Company Notes Series (#14): The Central and Eastern Europe Fund

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 13 editions in the series can be found here, here, here, here, here, here, 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!

Start of notes for The Central and Eastern Europe Fund

Data as of 2024-11-09
Ticker: CEE
Exchange: NYSE
CEE is a closed-end fund that invests in equities and equity-linked securities in Central and Eastern Europe. It is managed by DWS, which has €933 billion in assets under management as of 30 September 2024.
CEE’s NAV per share as of 30 September 2024 is US$11.40, with total net assets of US$73 million, giving rise to about 6.4 million shares outstanding in the fund. Share price on 2024-11-09 is US$13.14.
CEE’s Russian holdings have been valued at zero since 14 March 2022. The manager of the fund has observed occasional privately negotiated transactions in depositary receipts of non-sanctioned Russian issuers taking place (at prices that are deeply discounted from those taking place through the facilities of the Moscow Stock Exchange). In May 2024, CEE was successful in selling depositary receipts of one non-sanctioned Russian issuer in such a privately negotiated transaction, resulting in positive impact to the fund’s net asset value. DWS will continue to monitor developments in this area and may make further opportunistic sales of depositary receipts for Russian securities. Three of CEE’s remaining 16 positions in Russian securities are “local shares” which cannot currently be sold. In addition, four positions are in securities of issuers that are subject to US sanctions that bar CEE from selling, unless special permissions are granted by the US. So CEE continues to value certain Russian securities at zero, unless it has received a recent bid for the security and the sale of the security would be permissible under the applicable sanctions and other laws and regulations.
CEE’s Russian stocks as of 30 April 2024 are shown in Table 1. Unsure which stock was sold in May 2024, but it was a depository receipt.

Valuation on 2024-11-09:
- 6.4 million shares outstanding
- NAV of the Russian portfolio in Table 1 equates to US$9.88 per share for CEE (US$63.27 million divided by 6.4 million shares), so total NAV for CEE is US$21.28 (US$11.40 + US$9.88)
- If we remove the value of the most valuable depository receipt (Novatek PSJC) to account for the sale of a depository receipt in May 2024, the NAV of the Russian portfolio in Table 1 equates to US$9.32 (US$59.64 million divided by 6.4 million shares), so total NAV for CEE is US$20.72
- Stock price of US$13.14, so there’s a prospective return of around 60% if Russian stocks are no longer barred from being traded globally
CEE’s portfolio characteristics are shown in Figure 1 below:

A quick look at the current valuations of CEE’s 2024-09-30 top 10 holdings is shown in Table 2. It’s clear that most of the top 10 holdings carry very low valuations. The top 10 holdings account for 60% of CEE’s NAV. So CEE at its current state, even with the Russian holdings held at effectively zero, looks like a low-risk investment.

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Company Notes Series (#13): SR Bancorp

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 11 editions in the series can be found here, here, here, here, here, 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!

Start of notes for SR Bancorp

Data as of 2025-04-24

General background on SR Bancorp

SR Bancorp (ticker symbol “SRBK”) is the holding company for Somerset Regal Bank.
Somerset Regal Bank was established in 1887 as The Bound Brook Building and Loan Association; it became Somerset Regal Bank in 2023.
Somerset Regal Bank conducted a standard conversion that was completed in September 2023; trading of SR Bancorp shares on the NASDAQ exchange started on 20 September 2023. When the IPO was completed, SR Bancorp had 9.50793 million shares outstanding.
A day prior to the conversion, SR Bancorp acquired Regal Bancorp and its subsidiary, Regal Bank. The Somerset Regal Bank of today is thus the combination of Somerset Savings Bank and Regal Bank.
SR Bancorp’s branches are under either the Somerset Savings Bank banner or the Regal Bank banner; all the branches are in the North Eastern part of the state of New Jersey in the USA.

SR Bancorp engages primarily in the lending of fixed-rate and adjustable-rate commercial real estate and residential mortgage loans to individuals. Within commercial real estate loans, most of them are in multi-family loans, which are still related to residential real estate (see Figure 2). Loan-to-value ratios for the loans are acceptable: generally no more than 75% for commercial loans, 80% for multifamily loans and 80% for residential loans (residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion generally require private mortgage insurance). Nearly all of SR Bancorp’s loan portfolio is in New Jersey.

*Figure 2; Source: SR Bancorp FY2025 Q2 10-Q*

Investing information on SR Bancorp

SR Bancorp is a thrift conversion – see here for how to invest in thrifts
As of 31 December 2024, SR Bancorp had total assets of US$1.065 billion and shareholders’ equity of US$0.198 billion, giving a total equity to assets ratio of an excellent 18.6%. SR Bancorp’s total assets include securities held-to-maturity at amortized cost of US$148.8 million as of 31 December 2024; these securities have a marked-to-market value of US$122.6 million. If SR Bancorp’s shareholders’ equity is adjusted for the marked-to-market value, it would be US$0.172 billion, which would give a total equity to assets ratio of a still-robust 16%.
As of 24 April 2025, SR Bancorp has a stock price of US$13.23. Its latest financials (for the 3 months ended 31 December 2024) has its adjusted tangible shareholders’ equity (adjusted for mark-to-market value of securities and intangible assets) at US$0.144 billion, and its share count as 9,255,948, giving an adjusted tangible book value per share of US$15.56, and thus a price-to-tangible book (PTB) ratio of 0.85. If tangible shareholders’ equity was used, the tangible book value per share would be US$18.45 and the PTB ratio would be even better at 0.72
On 20 September 2024, SR Bancorp adopted a program to repurchase up to 950,793 shares, which was around 10% of its outstanding share count back then. Since the adoption of the buyback programme, SR Bancorp’s management has led buybacks of 347,067 shares, as of 31 December 2024, at an average price of US$11.29 each. Considering SR Bancorp’s low PTB ratio, the buybacks are accretive to shareholder value. Moreover, the adoption of the repurchase program happened exactly on the 1st anniversary of the thrift’s IPO, which is the earliest date on which a converted thrift can start repurchasing shares; this is a sign that management understands capital allocation and is trying to do the right things for shareholders.
SR Bancorp has no non-performing assets as of 31 December 2024. Non-performing assets were 0.00% and 0.03% of total assets in FY2024 (fiscal year ended 30 June 2024) and FY2023. This points to well-run lending practices.
SR Bancorp’s annualised return on average equity in the first half of FY2025 was a decent (relative for a thrift!) 2.47%.
SR Bancorp’s three senior-most leaders are:
- William Taylor, CEO of SR Bancorp and Somerset Regal Bank, and Chairman of Somerset Regal Bank; Taylor has been CEO since 2013, and Chairman since 2018; Taylor is already 67
- Christopher Pribula, President and COO of SR Bancorp and Somerset Regal Bank; Pribula has been COO since 2013; Pribula is already 60
- David Orbach, Executive Chair of SR Bancorp and Executive Vice Chair of Somerset Regal Bank; Orbach had been Executive Chairman of Regal Bancorp since its formation and of Regal Bank since 2011; Orbach is only 51
The compensation of Taylor, Pribula, and Orbach, are reasonable, as shown in Figure 3 below. As of 12 February 2024, Taylor, Pribula, and Orbach control 49,269 shares, 30,166 shares, and 133,919 shares respectively; based on SR Bancorp’s share price of US$13.23 as of 24 April 2025, the value of their stakes are US$0.652 million, US$0.399 million, and US$1.77 million, respectively. For Orbach, who has the most shares among the leadership team, his equity value significantly outstrips his annual compensation.

*Figure 3; Source: SR Bancorp FY2024 proxy filing*

Taylor, Pribula, and Orbach have compensation plans that include change in control provisions. In the event that SR Bancorp or Somerset Regal Bank is acquired and the trio’s employment ends, they are each entitled to a severance payment that is equal to 3x the sum of (1) their highest base salary in the three years before their termination, and (2) their average annual total incentive bonus for the three years before their termination. In addition, the terminated executive would also receive a lump sum payment equal to the value of the cost of 36 months of health care.
Putting everything together, it appears that SR Bancorp is a thrift with (1) a low valuation, (2) a management team that understands capital allocation, (3) well-run lending operations, (4) a management team with reasonable capability in running a profitable banking operation, and (5) a management team with reasonable compensation and some incentive to sell the bank. SR Bancorp’s standard conversion was completed in September 2023, so the earliest it can sell itself will be September 2026. The ages of Taylor and Pribula suggest that they would be very open to sell SR Bancorp, but Orbach is still relatively young so Orbach’s age could be a “risk” of SR Bancorp choosing to remain independent – the saving grace is that Orbach’s equity value significantly outstrips his annual compensation, as mentioned earlier
Assume that SR Bancorp (a) has a return on equity of 2.5% each year, (b) has a P/TB ratio that consistently hovers at 0.7, (c) uses up its repurchase program by April 2026, and subsequently buys back 5% of its outstanding shares annually, (d) gets acquired at a P/TB ratio of 1.4 eventually. Under such a scenario, the returns we could theoretically earn are shown in Table 1

Company Notes Series (#12): Descartes Systems Group

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 11 editions in the series can be found here, here, here, here, 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!

Start of notes for Descartes Systems Group

Data as of 2023-02-21

Background

Founded in 1981
Listed in 1999, dual listing on NASDAQ (NASDAQ: DSGX) and Toronto Stock Exchange (TSX: DSG)
Headquartered in Ontario, Canada
Over 1500 employees
Reports financials in the US$

Business

The problem Descartes is trying to solve:
- We believe logistics-intensive organizations are seeking to reduce operating costs, differentiate themselves, improve margins, and better serve customers. Global trade and transportation processes are often manual and complex to manage. This is a consequence of the growing number of business partners participating in companies’ global supply chains and a lack of standardized business processes.
- Additionally, global sourcing, logistics outsourcing, imposition of additional customs and regulatory requirements and the increased rate of change in day-to-day business requirements are adding to the overall complexities that companies face in planning and executing in their supply chains. Whether a shipment is delayed at the border, a customer changes an order or a breakdown occurs on the road, there are increasingly more issues that can significantly impact the execution of fulfillment schedules and associated costs.
- The rise of e-commerce has heightened these challenges for many suppliers with end-customers increasingly demanding narrower order-tofulfillment periods, lower prices and greater flexibility in scheduling and rescheduling deliveries. End customers also want real-time updates on delivery status, adding considerable burden to supply chain management as process efficiency is balanced with affordable service.
- In this market, the movement and sharing of data between parties involved in the logistics process is equally important to the physical movement of goods. Manual, fragmented and distributed logistics solutions are often proving inadequate to address the needs of operators. Connecting manufacturers and suppliers to carriers on an individual, one-off basis is too costly, complex and risky for organizations dealing with many trading partners. Further, many of these solutions do not provide the flexibility required to efficiently accommodate varied processes for organizations to remain competitive. We believe this presents an opportunity for logistics technology providers to unite this highly fragmented community and help customers improve efficiencies in their operations.”
Provides software for logistics and supply chain management business processes; helps customers to streamline their logistics processes and save costs. Customers use Descartes’ software “route, schedule, track and measure delivery resources; plan, allocate and execute shipments; rate, audit and pay transportation invoices; access and analyze global trade data; research and perform trade tariff and duty calculations; file customs and security documents for imports and exports; and complete numerous other logistics processes by participating in a large, collaborative multi-modal logistics community.” In other words, Descartes help customers manage their end-to-end shipment, including researching global trade information, booking of shipment, tracking of shipment, regulatory compliance filings, settlement of audit etc. Descartes offers many software applications that are modular and interoperable.

The company has historically lost, over a 1-year period, 4% to 6% of aggregate annualised recurring revenue
Customers include logistics companies (3P logistics providers, freight forwarders, and custom brokers), transportation companies (air/land/ocean), and distribution-intensive companies where logistics is critical in their own product or service offering (direct-to-consumer e-commerce companies for example); these customers include Delta Air, CMA CGM, FedEx, DHL, Home Depot, WayFair, Coca-Cola, Toyota, Fresenius.
Has a mostly SaaS model subscription model but also has a few clients on perpetual licenses – worth noting that some of the revenue earned by Descartes from its software is tied to volume of shipments being processed.
Descartes’ tailwinds: Can benefit from the rise of e-commerce and greater demand for logistics
Created a Global Logistics Network (GLN) – a state-of-the-art messaging network – of trading partners that customers can use. This GLN is the moat behind Descartes as it is the foundation of the company’s technology platform that manages the real-time flow of data and documents that tracks and control the movement of inventory, assets, and people. Customers can use the GLN to access and collaborate with a wide range of trading partners.
In first 9 months of 2022, USA was 63% of total revenue, EMEA 26%, Canada 7%, and Asia Pac 4%

Sales strategy

Sales in North America and Europe are through direct sales
Use channel partners in APAC, India, LATAM, and Africa. Channel partners include distributors, alliance partners, and value-added resellers
Has a “United by Design” alliance with numerous companies so that Descarte’s software is interoperable with numerous other service providers (this is another moat in my view)

Customer Stats

25,000+ customers worldwide, from 160+ countries
On an annual basis, Descartes now tracks >575 million shipments in real time and processes >18.6 billion messages

Growth strategy

Acquisitions are a key factor in Descartes’ historical growth (see “Financial Results” below); the acquisition strategy is focused on “complementary technologies, industry consolidation and close adjacencies across logistics”
Made 31 acquisitions for a total sum of $1.04 billion since 2014. This is more than its total free cash flow generated, so it funded some acquisitions through secondary public offerings in July 2014 (in FY2015) and June 2019 (in FY2020). But Descartes has recently been building back its cash position; as of October 2022, it has net cash of US$229 million (cash minus capital leases)
Likely will accelerate acquisitions again?

Financial Results

Fiscal year ends on 31 Jan
Revenue compounded at 15.7% per year (FY2010 – FY2022)
FCF compounded at 22%
FCF ex WC (working capital) margin has grown from 22% to 36%, aided by some WC change. But even excluding WC changes, FCF has compounded at 20.7%
Cash conversion is 231% of net income. Cash conversion ratio is super high for two reasons: (1) Net income impacted by amortisation of intangible assets which is not a cash expense but quite significant on the income statement; (2) Some SBC
FCF per share has compounded at 16.5% (FY2010 – FY2022) which accounts for the dilution from the two secondary offerings made in the period
Company is now net cash positive at US$229M
There is some dilution from SBC (stock-based compensation) but it is minimal and well-controlled (weighted average diluted share count up 3.6% from FY2010 to FY2022)

FY2023 Q3 Results

New financial year starts on 1 Feb
Q3 FY23 revenues were up 12% but down QoQ due to forex to US$121.5 million
91% of revenue is service revenue and 8% is professional fees
License only makes up 1%
CFO was US$50.9 million, up 18%, and 42% of revenue
Year-to-date revenue was up 16% and CFO up 8%
Has US$237 million in cash and US$350 million of credit facilities (which can be expanded to US$500 million upon lenders’ approval), so there’s ability to leverage up the balance sheet which could be good for shareholders

Management

CEO Edward J. Ryan (54). Been CEO since November 2013, was previously Chief Commercial Officer (2011-2013). Joined Descartes in 2000.
President and COO J. Scott Pagan (49). Been COO since November 2013. Joined Descartes in 2000.
CFO Allan Brett (55). Been CFO since May 2014. Joined Descartes as CFO
Hard to tell exactly how many shares are owned by them because the data reported is only for market-value of shares held, and market value of “in the money” of unexercised but vested options held by them. But nonetheless, as of 29 April 2022, based on a share price of C$80.14 (the weighted-average price for the 5 days prior to 29 April 2022) – price is C$101.29 as of 21 Feb 2023 – the value of Descartes shares controlled by Ryan, Pagan, and Soctt, is US$34.0 million, US$35.0 million, and US$14.0 million, respectively. That is a decent amount of skin in the game.

Compensation of Management

Compensation consists of 3 components: (1) Base salary and benefits, (2) Short-term incentives, and (3) Long-term incentives.
Base salary for FY2022 was US$500,000 for Ryan, US$350,000 for Pagan, and US$350,000 for Brett.
Short-term incentive for FY2022 was a maximum of US$750,000 for Ryan, US$446,250 for Pagan, and US$367,500 for Brett. Short-term incentive for FY2022 was based on Descartes’ adjusted EBITDA, revenue, and OCF as % of adjusted EBITDA. Descartes had to meet targets in FY2022 of 10% growth in adjusted EBITDA (actual was 31%), 9% growth in revenue (actual was 22%), and OCF as % of adjusted EBITDA of 80-50% (actual was 95%). All 3 executives were paid short-term incentives of the maximum amount stated.
Long-term incentive for FY2022 consists of:
- PSU grants which vest at the end of a three-year performance period
- RSU grants which vest over a period of three fiscal years; and
- stock options that vest over a period of three fiscal years.
The actual PSU to be received by the executives ranges from 0% to 200% of the granted target PSUs and depends on the total shareholder return of Descartes relative to a Comparator Group over a 3-year period. If Descartes is less than the 30th percentile, the actual PSU distributed will be 0%; if Descartes is in the the 90% percentile or higher, the actual PSU distributed will be 200%. On the date of the grant, the target PSUs were worth US$2 million; the RSUs were worth US$1.4 million, and the stock options were worth US$0.6 million. The Comparator Group includes Enghouse Systems, Kinaxis, Wisetech Global, Aspen Technology, Ebix QAD, and more.
Sensible compensation structure, since it emphasises long-term stock price return. Dollar-amounts are reasonable (though on the high-side) since the total compensation of each executive in FY2022 is still a single-digit percentage of net income and FCF.

Valuation

US$6.4 billion market cap (as of 21 February 2023) and trailing FCF of US$182 million
~35 PFCF ratio
EV of US$6.1 billion, so EV-to-FCF of 34
Doesn’t pay a dividend nor does it buyback shares, so no cash is being returned to shareholders yet
But there are good capital allocators at the helm so far, judging from growth of business through acquisitions
Pricey given that all the cash flows need to be reinvested back to drive growth in the form of acquisitions

Company Notes Series (#11): Alquiber Quality

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 10 editions in the series can be found here, here, here, 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!

Start of notes for Alquiber Quality

Data as of 2023-09-07

Background

Ticker: ALQ
Listed in Spain in 2018
Spain has a dividend withholding tax of 19%
Alquiber runs a vehicle rental business in Spain and operates in a highly fragmented market
The largest player is Arval Service Limited with US$1 billion in revenue; Alquiber has around US$100m revenue in FY22

Key information

Recent share price of €8.85
Outstanding shares of 5.5 million
Market cap of €48.6 million or US$52 million
LTM revenue of US$107 million, operating income of US$16.8 million, and net income of US$9.1 million
US$7.2 million in cash, US$39 million in near-term debt and US$40.7 million in long term debt

Business

Rental automotive business
Alquiber’s business is capital intensive, as the company needs to buy automobiles first and then earns revenue after
Had 221 staff in 2022, consisting of 51 technical staff, 100 admin staff, and 70 other services staff
Very simple business model: It earns revenue from rental services as well as the sale of used vehicles
In 2022, Alquiber’s rental income was €83 million, and the sale of old vehicles was €16 million; rental income accounted for 84% of total revenue and revenue of old vehicles was 16%

Key stats of the business

Fleet was 16,000 vehicles in 2022, up 21% from year ago
Average purchase price was up 21%
Average occupancy rate was 91%
Number of commercial offices was 23, up from 22 in 2021

2022 growth

Rental revenue increased 31%
Alquiber also started industrial vehicle rental, which contributed to growth
There was YoY rental growth in every month in 2022

Alquiber’s advantage

Strong relationships with clients with significant percent of revenue from large corporations and companies in essential sectors (such as electricity and infrastructure)
Wide network of offices across Spain which ensures proximity to the client
Wide range of vehicles that can cater to clients’ needs
Offices across the country also allow for fast response speed

Cash flow

Operating cash flow is very strong
In 2022, Alquiber had US$49 million in operating cash flow from just US$107 million in revenue
Operating cash flow minus depreciation for the year is a better gauge of the company’s real cash-flow generation because there’s a need to depreciate its vehicles, which need replacing
2022 operating cash flow minus depreciation was only US$5 million

Historical numbers (2014-2022)

Net debt has risen substantially over time as capex has exceeded depreciation and amortisation, as the rental fleet expands; the rental fleet has been growing with property, plant, and equipment on the balance sheet growing from US$25 million to US$200 million
Free cash flow has been consistently negative
Operating cash flow minus depreciation has also not been very strong
Alquiber seems focused on EBITDA, which is probably the wrong metric to use as it is a capex-heavy business
Revenue CAGR of 26% since 2014, and net income CAGR of 32%
Near-term debt has become an issue, with near-term debt more than cash on hand

Debt profile

Alquiber appears to have raised some 2-year bonds to cover its current debt for the year

Valuation

Market cap of US$52 million, and net debt of US$76 million, giving an enterprise value of US$128 million
Net profit of US$9 million, so EV/net profit of 14
But cash conversion when using operating cash flow minus depreciation has not been strong
Overall, not an interesting business with too much debt and weak cash flows

Company Notes Series (#10): Ponce Financial Group

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 eight editions in the series can be found here, here, 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!

Start of notes for Ponce Financial Group

Data as of 2025-06-07

Background on Ponce Financial Group

Ticker: PDLB
Listed exchange: NASDAQ
HQ location: Bronx, New York
Ponce Financial Group is the holding company for Ponce Bank (from here on in this set of notes, Ponce Financial Group will be referred to as PDLB)
Ponce Bank was established in 1960 under the name Ponce De Leon Federal Savings and Loan Association. In 1985, the bank changed its name to Ponce De Leon Federal Savings Bank. In 1997, the bank changed its name again to Ponce De Leon Federal Bank. In 2017, the bank adopted its current name of Ponce Bank.
Ponce Bank conducted a second-step conversion that was completed on 27 January 2022. The first-step of the conversion was conducted in September 2017. When the second-step conversion was completed, PDLB had 24.712 million shares outstanding.
PDLB’s banking offices are all located in New York; at the end of 2024, PDLB had 13 full service banking and 5 mortgage loan offices.
PDLB engages primarily in making mortgage loans consisting of one-to-four family residential (both investor-owned and owner-occupied), multifamily residential, nonresidential properties and construction and land, and, to a lesser extent, in business and consumer loans – see Figure 1. As of 31 March 2025, PDLB’s weighted-average loan-to-value ratio for its loans portfolio is a healthy 56.4%. PDLB’s loans are granted to customers who are located primarily in the New York City metropolitan area.

Details of PDLB’s ECIP preferred stock

The acronym ECIP stands for Emergency Capital Investment Program. The ECIP was set up by the US Treasury to provide investment capital directly to CDFIs (Community Development Financial Institutions) or MDIs (Minority Depository Institutions) to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, in low-income and underserved communities.
On 7 June 2022, PDLB issued 225,000 shares of preferred stock for US$225.000 million to the US Treasury, as part of the Treasury’s ECIP.
The ECIP preferred stock issued by PDLB has the following characteristics:
- No dividends will accrue for the preferred stock in the first two years after issuance. For years three through 10, depending upon the level of Qualified and/or Deep Impact Lending made in targeted communities, as defined in the ECIP guidelines, dividends will be at an annual rate of 2.0%, 1.25%, or 0.5% and, thereafter, will be fixed at one of the foregoing rates. As of 2025 Q1, PDLB has reported 11 consecutive quarters for which it has met both the Deep Impact and Qualified Lending Conditions, and the ECIP preferred stock currently has a dividend rate of 0.5%.
- As a participant in the ECIP, PLDB must adopt the Treasury’s standards for executive compensation and luxury expenses for the period during which the Treasury holds the ECIP preferred stock. PDLB also cannot pay dividends or repurchase its common stock unless it meets certain income-based tests and has paid the required dividends on the ECIP preferred Stock; PDLB started paying the ECIP preferred stock’s dividend in 2024.
- On 20 December 2024, PDLB entered into an option agreement with the US Treasury to repurchase the ECIP preferred stock. PDLB now has the option to purchase all of the ECIP preferred stock during the first 15 years from the date of issue of the preferred stock. The purchase price will be based on a seemingly publicly-undisclosed formula to calculate the present value of the preferred stock, but management expects the purchase price to be at a substantial discount to the face value of the preferred stock, potentially less than 7 cents on the dollar. This is in line with the US Treasury’s announcement on 13 August 2024 that as of March 2024, any repurchases of ECIP preferred stock by the issuer can be done at a price ranging from 7% to 28% of the principal amount. As another sense check, given the current dividend rate of 0.5% on PDLB’s ECIP preferred stock, the annual cash flow accruing to the US Treasury is US$1.125 million; the present value of a perpetual annual cash flow of US$1.125 million, at a discount rate of 5%, is US$22.5 million, which is just 10% of the face value of PDLB’s ECIP preferred stock.
- PDLB cannot exercise the option to repurchase the ECIP preferred stock until at least one of the Threshold Conditions are met and the earliest possible date by which a Threshold Condition may be met is 30 June 2026. The Threshold conditions are, such that, in the first 10 years from the issue of the ECIP preferred stock, PDLB meets either of: (1) over any 16 consecutive quarters, an average of at least 60% of PDLB’s total loan originations qualifies as Deep Impact Lending, (2) over any 24 consecutive quarters, an average of at least 85% of PDLB’s total loan originations qualifies as Qualified Lending, and (3) the preferred stock has a dividend rate of no more than 0.5%. As mentioned earlier, as of 2025 Q1, PDLB has reported 11 consecutive quarters for which it has met both the Deep Impact and Qualified Lending Conditions, and the ECIP preferred stock currently has a dividend rate of 0.5%.
- Qualified Lending and Deep Impact Lending are, broadly speaking, loans made to (1) low-to-moderate income individuals, (2) rural communities, low-income communities, underserved communities, minority communities, and counties in persistent poverty, (3) small businesses and farms, and (4) affordable housing projects, public welfare and community development investments, and community facilities.
If PDLB ends up meeting at least one of its Threshold Conditions by 30 June 2026, and its US$225 million in ECIP preferred stock can be repurchased for US$15.75 million (7%) or less, at least US$209.25 million can be added to PDLB’s common stockholder’s equity. In the meantime, the ECIP preferred stock serves as a very low-cost source of capital for PDLB, given the annual dividend rate of just 0.5%.

Investing information on PDLB

PDLB is a thrift conversion – see here for how to invest in thrifts
As of 31 March 2025, PDLB had total assets of US$3.090 billion and common stockholders’ equity of US$288.886 million, giving a common stockholders’ equity to assets ratio of a poor 9.3%. PDLB’s total assets include securities held-to-maturity at amortized cost of US$358.024 million as of 31 March 2025; these securities have a marked-to-market value of US$349.518 million, so the difference is not material and can be ignored in the calculation of PDLB’s common stockholders’ equity. But the true economic value of PDLB’s ECIP preferred stock (see the “Details of PDLB’s ECIP preferred stock” section) should be factored into the calculation of PDLB’s common stockholders’ equity. Assuming the ECIP preferred stock can be repurchased for US$15.75 million (7% of the face value), PDLB’s adjusted common stockholders’ equity becomes US$498.136 million, and the common stockholders’ equity to assets ratio becomes a good 16.1%.
As of 07 June 2025, PDLB has a stock price of US$13.36. Its latest financials (for the 3 months ended 31 March 2025) has its share count as 23.9662 million and its reported tangible book value per share as US$12.05. This gives a high price-to-reported tangible book (PTRB) ratio of 1.11. But if PDLB’s adjusted common stockholders’ equity of US$498.136 million is used, its price-to-adjusted tangible book (PTAB) ratio becomes an attractive 0.64.
PDLB has not bought back shares since its second-step conversion, and that’s a bad sign on management’s understanding of capital allocation, especially since PDLB is now trading at a deep discount to its adjusted tangible book value.
Non-performing loans were 0.88% of total assets in 2025 Q1, while non-performing assets as a percentage of total assets were 0.91% in 2024, 0.65% in 2023, 0.78% in 2022, 1.07% in 2021, and 1.35% in 2020. These are not exceptional nor bad.
PDLB’s annualised return on reported common stockholders’ equity in 2025 Q1 was a strong (relative for a thrift!) 7.97%. Using the adjusted common stockholders’ equity, the annualised ROE is still decent (again, relative for a thrift!) at 4.6%. But PDLB’s net income has been volatile since its second-step conversion: It was US$10.334 million in 2024, US$3.352 million in 2023, and -US$30.0 million in 2022.
PDLB’s three senior-most leaders are:
- Steven Tsavaris, executive chairman of PDLB. Tsavaris has served as a director since 1990. He joined Ponce Bank in 1995 as an executive president and became CEO of Ponce Bank in 2011. He became chairman of the board and CEO of Ponce Bank in 2013. Tsavaris is already 75.
- Carlos Naudon, president and CEO of PDLB. Naudon has served as a director since 2014. He became president and COO of Ponce Bank in 2015, and is currently the president and CEO of Ponce Bank. Naudon is already 74.
- Sergio Vaccaro, executive vice president and CFO of PDLB. Vaccaro joined PDLB in June 2022 in his current role. Prior to PDLB, he was the CFO of Private Bank America at HSBC from 2015 to May 2022. Vaccaro is still young at 49.
The compensation of Tsavaris, Naudon, and Vaccaro in 2024 are high, as shown in Figure 2 below, when compared to PDLB’s net income; their compensation for 2023 are even higher, although the step-down in 2024 is welcome to see.
As of 16 April 2025, Tsavaris, Naudon, and Vaccaro control 476,142 shares, 500,149 shares, and 22,660 shares respectively; based on PDLB’s share price of US$13.36 as of 07 June 2025, the value of their stakes are US$6.361 million, US$6.682 million, and US$0.303 million, respectively. For Tsavaris and Naudon, who are the two most important leaders in PDLB, their equity values significantly outstrips their annual compensation.

Tsavaris, Naudon, and Vaccaro have compensation plans that include attractive change in control provisions. In the event that PDLB or Ponce Bank is acquired and the employment of Tsavaris and Naudon ends, they are each entitled to a severance package that includes: (1) 3x the amount of their highest gross income in the three years before their termination, (2) an amount equal to the value of any restricted stock, stock options, or stock awards, whether vested or unvested, and (3) 2 years of health insurance. In the case of Vaccaro, he is entitled to a severance package that includes: (1) 1.5x the amount of his average annual compensation in the five years before his termination, or whatever number of years that applies if he has been employed for less than five years, and (2) continuation of life, medical and disability coverage that is substantially identical to the coverage maintained by PDLB.
Putting everything together, it appears that PDLB is a thrift with (1) a low valuation, (2) a management team that does not seem to appreciate capital allocation, (3) average lending operations, and (4) a management team at retirement age with high ownership in PDLB and attractive change in control provisions, giving them incentive to sell the bank. PDLB’s second-step conversion was completed in January 2022, so it can already sell itself if management wants to (January 2025 would have been the 3-year anniversary), but management may be waiting for 30 June 2026, because that is the earliest date on which PDLB can repurchase its ECIP preferred stock. Management commented in the 2024 Q4 earnings release that they intend to repurchase the ECIP preferred stock:

“We are working diligently to ensure that we will meet the conditions necessary to allow us to repurchase our ECIP preferred stock in the future. The agreement we executed with the U.S. Treasury in December 2024, allows for a repurchase of the ECIP preferred stock once we have achieved Deep Impact Lending, as defined under the ECIP program, that is at least 60% of our total originations on average over 16 consecutive quarters, provided that we also meet certain other conditions at the time we exercise the repurchase option. As of December 31, 2024, our Deep Impact Lending over the last 10 consecutive quarters stands at 79%, well above the threshold. Also, from second quarter of 2024 to fourth quarter of 2024, we have originated $514 million of Deep Impact Lending as well as $54 million of qualified lending which represents 383% of our base, which period, together with the first quarter of 2025, will determine the rate of dividends payable on the ECIP preferred stock from the third quarter of 2025 to the second quarter of 2026. With one quarter to go, we are confident that we will get to over 400% of our base and ensure another year of preferred dividends of 0.50%, which is the lowest dividend rate.”

Assuming that (1) PDLB has a return on common stockholders’ equity of 7% in 2025, (2) PDLB’s ECIP preferred stock can be repurchased for 7% of face value in June 2026, and thus US$209.25 million can be added to PDLB’s common stockholder’s equity, (3) PDLB has an annualised return on common stockholders’ equity of 4% in 2026 H1, and in subsequent years and (4) PDLB gets acquired at a P/TB ratio of 1.2 eventually. Under these assumptions, the theoretical returns are shown in Table 1.

Assuming that (1) PDLB has a return on common stockholders’ equity of 7% in 2025, (2) PDLB’s ECIP preferred stock can be repurchased for 7% of face value in June 2026, and thus US$209.25 million can be added to PDLB’s common stockholder’s equity, (3) PDLB has an annualised return on common stockholders’ equity of 4% in 2026 H1, and in subsequent years and (4) PDLB gets acquired at a P/TB ratio of 1 eventually. Under these assumptions, the theoretical returns are shown in Table 2.

Company Notes Series (#9): CompoSecure

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 eight editions in the series can be found here, 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!

Start of notes for CompoSecure

Data as of 25 September 2024

Details of CompoSecure

Ticker: CMPO
Exchange: NASDAQ
HQ: New Jersey
Founding year: 2000
Date of IPO: December 2021, via a SPAC-merger with Roman DBDR Tech Acquisition Corp

Business of CompoSecure

CompoSecure led the creation and growth of the metal card form factor through its expertise in material science and has been at the forefront of emerging embedded payment card technology.
CompoSecure is a category leader in the design and manufacture of premium metal payment cards. Its metal payment cards are currently issued typically on the Visa, Mastercard, American Express, and China Union Pay payment networks.
In 2003, for the American Express Centurion program, CompoSecure created the world’s first metal payment card. In 2009, CompoSecure developed the first commercialized metal payment cards with embedded EMV chips (EMV is an acronym derived from the names Europay, Mastercard, and Visa, and is a high-security payment protocol for payment cards which utilizes an embedded microprocessor that, when paired with an EMV enabled payment terminal, authenticates cardholder transactions; EMV cards are often called “chip cards”). In 2010, for the JP Morgan Chase Sapphire Preferred program, CompoSecure created the first metal payment card targeting the mass affluent segment. In 2017, CompoSecure introduced the first large-scale NFC-integrated dual-interface metal payment cards for the American Express Platinum program; NFC refers to the near-field communications protocol which enables RFID (radio-frequency identification) communications between payment cards and payment terminals.
Dual-interface payment cards comprise the majority of CompoSecure’s sales volume today.
CompoSecure has many form factors for metal payment cards and the primary ones are shown in Figure 1.
In 2022, CompoSecure also began offering its customers the opportunity to include innovative features in their payment cards:
- Biometrics – Fingerprint sensors for added security
- Dynamic CVV – Converts the CVV code from a static number printed on the back of a card to one on a tiny e-ink screen that refreshes periodically.
- LED – LEDs on the face of a CompoSecure Metal Veneer card that lights up when the card is used for transactions; the LEDs can form the issuing bank’s logo or other elements
CompoSecure’s customers are global issuers of payment cards. Its largest customers are American Express and JP Morgan Chase. Together these customers represented 70.5% of CompoSecure’s revenue of US$390.6 million in 2023, with American Express representing 28.8% and JP Morgan 41.7%. See Figure 2 for the proprietary and co-branded card programs of JP Morgan Chase and American Express that CompoSecure supports.
CompoSecure’s contract with American Express was extended in 2023 and will be up for renewal on 31 July 2026. Under the contract, American Express reserved annual capacity of products and is required to order a certain percentage of that capacity from CompoSecure, and the company may charge American Express for a portion of that capacity even if American Express orders below capacity for any given year. American Express can terminate the contract with written notice. CompoSecure has been working with American Express for nearly 20 years.
CompoSecure’s contract with JP Morgan was extended in 2023 and will be up for renewal on 31 December 2028. Under the contract, JP Morgan Chase agreed to purchase its metal payment cards only from CompoSecure during the contract-term, and reserved annual capacity of products. JP Morgan can terminate the contract with written notice. CompoSecure has been working with JP Morgan for nearly 16 years.
CompoSecure’s revenue comes primarily from the sale of its metal cards. In 2023, CompoSecure produced 31 million metal cards, and it served more than 150 card programs. There are recurring elements in CompoSecure’s revenue because the company’s metal cards support its customers’ new customer acquisition and replacement card activity for lost and stolen cards, account fraud, and natural card reissuance cycles.
82.3% of CompoSecure’s revenue in 2023 came from the USA; the rest was grouped under International.
CompoSecure competes with other card manufacturers. But most of the company’s competitors in card manufacturing are large, diversified businesses with areas of strategic focus outside of the payment cards market, and their card operations focus primarily on lower margin plastic cards. CompoSecure’s management also believe that most competitive metal card manufacturers have substantially less production capacity, less technical expertise in the metal form factor, a limited selection of metal card designs and constructions, and less extensive supplier relationships for the raw materials needed for metal cards. CompoSecure’s metal-card competitors include Idemia France S.A.S., Thales DIS France SA, CPI Card Group, Giesecke & Devrient GmbH, Federal Card Systems, Kona I, BioSmart Co., Ltd., and ICK International.
CompoSecure designs and manufactures its metal payment cards. It has 5 facilities that total 241,000 square feet, and all are in Somerset, New Jersey.
In the third quarter of 2021, CompoSecure entered the cryptocurrency market through the launch of the Arculus Platform, a three-factor security platform with broad industry applicability. The Platform makes it safe, simple and secure for an individual to buy, swap and store cryptocurrencies. CompoSecure started with offering the Arculus Cold Storage Wallet to businesses and consumers. The Arculus Cold Storage Wallet allows users to easily and securely buy and swap cryptocurrencies and store their private keys, providing the convenience of a hot storage wallet with the security of cold storage. Hot storage wallets generate and store private and public keys and digitally sign transactions within Internet-connected devices where storage of the keys is hosted by a third party. Cryptocurrency exchanges typically provide their customers hot storage wallets with the exchange having custody of the user’s private keys. Cold storage wallets store private keys and sign transactions in an offline device, with the private key in the custody of the user, thus protecting the wallet from network-based security vulnerabilities; cold storage wallets are thus less prone to risk of cyber-theft than hot storage wallets. Today, CompoSecure has expanded the Arculus platform into two areas, Arculus Business Solutions, and Arculus consumer products.
Arculus Business Solutions consist of:
- Payments + Arculus Authenticate: The Arculus Authenticate solutions can be seamlessly integrated and paired with CompoSecure’s payment cards, allowing consumers to make secure transactions and gain secure access to personal accounts, all from the same metal card. This custom security solution enables card issuers and other businesses to build multi-factor authentication solutions for their customers, through the convenience of the Company’s premium metal cards
- White-Labeled Cold Storage: CompoSecure provides white-labeled cold storage wallets in the form of a premium metal cards, to give consumers the ability to make transactions and store the private keys to their digital assets in the same metal cards
- Payments + Arculus Cold Storage: CompoSecure provides the combination of Arculus Cold Storage combined in premium metal payment cards to give consumers the ability to make transactions and store the private keys to their digital assets in the same metal cards
- Payments + Arculus Authenticate + Arculus Cold Storage
Arculus consumer products consist of the Arculus Cold Storage Wallet

Market opportunity of CompoSecure

CompoSecure’s sales volume of payment cards in 2023 is less than 0.7% of the estimated addressable market for payment cards. Worth noting that CompoSecure’s market share was around 0.5% in 2021.
In 2023, CompoSecure produced metal payment cards for 8 of the top 10 U.S. card issuers. Management believes there are substantial opportunities to expand adoption of metal cards for existing customers’ proprietary and co-branded mass affluent card programs in the U.S. which do not currently offer metal payment cards. The number of issuers adopting metal programs continues to increase, and there has been an increase in card issuers expanding their metal card programs to additional proprietary and co-branded portfolios.
Management believes that issuers in international markets are still in the early stages of adoption of metal cards and largely untapped opportunities exist across major markets in Europe, Asia, India, the Middle East, and Latin America. In these regions, issuers are developing awareness of the relatively low cost and attractive economics of metal payment card programs.
Digital banks and other fintechs are increasingly seeking premium physical touch points to enhance their typically digital-only customer relationships, which mean they are more likely to offer premium metal cards to their customers.
CompoSecure’s metal cards use 65% post-consumer recycled stainless steel and this is a major sustainability advantage over plastic cards.

Management of CompoSecure

On 7 August 2024, David Cote announced that his family office will invest US$372 million to buy 60% of CompoSecure’s shares (49.3 million) from existing CompoSecure shareholders and thus become a majority shareholder. The investment equated to a price of US$7.55 per share and it was completed on 17 September 2024. As part of the investment, David Cote became executive chairman of CompoSecure’s board, while CompoSecure’s management team – including CEO Jon Wilk – continued in their current roles. Wilk has been CEO since May 2017.
Prior to Cote’s involvement, CompoSecure had Class A and Class B shares, where Class B shareholders could receive certain tax benefits; the entire set-up was very complicated. Cote’s investment cleaned up the capital structure as the sellers of CompoSecure’s shares converted all of their Class B shares into Class A shares, and sold the Class A shares to Cote. CompoSecure now has only one single class of common stock.
Cote has a legendary track record of improving companies’ efficiency and margins.
Cote first built his reputation with Honeywell, where he was CEO from 2002-2017. 2003 was the first full-year Cote was CEO of Honeywell. Table 1 below shows Honeywell’s revenue, operating profit, and net profit from 2003 to 2017. Notice the strong growth in operating profit and net profit (2017’s net profit was hurt by very high taxes because of the US tax reform). Cote became executive chairman of Vertiv Holdings in February 2020 and is still executive chairman today; Vertiv’s operating margins have increased from 7.7% in 2020 to 15.1% in the last 12 months.
In talking about his investment in CompoSecure, Cote said:

“We are excited to begin working with Jon Wilk and the team at CompoSecure to continue driving long-term value for shareholders. We plan to focus our efforts on enhancing the Company’s organic growth and operational efficiency while evaluating ways to further diversify its customer base and business mix through M&A. The Company’s permanent capital base eliminates the duration and transactional constraints of traditional alternative asset structures and can allow it to become the acquiror of choice for companies in need of operational improvement and M&A expertise.”

The prior major shareholders of CompoSecure were Mitchell Hollin and Michele Logan. Mitchell Hollin is a leader of LLR Partners, a private equity firm, while Michele Logan is a co-founder of CompoSecure. They were the ones who sold their shares to David Cote.

Financials and valuation (numbers as of 2024-09-25) of CompoSecure

For 2019-2023, CompoSecure’s revenue CAGR is 12.6%, helped by a big jump of 41.3% in 2022; 2023’s revenue growth is 3.2%
For 2019-2023, CompoSecure generated consistent profit and free cash flow.
Note that CompoSecure’s net profit in Table 2 includes the portions that accrue to the Class B shareholders; after David Cote’s investment, there is only one single share class as mentioned earlier.
As of 30 June 2024, CompoSecure had:
- 81.7 million Class A and Class B shares, so after David Cote’s investment, we can take the total number of Class A shares to be 81.7 million.
- A total of 8.4 million restricted stock units, performance stock units, and earnout shares that have yet to be vested.
- 22.415 million public warrants outstanding; the warrants expire on 27 December 2026, and each public warrant entitles the registered holder to purchase one share of the company’s Class A common stock at a price of $11.50 per share.
- US$130 million in exchangeable notes that can be exchangeable into Class A common stock at a conversion price of US$10.98 per share, which works out to 11.8 million shares. But CompoSecure has the intention to redeem the exchangeable notes and it’s at the discretion of the company to make the redemption, instead of letting the notes convert.
- A total diluted share count of 112.52 million, taking into account: the 81.7 million Class A shares; the 8.4 million RSUs, PSUs, and earnout shares; and the 22.415 million public warrants outstanding
CompoSecure’s trailing EPS and FCF per share are US$1.06 and US$0.96 respectively, using the 112.52 million total diluted share count. CompoSecure’s stock price of US$13.75 gives it a PE and PFCF ratio of 12.9 and 14.3. Worth noting that David Cote’s investment (as a result of the simplification of the tax structure) is expected to deliver an additional annual US$20 million in free cash flow.
Is a PE and PFCF ratio of 12.9 and 14.3 too low for a company with an effective monopoly in metal payment cards, and with a new major shareholder on board who has a long history of excellent execution at industrial companies?

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 a vested interest in Mastercard and Visa. Holdings are subject to change at any time.

Company Notes Series (#8): Ossia International

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!

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.

*Table 3 (total debt includes lease obligations)*

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.

Company Notes Series (#7): iCAD

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%.

*Figure 1; Source: iCAD 2024 September investor presentation*

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.

*Table 1; Source: iCAD earnings call transcripts*

*Table 2; Source: iCAD earnings call transcripts*

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.

*Figure 2; Source: iCAD 2024 September investor presentation*

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.

Company Notes Series (#6): Azeus Systems Holdings

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?

Company Notes Series (#5): Edilizi Acrobatica

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).

*Figure 3 (“Totale edifici” refers to “total buildings” and “Edifici residenziali” refers to 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.

*Figure 4 (“ricavi medi dichiarati” refers to “average revenue reported”)*

*Figure 5 (“ricavi medi dichiarati” refers to “average revenue reported”)*

*Figure 6 (“ricavi medi dichiarati” refers to “average revenue reported”)*

*Figure 7 (“ricavi medi dichiarati” refers to “average revenue reported”)*

*Figure 8 (“ricavi medi dichiarati” refers to “average revenue reported”)*

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.