EFFN - Effnetplattformen

[NewbieD]

Don't know how many can invest in this. Market cap is about 20 million usd. Listed in Stockholm growth list as stated above.

My first real attempt to turn an engineering/poker brain into finance mode. Feedback and pointers on the write-up/valuation process/thinking are much appreciated:)

 

Below text can be seen in google docs here for nicer formatting: https://docs.google.com/document/d/1sbXLp7HnFNHkad0hCMm-MkIwUHKMzLRYQ6BYpRZo0F4/pub

 

Effnetplattformen

 

Summary investment thesis

-The company is the sole independent supplier of off-the shelf header compression implementations of several compression standards. The only other known implementations of these standards is owned by Nokia, Ericsson, Siemens.

-Undergoing rapid growth due to roll-out of VoLTE mobile calls.

-A low cost base (5 FTEs) gives a high operational leverage

-Low financial risk with recurring revenues and sizable net cash

-The board has during the last 12 years done several M&A transactions that have added considerable value to shareholders through dividends in real-estate companies

 

The company is cheaply priced due to:

-Low transperency in revenues which have historically been lumpy

-Short stock history after being relisted multiple times post M&A transactions

-Limited liquidity

 

Catalysts

-Increasing revenues and earnings in reports. When the revenue from VoLTE is better known the future earnings will become easier to predict and less cheap.

-Confirmed royalties from mobile phone chip manufacturers (not only networks)

-New contracts from new product line within Internet of Things

-Additional value spun out through M&A using the cash

-The company might realise it has untapped pricing power (it seems likely IMO given their unique market position and long history)

 

Company overview

Effnetplattformen AB is a young entity that was listed on Nasdaq OMX First North in 2014. The main holding Effnet is older, being started in 1997. As will be explained further, transactions and reverse mergers is a part of the strategy, and the current management has been doing this strategy since early 2000’s. They have delivered about 10x return during the previous instance of the entity during 2010-2014.

 

The company has two separate value creation chains:

Effnet AB. A codebase for header compression of IP traffic sold to major chip manufacturers. Intel, Qualcomm etc are customers. 5 employees.

Helping companies that want to be listed on Nasdaq OMX First North. Primarily by offering the broad ownership base, current listing and small cash injections. The procedure has been reverse mergers followed by distribution of the core holding Effnet AB into a newly created company. This activity seems to be mostly handled by the two main owners Göran E Larsson and Hans Runesten.

 

Effnet AB

Effnet has a nice overview of their reported figures here:

http://www.effnetplattformen.se/pages/uk/review.php

 

The company implements about 10 different header compression schemes defined as RFCs.

This is their sole focus and they seem to be alone in this niche. http://www.effnet.com/pages/uk/solutions.php

 

The interesting thing about this business is that it is priced as a steady state affair with little growth at about 10x current earnings net cash. But there are reasons to believe revenue will increase driven by a roll out of the VoLTE standard of mobile telephony.

 

VoLTE expansion

The header compression the company enables is part of the VoLTE standard now being rolled out across the global. Below are 3 research reports that respectively indicate a market CAGR of between 36%/year to 2018, 55%/year to 2020 (china only), 79% year to 2019.

https://www.linkedin.com/pulse/20140512130000-259066801-global-lte-market-size-expected-value-is-usd-610-71-billion-by-2019-and-growing-at-a-cagr-of-78-6-from-2013-to-2019

 

The company is usually humble in their communication but have started sounding positive and have reported increasing earnings the last two quarters. The stock is up a bit, but not much. There is very little marginal costs, so almost all revenue changes go down to the bottom line.

M&A activity

As stated, the companies board are experienced M&A people that have added value through reverse mergers.

2004: The property company Sagax was listed through a reverse merger with Effnet. Sagax has been a huge success, with a current market cap about 100 times larger than Effnet.

2014: Equity issue, ca 2,5 MEUR. Header Compression Holding purchases Stendörren. HCH renamed to Stendörren. Effnet AB spun out as Effnetplattformen AB.

2015: Equity issue, ca 2,5 MEUR. The company has stated they want cash at hand to pursue similar opportunities as Stendörren.

There is currently 33 MSEK sitting on the balance sheet which is clearly not needed in the operations and aimed for transactions - stated goal of management.

 

Valuation

We will value the header compression business separately from the M&A activity.

Bear case for header compression (25%)

Header compression will be used in LTE, but Effnets position will be undermined by new competitors and the next cycle of mobile standards not needing the technology. I believe this scenario is unlikely for the following reasons:

Fairly long cycles in mobile network technology

There has been no interest in attacking the niche so far

Even if new players enter there are long term contracts in place protecting underlying growth in current customers

 

The CAGR in this scenario is 6% to 2020 (-10% from 2015p).

 

Normal case for header compression (50%)

The company is able to capitalize on the roll-out of VoLTE. The predicted growth for VoLTE-enabled networks is X%. The predicted growth for VoLTE enabled phones is Y%. In this scenario we predict the growth will be Z% for 4% years and then keeping steady at 3%. Eg limited upside from new product lines. The CAGR for this scenario is 35% to 2020.

 

Bull case for header compression (25%)

The company is able to build a larger niche due to trends towards higher data usage, larger packet headers (IPv6), more cellular traffic and more IoT enabled devices. The CAGR in this case is 45% CAGR to 2020 and implies capturing most of the VoLTE market growth, possibly alongside new IoT-related products. I don't see this as a best case scenario. For instance it does not predict tight coupling of revenues to VoLTE enabled phones.

 

Bear case M&A activity (25%)

The company doesn’t find any good investments the next 4 years. The company gets impatient and makes a bad deal loosing the entire investment. I think this scenario is very unlikely given the percieved risk averseness of the main owners. The assumption for this case is the cash is misused to generate a loss and is valued at 75%.

Normal case M&A activity(50%)

One or more good investments can be found and the cash will generates a 15% return over the holding period.

Bull case M&A activity (25%)

The M&A activity continues similarly to historical figures. A great investment is found every 3-5 years. Given the past history a reasonable assumption could be that the cash will generate a return of 25%.

 

The spreadsheet is found here: https://docs.google.com/spreadsheets/d/1fnFi6rm1B_luci5-xF1KnoFa-QkpgVEIwLoQZtUtIJ0/edit?usp=sharing

The valuation ends up at 88% upside compared to current price.

 

Risks

People. It is a small company. The valuation builds the M&A part entirely on the track record of the two main owners. They might be less savvy than it looks and more lucky.

Competition. This will be a threat sooner or later, given the thesis plays out. I think it likely it will take some time before this emerges though. Even if the compression standards are public a new implementation from scratch that is of similar quality will require a fairly costly development of specialised people (e.g. assembly language coding), lots of testing etc. However it is a risk that must be considered.

Fraud/accounting. I think this is next to 0 given the humble way of operating.

Non-paying customers / IPR not respected. So far the company seems to have been able to sign and charge for their product. Customer list. But there is a risk companies copy the product and claim to have replaced it with an inhouse solution or similar if they believe they will save money and not have to support many future changes.

 

Conclusion

The company has an interesting position in a growing niche. The next two quarters will reveal critical information on the coupling of revenues to VoLTE roll-out. Given a favorable outcome it looks very cheap. The downside today is about 50% given a reversion to previous income figures (not likely).

 

[alwaysinvert]

I have looked at this before and bought a small tracker position right after the most recent equity raise.

 

Their main business has, as you say, very good economic characteristics where incremental revenue almost turns into pure profit. However, I have no clue of how to go about evaluating that side of things both on the technical side and because they are so tight-lipped about their contracts.

 

What they provide seems to be so small revenue-wise that I wonder why IT giants can't just do it in-house, but maybe that is exactly the argument: it's so cheap to buy so why bother. If there are any specific IP reasons for this, I don't think I ever would be able to understand it.

 

The backdoor listing "business" is very interesting and since nobody else seems to be interested in starting to do this, the niche will probably keep being well-compensated. I don't see any particular reasons why this would dry up other than some kind of regulation change that would put a stop to repeated spin-offs or something. No incentives for the stock-exchange to pursue this and I don't think investment banks ever will be worried enough about the competition to go after it :)

 

Of course, them being able to find suitable mergers every year may be a bit optimistic, but I think they have pretty much managed to do it in the past.

[alwaysinvert]

Of course, Stendörren was an ideal case for Effnet/HCH, because they really needed a fast-track into getting a listed stock to use as currency in their roll-up strategy. I don't think you can expect future deals to be as good.

[NewbieD]

Agreed that the tight-lippedness makes it hard to value. The technical side of things is also not that easy to say how easy it would be to copy. But I think it's clear they are a big fish in a small pond, and I'd rather buy that then the other way around. One of their employers is a chairman in the committee that makes the standard specification for RoHC.

 

Q3 report is due out on thursday. Will be interesting..noticed something of a love bias towards this one in myself that must be killed, especially on bad figures;D

 

Some questions on the valuation method:

- is a 12% discount rate reasonable for this?

- given I own > 0.5% of the company I face more liquidity risk than I ever have before. This is 5-10x daily avg volume. How would you take this into account in a valuation?

[netnet]

Is a balance sheet in English available?

[NewbieD]

Not a new one. This is the latest report in swedish: http://www.effnetplattformen.se/pdf/se/interimreports_2015_q2_swe.pdf

Google translate below - unfortunately statements got too screwed up for me to try and fix:

 

INTERIM REPORT

January-June 2015

HIGHLIGHTS SECOND

QUARTER 2015

Header Compression Revenues from ongoing royalties and support fees from contract concluded earlier. Quarter revenues amounted to SEK 3.6 million. Was launched in May Effnet Backhaul Header Compression (Effnet BHCTM), a product that is formed satellite and microwave e.g. mobile backhaul, and for Relay networks to LTE base stations.

FINANCIAL REPORTING

Comparative figures The group was formed in the fourth quarter of 2014. The operational activities conducted within Effnet AB. Effnet AB was formerly a subsidiary of Header Compression Sweden Holding AB (HCSH) now a Real Estate renamed Stendörren AB. Most relevant and therefore in this report using comparative figures, called "pro forma" refers to previously Parent Company and the Group HCSH then the business at that time were conducted in HCSH was identical to the current business.

FINANCIAL REPORTING

April-June 2015 Net sales and profit Consolidated sales for the the second quarter was MSEK 3.6 (1.7).

Operating profit was MSEK 2.2 (0.71). The quarter's net income amounted to SEK 1.8 (0.61) Or SEK 0.25 (0.11) Per share. Cash flow from operating activities was SEK -1.3 1.3) Or SEK -0.18 (0.25) Per share.

FINANCIAL REPORTING

January-June 2015

Net sales and profit Consolidated sales for the the first six months amounted to MSEK 7.2 (4.2), Or SEK 1.10 (0.82) Per share, which is the highest six months revenue then in 2005. Operating profit for the first half year were SEK 4.7 (1.81). Net profit amounted to MSEK 3.9 (1.4), Or SEK 0.60 (0.27) Per share. Both operating income and Net profit for the first half of the year the best since 2005 and exceeded greatly corresponding figures for full year 2014. Cash flow from operating activities during the first half year SEK 0.0 (0.71) Or SEK -0.01 (0.131) Per share. Investments During the quarter, no investments in equipment. Staff The average number of employees during the

half amounted to 5 (4) People. At June-end number employees to 5 (4).

 

The platform Effnet AB (publ) - Interim Report January - June 2015

page 4 of (8)

FINANCIAL POSITION

Cash and cash equivalents Consolidated liquid assets at the end of the period amounted to MSEK 32.3 (28.22), Equivalent to SEK 4.47 (5.462) Per share. Equity and solvency Shareholders' equity at period Exit to MSEK 33.9 (28.52) Or  4.68 (5,532) Per share. The Group's equity ratio amounted to 93 (92) Percent. PARENT The platform Effnet AB reported a

operating income for the quarter of MSEK -0.5. The parent company's equity totaled at the end of the quarter to MSEK 25.0 (3.3 at year-end). Cash funds amounted to MSEK 2.5. No investments were made during

period.

SIGNIFICANT RISKS AND

UNCERTAINTIES

The Group's business activities exposed to risks of both operating and financial nature. In the company uses an ongoing process to identify where risks and assess how these to be handled. Markets Company's products are characterized by great potential but with long sale cycles and therefore a erratic sales trends.

CALENDAR

 

 

 

 

[Guest Schwab711]

I just wanted to say that this is an awesome write-up/intro to the investment idea! Thanks for sharing. I haven't tried to look into this yet so nothing else to add.

[NewbieD]

Thanks Schwab. The stock tanked ~20% on the Q3 report - a pretty reasonable reaction. Updated the valuation with my new estimates.

[NewbieD]

Short update after Q4 report: http://www.scandismallcap.com/effnetplattformen-update-after-q4/

 

Q4 is their weakest quarter. It was pretty much in line and on par with the strongest quarter yet. Stock is flat since last quarter. YoY revenues grew 45% and results 101%.

Q1 will be important. If they can grow over last years numbers the royalties coming from VoLTE build out will be confirmed.

[NewbieD]

Q1 report coming up in 10 days. Stock is trading close to ATH but if Revenue link to VoLTE roll-out through the World is confirmed it is cheap so the report will be worth watching..

[Jurgis]

Q2: http://www.effnetplattformen.se/pdf/se/interimreports_2016_q2_swe.pdf

 

With the price runup my concern is that this is 5 person company that's getting royalty stream that may grow/stabilize/shrink. I'm not sure they can/will develop anything new that would significantly add to that royalty stream. So that leaves investments in small Swedish co's as the future business model. If you look at it as investment company, the P/B is way high. Yeah, I know you have to adjust for the royalty stream business, so it's not clear cut, but still...

 

Disclosure: I have a position.

[NewbieD]

Q2 was a slight dissapointment in that 16 YTD shows no growth compared to 15.

 

There is significant speculation that their agreement with Intel and the inclusion of an Intel VoLTE modem in the new iphone 7 will lead to significant growth in royalty. Since management is very opaque about the nature of the agreements it's anyone's guess.

 

I attended the board meeting in May (my first ever). Nice open familiar feeling with many handshakes with the board, CEO and co-ceo and a long Q-A session. The company has plans to announce a new product in the near future. It was a combo of customer demand and a niche they see as ripe.

 

It was stated that the investment part of the business has a harder time to do deals when money is as cheap as now. After the meeting they announced a small pre-ipo investment in a gambling developer. It seems to be the gambling b-team in my estimation.

 

Would be surprised if the royalties decline. At the same time the current price needs much growth to warrant it. Maybe 30% yearly for 5-7 depending on other guesses. Price has increased from 11 to 33 while nothing has really changed, except interest rates dropped further. I sold 1/3 of my position before Q2 and decreased further after. 

[Jurgis]

Stockholm, October 21, 2016 - The Board of Effnet platform proposes that the Extraordinary General Meeting 14 November 2016 resolves to distribute all shares in the three newly formed subsidiaries Effnet platform Ventures 1 AB Effnet platform Ventures 2 AB and Effnet platform Ventures 3 AB (the "Companies"). The Board proposed to obtain authorization to decide on the record date for the dividend.

 

Above translated via Google translate.

 

Tax headache incoming.  ::)

[NewbieD]

And another one=)

 

The parent company acquires all shares in Civil company in the Nordic AB (publ) (following its acquisition of AB Högkullen (publ) and Gimmel Fastigheter AB), coastal town Fastigheter AB and Sörmlandsleden Sport AB and will take over the outstanding preferred shares and convertible bonds in the Civil company in the Nordic AB (publ) (including the outstanding preferred shares and warrants in Högkullen AB (publ)). In the event that these convertible bonds, preference shares and warrants convertible into common shares ownership can be changed. The acquisition is made through cash issues totaling approximately 406 million common shares, of which approximately 218 million Class A shares and approximately 188 million Class B shares, representing approximately 98.25% of the share capital and 99.70% of votes after the issue. And a cash payment of approximately 253 million SEK. The parent company's current shareholders will after the acquisition hold about 7 million B shares, representing approximately 1.75% of the share capital and approximately 0.30% of the votes. The total number of shares in the parent company after the proposed non-cash issue approximately 413 million shares. Equity in the parent company, which changed its name to Planning company in the Nordic AB (publ), calculated after transactions amount to approximately SEK 2.9 billion, including preferred capital.

[Jurgis]

There has been about 10 press releases from the company in the last month or so. Most concerned with their RE company. If someone wants to follow, they should read them directly.  8)

[Jurgis]

OK, this is getting confusing.

 

Anyone understands what the currently-on-exchange traded stub contains? Doesn't it still contain their header compression business? If so, why is it trading so low?

 

IIUC, there's yet another bunch of shares (yet another different share?) coming from the January 17 reorg. Which will contain their RE business? Is this correct?

 

There might be an opportunity here if I only could wrap my head around this Swedish polska.  8)  ???  ::)

[alwaysinvert]

OK, this is getting confusing.

 

Anyone understands what the currently-on-exchange traded stub contains? Doesn't it still contain their header compression business? If so, why is it trading so low?

 

IIUC, there's yet another bunch of shares (yet another different share?) coming from the January 17 reorg. Which will contain their RE business? Is this correct?

 

There might be an opportunity here if I only could wrap my head around this Swedish polska.  8)  ???  ::)

 

No, it contains the real estate company. The original company is the spun off part that will start trading separately next week.

[Jurgis]

OK, thanks.

[NewbieD]

There was a very nice trading opportunity on the first day of trading when EFFN represented the Real Estate.

 

Not as fun to earn Money from confusion as value Creation, but would've felt stupid not to act.

[Jurgis]

There was a very nice trading opportunity on the first day of trading when EFFN represented the Real Estate.

 

Not as fun to earn Money from confusion as value Creation, but would've felt stupid not to act.

 

You sold it for 20-30kr?

[NewbieD]

Didn't think of the opportunity beforehand so was late to the party. But I was happy to sell at 14 after first compulsory account check of the day...Then called my mom and wifes dad and told them to sell down to 10. Wifes dads reply "now when it's down so much there's no point in selling" ;D

[Jurgis]

That RE stub is a bit hard to value now with all the purchases, share issuances, etc. Do you have a valuation for it or just guessing that it's less than 10kr?

 

I'll just keep what I have in it, which is very little.

[NewbieD]

Nothing fancy. The company with a most similar structure on the same exchange, Hemfosa, trades at 0.7X book. There is about 400 million shares and Book value 3.7 BSEK. This would give something like 7 SEK/share. The stated proforma profit is about 290 MSEK. If you value this at 12X you get a value of more like 9 SEK.

 

Guess it depends on your view of Real Estate sector and interest rates. Their previous RE listings have done great over time, but maybe the sector's had its happy days this time around?