First of all, thanks for your write-up. I enjoyed the article and digging deeper into the company. I have a few questions and would like to hear your opinion:
The company amortizes acquired customer lists over 4 years, despite emphasizing a very low customer churn rate and high recurring revenue. I am not sure if this is IFRS-compliant because the amortization period must correspond to the asset's economic useful life.
The 13% discount rate applied in impairment tests appears excessively high for a stable cleaning business with predictable cash flows. Do you think these accounting practices are still legal, and what could happen if the regulatory authority concludes they were too aggressive?
The guidance is £5+ million FCF in 3 years. Are there any projections on how high the dilution will be by then, and what is your opinion? If the company doubles the share count, the high FCF won’t create significant value for shareholders. The high number of options granted over the last 2 years (approximately 2 million) seems concerning. Furthermore, the company pays very little in taxes due to the high amortization charges. At some point in the future, they will have to pay more taxes, which will reduce the FCF.
The company is pretty aggressive with their amortization but they’ve been doing it for years and haven’t gotten any pushback yet. I asked an accountant (who I trust 100%) about it and he basically said he wouldn’t be concerned.
The dilution is the reason why I haven’t bought any shares yet.
Mark has recognized the dilution and said he doesn’t plan to do more M&A with shares and the Aquaflow acquisition was mostly funded by debt though they then diluted to increase working capital…
From the full year call, Mark clearly believes the shares of $REAT are cheap and doesn’t want to dilute but if he needs to he will.
I haven’t talked to Mark personally (though I’d like to one day) so I’m unsure of his plans but he did mention he wants to acquire another company in the next year or so and unless the acquisition is small or they take on a lot more debt I don’t know how they’d finance it.
I’m unsure of the future dilution but I’m going to be keeping an eye on the company and if they slow down the dilution and the company keeps on performing at this level I’ll likely add it to my portfolio
First of all, thanks for your write-up. I enjoyed the article and digging deeper into the company. I have a few questions and would like to hear your opinion:
The company amortizes acquired customer lists over 4 years, despite emphasizing a very low customer churn rate and high recurring revenue. I am not sure if this is IFRS-compliant because the amortization period must correspond to the asset's economic useful life.
The 13% discount rate applied in impairment tests appears excessively high for a stable cleaning business with predictable cash flows. Do you think these accounting practices are still legal, and what could happen if the regulatory authority concludes they were too aggressive?
The guidance is £5+ million FCF in 3 years. Are there any projections on how high the dilution will be by then, and what is your opinion? If the company doubles the share count, the high FCF won’t create significant value for shareholders. The high number of options granted over the last 2 years (approximately 2 million) seems concerning. Furthermore, the company pays very little in taxes due to the high amortization charges. At some point in the future, they will have to pay more taxes, which will reduce the FCF.
Hey I’m glad you enjoyed the write up.
The company is pretty aggressive with their amortization but they’ve been doing it for years and haven’t gotten any pushback yet. I asked an accountant (who I trust 100%) about it and he basically said he wouldn’t be concerned.
The dilution is the reason why I haven’t bought any shares yet.
Mark has recognized the dilution and said he doesn’t plan to do more M&A with shares and the Aquaflow acquisition was mostly funded by debt though they then diluted to increase working capital…
From the full year call, Mark clearly believes the shares of $REAT are cheap and doesn’t want to dilute but if he needs to he will.
I haven’t talked to Mark personally (though I’d like to one day) so I’m unsure of his plans but he did mention he wants to acquire another company in the next year or so and unless the acquisition is small or they take on a lot more debt I don’t know how they’d finance it.
I’m unsure of the future dilution but I’m going to be keeping an eye on the company and if they slow down the dilution and the company keeps on performing at this level I’ll likely add it to my portfolio