I decided to do a very rough analysis of the current share price to see if Envirosuite Limited (EVS) was worth a more in depth analysis and valuation for the purpose of investing.
EVS operates on a customer subscription model giving an Annual Recurring Revenue (ARR), which I like the certainty of, and is growing it’s revenue (seems like 7% increase since last year based on the figures given in the most recent financial report, after deducting one off sales).
The current Market Capitalization (MC) is $127.28M on an ARR of $7M at the start of the year (as stated in the most recent sales update). A recent announcement stated that there has since been a new contract bringing $2.8M in the first phase of the contract. If we optimistically assume that this one off sale is reoccurring revenue (which it doesn’t seem to be), that puts EVS at a multiple of ARR of ~13. For me, this is way too high for a company that is only growing at a rate of 7%pa.
I really want to like this small cap company, but I’m finding it hard to see value without doing more analysis (perhaps there is more to the growth history that supports this valuation?); however I won’t do more analysis because it doesn’t seem worthwhile based on this rough first glance.
Addendum: Since I had the page open, I couldn’t resist flicking through the rest of the company report. Something caught my eye, which required a fresh analysis and suckered me into doing a more in depth (but still rough) investigation: EVS has raised an additional $84M capital since the financial report was release, which I had not considered in my former analysis. It seems this money was used to buy a subsidiary.
If we do the same analysis above, but subtract the additional $84M worth of equity from the MC (127.28 – 84), then divide that by the ARR (I’ll use a value of $7M for the ARR, because the valuation is not so obviously an unfavorable price, so no need to use overly optimistic numbers to prove how bad the value is), this gives a multiple of ARR of 6.2. We can probably round this down to 6, to factor in any growth for the start of the year. Truthfully, assuming EVS’s use of this additional equity will be accreditive to revenue, this multiple of 6x ARR is very likely to be less.
A multiple of ARR of 6 isn’t bad. It’s not great either. If I was buying a company privately this would be expensive, but as it’s on the ASX, it’s actually kind of comparable. It’s possibly worth doing a proper analysis on EVS to work out if it’s worth investing right now, but since I’m holding off to see how the economy goes, I probably won’t invest in EVS at this stage.
Addendum #2: It looks like historic growth in this company is high. It’s definitely worthwhile looking into EVS in more detail, specifically I’d be looking at ROI and whether the company could be profitable if money wasn’t going into growth – I think I’ll still wait to see how the economy looks after COVID19 before investing anything significant.