technological disruption, page-2

@MarsC,

I think the thing that you are worried about is largely already upon as, for reading your post made almost immediately left me thinking, "That's a pretty accurate description of the share registry industry today".

It is already fully web-based (I'm a self-confessed Luddite of the most techno-phobic kind and even I have for some time now been updating my TFN, banking account or contact details online, without ever filling in one of those share registry tedious forms).

Automation is now a feature of the business. Whenever I buy a new share, CommSec, the broker through which I buy and sell shares, automatically and electronically "talks" to the relevant registry company, advising my banking details, HIN, TFN and my communication preferences.

As for people-less, ASW's employee base numbers a paltry 23 strong. And that's after the "hiring spree" earlier this year of 2 more bodies to bolster the Sales and Marketing effort (much-needed, I think). And I suspect ASW could double, treble or even quintuple its Revenue base, and those 23 people won't be needing to work that much harder, due to the scalability of the business.

The service is already commoditised. Service levels are absolute. There are no degrees of registry management performance: either it gets done properly or it doesn't get done at all. CPU don't get dividends to the bank accounts of 99.5% of shareholders, while Link gets, say, 99.7% and AWS gets, maybe, 99.2%.

They all get 100%.

Otherwise they cease to exist.

And that CPU, ASW, Link, Boardroom and Security Transfer Registrars all provide almost exactly the same service to their clients means that there is almost zero scope for differentiation, other than on pricing.

This lack of pricing power can be seen in the fact that what is a mission-critical aspect of any listed business [*], the registry service function is very inexpensive. ASW has more than 200 corporate clients on its books, from which it derives around Registry Revenue of some $5.0m (i.e., put crudely, if you are the CFO of a small listed company, AWS will handle your company's registry affairs for the bargain price of less than $25,000 pa).

For most companies, that's less than the annual biscuit budget.

[*] No company executives want to encounter the situation of their shareholders not getting their dividends because they were paid into the wrong bank accounts, or that AGMs were convened and shareholders were not, or were incorrectly, notified, or that HIN's or TFNs were misquoted on correspondence or that personal shareholder information had leaked into the public domain.


One of the things that attracts me to ASW as an investment is that it is the "lowest-cost manufacturer" in the sector, with a Cost-to-Income (CTI) ratio around 50% (hence the high margins to which you rightly referred). By comparison, CPU's CTI is 73% and LNK's in 75%.
I have not come across financial accounts for Boardroom but I did see DY2015 abridged results for Security Transfer Registrars some time back which I recall reflected a 30% EBIT margin (given there is very little "D&A" in these sorts of businesses, EBITDA margin would have been not too dissimilar, implying a CTI of almost 70% for this company).

So, for me, if the thing that ultimately matters is the price of the service, then I want the guy that I am backing to be able to wear the lowest price.

So I think the thing to note is that, while ASW's margins do indeed look attractive, that's not an industry-wide phenomenon. The gorilla's in the industry merely do OK on the margin front (the reason the share registry industry, overall, generates superior returns on capital is more due to it being notably capital-light, rather than due to it being able to garner excessive operating margins).

My reading of this sort of industry structure - where you have just a few players and where the margins of the dominant ones are lower than those of the remainder of the industry participants - is that the scope and potential for unhealthy pricing competition is low.

That's the good news.

The bad news - for someone like ASW, who is looking to grow market share - is that, because of the confluence of "mission-critical" and "cheap" in eyes of the clients of registry service businesses, customer stickiness is high. (No sensible CEO/CFO would risk picking up problems on-boarding a new registry company for the sake of making savings that would barely register even if it was paid out of petty cash).

So this is all a bit of a two-edged sword for ASW, because while ASW can offer the service profitably at a lower price than its competitors, the propensity for it to win additional custom on the basis of lower price is, I think, not very high.

And this, in my view, is the main investment risk: that ASW is unable to gain market share, other than from debut listings. (As an aside, it is this customer stickiness that makes it difficult for new players to gain entry to the industry.)

The other risk that exercises my mind concerning this company is one of governance. While ASW might be a publicly listed company in classification, in nature it is essentially a private company in many ways: the board isn't exactly independent and the founder speaks for a controlling stake in the business, so minority shareholders are ultimately at the mercy of the whims of Mr Kim Phin Chong.

To date, my observations are that the founder/major shareholder/CEO has done nothing whatsoever to give cause for concern (quite the opposite, in fact: he appears to me to be fully engaged in the business, running it with great care and attention to detail...one of the outcomes being industry-leading margins, despite ASW lacking the scale of its much larger competitors).

But still, out of principle, it sits a bit uneasy with me having my financial fortunes so closely tied to just one or two individuals. Especially in a stock as illiquid as this.

So, to summarise, while I think there are a few things about which to worry when it comes to investing in ASW, that the company gets white-anted by some technological obsolescence is not one of them, I don't think.

Incumbency in this kind of industry, where customer attrition rates are acutely low, counts for a lot, I strongly believe, and especially so when you are positioned where ASW is in terms of relative cost competitiveness.

As I think @travelightor mused in an earlier post, this is not a double-your-capital story; but, commensurately, the risks around it are low.

I see ASW as a modest 10% to 12% pa Total Shareholder Return situation... 5% or 6% from dividends, plus a similar quantum from capital appreciation.