EVS - valuations, page-6

Thanks for sharing your calculations. I like the method. How do you come up with the constant factor of 25? Does it change depending on the industry? I dropped to a base case 70% gross margin and 100% growth and by the end of CY2019 we reach your view of fair value with a MC of $159m assuming ARR of $9m is reached (i.e. 43c SP). This would be a multiple of c. 17.5x though, which is probably the upper limit but not impossible. I think your fair value of $130m MC is about right. But we could be at this by end of CY2019 - a 35c SP.

I've been doing some reading as well. In my first post I used the basic method of company value = ARR x multiple. But we then need to take into account the metrics for judging that multiple as you've raised. And there are also others we can look at.

If we use a baseline ARR multiple of 5x (for public SaaS companies) we can then adjust based on other factors.

Growth and scale of revenue - as of 31 Dec 2018 revenue was up 126% YoY (very high and therefore a higher premium to multiple). Faster growing businesses get higher multiples. Faster growth means larger expected cash flow sooner. And EVS has reflected this ambition in their March 2019 presentation - slide 1 is a winner on paper - "monthly EBITDA targeted to be positive by FYE20".

EVS is currently growing well above the average SaaS company growth rate (relative to its size). For example, a SaaS business with around $5m revenue needs to be growing at least 50% to get an average valuation multiple of 5x ARR. A premium of 1-2x would be justifiable for growth rates above 60% for companies of this size and above 75% growth the premium could be 3 to 5x or more. As EVS becomes a larger SaaS business (i.e. arr of $10m or more) a growth premium will be relevant above 35% in growth (this is taken from a 2016 study). Given EVS is growing at or above 100% I feel a 5x premium above the average is warranted. This puts us at our current 10x multiple.

Total addressable market (TAM) - the size of a companies addressable market is key to future cash flow. It doesn't necessarily increase the potential valuation multiple that can be applied but if the market is too small then it can negatively impact an investors calculations. A small business in a small market won't generate large profits! But EVS ticks the box here too. They work in a growing global market. They have recently entered the environmental smart city sector and their acquisition of Odotech has provided introductions into the Middle East. They are focusing on 3 major growing sectors - odour related (wastewater, agriculture, landfill, composting), mining and smart cities. They are doing this across 6 regions (ANZ, Europe, Middle East, North America, Latin American, Asia). Companies are increasingly having to find new ways to ensure they meet their regulatory requirements. It's difficult to put a number on this TAM but I think it's very significant, muchgreater than $1 billion. Keen to hear others views on a TAM for EVS.

Revenue retention - high retention increases TAM, increases revenue growth, provides predictability and reduces risk. Retention rates above 100% (i.e. through up selling and service price increases) can justify a premium to our valuation. EVS has stated attrition less than 2.5% (i.e. a retention rate of 97.5% or greater). The EVS platform has the potential for significant up-selling through their environmental intelligence suite/add-on products. In my eyes this is a strength of EVS and could potentially add an additional 1-2x multiple premium.

Customer acquisition costs/cash at bank - significant upside gained from Odotech acquisition ($0.86m cost for $1.35m arr gain, not to mention hardware leveraging and opening of new verticals). $10m cap raise completed October 2018 with $9.24m at bank and no debt as of December 2018. Following the raise, EVS stated "the gross proceeds of $10m raised across the two-tranche capital raise are anticipated to see the Group through to cash flow break-even over the next two years." I'm not factoring another cap raise into EVS's valuation. But we do need to closely watch operating costs (my original comments on hitting an inflection point).

Other factors affecting valuation multiples are the quality of management, gross margins and the time taken to on board customers. I might talk about these later as that's enough for today.

Exciting 12-36 months ahead for EVS I think.