Reporting Season Quick Review

GDC.AX, RKN.AX, PRO.AX, FAR.AX, 5GN.AX

Global Data Centre Group ($GDC.AX)

• Current Mcap $170m

• Nothing too exciting was reported, no asset sales as of yet. The exciting news has been news articles on of the sale of Airtrunk (which GDC own ~1% of through an investment into the consortium that acquired 88% of AirTrunk)

• My Valuation - $256m

  • ETIX -  $115m (validated by recent second strategic investment from Eurazeo Infrastructure Partners)

  • Perth Data Centre - $15m (Currently held for sale. Leased to Fujitsu with approx 1.5 years remaining on the lease and one 5-year extension option remaining.) Uncertain what price they can get for a small (10MW) DC.

  • Cash - $6m

  • Airtrunk - $120m (On balance sheet as $48.5m, I believe this is auditor conservatism. Recent articles suggest a $12bn sale price, but given NXT.AX is up 73% over the last year + AI/NVIDIA explosion wouldn't be surprised if there is upside to this.

• It's easy to find companies trading at a decent discount to NTA in Aussie micro/small caps. Key here is the catalyst which is the new/changed GDC investment managers incentives to realise NTA by liquidating assets and returning cash to shareholders.

• Basically their management fee has been cut in half but performance fees from value realisation introduced. If NTA returned to shareholders is $3 per share (10% below my valuation) then they could effectively earn ~22 years of management fees ($26m) in a couple years which as shareholder you'd be happy to pay.

• Value realisation is likely within 24 months as the hurdles start increasing 10% p.a after this period making it harder.

• So the upside is 35% over 24 mths (($256m - $27m fees)/$170m) which isn’t bad, especially given the lack of downside (in my view), but I think Airtrunk could provide more upside potential.

Reckon Ltd ($RKN.AX)

• Current Mcap $63m

• Steady as she goes. Trading at 1.2x Rev, 1.3x ARR, 3.1x EBITDA, 12x P/E which includes a loss making but growing business.

• 3.1x EBITDA compares to 8.4x they sold a somewhat similar business for in 2022 (Its revenue was going backwards but was a duopoly basically)

• Business group growth low single digits as expected. The key for this business is to move clients from Reckon Accounts Hosted product (uses Intuit source code) to Reckon One (by making Reckon One as feature rich as Accounts Hosted) without churning clients and reducing ARPU. Reason being that certain companies would be excluded from buying Reckon given Accounts Hosted products contains Intuit source code. This will likely take 3+ years I would suspect as no need to risk a churn event by immediately forcing users to change. And you get a 8.5% gross dividend yield while you wait.

• At 8.4x EBITDA the business group would be worth ~$181m. Why don't PE just take RKN out & flog it to a bank in a few years once the total transition away from Intuit source code is done…

• Legal group showing decent signs of growth (double digit revenue growth YoY) as the 15% part owner managers with a strong track record in the space get settled. They only started in mid-2021 but subscription revenue has grown consistently in each half.

• The points above are attractive but combined with the management incentives regarding the sale of assets/returns to shareholders gets me more excited.

• The CEO/CFO and the Legal group management/part owners have various incentives (read previous note) that shareholders would be very happy to pay them should they succeed. 

• The Reckon business has been progressively sold over the last 6 years (I believe this has been founders led. Clive Rabie (~9% ownership) & Greg Wilkinson (~7% )

• Some small share sales by Clive and the CEO post reporting was the one negative.

Prophecy International Holdings Ltd ($PRO.AX)

• Current Mcap $42m, EV $31m. Illiquid as expected.

• Very strong revenue growth (29% YoY). ARR grew 21% to $24.9m.

• PRO is trading on 1.2 EV/ARR, is not burning cash ($10.9m cash), with revenue growing >20% p.a while transitioning to SaaS model with a large untapped market.

• Expenses up 22% half on half was a negative but could be because some annual costs fall in 1H as per previous FY. If right then 2H24 could produce a decent positive EBIT number & so still likely to be very close to FCF breakeven for FY24.

• Given the sales growth I have no problem with keeping the company breakeven for a land grab, just don’t want to see cash burn.

• eMite seems to be a very sticky product given the time spent setting up + huge volume of data on system which means it’s a big job to change systems and might need to multiple tools to do what eMite does all itself, hence without direct competitors I think go for growth while it’s there.

Couple of other very small positions I have taken;

5G Networks Ltd ($5GN.AX)

• Current Mcap $51m, EV -$20m

Rough Valuation - $123m

• Cash - $71m

• $52m - 33% holding in company they just sold for $158m (to private equity who have a record in flipping these exact assets for good returns). On balance sheet its recorded as $20m but this is just an accounting issue as they already "had" the other $30m cash they were owed.

• $0 - Loss making, small scale data centre business that burnt $5.7m in CY23.

• Had to have a nibble even though management presentations very much lack transparency which is a red flag, and if they manage to burn through that cash without adding any value that would be a feat.

• What's the downside on this?...although could've said that 30% ago…

• They have stated they will likely use the cash for "Targeted acquisitions of complementary hosting, cloud and managed services businesses at <5x multiple of EBITDA", if they manage to spend all the $71m on half decent companies at this valuation ($48m Mcap) then upside would be large. They have already purchased one very small one for $4m.

 FAR Ltd ($FAR.AX)

• Current Mcap $35m

• Worth a nibble given the likely soonish sale of the Contingent Payment to Woodside/another party.

• Assuming oil price remains above US$70 per barrel and that the Sangomar Field starts operating relatively soon (to get the entitled barrels out before Dec 27) then FAR are entitled to $55m USD as below

• Which could look like the below in practice.

• Even just cashing the checks would be a great return (assuming oil price + production is ok)

• I don't like the oil price risk but a small position in what I view as a in the money option on oil that has payout of maybe >100% ($85m) seems like a good bet.

This isn’t investment advice - I don’t know your circumstances. I obviously like the ideas, hence I hold a position at the moment, but this could change. This update is based on my opinion of things that could happen in the future using publicly available information. Writing clarifies my thoughts, but we all make mistakes so do your own research and do not rely on me