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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.
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.
"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.
"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.
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.
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.
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.
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?
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.
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
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.
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
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
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.
I think what is interesting Barcap, is that this is where I start off too when I first look at an investment especially for long term investment prospects. You could apply a cynical approach rather quickly and rule it out almost straightaway.
My due diligence process doesn't include 'hunches' or 'feelings' however.
For board of management due diligence, I have a check list with 10 areas for close examination with 3 questions in each area. How does yours go?
BlueRaphus
I don't base my negativity on just gut but on how the company behaves financially, honesty, news feeds and dealing with investors.
I listed my views months ago which made me see this is a badly run company.
If people are interested then they can trawl my AWE posts but long term this company will go BUST.
As I said, time will tell, so let's just wait and see.
I respect your posts BlueRaphus so totally respect your view.
We are just at opposite ends of the long v short positions which is what trading/investing is all about.
I wish you well and enjoy our chats
Cheers
Barcap
So far as I can recall, you've never given a basis for why you think the company will go bust long term - other than your view that the management are incompetent for which there is no credible evidence.
What will most likely happen long term is that the company will be bought out and certainly at a premium to today's price if not at a premium to the opening IPO price. This will be well beyond 2027 and more probably in the 2030's.
Happy for you to come back to me at end of 2027 on this one and we can discuss again where you went wrong in your determination of the management.
BlueRaphus
I remember doing a point by point list of my issues with this company months ago.
I'm not here to spoon feed so people need to do their own research and take a position.
I shorted 260p to 119p which was posted on here in real time and made me a new quality car.
I opened another short at 112p which has proved painful but ultimately I'll make a good profit.
Everyone to their own.
As said, time will tell but there's more to a company value than just figures and promises for the future.
Maybe it's difficult for you to see the wood for the trees.
People always cite a takeover when prices dive.
It won't happen but their technology will be used in the future but not to benefit of AWE share holders.
The adminstrators will sell it off to pay off debts.
As I said, I respect your views but maybe just open your eyes a bit.
In 2027 AWE wont exist even in takeover mode.
Cheers
Barcap
Barcap, I would be interested in being spoon fed your detailed viewpoint on why this is a short, also it should also assist in market discovery of the right share price for this company (which will be in your interest if you are correct)
I have just re-iterated AWE from my Speculative to Bargepole watchlist.
Barcap,
Your posting history is quite something to behold! Your reputation proceeds you!
Yes you posted your views and 'feelings' on the stock on 30 Jan this year.
Merely 6 points (which you openly admit to being alleged).
Five of which are verifiably false and one which only you could know about as you state to have seen 'photos' of their lab!
You started on AWE with a buy at £3.71 on 24 Sept 2021 declaring you'd done your research and that they look real good or similar words to that effect. You said sit tight everyone don't let the crooks steal your shares!
Even as the shorting campaign was well underway you declared "The Tea Lady says it will close 250p and may get to 260p. Pause before another move up!". All of a sudden a few days after you change your tune!
and declare your short at £2.57.
Your declarations on other stocks don't look great either.
You bought Darktrace at £5.10 on 31 Nov 21. Some days later you declared "This ones quite a long haul!"
Indeed it must be a long haul as it sits at £4.16 nearly two years on!
You bought Kainos at £15.73 on 17 Jan 22 and it never rose after then. Today it sits at £11.59.
You called bottom on Ocado at £9.20 on 27 Apr 22. But the price only kept on falling and today is at £6.80.
On AWE you declared it would be 50p by April!
I didn't buy in to AWE until February this year right around its bottom point.
I have no concerns. Of course there's some risk involved here but a very low probability of them materialising.
Like your view on Darktrace (which I have no opinion on) I'm in AWE for the long haul and I am absolutely certain it will still be in existence and thriving in 2027.
BlueRaphus
I've always been respectful to you and clearly said I respect your views on AWE even though our views are at opposite extremes.
It's a shame you can't recipricate my friend and you are clearly rattled by the AWE performance.
We are here to "argue" sensibly about AWE not to make personal attacks.
I'll leave it at that and let the AWE sp do the talking.
Cheers
Barcap
Weak response Barcap. You should substantiate your negative view. You become background noise if you can't back up strong headline statements with some analysis.
I think where I've lost confidence is with the worsening financial position and surprise that they have been capitalising significant cost which if had been expensed would have resulted in much lower EBITDA margin. A lot has to be taken on faith here, underpinned perhaps by the rapid growth of the end uses cases. But I don't see why they are so clearly in trouble, as you suggest.
My negative views have always focused on the directors of this company, not the product or business model.
I don't wish to commit libel which is why I'll leave at that.
This company WILL FOLD.
Just a matter of when.
Cheers
Barcap