Global Voice - Is the CEO talking about Share Price ?
Interestingly, I have been keeping track of Global Voice's recent performance in terms of share price and also had a quick glance at its latest FY 2007 financial statements even though I had divested myself of this company some time back. It will always remain a lesson to learn for me as my original purchase of this company was not based on value investing principles, thus I use it as a benchmark as to how far WRONG I can be !
The CEO of Global Voice had, on March 10, 2008, issued a press release which specifically commented on the SHARE PRICE of the company. I will feature snippets (in quotation marks) of what was announced and my comments shall be in italics. Note that this is NOT a "whack-the-CEO" session, but merely to point out that Management should seriously consider building the business instead of worrying (to the point of being beleaguered !) about share price.
1) "confirmed that the board of the Company was unaware of any business, financial or operational reasons for last week’s decline in the share price " Erm, actually I did not realize that anyone had asked him to publicly comment on the sharp share price tumble. So why did he take it upon himself to comment publicly about the "sudden share price plunge" ?
2) "The board is therefore disappointed and surprised by the recent decline in the company’s share price " What I do not understand is why the Board has to care so much about share price ? It's as if they intend to raise funds through a secondary offering; that's the only time I can think of for Management to glance at the share price. Otherwise, please go about the business of creating shareholder value and concentrate on building the company.
3) "Measuring all business signed year-over-year to March 9th 2008, total number of agreements have grown 106% and total contracted monthly recurring revenues have grown 144% in value year-over-year." I did note that Management's focus is always perennially on revenues and order book flow. They have to realize that shareholders care about expenses and COGS as well and these are equally important in determining if the company can be profitable or if it can have enough cash to sustain its operational activities. I did note that capex requirements are high for a company like GV (which results in high depreciation and amortization expenses) and that they had raised funds through convertible bonds TWICE (which means very high financing costs and cash outflows).
4) "This early indicative performance, alongside the largest ever sales pipeline the company has had, gives us strong confidence in achieving the goals we have set out for the company in 2008." I did note that their goals included achieving strong growth in revenues, profitability and shareholder value in FY 2008. But how do you grow profitability when the company is not even profitable in the first place ? It boggles the mind when they make such a statement. If Management had any candour at all, they would address the problem of high costs and talk about turning the company around. I also noted that for FY 2008, they will be making "a major investment in their recently secured London network", which may mean more fund raising and more debt being issued. Somehow, I feel that the Management have yet to address the critical issues of high costs, depreciation and financing costs clearly enough. They previously mention EBITDA rising which is not indicative of the TRUE performance of the company, as you cannot afford to ignore income taxes, depreciation and amortization.
The whole point of this post is to remind investors that Management should not fret over "share price plunges", but instead just work on building the business, reducing costs and ensuring they have enough cash on hand without resorting to the debt and equity markets too often. Sometimes, growth can come at a price but when this price is too high, it may yet collapse the company.
I will post updates on Global Voice as a matter of learning as and when I see fit.
Showing posts with label Global Voice. Show all posts
Showing posts with label Global Voice. Show all posts
Thursday, March 13, 2008
Thursday, October 04, 2007
Global Voice - Issuance of 32 Million Euro Convertible Bonds
I read with some amazement and trepidation the latest announcement by GV relating to their business expansion. They are issuing 32 million Euro worth of convertible bonds (CB) to "accelerate rollout of metro networks and associated services in London, Berlin and Munich". The interest rate on the bonds is 3%. They also need the funds to complete the commissioning of a datacentre in Amsterdam and another next-generation long-haul network in Germany. The conversion price for the bonds is S$0.191 (19.1 Singapore Cents). Recall that in April 2006, GV had issued about 35 million Euro worth of convertible bonds as well, with an interest rate of 3% payable semi-annually.
The question which begs asking is: why does GV need to raise so much cash in order to operate ? Recall that in the RTO of Horizon.com, GV had already purchased the entire metropolitan fibre network at a fraction of the original cost. In fact, one can say that GV had ownership of these assets, which they can subsequently deploy to generate recurring revenues. Back then, utilization rate was very low at 1-2% and it was touted that if utilization increased, then shareholders would see a dramatic jump in revenues, and the company would turnaround from the red. There was intensive coverage of GV during FY 2005 by CIMB and DBSV which promoted the company and said that the metropolitan fibre was about to "take off". Apparently, nothing much came out of it eventually as the company managed to report a loss during each half-year reoprting season. This is despite the fact that it was snaring more and more contracts on a regular basis and building up their customer base. I had highlighted this point before in my review on GV some months back when I analyzed their 1H 2007 financial statements.
So if one glances at the income statement for 1H 2007, it is glaringly obvious that finance costs have increased significantly, up a whopping 630% from 1H FY 2006 ! The announcement of another 32 million Euro worth of convertible bonds only serves to exacerbate the problem of high interest expenses as the interest paid in future years will almost double as compared with FY 2007. Don't forget that being convertible bonds, they also carry the potential to be extremely dilutive once exercised, and the conversion price is not all that far away from the current market price of around 17 to 17.5 singapore cents. A discerning shareholder should then wonder: why does the company need to raise so much cash if it has secured enough contracts over the last 12 months to sustain its operational cash flows ?
The amount raised is not small by any standards and would further raise their interest-bearing borrowings under long-term liabilities in the Balance Sheet to about 61 million Euro. Take a quick glance at the Cash Flow Statement from 1H Fy 2007 and one can see that the operations are not generating sufficient operating cash flows to enable the business to sustain itself, which is probably why they are doing a "fund-raising exercise" every now and then. They already have a 35 million Euro cash outflow for 1H FY 2006; now they are going to have another 32 million Euro outflow for 2H FY 2007 ? When will it end ?
Assuming that even if GV DOES have the means to sustain its operations through the generation of recurring cash flows from their key customers, remember that they still need to service the interest payments, and try to gradually reduce borrowings as well. This all seems like an uphill task for the company as they struggle valiantly to return to the black.
Finally, why are GV undertaking to invest in more assets to bolster their current network ? As I recall, GV already has their fibre network in the regions indicated in the press release, so why are they purchasing another datacentre and another network ? There is insufficient information given to shareholders as to what are the nature of the assets to be purchased, and how these will contribute to improving their value proposition and competitive advantage. This factor, coupled with the opaque reporting for each of their contracts, means that shareholders have no inkling on whether the company is managing to improve revenues significantly or slightly.
The announcement of the new convertible bond issue was the proverbial straw that broke the camel's back. I divested myself of Global Voice once and for all, and incurred a loss of 4.2% (excluding brokerage) on this "long-term" investment. Suffice to say that if I had done my proper due diligence initially when I considered this company, I would probably not have bought it at all. This is my worst investment mistake thus far as I have incurred a huge opportunity cost in locking up my funds in a stagnant company. I will be providing details of this mistake in a future posting under "Investment Mistakes".
Thus, my portfolio now contains only 5 companies; Suntec REIT, Ezra, Boustead, Pacific Andes and Swiber.
I read with some amazement and trepidation the latest announcement by GV relating to their business expansion. They are issuing 32 million Euro worth of convertible bonds (CB) to "accelerate rollout of metro networks and associated services in London, Berlin and Munich". The interest rate on the bonds is 3%. They also need the funds to complete the commissioning of a datacentre in Amsterdam and another next-generation long-haul network in Germany. The conversion price for the bonds is S$0.191 (19.1 Singapore Cents). Recall that in April 2006, GV had issued about 35 million Euro worth of convertible bonds as well, with an interest rate of 3% payable semi-annually.
The question which begs asking is: why does GV need to raise so much cash in order to operate ? Recall that in the RTO of Horizon.com, GV had already purchased the entire metropolitan fibre network at a fraction of the original cost. In fact, one can say that GV had ownership of these assets, which they can subsequently deploy to generate recurring revenues. Back then, utilization rate was very low at 1-2% and it was touted that if utilization increased, then shareholders would see a dramatic jump in revenues, and the company would turnaround from the red. There was intensive coverage of GV during FY 2005 by CIMB and DBSV which promoted the company and said that the metropolitan fibre was about to "take off". Apparently, nothing much came out of it eventually as the company managed to report a loss during each half-year reoprting season. This is despite the fact that it was snaring more and more contracts on a regular basis and building up their customer base. I had highlighted this point before in my review on GV some months back when I analyzed their 1H 2007 financial statements.
So if one glances at the income statement for 1H 2007, it is glaringly obvious that finance costs have increased significantly, up a whopping 630% from 1H FY 2006 ! The announcement of another 32 million Euro worth of convertible bonds only serves to exacerbate the problem of high interest expenses as the interest paid in future years will almost double as compared with FY 2007. Don't forget that being convertible bonds, they also carry the potential to be extremely dilutive once exercised, and the conversion price is not all that far away from the current market price of around 17 to 17.5 singapore cents. A discerning shareholder should then wonder: why does the company need to raise so much cash if it has secured enough contracts over the last 12 months to sustain its operational cash flows ?
The amount raised is not small by any standards and would further raise their interest-bearing borrowings under long-term liabilities in the Balance Sheet to about 61 million Euro. Take a quick glance at the Cash Flow Statement from 1H Fy 2007 and one can see that the operations are not generating sufficient operating cash flows to enable the business to sustain itself, which is probably why they are doing a "fund-raising exercise" every now and then. They already have a 35 million Euro cash outflow for 1H FY 2006; now they are going to have another 32 million Euro outflow for 2H FY 2007 ? When will it end ?
Assuming that even if GV DOES have the means to sustain its operations through the generation of recurring cash flows from their key customers, remember that they still need to service the interest payments, and try to gradually reduce borrowings as well. This all seems like an uphill task for the company as they struggle valiantly to return to the black.
Finally, why are GV undertaking to invest in more assets to bolster their current network ? As I recall, GV already has their fibre network in the regions indicated in the press release, so why are they purchasing another datacentre and another network ? There is insufficient information given to shareholders as to what are the nature of the assets to be purchased, and how these will contribute to improving their value proposition and competitive advantage. This factor, coupled with the opaque reporting for each of their contracts, means that shareholders have no inkling on whether the company is managing to improve revenues significantly or slightly.
The announcement of the new convertible bond issue was the proverbial straw that broke the camel's back. I divested myself of Global Voice once and for all, and incurred a loss of 4.2% (excluding brokerage) on this "long-term" investment. Suffice to say that if I had done my proper due diligence initially when I considered this company, I would probably not have bought it at all. This is my worst investment mistake thus far as I have incurred a huge opportunity cost in locking up my funds in a stagnant company. I will be providing details of this mistake in a future posting under "Investment Mistakes".
Thus, my portfolio now contains only 5 companies; Suntec REIT, Ezra, Boustead, Pacific Andes and Swiber.
Monday, August 20, 2007
Global Voice – 1H 2007 Results Review
Well, to start off, let me reiterate again my fears for the IT industry and how I was “cautiously optimistic” and even “slightly pessimistic” before the 1H 2007 results were released. Suffice to say that my worst “fears” have come true, as my estimate of the competitiveness and cost-efficiency of companies in the IT industry was more or less right. Looking at the sorry state of companies such as Mediaring and Trek 2000, I sometimes wonder what the future will be like for these companies. They are in an intense industry which is changing every 6 months, and which sees prices being slashed by 70-80% due to shorter and shorter product life cycles. It is with a heavy heart and a tinge of regret that I bring you this analytical review:-
Income Statement
The income statement for 1H 2006 is apparently “misleading”, as a bulk of revenues came from “non-recurring infrastructure sales and sales from discontinued operations”. Notwithstanding this fact, recurring revenues only rose a miserable 20% in spite of the fact that they inked about 20+ contracts since Jan 2007 (announced on SGXNet almost on a regular basis by now). The problem here is that purchases also grew as they had to set up a datacenter and to extend higher sales-led connections (whatever that means). A lot of the cost of goods is not adequately explained to my satisfaction and this irks me to some extent. If a company has low margins (or in this case, a net loss margin) I would really appreciate it if Management could dissect the numbers and focus more on how to cut costs. This, incidentally, was not done in their commentary of significant trends on pages 9 and 10 of the financial statements.
If one takes into account the jump in staff costs (presumably to boost their sales and marketing workforce in order to clinch the aforementioned contracts) as well as the jump in depreciation expenses due to the setting up on an additional datacenter, you can clearly see why there is no profit from operations. Forget about Management’s excessive (yes, excessive !) focus on EBITDA; the truth is that depreciation is an expense like any other (except that it has no cash basis) and will still affect a company’s bottom line. Saying that they are EBITDA profitable is tantamount to calling a cat “a dog which meows”. This to me stinks of trying to avoid the problems of turning around the business (meaning Management is not being candid).
As can be glaringly seen, finance costs (namely, interest on convertible bonds) was up a whopping 631% to EUR 1.08 million. Looking to Page 2 of the press release, it mentions that GV has signed EUR 11.2 million of new contracts in the first 6 months of FY 2007. A simple computation will tell you that finance costs alone are 10% of new contracted revenues ! This is an extremely high figure compared to other companies where interest costs are typically less than 5% of the revenue figure (for Pacific Andes, this figure is 3.8% of their revenues). Cash flows are also an issue when interest costs are so high, yet revenue cannot keep pace with it.
Balance Sheet
Looking at the Balance sheet does give me the chills. As an accounting-trained guy, I cannot help but wonder how the company’s balance sheet had deteriorated to this extent. Firstly, have a quick look at the current ratio. Their total current assets are EUR 6.715 million while total current liabilities total EUR 9.32 million ! So GV are in negative working capital and their current ratio is a dismal 0.72 (for 1H 2006 the current ratio was marginally better at 0.87). Technically, this means that GV is insolvent as all their current assets are insufficient to service their current liabilities. This is one big danger signal for any company, but more so for GV as I mentioned it has high interest and staff costs.
Interest bearing borrowings are 26.6% of total equity, and about 446% of current assets. Looking at GV’s paltry cash balance of EUR 760K as at June 30, 2007; it seems glaringly obvious that this borrowing would not be paid down anytime soon. In fact, I am seriously concerned about GV’s ability to continue to service the loan interest, assuming their cash flows remain weak (see next section on cash flow statement).Altogether, a very weak balance sheet which may not be able to hold up in future accounting periods.
Cash Flow Statement
The cash flow statement, in all honesty, does not look compellingly attractive either. Take a look at the net cash from operating cash flows and one can see that there is a net outflow of EUR 4.785 million; which implies that they are not generating enough cash to cover their basic operations. This is opposed to EUR 942K of cash inflows for June 30, 2006. The main culprit appears to be the decrease in payables and the increase in receivables, which has provided the “squeeze” for GV. Their cash conversion cycle must be seriously examined as the numbers show that they may be paying off their creditors much faster than they are collecting from debtors, which leads to the problem mentioned above.
Cash flows from investing activities continues to be negative as GV has invested EUR 2.2 million to purchase the datacenter and related equipment. As can be seen under their cash flows from financing activities, the interest paid more than wipes out any cash inflows from further borrowings. It would imply that GV can only seem to raise enough cash through borrowings, which increases their gearing and interest costs. An extremely worrying trend is for any company to rely too much on financing activities to generate cash inflows instead of letting the operations side generate the required cash flow. Contrast this with Boustead’s cash flow statement which showed a healthy operating cash flow which more than covered any interest payments from loans.
Prospects and Outlook
From these numbers alone, warning bells are already sounding. Many people on various forums trumpet their “unwavering support” for GV in hopes of a turnaround and an improvement in its fortunes. For me, I rely objectively on the numbers and all three financial documents present numbers which do not look favourable at all ! I made the mistake of deluding myself back in Feb 2007 that things still looked rosy and the company could improve its earnings through a gain in revenues. Apparently, not only has that not come to pass, but it seems that the company is now technically insolvent and has a major problem managing their cash flows effectively. Management is also not candid as it focuses too much on how to grow their market share and gives a lengthy and often unnecessary description of the changes in the industry and how it will benefit the company. My take is: clean up your own act first (i.e. turnaround) before analyzing the industry and prospects for your company. It’s like trying to run when you have a gaping wound in your leg: all the while it is bleeding but you only think about next week’s races and how many more competitions are coming up instead of focusing on bandaging the wound.
In view of the above analysis and objective number-crunching, I do not see any real reason for being “loyal” to this investment. Loyalty without reason amounts to stupidity in my opinion, especially when faced with such numbers. The fundamentals have deteriorated significantly and I can no longer justify to myself why I should be optimistic or hopeful. Even if (and this is a big IF) GV manages to turn around in future, it will be a huge opportunity cost for me as my money is locked up in this investment without dividends, interest or capital gains.
Thus, I will proceed to divest this investment and re-deploy the proceeds into other worthwhile companies. To the reader, it is up to you (as an intelligent investor) to make your own conclusions and use independent thinking to sort out the facts. I wish all remaining Global Voice shareholders good luck in their investment.
Note: Since I am in no hurry to realize more cash (as I already have a cash stash ready for deployment during this market correction), I will wait for a better price to divest GV as Mr. Market is being excessively manic-depressive right now. Let's wait for one of those days when he is irrationally exuberant, then I can quietly sell him my stake in this company.
Well, to start off, let me reiterate again my fears for the IT industry and how I was “cautiously optimistic” and even “slightly pessimistic” before the 1H 2007 results were released. Suffice to say that my worst “fears” have come true, as my estimate of the competitiveness and cost-efficiency of companies in the IT industry was more or less right. Looking at the sorry state of companies such as Mediaring and Trek 2000, I sometimes wonder what the future will be like for these companies. They are in an intense industry which is changing every 6 months, and which sees prices being slashed by 70-80% due to shorter and shorter product life cycles. It is with a heavy heart and a tinge of regret that I bring you this analytical review:-
Income Statement
The income statement for 1H 2006 is apparently “misleading”, as a bulk of revenues came from “non-recurring infrastructure sales and sales from discontinued operations”. Notwithstanding this fact, recurring revenues only rose a miserable 20% in spite of the fact that they inked about 20+ contracts since Jan 2007 (announced on SGXNet almost on a regular basis by now). The problem here is that purchases also grew as they had to set up a datacenter and to extend higher sales-led connections (whatever that means). A lot of the cost of goods is not adequately explained to my satisfaction and this irks me to some extent. If a company has low margins (or in this case, a net loss margin) I would really appreciate it if Management could dissect the numbers and focus more on how to cut costs. This, incidentally, was not done in their commentary of significant trends on pages 9 and 10 of the financial statements.
If one takes into account the jump in staff costs (presumably to boost their sales and marketing workforce in order to clinch the aforementioned contracts) as well as the jump in depreciation expenses due to the setting up on an additional datacenter, you can clearly see why there is no profit from operations. Forget about Management’s excessive (yes, excessive !) focus on EBITDA; the truth is that depreciation is an expense like any other (except that it has no cash basis) and will still affect a company’s bottom line. Saying that they are EBITDA profitable is tantamount to calling a cat “a dog which meows”. This to me stinks of trying to avoid the problems of turning around the business (meaning Management is not being candid).
As can be glaringly seen, finance costs (namely, interest on convertible bonds) was up a whopping 631% to EUR 1.08 million. Looking to Page 2 of the press release, it mentions that GV has signed EUR 11.2 million of new contracts in the first 6 months of FY 2007. A simple computation will tell you that finance costs alone are 10% of new contracted revenues ! This is an extremely high figure compared to other companies where interest costs are typically less than 5% of the revenue figure (for Pacific Andes, this figure is 3.8% of their revenues). Cash flows are also an issue when interest costs are so high, yet revenue cannot keep pace with it.
Balance Sheet
Looking at the Balance sheet does give me the chills. As an accounting-trained guy, I cannot help but wonder how the company’s balance sheet had deteriorated to this extent. Firstly, have a quick look at the current ratio. Their total current assets are EUR 6.715 million while total current liabilities total EUR 9.32 million ! So GV are in negative working capital and their current ratio is a dismal 0.72 (for 1H 2006 the current ratio was marginally better at 0.87). Technically, this means that GV is insolvent as all their current assets are insufficient to service their current liabilities. This is one big danger signal for any company, but more so for GV as I mentioned it has high interest and staff costs.
Interest bearing borrowings are 26.6% of total equity, and about 446% of current assets. Looking at GV’s paltry cash balance of EUR 760K as at June 30, 2007; it seems glaringly obvious that this borrowing would not be paid down anytime soon. In fact, I am seriously concerned about GV’s ability to continue to service the loan interest, assuming their cash flows remain weak (see next section on cash flow statement).Altogether, a very weak balance sheet which may not be able to hold up in future accounting periods.
Cash Flow Statement
The cash flow statement, in all honesty, does not look compellingly attractive either. Take a look at the net cash from operating cash flows and one can see that there is a net outflow of EUR 4.785 million; which implies that they are not generating enough cash to cover their basic operations. This is opposed to EUR 942K of cash inflows for June 30, 2006. The main culprit appears to be the decrease in payables and the increase in receivables, which has provided the “squeeze” for GV. Their cash conversion cycle must be seriously examined as the numbers show that they may be paying off their creditors much faster than they are collecting from debtors, which leads to the problem mentioned above.
Cash flows from investing activities continues to be negative as GV has invested EUR 2.2 million to purchase the datacenter and related equipment. As can be seen under their cash flows from financing activities, the interest paid more than wipes out any cash inflows from further borrowings. It would imply that GV can only seem to raise enough cash through borrowings, which increases their gearing and interest costs. An extremely worrying trend is for any company to rely too much on financing activities to generate cash inflows instead of letting the operations side generate the required cash flow. Contrast this with Boustead’s cash flow statement which showed a healthy operating cash flow which more than covered any interest payments from loans.
Prospects and Outlook
From these numbers alone, warning bells are already sounding. Many people on various forums trumpet their “unwavering support” for GV in hopes of a turnaround and an improvement in its fortunes. For me, I rely objectively on the numbers and all three financial documents present numbers which do not look favourable at all ! I made the mistake of deluding myself back in Feb 2007 that things still looked rosy and the company could improve its earnings through a gain in revenues. Apparently, not only has that not come to pass, but it seems that the company is now technically insolvent and has a major problem managing their cash flows effectively. Management is also not candid as it focuses too much on how to grow their market share and gives a lengthy and often unnecessary description of the changes in the industry and how it will benefit the company. My take is: clean up your own act first (i.e. turnaround) before analyzing the industry and prospects for your company. It’s like trying to run when you have a gaping wound in your leg: all the while it is bleeding but you only think about next week’s races and how many more competitions are coming up instead of focusing on bandaging the wound.
In view of the above analysis and objective number-crunching, I do not see any real reason for being “loyal” to this investment. Loyalty without reason amounts to stupidity in my opinion, especially when faced with such numbers. The fundamentals have deteriorated significantly and I can no longer justify to myself why I should be optimistic or hopeful. Even if (and this is a big IF) GV manages to turn around in future, it will be a huge opportunity cost for me as my money is locked up in this investment without dividends, interest or capital gains.
Thus, I will proceed to divest this investment and re-deploy the proceeds into other worthwhile companies. To the reader, it is up to you (as an intelligent investor) to make your own conclusions and use independent thinking to sort out the facts. I wish all remaining Global Voice shareholders good luck in their investment.
Note: Since I am in no hurry to realize more cash (as I already have a cash stash ready for deployment during this market correction), I will wait for a better price to divest GV as Mr. Market is being excessively manic-depressive right now. Let's wait for one of those days when he is irrationally exuberant, then I can quietly sell him my stake in this company.
Thursday, August 09, 2007
Ezra – Milestone Contract for Pipelay Barge
On August 7, 2007, Ezra announced that they had secured a contract to provide services for a national oil company as part of a US$888 million sub-sea installation project. The vessel in question is Lewek Champion, which is under the care of Emas Construction and Production Pte Ltd (a 100%-owned subsidiary of EOC Ltd of which Ezra has an 88% stake). Lewek Champion is Ezra’s first heavy-lift, accommodation and pipelay barge and was only recently delivered (late FY 2007). Recall that Lewek Champion was also chartered out to ConocoPhillips for 1H FY 2008 in an announcement dated June 11, 2007. For ConocoPhillips, the vessel will be deployed in the Timor Gap where it will be used for accommodation support and de-commissioning work in the planned shutdown of the Bayu Undan platform.
From these two announcements, there appears to be some “overlap”. How can Lewek Champion be chartered to ConocoPhillips and the national oil major at the same time ? The press releases do not provide a timeline for the usage of the vessels and there was also no contract value specified (note that the US$888 million refers to the entire sub-sea project, not Ezra’s portion which only includes the provision of services). The best scenario I can come up with is that the Lewek Champion would be deployed to ConocoPhillips in 1H FY 2008, after which it will be used for the sub-sea project from the remainder of FY 2008 till FY 2010. This will ensure a constant revenue stream for the vessel and if charter rates increase, there may also be a clause in the contract for variable rate adjustments, which was why Mr. Lionel Lee mentioned that he wished to take advantage of the buoyant conditions in the oil and gas industry.
Even though the contract values were not specified (which makes it difficult to estimate the earnings stream from Ezra), the good news is that the vessel will be on charter for at least 3 financial years up till FY 2010. This will ensure a steady and constant stream of revenue even as Ezra decides to scale up its business by expanding their fleet further. Also recall that Mr. Lionel Lee had boldly gave a guidance of snaring one FPSO deal every 18 months. Thus far, the previous FPSO deal was sealed back in October 2006, so this means they are confident of securing another by March 2008 (about 7 months away from now). I am not sure if the company may be over-stretching themselves as they may not have the financial muscle (funds) of the larger players (such as Tidewater and Solstad) to bid aggressively for more FPSO projects. The cost of managing an FPSO is very high even though the charter rates are strong and one charter can last for seven financial years; thus the initial outlay for Ezra will also be a drain on cash flows.
Managing cash is an important aspect of any business, but for Ezra’s case it is particularly important as their vessels are very capital intensive and require a lot of upfront funding before they can be constructed and deployed on charter contracts. Ezra’s use of financing schemes such as sale-and-leaseback have managed to enable them to keep their balance sheet light and ensured that they have cash inflows to fund further expansion. This strategy is sound in the short-term but becomes riskier in the medium-term as Ezra would need to depend on a steady stream of chartering cash inflows in order to sustain their operational leases for the sale-and-leaseback vessels. Fortunately, I was told that Ezra will only embark on a vessel order if it has a firm order from a customer for the use of that vessel. For FY 2009, they have already ordered two 30,000 bhp AHTS and another pipe-lay barge; and the understanding is that they are already able to find customers willing to charter these vessels. The future is unclear at this point as Ezra has not made any indication of ordering more vessels, but more will probably be revealed when they announce their FY 2007 results in late October 2007. Kim Eng’s latest report on Ezra dated August 8, 2007 has forecast a full-year net profit of S$75.1 million while DBSV is more conservative with an estimate of S$71.1 million net profit after tax.
Update: Ezra has obtained in principle approval for the listing and quotation of the bonus shares from SGX. This means that they can go ahead and convene an EGM to seek approval for the bonus issue and the proposed sale of EOC shares.
Global Voice – Comments and Update before their 1H 2007 results release
Thus far, Global Voice (GV) has been announcing contracts on a regular basis every week or so. There have been 19 contracts announced with various companies (some purportedly large and some smaller ones) for FY 2007 (up till today), which boils down to about an average of 2.5 contracts per month. There is, of course, no mention of contract value or duration as this is not allowed in the IT industry and would be tantamount to a breach of client confidentiality. As a result, it is very difficult to estimate revenues and to project revenue growth because each announced contract may only be of a low value or of a short duration.By referring back to the FY 2006 results announcement, notice that under Note 15 on Page 19, the breakdown of sales is provided as about EUR 11 million (after removing the item sales of fixed assets which is a one-off non-recurring item). Essentially, there was almost no growth at all from FY 2005 to FY 2006 as FY 2005 already registered recurring sales of about EUR 11 million (remove the EUR 5.6 million of sales of fixed assets). Some may argue that GV has scaled up their operations a lot more in FY 2007, re-branded themselves as EUNetworks and also hired more sales and marketing staff to aggressively bid for projects.
All this is well and good, of course. However, it still does not guarantee that GV can turn-around. Here are several danger areas which may play itself out in the coming weeks:-
a) Revenues may not have increased sufficiently to offset increased expenses relating to GV’s aggressive push for market share. Recall that GV said that only 2% of their fibre network was being utilized as at FY 2006, which implies that 98% was still available for “leasing” to customers. However, the costs involved in marketing and selling their fibre may outweigh any potential benefit from it. I expect GV to have increased marketing costs (for its EUNetwork launch as well as sponsor of several network events including Capacity 2007), increased staff costs (to boost their sales team) and increased administrative costs (as a result of the expansion of their sales team, a requisite backup team is necessary to provide support). Finance costs will also remain high because of the interest due on their convertible bonds in April 2007.
b) Cash flows may also be an issue for GV because of their requirement to pay interest cost upfront, while slowly collecting fibre leasing revenue from their customers. In FY 2006 financials, there was an operating cash outflow of EUR 5.5 million and also a net investing cash outflow of EUR 25.8 million for purchase of fixed assets. Most of their cash inflows came from borrowings (about EUR 34.2 million) and thus they are highly geared. The FY 2006 ending cash balance of EUR 8.3 million is not impressive and for the 1H 2007 results, the cash flow statement should be carefully scrutinized to see where the cash has been spent.
c) Demand might be an issue for GV as they are, after all, in the technology industry where services and products can go obsolete faster than one would expect. GV always touts that their private fibre networks are unique in that they have millions of miles of fibre for use all over Europe which can link datacenters together and reduce data redundancy. It remains to be seen how many corporations actually require GV’s services as they provide pan-Europe connections which some companies may either not require or cannot afford.
d) Management has been known to talk about the share price by saying that it is under-valued and that they would support it if necessary. I usually frown upon Management which likes to talk about the share price as this means they are more concerned about the market price than on running the business. I do not know if their remuneration or bonuses are in any way tied to the share price and am not insinuating anything; but take note that an excessive focus on share price is not healthy (the Management of the other companies I own do NOT talk about share price, they just focus on the business)
Even though the frequent announcements of contract wins has ignited hope for GV to turn-around this year, much still remains uncertain. Even if they were to show a marginal profit for 1H 2007, I may still consider divesting as I am not comfortable with the lack of clarity for their earnings, the uncertain demand for their services and their high gearing.
Wishing all Singaporeans a Happy National Day !
On August 7, 2007, Ezra announced that they had secured a contract to provide services for a national oil company as part of a US$888 million sub-sea installation project. The vessel in question is Lewek Champion, which is under the care of Emas Construction and Production Pte Ltd (a 100%-owned subsidiary of EOC Ltd of which Ezra has an 88% stake). Lewek Champion is Ezra’s first heavy-lift, accommodation and pipelay barge and was only recently delivered (late FY 2007). Recall that Lewek Champion was also chartered out to ConocoPhillips for 1H FY 2008 in an announcement dated June 11, 2007. For ConocoPhillips, the vessel will be deployed in the Timor Gap where it will be used for accommodation support and de-commissioning work in the planned shutdown of the Bayu Undan platform.
From these two announcements, there appears to be some “overlap”. How can Lewek Champion be chartered to ConocoPhillips and the national oil major at the same time ? The press releases do not provide a timeline for the usage of the vessels and there was also no contract value specified (note that the US$888 million refers to the entire sub-sea project, not Ezra’s portion which only includes the provision of services). The best scenario I can come up with is that the Lewek Champion would be deployed to ConocoPhillips in 1H FY 2008, after which it will be used for the sub-sea project from the remainder of FY 2008 till FY 2010. This will ensure a constant revenue stream for the vessel and if charter rates increase, there may also be a clause in the contract for variable rate adjustments, which was why Mr. Lionel Lee mentioned that he wished to take advantage of the buoyant conditions in the oil and gas industry.
Even though the contract values were not specified (which makes it difficult to estimate the earnings stream from Ezra), the good news is that the vessel will be on charter for at least 3 financial years up till FY 2010. This will ensure a steady and constant stream of revenue even as Ezra decides to scale up its business by expanding their fleet further. Also recall that Mr. Lionel Lee had boldly gave a guidance of snaring one FPSO deal every 18 months. Thus far, the previous FPSO deal was sealed back in October 2006, so this means they are confident of securing another by March 2008 (about 7 months away from now). I am not sure if the company may be over-stretching themselves as they may not have the financial muscle (funds) of the larger players (such as Tidewater and Solstad) to bid aggressively for more FPSO projects. The cost of managing an FPSO is very high even though the charter rates are strong and one charter can last for seven financial years; thus the initial outlay for Ezra will also be a drain on cash flows.
Managing cash is an important aspect of any business, but for Ezra’s case it is particularly important as their vessels are very capital intensive and require a lot of upfront funding before they can be constructed and deployed on charter contracts. Ezra’s use of financing schemes such as sale-and-leaseback have managed to enable them to keep their balance sheet light and ensured that they have cash inflows to fund further expansion. This strategy is sound in the short-term but becomes riskier in the medium-term as Ezra would need to depend on a steady stream of chartering cash inflows in order to sustain their operational leases for the sale-and-leaseback vessels. Fortunately, I was told that Ezra will only embark on a vessel order if it has a firm order from a customer for the use of that vessel. For FY 2009, they have already ordered two 30,000 bhp AHTS and another pipe-lay barge; and the understanding is that they are already able to find customers willing to charter these vessels. The future is unclear at this point as Ezra has not made any indication of ordering more vessels, but more will probably be revealed when they announce their FY 2007 results in late October 2007. Kim Eng’s latest report on Ezra dated August 8, 2007 has forecast a full-year net profit of S$75.1 million while DBSV is more conservative with an estimate of S$71.1 million net profit after tax.
Update: Ezra has obtained in principle approval for the listing and quotation of the bonus shares from SGX. This means that they can go ahead and convene an EGM to seek approval for the bonus issue and the proposed sale of EOC shares.
Global Voice – Comments and Update before their 1H 2007 results release
Thus far, Global Voice (GV) has been announcing contracts on a regular basis every week or so. There have been 19 contracts announced with various companies (some purportedly large and some smaller ones) for FY 2007 (up till today), which boils down to about an average of 2.5 contracts per month. There is, of course, no mention of contract value or duration as this is not allowed in the IT industry and would be tantamount to a breach of client confidentiality. As a result, it is very difficult to estimate revenues and to project revenue growth because each announced contract may only be of a low value or of a short duration.By referring back to the FY 2006 results announcement, notice that under Note 15 on Page 19, the breakdown of sales is provided as about EUR 11 million (after removing the item sales of fixed assets which is a one-off non-recurring item). Essentially, there was almost no growth at all from FY 2005 to FY 2006 as FY 2005 already registered recurring sales of about EUR 11 million (remove the EUR 5.6 million of sales of fixed assets). Some may argue that GV has scaled up their operations a lot more in FY 2007, re-branded themselves as EUNetworks and also hired more sales and marketing staff to aggressively bid for projects.
All this is well and good, of course. However, it still does not guarantee that GV can turn-around. Here are several danger areas which may play itself out in the coming weeks:-
a) Revenues may not have increased sufficiently to offset increased expenses relating to GV’s aggressive push for market share. Recall that GV said that only 2% of their fibre network was being utilized as at FY 2006, which implies that 98% was still available for “leasing” to customers. However, the costs involved in marketing and selling their fibre may outweigh any potential benefit from it. I expect GV to have increased marketing costs (for its EUNetwork launch as well as sponsor of several network events including Capacity 2007), increased staff costs (to boost their sales team) and increased administrative costs (as a result of the expansion of their sales team, a requisite backup team is necessary to provide support). Finance costs will also remain high because of the interest due on their convertible bonds in April 2007.
b) Cash flows may also be an issue for GV because of their requirement to pay interest cost upfront, while slowly collecting fibre leasing revenue from their customers. In FY 2006 financials, there was an operating cash outflow of EUR 5.5 million and also a net investing cash outflow of EUR 25.8 million for purchase of fixed assets. Most of their cash inflows came from borrowings (about EUR 34.2 million) and thus they are highly geared. The FY 2006 ending cash balance of EUR 8.3 million is not impressive and for the 1H 2007 results, the cash flow statement should be carefully scrutinized to see where the cash has been spent.
c) Demand might be an issue for GV as they are, after all, in the technology industry where services and products can go obsolete faster than one would expect. GV always touts that their private fibre networks are unique in that they have millions of miles of fibre for use all over Europe which can link datacenters together and reduce data redundancy. It remains to be seen how many corporations actually require GV’s services as they provide pan-Europe connections which some companies may either not require or cannot afford.
d) Management has been known to talk about the share price by saying that it is under-valued and that they would support it if necessary. I usually frown upon Management which likes to talk about the share price as this means they are more concerned about the market price than on running the business. I do not know if their remuneration or bonuses are in any way tied to the share price and am not insinuating anything; but take note that an excessive focus on share price is not healthy (the Management of the other companies I own do NOT talk about share price, they just focus on the business)
Even though the frequent announcements of contract wins has ignited hope for GV to turn-around this year, much still remains uncertain. Even if they were to show a marginal profit for 1H 2007, I may still consider divesting as I am not comfortable with the lack of clarity for their earnings, the uncertain demand for their services and their high gearing.
Wishing all Singaporeans a Happy National Day !
Tuesday, July 10, 2007
Ezra - Announcement of Charter Contracts worth US$127 Million
This evening, Ezra announced charter contracts for 10 of its vessels, worth potentially US$127 million (about S$194 million). The latest charters come at "improved rates" and shows the "continued strength in the oil and gas sector", said Mr. Lionel Lee (CEO of Ezra Holdings). One good point to note is that Lewek Stork will be the 2nd AHTS to be chartered by the same client (client name not mentioned) and it will be used in India, which is one of the markets Ezra is targeting to enter.
Ezra is chartering 8 vessels from its existing fleet consisting of 5 AHTS and 3 AHT to various oil majors in South-East Asia. It is not immediately clear if these 8 vessels were previously already on charters which have expired, or if these are new vessels which have come on board recently and are awaiting charter confirmations. The value of the charters for these 8 vessels is about US$69 million (S$106 million) and are for a period of 5 years, with extension options. This would indicate that this revenue stream will continue for at least 5 years till FY 2012. However, what is not clear is what proportion of this revenue would be recognized in FY 2007, and whether the US$69 million relates to revenues per year, or over the 5-year charter period. Perhaps it would be good to clarify this with Management should I have the chance (perhaps at the EGM).
As for the remaining 2 vessels, Ezra is negotiating charter contracts worth US$58 million on a 3-year charter contract basis. These 2 vessels are new vessels which will come on board in the early part of FY 2008 (which may mean as early as Nov-Dec 2007). I would hazard a guess that the vessels should be ready by late calender year 2007 as most charter contracts for new vessels are signed 2-3 months before the vessel is delivered (as per Management's assertion).
For now, it is not possible to quantify the impact of these new charter contracts as the duration and revenue recognition breakdown was not stated. In addition, the recent award of the contract with ConocoPhillips also did not state the contract amount and duration due to confidentiality reasons. This makes valuing the company all the harder, what with the impending vendor share sale of 42% of EOC Limited as well. What's important is that the company is growing its vessel fleet and can sustain or even improve its revenue stream due to buoyant market conditions. Gross and net margins have to be assessed in their FY 2007 results release to ensure they remain competitive.
Global Voice - Deploys PrivaNex for AIXIT
Global Voice today announced another contract (a 5-year one this time) to deploy a dully redundant private fibre network for Aixit. Readers can download the full announcement from http://www.globalvoice.com to read the details, including the technical details of the deployment.
I must admit I am becoming increasingly uncomfortable about GV's business model and ability to generate good cash flows and increased earnings. This comes after Mediaring (the first profitable VoIP company) announced a half-year operating loss due to intense competition and eroding gross profit margins. Although GV is in a different business altogether and they are operating different types of assets, nevertheless, they are in the same industry (IT-related) and it worries me that Mediaring, being a market leader, has also succumbed to competitive forces. Recall from my previous post on Porter's 5-Forces that in the IT industry, threat of substitutes is very high as users are now switching to Skype (which is free) instead of using paid VoIP.
GV needs to demonstrate that it can retain and capitalize on its "Private Fibre Networks" as a unique competitive advantage and value proposition which is difficult to replicate, substitute or replace. The risks are definitely there, as mentioned by several well-informed forum members, that another new technology may replace GV's offering in time to come. If this happens, the worst case scenario will be a total erosion of business for GV as their customers (or potential customers) switch over to the new technology. I remain hopeful that GV can maintain its competitive edge, but will watch the industry for danger signs.
This evening, Ezra announced charter contracts for 10 of its vessels, worth potentially US$127 million (about S$194 million). The latest charters come at "improved rates" and shows the "continued strength in the oil and gas sector", said Mr. Lionel Lee (CEO of Ezra Holdings). One good point to note is that Lewek Stork will be the 2nd AHTS to be chartered by the same client (client name not mentioned) and it will be used in India, which is one of the markets Ezra is targeting to enter.
Ezra is chartering 8 vessels from its existing fleet consisting of 5 AHTS and 3 AHT to various oil majors in South-East Asia. It is not immediately clear if these 8 vessels were previously already on charters which have expired, or if these are new vessels which have come on board recently and are awaiting charter confirmations. The value of the charters for these 8 vessels is about US$69 million (S$106 million) and are for a period of 5 years, with extension options. This would indicate that this revenue stream will continue for at least 5 years till FY 2012. However, what is not clear is what proportion of this revenue would be recognized in FY 2007, and whether the US$69 million relates to revenues per year, or over the 5-year charter period. Perhaps it would be good to clarify this with Management should I have the chance (perhaps at the EGM).
As for the remaining 2 vessels, Ezra is negotiating charter contracts worth US$58 million on a 3-year charter contract basis. These 2 vessels are new vessels which will come on board in the early part of FY 2008 (which may mean as early as Nov-Dec 2007). I would hazard a guess that the vessels should be ready by late calender year 2007 as most charter contracts for new vessels are signed 2-3 months before the vessel is delivered (as per Management's assertion).
For now, it is not possible to quantify the impact of these new charter contracts as the duration and revenue recognition breakdown was not stated. In addition, the recent award of the contract with ConocoPhillips also did not state the contract amount and duration due to confidentiality reasons. This makes valuing the company all the harder, what with the impending vendor share sale of 42% of EOC Limited as well. What's important is that the company is growing its vessel fleet and can sustain or even improve its revenue stream due to buoyant market conditions. Gross and net margins have to be assessed in their FY 2007 results release to ensure they remain competitive.
Global Voice - Deploys PrivaNex for AIXIT
Global Voice today announced another contract (a 5-year one this time) to deploy a dully redundant private fibre network for Aixit. Readers can download the full announcement from http://www.globalvoice.com to read the details, including the technical details of the deployment.
I must admit I am becoming increasingly uncomfortable about GV's business model and ability to generate good cash flows and increased earnings. This comes after Mediaring (the first profitable VoIP company) announced a half-year operating loss due to intense competition and eroding gross profit margins. Although GV is in a different business altogether and they are operating different types of assets, nevertheless, they are in the same industry (IT-related) and it worries me that Mediaring, being a market leader, has also succumbed to competitive forces. Recall from my previous post on Porter's 5-Forces that in the IT industry, threat of substitutes is very high as users are now switching to Skype (which is free) instead of using paid VoIP.
GV needs to demonstrate that it can retain and capitalize on its "Private Fibre Networks" as a unique competitive advantage and value proposition which is difficult to replicate, substitute or replace. The risks are definitely there, as mentioned by several well-informed forum members, that another new technology may replace GV's offering in time to come. If this happens, the worst case scenario will be a total erosion of business for GV as their customers (or potential customers) switch over to the new technology. I remain hopeful that GV can maintain its competitive edge, but will watch the industry for danger signs.
Thursday, June 28, 2007
Global Voice – Launch of Euro-One Network Collaboration
Global Voice announced on June 27, 2007 that it has launched the Euro-One Network. This is a metropolitan fibre network which connects Europe’s leading fibre optic network providers to deliver infrastructure and next generation networking solutions which span countries in Eastern, Western and Central Europe and North America.
The announcement and details can be found on GV’s website located at http://www.globalvoice.com. They are collaborating with e!Net, Exatel, FIBRELAC, Geo, Hybernia Atlantic, JazzTel, Neo Telecoms, Net4Net and Retalit. Each of these companies represent a specific country or region (details within announcement) and are working together to connect fibre cables up to 85,000 km spanning over 350 different cities in Europe and North America. The benefits of this collaboration are immense as it means that EuNetworks (GV) is not limited to serving customers just in Europe alone (bound by its own fibre optic network), but can also partner with the above companies to offer “bundled” solutions to customers. The implications are as follows:-
1) GV is the initiator of this collaboration between the companies and the entire seamless linking up was a success. This would definitely increase the visibility and profile of GV as this important piece of news will be widely reported in newspapers and network publications all over Europe as well as North America. This would propel GV into the spotlight and allow it to market its solutions more effectively.
2) In terms of branding, GV has imprinted its brand name in over 350 cities as it was the initiator of the Euro One Project and the CEO has also commented on the immense value of this news 85,000 km network. This would allow them to further increase their brand equity which is an intangible asset but which will allow them to grab more contracts in future.
3) With this seamless connection, GV can also partner affiliated companies in offering more customized solutions to potential customers. With an expanded network, more customers will be receptive to using the services of Euro One as its connectivity spans 350 cities almost across half the globe.
4) The size of contracts would probably get larger and span a longer period of time as well due to the new customer mix which GV can reach out to, assuming it collaborates with its partners to offer fibre network solutions to its customers. Since the network now covers more cities than GV’s own private fibre networks, this means customers which were previously not within their radar would become potential customers to target. This could significantly scale up GV’s business in the next few years.
5) This is just a guess, but with the increased network connections over Europe and North America, GV could perhaps offer solutions which were previously not available due to the constraints of their own private fibre networks. This would mean that they can expand their scope of services offered and possibly create a new revenue stream.
The above are just some thoughts regarding the launch of Euro One and we must still wait for confirmation from the company itself on whether it can continue to offer good value to customers, and generate good returns for shareholders. At this point in time, it’s easy to get excited over GV as they have been announcing consistent contract wins. What’s uncertain is their cash flow management and ability to return to profitability. I would rather take a more neutral and cautious stance now and adopt a wait-and-see attitude first. There will be more reviews and updates on Global Voice as more news comes up in future.
Global Voice announced on June 27, 2007 that it has launched the Euro-One Network. This is a metropolitan fibre network which connects Europe’s leading fibre optic network providers to deliver infrastructure and next generation networking solutions which span countries in Eastern, Western and Central Europe and North America.
The announcement and details can be found on GV’s website located at http://www.globalvoice.com. They are collaborating with e!Net, Exatel, FIBRELAC, Geo, Hybernia Atlantic, JazzTel, Neo Telecoms, Net4Net and Retalit. Each of these companies represent a specific country or region (details within announcement) and are working together to connect fibre cables up to 85,000 km spanning over 350 different cities in Europe and North America. The benefits of this collaboration are immense as it means that EuNetworks (GV) is not limited to serving customers just in Europe alone (bound by its own fibre optic network), but can also partner with the above companies to offer “bundled” solutions to customers. The implications are as follows:-
1) GV is the initiator of this collaboration between the companies and the entire seamless linking up was a success. This would definitely increase the visibility and profile of GV as this important piece of news will be widely reported in newspapers and network publications all over Europe as well as North America. This would propel GV into the spotlight and allow it to market its solutions more effectively.
2) In terms of branding, GV has imprinted its brand name in over 350 cities as it was the initiator of the Euro One Project and the CEO has also commented on the immense value of this news 85,000 km network. This would allow them to further increase their brand equity which is an intangible asset but which will allow them to grab more contracts in future.
3) With this seamless connection, GV can also partner affiliated companies in offering more customized solutions to potential customers. With an expanded network, more customers will be receptive to using the services of Euro One as its connectivity spans 350 cities almost across half the globe.
4) The size of contracts would probably get larger and span a longer period of time as well due to the new customer mix which GV can reach out to, assuming it collaborates with its partners to offer fibre network solutions to its customers. Since the network now covers more cities than GV’s own private fibre networks, this means customers which were previously not within their radar would become potential customers to target. This could significantly scale up GV’s business in the next few years.
5) This is just a guess, but with the increased network connections over Europe and North America, GV could perhaps offer solutions which were previously not available due to the constraints of their own private fibre networks. This would mean that they can expand their scope of services offered and possibly create a new revenue stream.
The above are just some thoughts regarding the launch of Euro One and we must still wait for confirmation from the company itself on whether it can continue to offer good value to customers, and generate good returns for shareholders. At this point in time, it’s easy to get excited over GV as they have been announcing consistent contract wins. What’s uncertain is their cash flow management and ability to return to profitability. I would rather take a more neutral and cautious stance now and adopt a wait-and-see attitude first. There will be more reviews and updates on Global Voice as more news comes up in future.
Tuesday, June 19, 2007
The difficulty in valuing Global Voice
Global Voice is a technology company which is extremely difficult to value, in terms of intrinsic value. It rose from the ashes of Horizon through a reverse take-over, and has only recently sold off its unprofitable legacy businesses in order to focus on its core competency: Private Fibre Networks. Because it was loss-making for FY 2006, PER isn't an appropriate measure. In addition, the following factors about GV make it all the harder to value:-
1) Contract values are not stated in their announcements of deals signed due to confidentiality requirements. Apparently, this is common within the IT industry where other competitors may use such information to benchmark their pricing. Thus, most press releases only contain details of the customer and the services being provided, as well as a short commentary by the CEO or another executive.
2) Gross margins and net margins are not known for each contract. For that matter, we don't even know the number of staff to be deployed for each customer and how costs are shared. Also, there is the matter of "purchases" in the Profit and Loss (for FY 2006). Just what does this relate to ? Technically, GV has all the assets it needs, it just needs to deploy them and allocate manpower. Thus, I can understand staff costs and contracting costs, but what constitutes "purchases" ?
3) Contract durations are only occasionally mentioned, also probably because of confidentiality requirements. Without an inkling of how long a contract lasts, it will be impossible to determine the recurrence of revenue for a particular contract/customer. A helpful point here is that GV did mention most contracts are of the 3-5 year duration type, thus we can safely conclude that most of the contracts captured and announced in late FY 2006 and FY 2007 will be recurrent in nature.
4) The re-branding of GV a.k.a EuNetworks has led to a significant increase in sales force as well as marketing personnel. The exact payroll cost increase is difficult to ascertain as some of the sales staff may be on fixed wages, while others may be incentivized through commissions. Furthermore, part of the costs may include outsourced personnel to handle the data storage solutions which GV is implementing.
5) Since late FY 2006 and for FY 2007, GV has embarked on promotional activities to raise its profile and also incurred A&P for its extensive re-branding exercise. It is difficult to estimate the extent of A&P expenses incurred so far as most of these are held in countries such as Holland and Germany of which most locals are unfamiliar with. Also, GV has sponsored several events in order to speak about the company's capabilities, and thus necessarily incurs costs which may or may not result in greater brand awareness and subsequent contract wins.
6) Cash flows are uncertain as well. In order to estimate intrinsic value, some value investors employ DCF methods which estimate a stream of cash inflows and outflows to the present. The only certain cash outflow is the interest expense of the convertible bonds of EUR 40 million. The coupon rate is 3% paid semi-annually which means an interest expense of about EUR 0.6 million every half-yearly (19 April and 19 October). Most of the deals mentioned are silent over the cash flow stream, meaning that the reader will not know the mode of payment arrangement between GV and the customer. This fuels further uncertainty.
The above factors serve to highlight the difficulty in assigning an intrinsic value to GV. Currently, the market price is hovering between 19 and 20 cents and this is the only indication of the "value" of GV, though I have alwqays reiterated that price seldom equals value. For those who are astutely wondering why the price is stagnant even though so many deals have been announced, the above 6 reasons should serve as a good guide.
Simply put, the market simpy DOES NOT KNOW what to expect from GV, and how to value such a company as there is no close equivalent of GV within the SGX. I have not done any research to find out if there are similar companies listed in Europe which can be used to benchmark against GV, but the uniqueness of their business model should be taken into account as well. Thus, there may not be any close comparables at all. Contributions are welcome if they are pertinent (just type it into the "comments" column, I will always read and reply).
The best thing to do now will be to wait for the HY 2007 results to be released in late August 2007. This will give an idea of GV's revenue growth as well as profit margins (assuming they are profitable). Hopefully too, the CEO and Chairman can shed more light on the uncertainties which I had highlighted and give some guidance on the future of the company in the next 3 years or so.
Global Voice is a technology company which is extremely difficult to value, in terms of intrinsic value. It rose from the ashes of Horizon through a reverse take-over, and has only recently sold off its unprofitable legacy businesses in order to focus on its core competency: Private Fibre Networks. Because it was loss-making for FY 2006, PER isn't an appropriate measure. In addition, the following factors about GV make it all the harder to value:-
1) Contract values are not stated in their announcements of deals signed due to confidentiality requirements. Apparently, this is common within the IT industry where other competitors may use such information to benchmark their pricing. Thus, most press releases only contain details of the customer and the services being provided, as well as a short commentary by the CEO or another executive.
2) Gross margins and net margins are not known for each contract. For that matter, we don't even know the number of staff to be deployed for each customer and how costs are shared. Also, there is the matter of "purchases" in the Profit and Loss (for FY 2006). Just what does this relate to ? Technically, GV has all the assets it needs, it just needs to deploy them and allocate manpower. Thus, I can understand staff costs and contracting costs, but what constitutes "purchases" ?
3) Contract durations are only occasionally mentioned, also probably because of confidentiality requirements. Without an inkling of how long a contract lasts, it will be impossible to determine the recurrence of revenue for a particular contract/customer. A helpful point here is that GV did mention most contracts are of the 3-5 year duration type, thus we can safely conclude that most of the contracts captured and announced in late FY 2006 and FY 2007 will be recurrent in nature.
4) The re-branding of GV a.k.a EuNetworks has led to a significant increase in sales force as well as marketing personnel. The exact payroll cost increase is difficult to ascertain as some of the sales staff may be on fixed wages, while others may be incentivized through commissions. Furthermore, part of the costs may include outsourced personnel to handle the data storage solutions which GV is implementing.
5) Since late FY 2006 and for FY 2007, GV has embarked on promotional activities to raise its profile and also incurred A&P for its extensive re-branding exercise. It is difficult to estimate the extent of A&P expenses incurred so far as most of these are held in countries such as Holland and Germany of which most locals are unfamiliar with. Also, GV has sponsored several events in order to speak about the company's capabilities, and thus necessarily incurs costs which may or may not result in greater brand awareness and subsequent contract wins.
6) Cash flows are uncertain as well. In order to estimate intrinsic value, some value investors employ DCF methods which estimate a stream of cash inflows and outflows to the present. The only certain cash outflow is the interest expense of the convertible bonds of EUR 40 million. The coupon rate is 3% paid semi-annually which means an interest expense of about EUR 0.6 million every half-yearly (19 April and 19 October). Most of the deals mentioned are silent over the cash flow stream, meaning that the reader will not know the mode of payment arrangement between GV and the customer. This fuels further uncertainty.
The above factors serve to highlight the difficulty in assigning an intrinsic value to GV. Currently, the market price is hovering between 19 and 20 cents and this is the only indication of the "value" of GV, though I have alwqays reiterated that price seldom equals value. For those who are astutely wondering why the price is stagnant even though so many deals have been announced, the above 6 reasons should serve as a good guide.
Simply put, the market simpy DOES NOT KNOW what to expect from GV, and how to value such a company as there is no close equivalent of GV within the SGX. I have not done any research to find out if there are similar companies listed in Europe which can be used to benchmark against GV, but the uniqueness of their business model should be taken into account as well. Thus, there may not be any close comparables at all. Contributions are welcome if they are pertinent (just type it into the "comments" column, I will always read and reply).
The best thing to do now will be to wait for the HY 2007 results to be released in late August 2007. This will give an idea of GV's revenue growth as well as profit margins (assuming they are profitable). Hopefully too, the CEO and Chairman can shed more light on the uncertainties which I had highlighted and give some guidance on the future of the company in the next 3 years or so.
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