Charles Jillings, CEO of Utilico, energized by strong economic momentum across Latin America. Watch the video here.
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BlueRaphus, thank you for your notes on the profit after tax adjustments - I will have a proper look at the 2022 accounts and raise specific questions with the board. It is encouraging that (most of ?) these are non recurring in nature. I will post again should anything further of interest result.
Hi Barcap,
I was interested in AWE and bought into the tech story about high speed computing and nanometers etc.
Thanks for your most recent post though, this is now my first and foremost reason for investing in anything!
"I see investment/trading as being built on a pyramid.
The base of the pyramid is ALWAYS... Do I TRUST the board and are they legitimate."
GLA,
Pedro
Hi BlueRaphus,
We are boh dons at this trading game I'm sure.
I see investment/trading as being built on a pyramid.
The base of the pyramid is ALWAYS... Do I TRUST the board and are they legitimate.
If that comes back as negative, then I would never buy shares in that company and maybe short it.
They can throw all the great facts and figures about technology and future growth they like but without the pyramid base then IMHO it counts for nothing.
I think it hangs in the balance whether your views or my views are the correct one.... But that is what investment is all about!
We'll know by Christmas probably.
Good Luck mate.
Barcap
You're welcome Barcap!
I appreciate you may have lots of experience trading bull and bear markets over the years and I don't doubt you may have mastered a skill in picking the right moments to buy or short on stocks.
I'm not one for identifying stocks on the basis of nasty feelings or sniffing out a bad'un, but hey, good on you if this is what has worked for you.
I 've read all your posts on AWE sometime ago now and your explanations unfortunately didn't pass my litmus tests for sound reasoning. I can however offer plenty of criticism of Alphawave. The major one being that they raised nearly a £1 billion at the IPO of which only £360 million went into the company's coffers, the other nearly £640 million going into the selling shareholders pockets. Clearly they had a set a budget they considered adequate to accomplish the long term company goals but which has proved to be well below what was needed. The fact they had to take out a debt facility to complete all their acquisitions is somewhat embarrassing considering how much they were able to raise.
In reality however, I don't think they had originally planned on buying Banias labs and the decision to do so was a change in strategy arising from the fact they identified an opportunity to capitalise on a particular sector within the connectivity space with the largest anticipated future growth trend and that's in Opto-electronics. If they have got this strategy right then they can expect to bear the fruits from this in about 3 years from now, though they will get some revenue from it starting next year. Had they not made that last acquisition, you would not have seen them reporting an operating loss yesterday. Moreover, they wouldn't have had need for a debt facility.
So the crux of the matter really is whether you believe they made the right decision in acquiring Banias Labs and whether their strategy to develop Opto-electronics based connectivity products was a gamble worth taking. To properly understand why this was worth the gamble requires a good knowledge of the trends and of what's happening in the world of data centres, high performance computing and all things AI related.
Was it a cynical ploy to call it LSE?
People may be misled into thinking it is linked to London Stock Exchange?
LSE seems to have a problem with 'less than' expressed in symbols
Thanks for the reply BlueRaphus.
A lot of useful information and very well researched.
I guess my main issue is your views look very positive but I still have a nasty feeling about this company. I've explained them a few times on here but won't bore by repeatiing.
Having traded through a lot of bull and bear markets I can sniff out a bad'un and this fits this company.
I may be wrong but we'll see.
Good luck with you AWE investments
Cheers
Barcap
Seems to happening. Increasingly their direction is trending towards high spec, high value collaborations.
Todays interim presentation : https://www.youtube.com/watch?v=07A8Bpy4iMM
Slide 11
H1 bookings ($187m) primarily in licensed IP and custom silicon, primarily in less than 7nm technology, mostly in AI infrastructure. 4 design wins in 3mn (involves 2 hyper scalers). The fact that most of the bookings are for licensed IP and custom silicon mean bookings will continue to deliver revenue for years to come.
Slide 12
Addressable market x10 since 2021. Expected to grow by 80% over next 3 years. Uniquely placed with a basket of complementary technologies
- High Speed connectivity
- Advanced Silicon (moving into 2nm)
- Chip design capability (seen as essential for advanced silicon). One of only 5 companies currently with chiplet capability.
- Opto Electronics
Slide 22
2023 guidance : Revenue $340-360m, EBITDA $87m
2025 guidance : Revenue $500m, EBITDA $150m
Other
At the forefront of UCIe seen as an enabler for chiplets, in turn seen as an enabler of shrinking dies, in turn seen as an enabler of AI, hyper scaler operations, etc. 60% (last year 20%) of pipeline is in licensed IP and custom silicon involving chiplets.
They believe their only competitor capable of providing solutions in 3mn with comparable connectivity is Marvell. Other players have point solutions.
Generally they believe that data scaling and AI will drive a requirement for custom silicon solutions. Some hyper scalers (a very few) might have the wherewithal to tackle this in house. Most will not / not have the appetite for this. AWE are uniquely positioned with solutions at the very high end to partner with. They do seem to be in the right place at the right time. There is always execution risk but I'd not be betting against them in the long term.
Seems to happening. Increasingly their direction is trending towards high spec, high value collaborations.
Todays interim presentation : https://www.youtube.com/watch?v=07A8Bpy4iMM
Slide 11
H1 bookings ($187m) primarily in licensed IP and custom silicon, primarily in
Seems to happening. Increasingly their direction is trending towards high spec, high value collaborations.
Todays interim presentation : https://www.youtube.com/watch?v=07A8Bpy4iMM
Slide 11
H1 bookings ($187m) primarily in licensed IP and custom silicon, primarily in
Monty9,
You can raise these questions directly to the company via investor relations. I am confident they will answer these for you.
However, here's my attempt:
1. The adjusted profit adds back £18M of share based payment. Does this mean it will not be repeated (perhaps distribution of LTIP to new staff)?
Note 27 on page 187/188 of the 2022 Financial Report explains what share based payments are. On page 161 there is an explanation as to why they exclude the share-based payments from the adjusted EBITDA. As far as I understand these payments are one offs as they are associated with the M&A activity.
2. What were £4M of retention payments?
I believe these are cash payments in lieu of share-based remuneration committed as part of the acquisition of Banias Labs. This is also explained on page 161 of the 2022 report.
3. Added back the amortisation of acquired intangibles of £6M. Will these not repeat during the following years?
Again, they exclude amortisation of acquired intangibles because Alphawave believe them not to be representative of the underlying operational performance of the business.
This why on another board I stated they had in fact made a pre-tax profit. It's going to get significantly better in future periods as well. The Company also have no need at this time to make further acquisitions so we shouldn't have to expect these kinds of payments in the future too often.
I hold.
I am always a little nervous of excessive focus on EBITDA in a highly acquisitive company and even more so on one that capitalises a lot of its payroll costs. I dare say they will reach their EBIT target by year end but have not feel for what the statutory pre-tax profit might be.
On page 20 of the interims is a reconciliation of profit after tax to "adjusted" profit after tax.
1. The adjusted profit adds back £18M of share based payment. Does this mean it will not be repeated (perhaps distribution of LTIP to new staff)?
2. What were £4M of retention payments?
3. Added back the amortisation of acquired intangibles of £6M. Will these not repeat during the following years?
If the adjusted profit really does describe the underlying profit, the after tax profit looks pretty good.
Views?
Barcap,
It was an IPO not a share placing and don't try and tell me that they are the same thing! They might both raise capital for the company but the former sells the company to the 'public'. They made three acquisitions the total purchase value of which exceeded the amount that was raised to the company in the IPO.
The loan covenant required them to maintain a FCCR ratio above 1.25. FCCR is financial metric used to assess the ability of the company to meet its fixed financial obligations. A value greater than 1 indicates that the company is generating sufficient income to cover its fixed charges and therefore a lower risk of default.
The reason they breached the covenant was principally due to a higher working capital requirement as a result of a significant reduction in deferred revenue, a higher proportion of lower margin silicon revenue at the beginning of the year and increased investment in R&D activities, as anticipated, as the Company invests in its own products business.
On Friday the Company established an amendment to the credit agreement with their lenders which suspends the FCCR ratio for the period from the quarter ended 30 September 2023 to the quarter ending 30 June 2024, after which it is set at 1.10x until the quarter ending 30 September 2025 when it reverts to 1.25x.
They inherited the lower margin silicon revenue through their acquisition of OpenFive which was a lower margin ASIC business selling custom silicon with nodes higher than 7nm and typically in 28nm range. The Company have already made rapid progress in transforming OpenFive into a higher margin business by integrating the Company's silicon IP and the revenue expected in H2 (and already in the backlog) and into next year will come from the higher margin products (which are in the 7nm down to 2nm range). So while the EBITDA margin has currently fallen to 17% they can still maintain the previously stated guidance of 25% EBITDA margin for end of 2023.
This margin can also be expected to substantially improve over the next two to three years.
So where has all the share placing money gone?
Also why did they nearly breach the covenent, related their loan payments?
Genuine questions so answer if you know.
To be clear this is a risky stock but that's the competitive nature of the marketplace and the need to be at the very top of the technology tree. If the products are no good then everything folds.
You cannot transfer the same financial metrics you would use for evaluating established FTSE stocks to this one. Or if you like you could but then this summarises the UK's traditional problem in investing in risky start up tech businesses - you don't invest so they raise capital in the US instead.
"Maybe that was the case pre 2021, it's certainly not anymore. The debt will be the death of them, I'm not a shorter, however if I was going to short anything then it would be this."
This statement only shows your zero comprehension for this stock. They currently have more in cash and cash assets $122.7m than of debt $100m. They acquired the debt facility last year with the intention to utilize it otherwise what is the point in acquiring a facility larger than what is needed? Comparatively, to their US counterparts their debt position is fine. If their breech of the FCCR was really an issue the lenders wouldn't have given them a waiver permitting the breech until June 2024.
The lower margins are down to what they inherited from OpenFive and R&D investment for the Connectivity products due to launch in 2024.
If you listen to the investor call, you will know that the current H1 EBITDA margin of 17% will revert back to the 25% figure as per their guidance for 2023 due to higher profitability expected in H2 which can already be forseen in their backlog as most of it is from higher margin revenue off their high end IP and Custom Silicon. You can still expect a small loss to be reported for end of 2023 but as they move into 2024 they will move back into profit territory as the revenues start to scale up.
"This or that item in the financial results is neither here nor there"
Maybe that was the case pre 2021, it's certainly not anymore. The debt will be the death of them, I'm not a shorter, however if I was going to short anything then it would be this.
Still landing.
Still expanding.
Still accelerating technology leadership.
Still translating technology leadership into orders.
Revenue and profitability ramping up / a work in progress.
DYOR but I'm comfortable that they are in the right place at the right time and ultimately this will result in a very attractive valuation.
I have a short at 112p which is burning me a bit.
The company continues to fail on its financial management.
A loss and reduced margins plus a nearly breached covenent.
I expect this company to finally fold at some point as I don't trust the directors an inch.
I still expect to make a profit on my short but I misjudged the level.
Avoid this one at all costs
Cheers
Barcap
This is a growing company. You need to have the same mind set as countless US tech and biotechs which are built up on debt / equity and the promise of a happy tomorrow.
This or that item in the financial results is neither here nor there
This company sinks or swims on the quality of its products. End of.
You really think a broker like JPM are going to call them out on capitalised R&D or a covenant breach? Come on
How has this dumpster truck fire got an EV of £1.1b?
All the broker reactions are broadly positive, noting these issues relate to their transition to being an ASIC provider.
JPM: Outlook & Guidance. The company has reiterated FY23 revenue guidance of $340-360m of revenue or $350m at the mid-point. EBITDA guidance for FY23 is $87m (c25% EBITDA margin). With 1H margins at 17%, the implied 2H margin for the company to meet full-year guidance is 33.5%. We believe that the revenue mix in 2H will shift from lower-margin silicon business (acquired from OpenFive) to more License & NRE revenues, which would catalyze sequential margin improvement.
With no changes to company guidance, we do not expect changes to FY23 consensus.
Only just got the covenant breach patched up before the results release...
"The Group did not meet the minimum fixed charges coverage ratio of 1.25x in the second quarter of FY 2023, which represented a breach of the bank covenant as at 30 June 2023. As such, the Term Loan and the RCF are payable on demand at 30 June 2023 and have been classified as current liabilities in the consolidated statement of financial position. On 22 September 2023, the Group signed an amendment to the credit agreement with the lenders waiving the covenant for the period to 30 June 2024, with a revised lower fixed charge coverage ratio covenant in effect from 30 September 2024 to 30 September 2025. Additionally, there is a minimum liquidity requirement that the Group must maintain for the period to 30 September 2025."
Also I note some $24m of capitalised development expenditure vs zero in prior year - easy to meet adjusted EBITDA targets if you bung a load of costs onto the balance sheet.
So in reality you have operating cash flow of $28m, a $60m working capital outflow, a $41m outflow on CAPEX + development spend & a further $12m outflow on interest expense ($10m) and lease costs.
Certainly, there appears no headroom for more large acquisitions, so we might actually get some YoY comps soon, which won't be pretty in my opinion.
AWE's addressable market is growing exponentially.
The big question is are they able to translate their industry leading solutions into market share / a slice of the cake.
Mondays interim results presentation should be interesting,
It's true what YamR1man says in regards to UK stocks. The FTSE 100 and All Share indices have been flat now for more than 6 years (apart from the Corona pandemic induced February 2020 dip and eventual recovery). I do think AWE sits in a different space though. It moved from its low point in February mainly thanks to the AI fervor that struck around May of this year and continued momentum after the July update indicated them being on track to achieve the guidance revenue.
It's worth noting that AWE's peers on NASDAQ have seen similar declines in recent weeks.
E.g.
Marvell was $66 on 1 August and fell to $57 by 18 August
Credo was $18.50 on 20 June and fell to $13.90 by 17 August
Rambus was $66 on 26 May and fell to $49.30 by 10 August
Ceva was $27 on 31 Jul and fell to $19.80 by 16 August
Broadcom was $920 on 25 Jul and fell to $817 by 18 August
So, essentially the AI fervor has died off somewhat but the expectation for growth in the sector particularly in the world of datacenters and AI remains strong for the medium term outlook. It should easily outpace the general global economy. Keep an eye on the health of the datacenter / AI economy, and check that AWE are continually demonstrating revenue growth and increasing capture of their addressable markets. This way you can determine if the investment prospect here is still compelling or not.