Category: Articles

I have received quite a few inbounds after my post of 6th October 2020 entitled GrowthOps – FY20 in Review asking for a more specific analysis of the Company’s cash position and different possible valuation outcomes. I’m going to spend a bit of time in this post on valuation considerations and come back to cash position in a week or so.

Disclaimer: I am the founder and a large shareholder of GrowthOps. Please read my disclaimer carefully here.

The following analysis is conducted in AUD (A$) with publicly available information obtained from the ASX, specifically:

• Full Year Statutory Accounts from 28 August 2020
• Appendix 4C – Quarterly from 31 July 2020

Key cash indicators:

Market Capitalisation: (at $0.06 per share)	$8.96M
Cash and cash equivalents	$6.11M
Net Assets	$14.285M
Debt	$12.718M
Enterprise Value^	$15.568M

If you purchased all of the stock in TGO today at its current price, you’d receive:

• $14.285M of Net Assets (including $6.11M of cash) at last audited value
• a business with $84+ million revenue with positive operating cash flow

… for $8.96M.

Putting it another way, if you net-out the cash acquired from the purchase of GrowthOps with the cash used for the purchase, you can buy an $84+ million revenue stream and $8.175M of Net Assets for $2.85M.

$84.4 million of GrowthOps’ maintainable consulting revenue from tier one clients, applying a long-run (normalised) cost structure, would be expected to generate a sustainable EBITDA of 10% or more once GrowthOps completes its foundational integration years and comes out of COVID-19. This is supported by a large amount of historic GrowthOps component company data (disclosed in the Prospectus and summarised below) as well as publicly available data from many competitors / comparables on many stock exchanges including the ASX.

At a 10% EBITDA margin, $84.4 million of revenue generates $8.4 million of EBITDA p.a. In FY20, despite being nascent and COVID-19 impacts, GrowthOps delivered underlying EBITDA of circa $3.1 million.

From the GrowthOps Prospectus, EBITDA % margin for the combined businesses FY18F back to FY15 were:

Financial Year	EBITDA % Margin
FY15	15.9%
FY16	18.2%
FY17	22.8%
FY18F	23.3%
Average	20.0%

I expect that once GrowthOps completes its foundational integration phase and gets past COVID-19, it will be back to these EBITDA % margin levels.

Valuation Inputs:

Maintainable Revenue	$84.4M
FY20 Underlying EBITDA	$3.1M
Normalised EBITDA (Conservative)	$8.4M

Valuation Methodologies

By any conventional valuation methodology used by corporate M&A teams at acquisitive advertising or consulting groups for an “at-scale” consulting company, TGO is meaningfully undervalued at its current share price. Acquirers would be expected to pay a minimum of 0.5x forward revenue for a business like GrowthOps, probably closer to 1.0x due to its unique attributes such as scale, service-mix, quality record, awards and regional footprint into Asian growth markets that are very hard to access authentically for large multinationals.

Comparable ASX Public Companies

	Revenue Multiple	EBITDA Multiple
SLATER & GORDON LIMITED (ASX: SGH)	0.84x	5.32x
PS&C LIMITED (ASX: PSZ)	0.41x	8.64x
ENERO GROUP LIMITED (ASX: EGG)	0.52x	5.68x
TRIMANTIUM GROWTHOPS LIMITED (ASX: TGO)	0.11x	2.89x

If you value GrowthOps by these ASX comparable revenue multiples for consulting companies of comparable scale, here is how much money is left on the table at the current share price of TGO:

It is well known by the market that the TGO share price around $0.06 is a long way away from intrinsic value, but it is going to take some time for the mainstream fund manager community to support the stock because of a complex web of broker / investment bank self-interest and endemic distribution conflicts that plague the stock resulting from GrowthOps’ non-conventional IPO pathway. The US is much more alive to these systemic conflict issues which is why you are seeing a rise in direct listings (Asana, Palantir, Spotify, Slack, etc.) and Special Purpose Acquisition Companies (SPACs) which bypass them altogether. Australia will slowly follow suit, but for now, is a decade or so behind in shining the necessary light of transparency where it is not wanted.

Over time, institutions will look past their biases and buy into the stock which will correct the price and liquidity in line with ASX comparables and M&A prospectivity. Or they won’t.

Disclaimer: I am the founder and a large shareholder of GrowthOps. Please read my disclaimer carefully here.

Disclaimer: I am the founder and a large shareholder of GrowthOps. Please read my disclaimer carefully here.

Trimantium GrowthOps Limited (ASX: TGO) is one of the most poorly understood stocks on the ASX given its sustained revenue (over A$80 million p.a.) and client profile. The vast majority of the online coverage of the company is either 1) ad hominem attacks against me or key people, 2) deliberately misleading to the point of market manipulation or 3) automatically generated content by content algorithms.

The financial analyst community has largely ignored the stock as the IPO was not led by an investment bank, no initiating coverage was provided and no analysts have yet decided to cover the stock on their own. Furthermore, GrowthOps’ trading volumes are not significant enough to justify enough brokerage business for a broker to cover the costs of research.

The advertising industry blogs focus on politics and niche issues within the industry and do not have credibility or readership in analysing companies such as performing a bottoms-up fundamental analysis of the company’s strengths and weaknesses.

The sheer lack of company awareness and 3 years of idiosyncratic interpretation of “facts” around TGO are likely to continue the irrational stock market outcomes which have plagued the stock since its IPO in March 2018. These quirks unpin trading opportunities until the stock is liquid enough so that its trading price is a reasonable approximation of the underlying value of a share. This day is still a long way off.

Trading volumes are low, and the big shareholders haven’t traded much at all, and so the market capitalisation of the company is set by small trading aberrations between small shareholders. This is a very inefficient and ineffective way to value the company.

In the short run, the market is a voting machine. In the long run, it is a weighing machine.

Benjamin Graham

I have yet to see a single news article, research piece, blog post or forum post that has had a substantive evaluation (positive, neutral or negative) of the GrowthOps business and its services. I look forward to the day when there is one.

There are, however, hundreds (potentially thousands) of articles, posts and comments that attack key people with basis, compare GrowthOps to other similar market consolidation plays around the world in the abstract and make conclusions from what GrowthOps might be (in fantasy) without any consideration of the significant differences between approaches. This is disappointing to me as a founder, patently intellectually offensive and another pathetic example of Australia’s darker side of modern culture.

What does the company do?

The company is primarily a consulting company that sells time to clients at an hourly rate, in some cases with bonuses linked to qualitative or quantitative outcomes.

Services include:

• Creative services including advertising and design
• Marketing services including digital
• Technology services
• Coaching and leadership services

Clients include:

• Queensland Government
• Dare Iced Coffee
• Bendigo Bank
• Proton
• Officeworks
• Movember
• The Australian Ballet

What am I positive on the company?

GrowthOps is in its foundational years and has a long way to go to realise its original vision which is well articulated in its IPO Prospectus documents. I still believe it can easily be a A$1 billion+ per annum revenue company which would still represent a tiny fraction of its potential market share in the Asia Pacific region.

The current management team and board are excellent under Scott Tanner and Clint Cooper, the key target markets and segments focus is now refined and supported with good data, the sales machine is becoming well calibrated and most of the underperforming teams and business units post-consolidation after IPO have been sold-off or shut-down.

GrowthOps and its key businesses are well-known to most buyers and decision makers at key target customers.

GrowthOps is actually differentiated from its competitors in a nuanced but important way – it is built from the ground-up to take accountability for the client’s outcome and deliver against agreed business goals. Everything I tried to instil at GrowthOps is about effectiveness and quality. Most GrowthOps competitors focus on service factors (the “how” and “what”), but don’t make any honest attempts to be different at their core (the “why”).

Clients know the difference, investors do not (yet).

What does the company need to improve on?

GrowthOps needs to improve in three key areas as a priority:

1. The technology practice

The technology practice continues to face headwinds resulting from consistent poor revenue performance over the last three years. This division was primarily the 3wks business which was acquired at IPO in March 2018. 3wks was a disappointing acquisition as it didn’t deliver maintainable revenue like the rest of the component businesses acquired at IPO. Management needs to make good decisions here. The issues stem from the ability to institutionalise a sales function and revenue bankability that matches the rest of the GrowthOps group. Technology practice has historically been the source of the largest operating losses, by far.

2. Geographic and segment focus post-COVID

New Zealand was historically a difficult market for GrowthOps and most of the operations there have been right-sized to ensure positive /neutral cash-flow contributions to the GrowthOps group.

Some key Asian markets will need to be carefully reviewed after the world stabilises post-COVID, particularly Singapore and Hong Kong. Whilst talent retention (due to aggressive poaching of GrowthOps staff – which is a compliment) is a consistent issue in Malaysia, the business has proven resilient for a long time (a key hub acquired via the takeover of Asia Pacific Digital)

3. Active and reactive cost management

Managing cost in a large regional services business is challenging, particularly in periods of unpredictable revenue. One of GrowthOps’ biggest structural challenges is that its costs are very rigid (majority full time employees with notice periods and accumulating employee entitlements over time, and office leases which are sticky), but its revenues are more fragile (a blend of different contract lengths, sizes and currencies). It is impossible to match revenues and costs perfectly in services-land, but GrowthOps needs to get better at forecasting, making more dynamic its labour cost model and reducing hard standing costs. There is still more fat to cut in non-productive roles which I can see in the latest announcements (August 2020) is continuing to be worked on. More to do!

How should the company be valued?

GrowthOps is a services business with a sustainable blend of contracted (long-dated) and project (short-dated) revenue, high cash flow, improving cash collection rates and payment term optimisation, medium (pushing high) gross margin, strong repeat and recurring business with long average client tenure.

It’s ASX closing price will not be a good measure of its intrinsic value for a very long time.

A better way to value a company like GrowthOps is based on its fundamentals as you would value a private company via a simple Discounted Cash Flow (DCF) analysis, considering:

• The core business expected trading profits and resulting cash-flows into the future
• Adjustments for once-offs like non-repeating revenues and costs
• Then add/subtract the net tangible assets (including debt and cash) as per the company’s expected balance sheet

If you do that and believe the business is worth more than is implied at a given time by its current market capitalisation, then consider buying the stock. If not, then don’t!

Another approach, which one would use as a cross-check to a fundamentals approach, would be to take the company’s key building blocks and use industry accepted valuation multiples to value each building block and add it all up. For example, a business unit like GrowthOps’ advertising business (formerly AJF Partnership and Khemistry) would typically be valued at 7-8 times its maintainable EBITDA which would usually be 1-2 times its maintainable revenue. At this part of the market cycle, a blended revenue multiple across GrowthOps’ whole business of 0.75 to 1.0 times would not be unreasonable.

The intelligent investor is a realist who sells to optimists and buys from pessimists.

Benjamin Graham

I plan to write a more detailed analysis of the company in the coming weeks and dispel some myths out there that have been continuously regurgitated by serial-haters.

Disclaimer: I am the founder and a large shareholder of GrowthOps. Please read my disclaimer carefully here.