Share Price: £0.10125 (down 4.7%)
Market Capitalisation: £4.6m.
Shareholders in Grafenia (formerly Printing.com) has seen their share price collapsed by 70% in five years, due to their outdated business model.
Their current market capitalisation is £4.6m. It once peaked in 2006 with a value of £30m. Now, onto their results.
Today, the company got bigger as sales grew 31% to £6.74m (2016: £5.14m). Most of the increase is down to acquiring Image Everything and ADD.
But, net loss increased to £390k from £255k (loss).
Onto the balance sheet: – Due to Grafenia recent acquisitions, intangible assets increased by £2m to £4.7m. These acquisitions were partly or mostly funded by debt, as it rose from £0.3m to £3.35m.
Onto their Cash Flow: – It seems the company made some progress in growing net cash profit to £655k from £300k. Though, this is down to changes in working capital. Ignoring working capital, Grafenia saw a slight decrease to £427k from £471k.
Capex is obviously higher. If we exclude acquisitions, capex would have risen to £1.32m from £0.44m.
Furthermore, Grafenia needed to do a sale and leaseback of machinery to partly finance their acquisition totalling £0.9m. And even then, it has a negative cash balance of £0.2m.
The acquisition of Image Everything is big for Grafenia, as they produced revenue (as of 31 May 2016) of £4.81m and has profit before tax of £0.43m.
Image Everything has a net asset value of £0.23m because it has no reported intangibles. Grafenia has £4.7m of intangibles helping to uplift shareholders’ equity to £4.22m.
What is interesting is: Image Everything’s 2017 accounts (“unaudited”) is expected to show revenue in excess of £5.53m (could be £6m or more) and profit before tax of £0.59m.
If this acquisition is a growing business, then it would drive growth in Grafenia leading to the prospects of a turnaround. But, first, they need to reduce borrowings before it can reward their shareholders.
If this is the beginning of a turnaround, then interested investors have time to research this in-depth to see if an opportunity present itself.
Over the years, Grafenia has seen their business rose and subsequently fell (mainly due to asset disposals). When revenue fell it’s down to the disposal of Grafenia BV for a cash consideration of 2.35m Euros. (the business was acquired back in 2010 for 2m Euros). That division produced over £6m in revenue and £0.4m in operating profit.
Chart one: Grafenia’s Turnover and Net Cash from Operations
The sale has affected the company’s net cash profit as this declined below £1m for two years in a row.
When it comes to software businesses, the employees are the brains of the operations. Thus, it is labour-intensive.
For Grafenia, they manage to tame average wages from rising “per employee.” However, their wage “component” accounts for an increasing and larger share of sales.
Here is the breakdown:
-Cost per employee is roughly £30k (apart from 2011: £26.5k), but wages have risen from 20%-25% to 35%-40% of REVENUE in the last three years.
Management interest less align with shareholders
The bar chart shows the level of directors’ pay as a % of Grafenia’s market capitalisation.
From 2012 to 2015, it averages around 6.5% of market cap but the last two years saw this average reached 11% of market cap.
I KNOW this may sound harsh, but these shareholders have suffered! Meanwhile, Grafenia’s management still draws a decent salary, despite small business size. At the very least, peg salaries to market cap., which most businesses should do (but doesn’t, can’t blame Grafenia!).
Things to Consider when looking at software businesses and Grafenia
If you are assessing software companies like Grafenia, you must consider the following: –
1). It is a labour-intensive business. So, monitoring the trend in labour costs, as a proportion to wages is important of the productiveness on the business.
2). For a subscription-based business model, you must refer to its deferred revenue. Deferred revenue is when a customer pays for a two-year subscription service. But, since the fee is spread over two years, half the fee is reported this year, the other gets reported for next year. If you see deferred revenue grow faster, then sales growth for next year is likely to increase.
3). Always look for new competitors or tech giants clamouring into these niches because they have better technology and are well known. P.S. All this requires some in-depth research.
At first glance, I think Grafenia is a business on a decline. Their low business opportunities would make it less appetizing for investors. Now, it made some interesting acquisitions that could possibly turn their business around.
I say “possibly” because we don’t know if its a good fit (think operationally and financially) yet. That will give us the time to figure out if Grafenia is a good investment at current valuation.
There’s one thing I’m 80% certain that’s reducing Grafenia borrowings because it accounts for 70% of market cap. Also, it attracts higher annual interest payments, which will hinder profitability.
Currently, they have a negative cash position and I wouldn’t rule out an equity issue to support current operations.
Grafenia Share Price is down 70%. Maybe this could be a turning point for shareholders only time will tell.
Thank You for reading. If you enjoy this post and think it’s informative, then please share it through your social media and email.
Finally, remember to subscribe to the blog.
The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.