
• Golden Throat Lozenge Series Products: Includes seven products comprising of Dule Lozenges (都樂含片), sugar-free Dule Lozenges, and five other sugar-free flavours of this series, namely orange (香橙), fructus momordicae (羅漢果), chrysanthemum (桑菊), American ginseng (西洋參) and hawthorn (山楂). A major difference between Golden Throat Lozenges (OTC) and Golden Throat Lozenge Series Products is that the former is approved as over-the-counter medicine, whereas the latter is approved as food products. The sugar-free series of Golden Throat Lozenge Series Products was launched in 2013, which supplements the company’s original sales channel and provides consumers with more diversified choices. As of 31 December 2021, Golden Throat Lozenge Series Products were exported to 17 countries and regions, and accounted for 8.7% of Golden Throat Holdings’ total revenue in 2021.
• Other products: Accounted for approximately 1.2% of Golden Throat Holdings’ total revenue in 2021. Includes: (1) Yinxingye Tablet ( 銀杏葉片), which is designed to facilitate blood circulation, remove blood stasis and dredge energy channels and was approved as a prescription medicine by the NMPA; (2) a new product, Golden Throat Intestinal Series (金嗓子腸寶), which is an exclusive nutrition for probiotics, also known as prebiotics; and (3) Golden Throat Compound Probiotic Lozenges, which was launched in June 2022 and was developed by Golden Throat Holdings and the scientific research team of “Food Microbial Function Development” of Beijing Agricultural College. Golden Throat Compound Probiotic Lozenges addresses the lack of self-developed probiotics in China. Golden Throat Holdings has developed six kinds of proprietary probiotic bacteria in three new flavors and the company is committed to using “Chinese bacteria” to improve the physique of Chinese citizens. Golden Throat Compound Probiotics adopts the internationally leading three-layer embedding technology, 360-degree thermal radiation freeze drying technology, and automatic ingredient fermentation and cultivation system.
• Golden Throat Holdings has established an extensive and structured sales and distribution network throughout China for its (i) over-the-counter medicines, (ii) food products, and (iii) prescription medicines. As of 31 December 2021 and 30 June 2022, substantially all of the company’s revenue was generated from sales to distributors. In 2021, there was only one customer that accounted for more than 10% of Golden Throat Holdings’ revenue (11.7%); there was no such customer in 2020.
• Golden Throat Holdings has a well-established brand in China: 
  • In October 2021, in the 2021 ranking of China nonprescription medicines enterprises and product brands, Golden Throat Lozenges (OTC) was recognised as No. 1 amongst Chinese traditional medicines (Throat) by the China Nonprescription Medicines Association.
  • Golden Throat Holdings was ranked 43rd amongst the nonprescription manufacturing enterprises in the 2021 ranking of China non-prescription medicines enterprises and product brands.
  • Golden Throat Holdings was listed in the Top 500 Chinese Brands at the 14th China Brand Festival in August 2020.
  • In August 2020, Golden Throat Holdings claimed the title of “2019 China Traditional Medicines Pharmaceutical Industry Top 100 Enterprise” at the China Pharmaceutical Industry Top 100 Annual Assembly.
  • In 2019, Golden Throat was awarded the Best Brand Value Award at the China Financial Market Awards 2019, and won the Huapu Award at the 13th China Brand Festival in August.
  •  In 2017, the Golden Throat (金嗓子) brand was selected as a world famous brand by the China America Branding Strategy Forum and also ranked amongst the listed companies on the Forbes China Up-and-Comers List.

Golden Throat Holdings’ market and future expansion

• According to a 2015 Euromonitor Report, retail sales value of lozenges in China increased 10.4% per year from RMB 2.09 billion in 2009 to RMB 3.42 billion in 2014, and was expected to increase to RMB 5.46 billion in 2019, at a CAGR of 9.7%. Lozenges accounted for 72% of the total throat remedies market in China in 2014; the throat remedies market primarily includes over-the-counter medicines and medicated confectionery (which are food).
• In 2021, plants and office buildings of a new medicine production and research and development base for Golden Throat Holdings, located at Luowei Industrial Concentration Area, Liuzhou, Guangxi Zhuang Autonomous Region, as well as the commissioning of product lines and trial production were completed. Golden Throat Holdings completed the overall relocation in the second half of 2021. The new production base covers a usable area of about 60,000 square metres, including research and development centres, production plants, warehouses and administrative office buildings. “The fully automated production line in the production plant will improve the efficiency of the production process. A brand-new modern production enterprise will be formed with the new production and research and development base, new factories, new workflow and new production lines, which will completely upgrade the management platform and manufacturing platform of the factories, comprehensively improving the manufacturing quality and technology content of the products, enhancing the comprehensive competitiveness of the Company, and will lay a solid foundation for expanding and strengthening the Company.” The new production base increased Golden Throat’s production capacity for its main products by 57% to 198.5 million boxes of Golden Throat Lozenges. See video of the new production base: https://news.gxtv.cn/article/detail_567c4b49e6924346917643b221fe9555.html
• Also in 2021, Golden Throat Holdings selected a 48 mu (~32,000 square metres) piece of land in the south of the new drug production and R&D base as the site for the second phase of the new Golden Throat Base, which is expected to have a usable area of approximately 50,000 square metres after completion. The second phase will house a food production plant and a food research and development centre. After completion, a high-tech R&D team, smart manufacturing and smart sales will be introduced to develop more comprehensive health products. The second phase of the Golden Throat new base will form the core of Golden Throat Doctor Workstation, the Golden Throat Professor Workstation, the Golden Throat Research Institute, the Golden Throat Gastrointestinal Research Institute, and the Golden Throat Heart and Brain Research Institute. It will also facilitate the development of new products such as genetic medicines, traditional Chinese medicine prescriptions, specialty medical devices, and specialty health foods. As of 30 June 2022, the second phase of the Golden Throat new base is in the initial stage of construction.
• The Golden Throat WeChat Mini Program Mall was launched in early 2020. “We will continue to expand online sales channel in 2022, and we believe there would be breakthroughs in our online business in the future.”

Golden Throat’s sales volumes and pricing of products

• There was a change in packaging-configuration in August 2013, so numbers for 2012 and 2013 are not like-for-like comparisons with numbers in later years.
• Golden Throat Holdings has managed to raise the prices for its Golden Throat Lozenges (OTC) products over time, while keeping  gross margin steady, keeping sales volume steady (although less steady then gross margin), and increasing revenue → signs of pricing power for Golden Throat Lozenges (OTC) product
• Golden Throat Holdings has managed to raise the prices for its Golden Throat Lozenge Series Products over time, while increasing gross margin, increasing sales volume, and increasing revenue → signs of pricing power for Golden Throat Lozenge Series Products
• Golden Throat Holdings’ sales volume was hurt in 2020 because of COVID, but the company still maintained or increased its product prices.
• Golden Throat’s sales volume for Golden Throat Lozenge (OTC) products did not increase much over time because the volume was already near the company’s capacity – prior to the expansion mentioned in Point 3, Golden Throat’s annual production capacity was ~126 million boxes of the Golden Throat Lozenge (OTC) product.

Golden Throat financial performance

Annual numbers

• Revenue has grown over time but had some ups and downs – same with net profit
• Was always generating positive operating cash flow and free cash flow (with exception of 2017), although there’s no clear growth in cash flows.
• Balance sheet was always in a strong net-cash position
• No history of dilution (IPO happened in 2015 – immediately after IPO, there was around 726.36 million shares)
• There was a dividend paid in every year since the company’s IPO, and it has increased over time; the dividend also looks fairly sustainable

Half-yearly numbers

• Revenue growth in H1 2022 was affected by resurgence of COVID in China, and so was net-income
• But cash flows have improved tremendously and balance sheet remains rock-solid
• Worth noting that Golden Throat’s borrowings are all on fixed rates, so there’s no danger of rising interesting rates negatively affecting the company’s profit and/or cash flow 

Management’s integrity and kindness

• There are related party transactions (RPTs), but they are minimal. In 2021, Golden Throat Holdings incurred RMB 9.576 million in expenses to procure raw ingredients (such as liquid isomalt, isomalt AG, syrup, and probiotics) from a related entity, Changbao; in 2020, the amount was RMB 4.388 million. These amounts make up only a single-digit percentage of total net profit (and even much smaller percentage of total revenue) in their respective years.
• The remuneration of Jiang Peizhen and Zeng Yong has largely increased at a faster rate than Golden Throat Holdings’ revenue, net income, and FCF over the years, especially after the company’s IPO. But their remuneration levels only make up a single-digit percentage of Golden Throat Holdings’ net income (see table below).
• Golden Throat Holdings ended 2021 with 937 full-time employees, of which 100 are disabled persons. In August 2020, Golden Throat Holdings provided electric vehicles for employees commuting to work. The EVs are produced by Liuzhou SGMW (柳州上汽通用五菱) and Golden Throat Holdings ordered over 700 of them from SGMW. Management thinks the EVs “would not only solve the transportation problem of employees with long commuting distance, but also effectively stimulate domestic demand and help economic growth and recovery.”

Valuation

• Valuation numbers based on 11 January 2023 share price of HK$1.98
• Trailing PE (price-to-earnings) of 7.8, trailing PFCF (price-to-free cash flow) of 7.7
• Net-cash per share of HK$0.88
• Trailing PE net of cash of 5.0, trailing PFCF ratio net of cash of 4.9
• Trailing dividend yield of a massive 9.1%
• Management wanted to acquire the company in August 2021 at HK$2.80 per share together with Affirma (emerging market private equity firm owned and operated by former senior leadership team of Standard Chartered Private Equity; managed over US$ 3.5 billion in assets at the time of the announcement).I think this price could be seen as a floor on the value of Golden Throat holdings. Golden Throat’s trailing earnings per share and free cash flow per share was RMB 0.30 (~HK$ 0.36 ) and RMB 0.18 (~HK$ 0.21), respectively, based on the company’s financials for the first half of 2021, meaning the acquisition price valued the company at a trailing PE and trailing PFCF ratio of just 7.8 and 13.1. Net of cash, the PE and PFCF ratios would be 5.3 and 8.8

Final thoughts (as of 16 January 2023)

• Very cheap valuation right now
• Possibility of much higher revenue in 2023 (compared to 2022 and 2021) as China has reopened and Chinese citizens depend on the Golden Throat Lozenge (OTC) product to soothe their ailments from COVID or otherwise; 2022’s overall numbers may be lower than in 2021 as China was in lockdown mode for most of 2022 and only opened up late in the year.
• Selling prices for Golden Throat Lozenge (OTC) products on Tmall are currently easily more than RMB 10 per box, and more commonly around RMB 12-14 per box (see screenshots below, taken on 16 Jan 2023 from Tmall app – sidenote: Tmall has better reputation than Taobao). The unit sale price to distributors reported by the company in H1 2022 was just RMB 7.0 per box; I think it’s reasonable to expect the unit sale price to distributors for 2023 – as well as overall volume – to be materially higher than 2022 and 2021, thereby boosting profit and cash flow margins for Golden Throat Holdings.
• Golden Throat Holdings had expanded production capacity in 2021, and is building a new plant right now.
• Golden Throat Holdings has also received strong government support for the production of its products. See the following English translations of a Mandarin article from the Guangxi government website:
  • “On January 4, Wei Guanghui, a member of the party group and deputy director of the Food and Drug Administration of the Autonomous Region, led a team to Guangxi Liangmianzhen Yikang Pharmaceutical Co., Ltd. and Guangxi Golden Throat Pharmaceutical Co., Ltd. The production of Golden Throat Lozenges provides door-to-door service guidance, and pays close attention to ensuring the supply of drugs for the prevention and control of the new crown epidemic.”
  • “Golden Throat Lozenges were selected into the “Catalogue of Drugs for New Coronary Virus Infection (First Edition)” issued by the Beijing Municipal Health and Health Commission. In order to meet the clinical needs of the general public, the company has expanded its capacity and production at full capacity, and the Food and Drug Administration of the Autonomous Region has followed up the whole process.”
  • “The working time of Golden Throat Lozenges has been extended from the original 8 hours to 12 hours, and the daily production has increased from 7.37 million tablets to 9.21 million tablets, which strongly supports the anti-epidemic needs of the people across the country.”
• For now, I see Golden Throat Holdings as a deep-value stock, but it could also change into a growth stock if its plans for new products such as genetic medicines, traditional Chinese medicine prescriptions, specialty medical devices, and specialty health foods succeed.
• One risk to the company’s future business prospects is if its Golden Throat Lozenge (OTC) product price gets controlled by the government. According to the IPO prospectus, “there had been no fixed or maximum prices promulgated by any authorities in China on Golden Throat Lozenges (OTC).” There’s been no update on the matter that I could find in subsequent annual reports.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have no vested interest in any company mentioned. Holdings are subject to change at any time.

Editor’s note: We’re testing out a new series for the blog, the “Company Notes Series”, where we periodically share our notes on companies we’ve studied in the recent past but currently have no vested interest in (we may invest in or sell shares in the companies mentioned at any time). The notes are raw and not updated, and the “as of” date for the data is given at the start of the notes. The first edition in the series can be found here. Please give us your thoughts on the series through the “Contact Us” page; your feedback will determine if we continue with it. Thanks in advance!

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Start of notes for BayCurrent Consulting

Data as of 31 May 2023

Background

• Founded in March 1998 as PC Works Co. Ltd for the purpose of consulting, system integration and outsourcing related to management, operations and IT. In December 2006, PC Works Co. Ltd changed its name to BayCurrent Consulting Co. Ltd. In April 2014, Byron Holdings Co. Ltd was set up. In June 2014, Byron Holdings Co. Ltd acquired BayCurrent Consulting Co. Ltd and then the combined entity changed its name to BayCurrent Consulting Co. Ltd.
• HQ: Tokyo, Japan
• Listed on September 2016 on the Tokyo Stock Exchange Mother’s section; moved to First Section of Tokyo Stock Exchange on December 2018; moved to Prime Market of the Tokyo Stock Exchange on April 2022
• Ticker: TSE: 6532
• Total number of consultants as of FY2023 (financial year ended February 2023) is 2,961; total number of employees as of FY2023 is 3,310

Business

• BayCurrent is a consulting firm that supports a wide range of themes such as strategy, digital, and operations for Japan’s leading companies in various industries. BayCurrent provides planning and execution support to clients, such as company-wide strategy planning and business strategy planning to support decision-making by management, and support for examining business operations using digital technology.
• Examples of the projects that BayCurrent is currently working on under Digital Consulting:
  • Finance, Cashless payment, and Design: Building a UX improvement process to continue achieving high customer satisfaction over the long term
  • Pharmaceutical manufacturing, Digital technologies, and Market research: Formulating plans to enter the Japanese market of advanced digital medical equipment business for foreign companies 
  • Telecommunication, Metaverse, and Business planning: Developing plans to use metaverse and examine the use of AI toward the smart city concept
  • Automobiles, AI, and Business creation: Building a model for business using AI and supporting its implementation, aiming to reduce the risk of traffic accidents
• Examples of the projects that BayCurrent is currently working on under Sustainability Consulting:
  •  Energy, ESG, and Support for practice: Forming a scheme and supporting negotiations for realizing offshore wind power business
  • Finance and Carbon neutrality: Considering policies in response to TCFD (Task Force on Climate-Related Financial Disclosures) in anticipation of sales of solutions in the future
  • High-tech, EV, and Business planning: Considering business domains and creating a road map for popularizing EVs (electric vehicles) to reduce CO2 emissions
  • Manufacturing, ESG, and Supply chain management: Considering the possibility of commercializing supplier ESG assessments and risk management
• See also Figures 1, 2, 3, and 4 for examples of BayCurrent’s projects

• BayCurrent groups its customers into three industry categories: Finance (banking, securities, insurance etc); Telecommunications/Media/High-Tech; and Others (energy, entertainment, government offices, food etc). In FY2023, 25% of revenue was from Finance, 35% was from Telecommunications/Media/High-Tech, and 40% from Others. In FY2019, the split was 40% from Finance, 30% from Telecommunications/Media/High-Tech, and 30% from Others. BayCurrent’s largest customer in FY2023 was Pfizer Japan, accounting for 12.0% of revenue; it seems like there’s no other company that accounted for more than 10% of revenue during the year.
• In FY2023, revenue from customers based in Japan was at least 90% of BayCurrent’s total revenue.

Market opportunity

• According to IDC Japan’s “Forecast for domestic business consulting market: 2021-2025” (announced on 1 July 2021), the Japanese consulting market is expected to have a CAGR of 7.8% from around ¥900 billion in 2020 to more than ¥1.2 trillion in 2025; within the consulting market is the digital consulting sub-segment which is expected to have a CAGR of 30.1% from more than ¥100 billion in 2020 to around ¥500 billion in 2025. BayCurrent ended FY2023 with revenue of just ¥76.1 billion.
• According to BayCurrent: “In today’s business environment, the challenges faced by corporate managers are becoming more diverse and complex due to intensifying market competition and changes in market structure. There is a growing need for consultants with a high level of expertise. Furthermore, with the further development of digital technology in the future, the need for the utilization of new technologies in business is expected to increase year by year, and the consulting market is expected to continue to grow at a high rate.”
• In Japan, there’s an initiative called DX (Digital Transformation) that began to be promoted heavily by the Japanese government starting in 2018 with the publication of the “DX [Digital Transformation]” report by the Ministry of Economy, Trade, and Industry (METI) during the year. METI warned that Japan would face an economic loss of ¥12 trillion per year by 2025 if traditional mainframes and backbone core systems were not updated and the shortage of ICT engineers were not addressed. Moreover, in 2016, the percentage of companies that have been operating their core systems for 21 years or more is 20%, and 40% for companies that have been in operation for 11 to 20 year; if this situation continues in 10 years, in 2025, the percentage of companies that have been operating core systems for 21 years or more will be 60%. Japanese companies appear to have heeded the government’s DX call. Surveys conducted by the METI and FUJITSU in 2020 indicated that almost half of the SMEs were actively promoting DX companywide, while large companies with more than 5.000 employees indicate an adoption rate close to 80%. These are a tailwind for BayCurrent Consulting.

Growth strategy

• BayCurrent is focused on further increasing the added value of its consulting services; the recruitment and training of human resources; and providing an attractive work environment. 
• BayCurrent’s support services for corporate managers in all industries are knowledge-intensive, and so management believes that improvements in the company’s consultants’ ability to make proposals and solve problems will affect its growth. For this reason, management strives to recruit excellent human resources with various backgrounds and focusing on creating an environment and treatment that makes it easy for each consultant to work with peace of mind. Management has established a wide variety of training programs and study sessions to improve its consultants’ skills for strategic planning and solving management issues. Management believes that BayCurrent is able to formulate viable strategies that meet the needs of clients precisely because the company’s consultants are professionals who have worked on numerous projects across industries and service areas; for this reason, management strives to not limit its consultants to specific fields. Figure 5 shows the establishment of the BayCurrent Institute, a business management research institute.
• Management also distributes knowledge obtained through dialogue with university professors working on research subjects and members of the management teams of leading companies, in order to gain visibility from the public. Most recent examples of such work:
  • Participated in FIN/SUM, one of Japan’s largest fintech conferences, co-hosted by the Financial Services Agency and Nikkei Inc. BayCurrent did the following: Joji Noritake, Managing Executive Officer and CDO, conducted a standalone lecture on “Sustainable customer experience connects emotional memories”; took part in panel discussion on “Possibility of future individual investment through digital technology”
  • Participation in Green CPS Consortium, an organization aimed at building eco-friendly industry and society by controlling material loss, energy loss, and other aspects in all economic activities while driving economic growth
  • Made a donation to the VR/metaverse in the corporate sponsored practical research program of the University of Tokyo Virtual Reality Educational Research Center. The research program conducts basic research on the creation and operation of metaverse space and conducts demonstration experiments to develop practical applications of the metaverse in society. 
• Growth of number of consultants vs growth of revenue (note the higher revenue growth vs consultant growth):

Financials

• Financials from FY2016 to FY2023 (financials in ¥; earliest data we could find was for FY2016): 

• Solid CAGRs in revenue:
  • FY2016-FY2023: 25.1%
  • FY2018-FY2023: 30.1%
  • FY2023: 32.4%
• Profitable since at least FY2016. Net income CAGRs and average net income margins:
  • FY2016-FY2023: 52.3% CAGR, 15.3% average margin
  • FY2018-FY2023: 60.3% CAGR, 18.1% average margin
  • FY2023: 43.3% growth, 27.6% margin
• Positive operating cash flow since at least FY2016. Operating cash flow CAGRs and average operating cash flow margins:
  • FY2016-FY2023: 34.0% CAGR, 19.4% average margin
  • FY2018-FY2023: 45.0% CAGR, 21.6% average margin
  • FY2023: 35.5% growth, 27.2% margin
• Free cash flow positive since at least FY2016. Free cash flow CAGRs and average free cash flow margins:
  • FY2016-FY2023: 34.0% CAGR, 19.1% average margin
  • FY2018-FY2023: 45.8% CAGR, 21.3% average margin
  • FY2023: 33.6% growth, 26.7% margin
• Balance sheet was initial in net-debt position and became net-cash in FY2020 onwards; high net-cash position of ¥33 billion in FY2023
• Minimal dilution as weighted average diluted share count increased by only 0.8% per year for FY2016-FY2023, and -0.3% in FY2023
• Management aims for a total shareholder return ratio (dividends and share buybacks) of around 40% of earnings; dividend payout ratio is typically 20%-30% under IFRS. In FY2023, interim dividend of ¥14 per share (adjusting for 1-for-10 stock split in November 2022) and final dividend of ¥23 per share, for a total dividend of ¥37 per share for FY2023, representing a payout ratio of 27%.

Management

• Yoshiyuki Abe, 57, is President and CEO. Became President in December 2016. Joined the original BayCurrent Consulting Co. Ltd in September 2008 and became an executive director in November of same year. Yoshiyuki Abe became President in December 2016 after some major turmoil at BayCurrent that happened in H2 2016:
  • Failed to gain deals matching waiting consultants and then suffered a largely lowered operation rate
  • Additionally faced the defection of employees as a result of a talk about withdrawal that resulted in the loss of credibility of the clients receiving the support for many years
  • Revised earnings forecasts downwardly on 9 December 2016; on the same day, the former President left office
• Kentaro Ikehira, 46, is Executive Vice President. Became Vice President in May 2021. Joined the original BayCurrent Consulting Co. Ltd in September 2007.
• Kosuke Nakamura, 41, is CFO. Became CFO in May 2021. Joined the original BayCurrent Consulting Co. Ltd in January 2007.
• Management has a long history of significantly beating their own mid-term growth projections. Examples:
  • In FY2018 earnings presentation, a projection for FY2019-FY2021 was given where revenue was expected to have a CAGR of 15%-20%, ending at ¥32-35 billion. Actual FY2021 revenue was ¥42.8 billion. 
  • In FY2022 earnings presentation, a projection for FY2022-FY2026 was given where revenue was expected to have a CAGR of 20% to end at ¥100 billion and EBITDA was expected to end at ¥30 billion. Projection given for FY2024 was for revenue of ¥94.6 billion and EBITDA of ¥36 billion – so FY2026 medium-term projection could be achieved/beat by as early as FY2024
• Management has set a target of FY2029 revenue of ¥250 billion, which represents a 20% CAGR from FY2024’s projected revenue of ¥94.6 billion.

Compensation of Management

• Yoshiyuki Abe’s total FY2023 compensation was ¥333 million, consisting of ¥40 million of fixed pay, ¥192 million of performance-linked remuneration, and ¥101 million of restricted stock compensation. Total compensation in FY2023 was just 1.6% of FY2023 net income as well as free cash flow. 
• Yoshiyuki Abe’s tota FY2022 compensation was ¥297 million, FY2021 compensation was ¥206 million, and FY2020 compensation was ¥137 million.
• Comparison of Yoshiyuki Abe’s compensation growth vs BayCurrent’s revenue/net income/FCF growth over past few years:

Valuation (as of 31 May 2023)

• 31 May 2023 share price of ¥5,110
• Trailing revenue per share is ¥496.47, hence PS is 10.3
• Trailing diluted EPS is ¥137.19, hence PE is 37.2
• Trailing FCF per share is ¥132.71, hence PFCF is 38.5
• Reminder that revenue growth projection for FY2029 is for CAGR of 20% from FY2024 – the valuation does not look too rich if BayCurrent is able to grow as projected 

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have no vested interest in any company mentioned. Holdings are subject to change at any time.

Editor’s note: We’re testing out a new series for the blog, the “Company Notes Series”, where we periodically share our notes on companies we’ve studied in the recent past but currently have no vested interest in (we may invest in or sell shares in the companies mentioned at any time). The notes are raw and not updated, and the “as of” date for the data is given at the start of the notes. Please give us your thoughts on the new series through the “Contact Us” page; your feedback will determine if we continue with it. Thanks in advance!

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Start of notes for Natural Resource Partners

Data as of 9 January 2024

Background on company

• Company name: Natural Resource Partners LP
• Ticker: NYSE: NRP
• Structure: Publicly traded Delaware limited partnership formed in 2002
• Natural Resource Partners LP’s operations are conducted through Opco and its operating assets are owned by its subsidiaries, where Opco refers to NRP (Operating) LLC, a wholly owned subsidiary of Natural Resource Partners LP.  NRP (GP) LP is the general partner and has sole responsibility for conducting Natural Resource Partners LP’s business and for managing its operations. Because NRP (GP) LP is a limited partnership, its general partner, GP Natural Resource Partners LLC, conducts its business and operations; the Board of Directors and officers of GP Natural Resource Partners LLC also makes the decisions for Natural Resource Partners LP. Robertson Coal Management LLC, a company wholly owned by Corbin Robertson, Jr., owns all of the membership interests in GP Natural Resource Partners LLC. 
• The senior executives who manage Natural Resource Partners LP are employees of Western Pocahontas Properties Limited Partnership or Quintana Minerals Corporation, which are both controlled by Corbin Robertson Jr.
• Neither GP Natural Resource Partners LLC nor any of its affiliates receive any management fee or other compensation in connection with the management of Natural Resource Partners LP apart from reimbursement for all direct and indirect expenses incurred on the behalf of Natural Resource Partners LP. 

Business

• Natural Resource Partners LP has two segments: Mineral Rights, and Soda Ash
• In 9M 2023, Natural Resource Partners LP’s total revenue was US$275.9 million and 79% was from Mineral Rights (US$217.3 million) and 22% was from Soda Ash (US$58.6 million). In 2022, Natural Resource Partners LP’s total revenue was US$389.0 million and 85% was from Mineral Rights (US$329.2 million) and 15% was from Soda Ash (US$59.8 million)

Business – Mineral Rights segment

• The Mineral Rights segment consists of 13 million acres of mineral interests and other subsurface rights – including coal and other natural resources – across the US; if combined in a single tract, the ownership would cover roughly 20,000 square miles. The ownership provides critical inputs for the manufacturing of steel, electricity, and basic building materials, as well as opportunities for carbon sequestration and renewable energy. Natural Resource Partners is working to strategically redefine its business as a key player in the transitional energy economy in the years to come. Figure 1 below shows Natural Resource Partners LP’s geographic distribution of its ownership. 

• Under the Mineral Rights segment, Natural Resource Partners LP does not mine, drill, or produce minerals. Instead, the limited partnership leases its acreage to companies engaged in the extraction of minerals in exchange for royalties and various other fees. The royalties are generally a percentage of the gross revenue received by lessees (the companies that extract the minerals), and are typically supported by a floor price and minimum payment obligation that protects Natural Resource Partners LP during significant price or demand declines. The majority of revenue from the Mineral Rights segment revenues come from royalties related to the sale of coal. Of the Mineral Rights segment’s US$217.3 million in revenue in 9M 2023, US$170.8 million came from Coal Royalty revenue, so Coal Royalty Revenue was 62% of Natural Resource Partners LP’s total revenue in 9M 2023; of the Mineral Rights segment’s US$329.2 million in revenue, in 2022, US$227.0 million came from Coal Royalty revenue, so Coal Royalty Revenue was 58% of Natural Resource Partners LP’s total revenue in 2022.  Natural Resource Partners LP’s coal is primarily located in the Appalachia Basin, the Illinois Basin, and the Northern Powder River Basin. Natural Resource Partners LP’s coal-related leases are typically long-term in nature – at end-2022, two-thirds of royalty-based leases have initial terms of 5 to 40 years, with substantially all lessees having the option to extend the lease for additional terms. Leases include the right to renegotiate royalties and minimum payments for the additional terms. 
• Figure 2 below shows all the other revenue sources for the Mineral Rights segment in 9M 2023 and 9M 2022:

• There are two kinds of coal, and Natural Resource Partners LP participates in both in its Mineral Rights segment:
  • Metallurgical coal, or met coal, is used to fuel blast furnaces that forge steel and is the primary driver of Natural Resource Partners LP’s long-term cash flows. Met coal is a high-quality, cleaner coal that generates exceptionally high temperatures when burned and is an essential element in the steel manufacturing process. Natural Resource Partners LP’s met coal is located in the Northern, Central and Southern Appalachian regions of the United States.
  • Thermal coal, sometimes referred to as steam coal, is used in the production of electricity. The amount of thermal coal produced in the US has been falling over the last decade as energy providers shift to natural gas and to a lesser extent, alternative energy sources such as geothermal, wind, and solar. Management believes thermal coal’s long-term secular decline will continue. This, together with the long-term strength of the met coal business and Natural Resource Partners LP’s carbon neutral initiatives mean that thermal coal will be a diminishing contributor to Natural Resource Partners LP’s business in the future. The vast majority of the limited partnership’s thermal coal sales are located in Illinois and its operations are some of the most cost-efficient mines east of the Mississippi River. The remainder of Natural Resource Partners LP’s thermal coal is located in Montana, the Gulf Coast and Appalachia.
  • Met coal tends to be priced higher than thermal coal.
  • In 2022, 70% of Natural Resource Partners LP’s Coal Royalty revenues and approximately 45% of coal royalty sales volumes were derived from metallurgical coal.
  • Figure 3 shows the types of coal production of Natural Resource Partners LP from various properties in 2022, and Figure 4 shows the limited partnership’s significant coal royalty properties in 2022.

• Under the Mineral Rights segment, Natural Resource Partners LP also participates in the sequestration of carbon dioxide underground. Similar to its Coal Royalty business, Natural Resource Partners LP only plans to lease acreage to companies that will conduct carbon dioxide sequestration. Natural Resource Partners LP owns approximately 3.5 million acres of specifically reserved subsurface rights in the southern US with the potential for permanent sequestration of greenhouse gases. The carbon capture utilization and storage industry is in its infancy but a few facts are clear. A sequestration project requires acreage possessing unique geologic characteristics, close proximity to sources of industrial-scale greenhouse gas emissions, and the appropriate form of legal title that grants the acreage owner the right to sequester emissions in the subsurface. Although carbon sequestration rights and ownership continue to evolve, management believes that Natural Resource Partners LP owns one of the largest acreages in the USA with potential for carbon sequestration activities. In 2022 Q1, Natural Resource Partners LP leased its first acreages (75,000 acres) for subsurface carbon dioxide sequestration in underground pore space in southwest Alabama, with the potential to store over 300 million metric tons of carbon dioxide; in October of 2022, the second subsurface carbon dioxide sequestration lease was signed, this time for 65,000 acres of pore space near southeast Texas, with an estimated storage capacity of at least 500 million metric tons of carbon dioxide. At end-2022, Natural Resource Partners LP had 140,000 acres of pore space under lease for carbon dioxide sequestration, with estimated carbon dioxide storage capacity of 800 million metric tons.

Business – Soda Ash segment

• The Soda Ash segment consists of 49% non-controlling equity interest in Sisecam Wyoming, a trona ore mining and soda ash production business located in the Green River Basin of Wyoming. Sisecam Wyoming mines trona and processes it into soda ash that is sold both in the USA and internationally into the glass and chemicals industries.
• Sisecam Resources LP runs Sisecam Wyoming and owns the other 51%. Natural Resource Partners LP is not involved in the day-to-day operation of Sisecam Wyoming, although Natural Resource Partners LP is able to appoint – and has appointed – 3 of the 7 members of Sisecam Wyoming’s Board of Managers.
  • In December 2021, Sisecam Resources LP changed majority-owners. Before this, Sisecam Wyoming was named Ciner Wyoming, and Sisecam Resources LP was named Ciner Resources LP. Under the terms of the transaction, Ciner Enterprises Inc, which controls 74% of Ciner Resources LP, effectively sold 60% of its interests in Ciner Resources LP to Sisecam Chemicals USA Inc, an indirect subsidiary of Turkish conglomerate Türkiye Şişe ve Cam Fabrikalari A.Ş. Ciner Resources LP subsequently changed its name to Sisecam Resources LP. 
  • In February 2023, Sisecam Resources LP announced that it would be fully acquired by Sisecam Chemicals Resources LLC. Sisecam Chemicals Resources LLC is in turn, 60% owned by Sisecam Chemicals USA Inc. The acquisition price of Sisecam Resources LP is US$25 per unit for all the units of Sisecam Resources LP that were not controlled by Sisecam Chemicals USA Inc (from the above, Sisecam Chemicals USA Inc already controlled 60% of Sisecam Resources LP – see Appendix for more). Sisecam Resources LP’s total unit count as of 31 March 2023 was 19.8 million, so Sisecam Resources LP was valued by Sisecam Chemicals USA Inc at US$495 million. Sisecam Resources LP’s only business interest is its 51% stake in Sisecam Wyoming; so if Sisecam Resources LP was valued at US$495 million, the entire Sisecam Wyoming is worth US$971 million, and Natural Resources LP’s 49% stake in Sisecam Wyoming is worth US$476 million.
• Sisecam Wyoming is one of the largest and lowest cost producers of soda ash in the world, serving a global market from its facility located in the Green River Basin of Wyoming. The Green River Basin geological formation holds the largest, and one of the highest purity, known deposits of trona ore in the world, in fact the vast majority of the world’s accessible trona is located in the Green River Basin. Trona is a naturally occurring soft mineral and is also known as sodium sesquicarbonate. Trona consists primarily of sodium carbonate (or soda ash), sodium bicarbonate, and water. Sisecam Wyoming processes trona ore into soda ash, which is an essential raw material in flat glass, container glass, detergents, chemicals, paper and other consumer and industrial products.
• Around 30% of global soda ash is produced by processing trona, with the remainder being produced synthetically through chemical processes. Synthetic production of soda ash is more expensive than the costs for mining trona for trona-based production. In addition, trona-based production consumes less energy and produces fewer undesirable by-products than synthetic production.
• Sisecam Wyoming’s Green River Basin surface operations are situated on approximately 2,360 acres in Wyoming (of which, 880 acres are owned by Sisecam Wyoming), and its mining operations consist of approximately 24,000 acres of leased and licensed subsurface mining area. 

Business – Customers

• There is customer concentration for the whole of Natural Resource Partners LP, and also for the Soda Ash segment.
• Natural Resource Partners LP’s revenue from (1) Alpha Metallurgical Resources was US$102.4 million in 2022, which accounted for 37% of the year’s total revenue and (2) Foresight Energy Resources was US$65.6 million, which accounted for 24% of the year’s total revenue.
• For the Soda Ash segment, the two largest customers of Sisecam Wyoming are distributors in its export network that collectively made up 26% of its total gross revenue.

Business – Commodity prices

• Even though Natural Resource Partners LP’s royalty fees are typically supported by a floor price and minimum payment obligation that protects Natural Resource Partners LP during significant price or demand declines, the limited partnership is still affected by price swings in commodity prices.
• In 2022, met coal and thermal coal prices both reached record highs in 2022; met coal prices was the primary driver of Natural Resource Partners LP’s strong Mineral Rights segment performance in 2022. See Table 1 below for Mineral Rights segment performance in 2022.
• In 9M 2023, met coal and thermal coal prices were both below record highs seen in 2022 – the Mineral Rights segment saw a dip in performance in 9M 2023, as shown in Table 1.

Management

• Corbin Robertson, Jr, 75, has served as CEO and Chairman of the Board of Directors of GP Natural Resource Partners LLC since 2002; GP Natural Resources LLC has managed Natural Resource Partners LP since its formation and listing in 2002.
• 2015 was a tough year for Natural Resource Partners LP as commodity prices crashed and it had too much debt. Since then, Natural Resource Partners LP has dramatically improved its financial health. See Figures 5, 6, and 7.

Valuation

• Unit price of Natural Resource Partners LP: US$96.93
• Market cap of Natural Resource Partners LP: US$1.225 billion
• Enterprise value of Natural Resource Partners LP: US$1.41 billion
• Value of Natural Resource Partners LP’s stake in Sisecam Wyoming is US$476 million, so the market is assigning a value of US$938 million for the Mineral Rights segment
• Trailing free cash flow as of 30 Sep 2023 is US$304 million (lion’s share comes from the Mineral Rights segment since most of net income is from the segment), so the Mineral Rights segment is valued at just 3x FCF. Worth noting that Natural Resource Partners LP’s FCF has been relatively stable since 2015 – see Figure 8
• In Figure 6 above, it is worth noting that Natural Resource Partners LP’s aim is to “retire all permanent debt, redeem all the 12% preferred equity, and eliminate all outstanding warrants, all of which will require approximately US$325 million.” 
• On the 12% preferred equity, Natural Resource Partners LP issued US$250 million of the preferred equity units in March 2017 at a price of US$1,000 per preferred equity unit. The preferred equity is convertible to common units, but Natural Resource Partners LP can choose to redeem the preferred equity for cash. The outstanding balance of the preferred equity as of 30 September 2023 is US$72 million. Once all the preferred equity is cleared, Natural Resource Partners LP can save US$30 million in annual coupon payments (based on US$250 million issue), and this adds directly to free cash flow; if the US$72 million outstanding balance is fully cleared, Natural Resource Partners LP can save US$8.6 million in annual coupon payments.

 

Appendix

Chart showing Sisecam Wyoming and Sisecam Resources LP’s ownership structure before and after the February 2023 announcement of the acquisition by Sisecam Chemicals USA

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