Category: Articles

GrowthOps – FY20 in Review

GrowthOps

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.

Free Market Monopoly

Back in 2010, Fiona Borrelli and I created a free and simple expansion for the Monopoly™ board game called “Free Market Monopoly”.

The idea behind the board game expansion was to create a more stimulating game for players looking for more financial complexity, more strategy and less chance.

My favourite board game of all time remains Diplomacy by Allan B. Calhamer / The Avalon Hill Game Co, and whilst Free Market Monopoly is no Diplomacy, it is definitely an incremental step towards the Diplomacy experience.

Furthermore, a game of Free Market Monopoly can be completed in a palatable timeframe (less than 2 days, which is my shortest ever Diplomacy game), and doesn’t require 7 people to be fully functional.

Expansion Overview

Monopoly: Free Market Expansion improves and extends the gameplay for veterans of the original Parker Brothers Monopoly board game. Having played the original rule set for many years, we identified the following areas for improvement:

  • Luck in early property acquisition creating an overly dominant player;
  • No ability for property poor players to get back into the game;
  • Difficulty in recording complex financial transactions between players;
  • Utilities and railway stations become irrelevant in end-game;
  • Gameplay is quite simplistic, often deterministic and doesn’t enable experienced players to capitalise on their experience;

The following items have been introduced into the Monopoly: Free Market Expansion

  • A welfare system for struggling players;
  • Formalised lending – bank to player and player to player;
  • Regular property tax;
  • Mining exploration rights on properties;
  • A new set of chance and community chest cards with interesting and realistic scenarios;

The expansion is FREE and can be played by simply downloading and printing off the new chance and community chest cards, and a lending ledger.

t + 10 years

10 years later, I recently fired up Free Market Monopoly and have some further thoughts on how to enrich the game which I plan to release in the coming months.

Many people reached out to me over the years with praise and feedback for the expansion, including senior staffers from various departments of treasury. It also seems to have influenced other expansions including Ultimate Monopoly (2014) which I look forward to trying out. Stay tuned.

Monopoly is a trademark of the Parker Brothers.

Armour is a Weapon

As part of Galactic Bioware‘s product development effort, I’ve had to get very deep in the issue of the handling of protected fibres such as those that comprise the well-known Kevlar (Aramid) by DuPont and less well-known, but much more interesting, Dyneema (UHMWPE) by Royal DSM which are common soft fabrics used in body armour products.

tl;dr – anything which can be used to make body armour outside of the US is extremely regulated as a weapon.

Each of the countries in our supply chain has different laws that apply to protected fibres, the ingredients for soft body armour. This makes for a complex regulatory web that impedes innovation in the civilian, defence and military sectors as a whole.

My opening position with this company is that our production should be onshore in Australia to help contribute to Australia’s efforts to rebuild a real economy based on advanced manufacturing, materials science, engineering, research and development, as opposed to, well, digging stuff out of the ground. This is particularly important for the state of Victoria, which has been the most severely economically debilitated by COVID-19.

The politics of body armour is not well known, but it is self-evident once you start to think about it. Some of the policing challenges in Australia’s modern memory start around the time of Ned Kelly and his gang which is a well-known but rare case of body armour being worn in a relatively contemporary society.

Ned Kelly’s home made body armour from c. 1880

Copyright Wikipedia
Image copyright Chensiyuan, sourced from Wikipedia
Key issues
  1. State’s desire for a monopoly on violence
  2. Principle of escalation in crime management
State monopoly on violence

The opening position of most contemporary societies (ex. USA) is that the state should have the monopoly on violence through police and the military. This means that weapons, and the protection from weapons, the argument goes, should only be available to these groups. Civilians do not need body armour in their daily lives, as the risk of harm from weapons is low.

In the State of Victoria, body armour is so defined:

“body armour” means a garment or item—
a) that is designed, intended or adapted for the purpose of protecting the body from the effects of a weapon, including a firearm; and
b) that is prescribed by the regulations to be body armour;

In New South Wales, the definitions are similar, as they are across most states in Australia.

The police in Australia have a great track record of not shooting people unless absolutely necessary, and violent crime is very low, so the question is why should anyone want body armour in the first place?

Well, low risk is not no risk. The world is becoming increasingly fragile and the availability and proliferation of weapons is definitionally higher than is reported.

Body armour (in general) also protects against innocent accidents e.g. hunter cross-fire to park rangers and hikers, bomb shrapnel, stab wounds, etc. It must be noted though that body armour is surprisingly lacking in versatility, for example, armour that is good for resisting ballistics such as bullets might be hopeless with knife slashes.

Whilst the state has monopolised violence at law, they have not in practice, and the disarmed and disarmoured civilian population currently absorbs this risk.

Principle of escalation

Escalation is best summarised by Commissioner Jim Gordon in Batman Begins:

Batman
Batman is a trademark of DC Comics, film copyright Warner Bros. Pictures

Jim Gordon: What about escalation?
Batman: Escalation?
Jim Gordon: We start carrying semi-automatics, they buy automatics. We start wearing Kevlar, they buy armor piercing rounds.

See clip on YouTube

It is a well accepted and rarely challenged argument that the greater the availability of body armour, the more it can be used by criminals to resist arrest and potentially do more harm whilst at-large. So that if body armour is legal, then criminals will be harder to catch.

Critics of this position suggest that if criminals can obtain weapons illegally, they can also obtain body armour illegally. Therefore, making body armour illegal disadvantages law abiding citizens seeking lower overall risk of harm, and does not really impact on criminals. Body armour in the hands of law abiding citizens does not pose risk to other citizens.

In an increasingly uncertain world with the visible breaking down of many systems that were assumed to always work, some of these legal positions may need to be revisited.

As a result, when Galactic Bioware launches its first product range in late 2020, the products, while Made in Australia, will not be available for Australian consumers.

What to expect

About PhillipKingston.com

I’ve had this domain since 2006 and it has taken on various incarnations since then to support my business and non-profit interests.

In 2020, after a number of quite significant life events, it will take on a new role.

I intend to post fairly regularly on a diverse range of topics including:

  • Entrepreneurial and business learnings from my 18 years working in my own technology businesses.
  • Market failure and irrationality.
  • Quirks in public markets and resulting opportunities.
  • Private markets and venture capital gossip.
  • Behind the scenes stories from my time at Sargon, GrowthOps and Trimantium.
  • Challenges and announcements from my new business Galactic Bioware

I am also likely to post niche content in the realms of skateboarding, DOTA and survivalism. Consider yourself warned. Please read and agree to the disclaimer before reading on.