Arowana International - Half Year Results Presentation February 2015
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Arowana International
Half Year Results Presentation
February 2015
1DISCLAIMER
The information contained in this Presentation or subsequently provided to the recipient whether orally or in writing by, or on behalf of Arowana International Limited (AWN) or
any of its directors, officers, employees, agents, representatives and advisers (the Parties) is provided to the recipient on the terms and conditions set out in this notice.
The information contained in this Presentation has been furnished by the Parties and other sources deemed reliable but no assurance can be given by the Parties as to the
accuracy or completeness of this information.
To the full extent permitted by law:
(a) no representation or warranty (express or implied) is given; and
(b) no responsibility or liability (excluding in negligence) is accepted,
by the Parties as to the truth, accuracy or completeness of any statement, opinion, forecast, information or other matter (whether express or implied) contained in this
Presentation or as to any other matter concerning them.
To the full extent permitted by law, no responsibility or liability (including in negligence) is accepted by the Parties:
(a) for or in connection with any act or omission, directly or indirectly in reliance upon; and
(b) for any cost, expense, loss or other liability, directly or indirectly, arising from, or in connection with, any omission from or defects in, or any failure to correct any information,
in this Presentation or any other communication (oral or written) about or concerning them.
The delivery of this Presentation does not under any circumstances imply that the affairs or prospects of AWN or any information have been fully or correctly stated in this
Presentation or have not changed since the date at which the information is expressed to be applicable. Except as required by law and the ASX listing rules, no responsibility or
liability (including in negligence) is assumed by the Parties for updating any such information or to inform the recipient of any new information of which the Parties may become
aware.
Notwithstanding the above, no condition, warranty or right is excluded if its exclusion would contravene the Competition and Consumer Act 2010, or any other applicable law
or cause an exclusion to be void.
The provision of this Presentation is not and should not be considered as a recommendation in relation to an investment in AWN or that an investment in AWN is a suitable
investment for the recipient.
References to “underlying” information is to non-IFRS financial information prepared in accordance with ASIC Regulatory Guide 230 (Disclosing non-IFRS financial information)
issued in December 2011.
Non-IFRS financial information has not been subject to audit or review.
2STATUTORY FINANCIAL RESULTS
1H FY2015 statutory results (including contribution from discontinued operations):
– Consolidated revenue of $2.9m1
– Consolidated earnings before interest and tax (“EBIT”) of $1.3m
– Consolidated net profit after tax (“NPAT”) of $2.5m
– Consolidated earnings per share of 1.58 cents
Numerical comparison to 1H FY2014 statutory results is not meaningful
– Intueri Education Group has been spun off
– HRM Asia has been sold
– New Funds Management division established
Statutory net tangible assets (“NTA”) of 87.1 cents (versus 82.1 cents as at 30 June 2014)
Dividend per share of 2.0 cents declared
– Franking level of 3.85%
– Record date of 5 March 2015 and dividend payment date of 12 March 2015
1 Includes other revenue
3UNDERLYING FINANCIAL PERFORMANCE
Statutory Underlying Underlying Underlying
half year ended half year ended half year ended % change
All figures in A$ 000’s 31 December 20141,2 31 December 2014 2,3,4 31 December 2013 2,3,5 1H FY2015 vs 1H FY2014
Revenue 1,285 1,285 1,354 (5.1%)
EBIT (2,541) (1,286) (1,128) (14.0%)
Underlying results exclude contributions from discontinued operations (including Intueri and HRM Asia)
Underlying results do include part year contribution from Funds Management division
Underlying half year results for FY13 have been restated to facilitate like for like comparison
Underlying results remove non recurring revenue and expense items
Group revenue (which excludes interest income) is down 5.1% primarily reflecting revenue weakness for Thermoscan
Underlying group EBIT reflects lower revenue, start up opex for the new funds management division and lower enterprise
office running costs
1. Statutory results for half year ended 31 December 2014
2. Excludes interest income received on corporate cash reserves
3. Includes adjustments to exclude the impact of non-recurring items
4. Excludes share of investment in associate profit
5. Restated to facilitate like for like comparison
Note: References to “underlying” information is to non-IFRS financial information prepared in accordance with ASIC Regulatory Guide 230 (Disclosing non-IFRS financial information) issued
in December 2011. Non-IFRS financial information has not been subject to audit or review
4GROUP SEGMENT EBIT RESULTS
Underlying Underlying Underlying
half year ended half year ended % change
All figures in A$000’s 31 December 20141,2,3,4 31 December 20131,2,3,5 1H FY2014 vs 1H FY2013 Comments
EBIT
Reflects start up opex; EBIT run rate
Funds Management (217) n/a n/a
is tracking positive
Reflects strong cost management;
Thermoscan 327 283 15.2%
further cost improvement unlikely
Reflects productivity initiatives
AWN Enterprise Office (1,396) (1,411) 1.1%
offsetting headcount increase
Group Total (1,286) (1,128) (14.0%)
1. Divisional EBIT excludes any internal management fee charges
2. Includes adjustments to exclude the impact of non-recurring items
3. Numbers may not add exactly due to rounding
4. Excludes share of investment in associate profit
5. Restated to facilitate like for like comparison
Note: References to “underlying” information is to non-IFRS financial information prepared in accordance with ASIC Regulatory Guide 230 (Disclosing non-IFRS financial information) issued in
December 2011. Non-IFRS financial information has not been subject to audit or review
5NTA BREAKDOWN
NTA Breakdown A$ Comments
Group cash 56,845,341 Includes SGD$8,196k; refer Appendix for cash movement breakdown
Intueri (IQE) shareholding 56,749,558 At IPO price of NZ$2.35 (plus share of equity accounted profit)
AASSF Investments: AASSF is the Arowana Australasian Special Situations Fund
UPMG convertible notes 14,000,000 At cost (excluding any accrued interest)
UPMG convertible preference shares 6,000,000 At cost (excluding any dividends)
VivoPower ordinary shares 2,417,915 At cost (including share of profit/loss)
Net Working Capital 309,497 Receivables less payables
PPE 550,647 At cost (net of depreciation)
Other Assets 1,237,426 At cost; includes HRM Asia retention cash of SGD982k (A$878,536 as at 31 Dec 2014)
Other Liabilities (201,095) Includes provisions only
Borrowings (179,744) Vehicle and camera finance (Thermoscan)
Net Tangible Assets ($) 137,729,545 Excludes goodwill amortisation and tax assets
Total Shares on Issue (#) 158,170,799 As at 31 December 2014
NTA per share (cents) 87.1 At cost (not adjusted for FX or share price movements)
Alternative valuation approach is Sum of the Parts incorporating net cash, investments (including seeded investments in the AASSF) and
applying earnings based multiples to Thermoscan and the Funds Management division, net of Enterprise Office costs
6OPERATING COMPANIES DIVISION: THERMOSCAN
Revenue down 5.1% but underlying EBIT increased by 15.5% versus 1H FY20141
Revenue decline reflects sluggish market conditions with an increase in competition noticeable
Increase in EBIT reflects tight cost management
Investment in new salesforce members has not yielded desired results to date
Change in leadership with departure of General Manager resulted in some disruption
A new General Manager has been promoted from within the ranks
Key priority is a ramp up of sales lead generation and conversion
In addition, strong cost management and discipline to be retained
1 The
underlying financial performance information excludes non-recurring items. References to “underlying” information is to non-IFRS financial information prepared in accordance with ASIC
Regulatory Guide 230 (Disclosing non-IFRS financial information) issued in December 2011. Non-IFRS financial information has not been subject to audit or review.
7OPERATING COMPANIES DIVISION: EDUCATION
For Intueri, the underlying proforma group revenue & gross margin were up 0.8% and 0.5% respectively on FY14
prospectus forecasts; however, underlying proforma group EBITA was down 5.1% versus prospectus forecast1
We understand from Intueri management that the EBITA shortfall reflects growth opex required to:
– increase capability to consummate more acquisitions for FY15 and beyond with build out of a shared services platform
– support strong growth in Online Courses of Australia (“OCA”) which is tracking significantly ahead of prospectus
Dividend of NZ7.7cents per share in line with prospectus; AWN to receive NZ$1.92m (but loses franking credits as a non NZ entity)
For iCarnegie, interest has been strong but has yet to translate into revenue opportunities for AWN as yet
AWN considers that:
– Education remains an attractive sector given secular tailwinds and inherently high ROIC characteristics
– Regulatory risk is and has always been a feature of education businesses given they are regulated by governments but this
can be mitigated successfully by having course, student and country diversification
– A balanced approach to managing the tension between the academic and commercial objectives is imperative, as is
maintaining a high and consistent tempo with regards to student recruitment and pastoral care
– Ex post the challenges faced by Vocation Limited, financial market participants remain nervous about the education sector
– However, this presents a unique opportunity for investors and operators with an informed perspective of regulatory direction
and a long term mindset
1 The
underlying financial performance information excludes non-recurring items. References to “underlying” information is to non-IFRS financial information
prepared in accordance with ASIC Regulatory Guide 230 (Disclosing non-IFRS financial information) issued in December 2011.
8OPERATING COMPANIES DIVISION: ACQUISITIONS UPDATE
We are currently in advanced due diligence on a number of potential acquisition opportunities
These are in the health focussed food, education, B2C testing and solar energy sectors
B2C testing and solar energy sectors are new focus industries for us as we seek to capitalise on tailwinds present for both sectors
Pipeline of acquisition opportunities has increased significantly since the beginning of CY2015 with over $50m aggregate EBIT of
potential deals across multiple sectors
At present, we are not seeing signs of any uptick in valuation expectations in the private SME market, despite the lower interest rate
environment
The team is being approached and presented with a lot of deals that do not meet our ROIC hurdles and requirements
Heightened investment discipline is being practiced at present as AWN leadership team (and investment committee) is conscious
that the most dangerous time to be an investor is when you have surplus cash
9FUNDS MANAGEMENT DIVISION: OVERVIEW
Launch of Funds Management division announced in July 2014 with target FUM of $100m from 2 products
As of 31 December 2014, 73% of this target achieved with total FUM just over $72m as follows:
– $47m for the Arowana Australasian Value Opportunities Fund (AAVOF) which listed on ASX on 5 Jan 2015
– $25m for the Arowana Australasian Special Situations Fund (AASSF)
At present, FUM targets are ahead of management budget and expectations, but focus remains on getting to at least $100m
– Capital raising environment remains mixed but a targeted approach has paid off thus far
– Fall in Australian dollar has piqued interest from offshore family offices (who have sat on the sidelines in last few years), however
there is a need to overcome perception of Australia as a high political & regulatory risk environment with low productivity metrics
Establishment of the AAVOF and AASSF enables AWN to:
– Expand the strategic “sandpit” that it is able to invest in beyond the Operating Companies division (refer next page)
– Better leverage its research cost base and infrastructure across a broader investment universe
10AWN INVESTMENT FRAMEWORK
AWN AASSF AAVOF
Acquires controlling Acquires strategic Acquires passive shareholdings
shareholdings (ideally 100%) in shareholdings (between (between 1% and 15% )
privately owned companies in 10% and 49% typically)
Australia and NZ Focus on listed securities in
Focus on Australia, NZ and Australia and New Zealand
Focus on Australia and NZ Asian headquartered only
headquartered companies companies only
only Typically ordinary shares
Typically yield bearing
Typically acquire ordinary Board seat representation only
mezzanine securities (including
shares or assets in exceptional circumstances
pre IPO bonds with warrants,
Hands on operational convertible notes, convertible No maximum investment
involvement and board control preference shares etc) duration but average hold
period of between 3 to 5 years
No limits on investment duration Board seat representation
Deploy external equity capital
Deploy internal capital and Maximum investment duration
only
reserves only of 10 years
Deploy external equity capital
and initial AWN seed capital
This framework allows us to apply our value based investment approach across an expanded
universe of investment opportunities (from direct ownership to passive ownership)
11FUNDS MANAGEMENT DIVISION: AASSF
As at 31 December 2014, the AASSF had invested the majority of its $25m seed capital as follows:
– $20m in convertible notes ($14m) and convertible preference shares ($6m) in a turnaround and business transformation opportunity,
Ubiquity Power Maintenance Group (UPMG)
– $2.4m in ordinary shares in VivoPower, a solar energy PPA (power purchase agreement) company focused on Australia & Asia
Post balance date (on 31 January 2015), further commitments were made to:
– invest US$0.92m in foundation ordinary shares in Arowana Inc. (a soon to be listed NASDAQ vehicle)
– a financing agreement with Evolution Road Maintenance Group (ERMG) (note: currently this is being done through AFM holding entity)
More information on the above investments above are set out in the Appendix
This diverse investment portfolio now provides the basis for the AASSF to be formally marketed globally
From a strategic perspective, the key priorities for the AASSF are to:
– Commence formal roadshow marketing campaign in March 2015 and further grow FUM; and
– Ensure expected portfolio returns are delivered whilst managing risk
From an operational perspective, the key priorities for the AASSF are to:
– Roll out Rockefeller Habits operating rhythms for the AASSF team; and
– ensure compliance, accounting and administration platforms are functioning seamlessly
12FUNDS MANAGEMENT DIVISION: AAVOF
AAVOF successfully completed its capital raising in December 2014 and the result was pleasing on 2 counts:
– Achieved in the face of conventional wisdom to not pursue an LIC due to apparent market fatigue and indigestion
– Shareholder eugenics have been well curated with a strong foundation of long term shareholders
The AAVOF shares and attaching free options listed on the ASX on 5 January 2015
– Shares first closed at $1.00 whilst the options first closed at $0.045 although liquidity is very low
– Accordingly investors had on paper made a 4.5% premium to the issue price
From a strategic perspective, the key priorities for the AAVOF are to:
– Invest in a creative but judicious manner so as to deliver absolute outperformance over long term; and
– To further grow FUM
From an operational perspective, the key priorities for the AAVOF are to:
– Recruit the right senior analyst supported by research capabilities in Sydney and Manila; and
– Ensure compliance, accounting and administration platforms are functioning seamlessly
13BOARD & LEADERSHIP UPDATE
Non Executive Chairman, Malcolm Keefe, is retiring after completing his 3 year tenure
– He continues to serve on the board of an unlisted Arowana & Co. investee company
An Executive Chairman role will be assumed by Kevin Chin in addition to his Managing Director role
– Key shareholders consulted in reaching this decision
A new Non Executive Director, Robert McKelvey has been appointed
– Aside from previous ASX listed board experience, Rob brings strong coaching and team development skills
– In addition, he brings a wealth of technology knowledge having been the Managing Director of Gartner Inc for the Asia Pacific
A new Chief Financial Officer, Conor Byrne has been appointed (interim with a view to permanent)
– Previously CFO/COO of Investors Mutual Limited and a Director of Treasury Group Investment Services for 8 years
– Has over 28 years of financial services experience
An outsourced group has been appointed to act as Chief Compliance Officer
– Important role to manage relationship between AWN and AAVOF in particular
14APPENDICES
Underlying Financial Information
Cash Movement Breakdown
AASSF Portfolio Summary
AAVOF Portfolio Summary
15UNDERLYING FINANCIAL INFORMATION
Explanation of underlying financial information
Underlying financial information represents profit and loss information derived from the
unaudited management accounts for the relevant operating entities in respect of the half
year ended 31 December 2014 and 31 December 2013 respectively adjusted as follows:
To exclude all revenue and costs associated with previous operating activities that have
now ceased
To exclude non recurring revenue and cost items
References to “underlying” information is to non-IFRS financial information prepared in
accordance with ASIC Regulatory Guide 230 (Disclosing non-IFRS financial information) issued
in December 2011.
Non-IFRS financial information has not been subject to audit.
16CASH MOVEMENT BREAKDOWN
AWN Cash Reconciliation A$ Comments
Cash @ 30 June 2014 97,077,244 As per audited balance sheet on 30 June 2014
Cash @ 31 December 2014 56,845,341 As per audited balance sheet on 31 December 2014; includes SGD8,196,475
Total Cash Movement (40,231,903)
AASSF seed investments (22,493,750) Represent amount invested as at 31 December 2014 (out of $25m seeded into AASSF by AWN)
AAVOF IPO startup costs (305,627) Represents non recurring incremental cost incurred due to Federal Government "flip flop" on FOFA regulations
Intueri IPO transaction costs (1,711,502) Represents non recurring transaction costs incurred for the Intueri IPO
Share buybacks (4,492,742 ) Off market equal access buyback (July 2014) and unmarketable parcels buyback (October 2014)
IQE LTVCP charity payment (8,000,000) Payment direct to charitable foundation (due to Kevin Chin foregoing part of his IQE LTVCP entitlement)
IQE LTVCP APG payment (4,600,107) Includes 10% GST; paid to Arowana Partners Group consultants (netted from Kevin Chin’s IQE LTVCP entitlement)
IQE LTVCP staff payment (1,101,381) Partial payment of LTVCP monies to other staff members
IQE LTVCP payroll tax (458,002) Payroll tax on IQE LTVCP payments (nb: new LTVCP structure approved at AGM in Nov 2014 removes this in future)
HRM LTVCP staff payment (210,000) Partial payment of LTVCP monies to staff members
HRM LTVCP APG payment (547,300) Includes 10% GST; paid to Arowana Partners Group consultants (netted from Kevin Chin’s IQE LTVCP entitlement)
HRM LTVCP payroll tax (11,445) Payroll tax on IQE LTVCP payments (nb: new LTVCP structure approved at AGM in Nov 2014 removes this in future)
Other net operating cashflows (2,305,336) Includes net interest income, non recurring revenue and expense items and regular operating revenue and expenses
Taxes (680,015) Includes miscellaneous taxes (including GST and instalment payments)
HRM net sale proceeds 6,685,304 Represents proceeds net of transaction costs and retention receivable ($878,536) from sale of HRM Asia subsidiary
Total Cash Movement (40,231,903)
1 Breakdown above is unaudited and classifications are based on management accounts
17AASSF INVESTMENT SUMMARY (INVESTED)
AASSF Investments A$m Comments
Ubiquity Power Maintenance Group 14.0 UPMG is an unlisted public company based in Australia (www.upmg.com.au)
(“UPMG”) UPMG provides generator, motor and switchboard installation and maintenance services
The business has experienced difficult trading conditions over the past 18 months
Convertible Notes
However, for the 6 months ended 31 Dec 2014, unaudited revenues were up 28% and EBITA turned positive (versus previous comparable
period)
UPMG is also undergoing a transformation with a focus on customer diversification & alternative energy investments (including VVP below)
The AASSF acquired 7,000,000 convertible notes at $2.00 each (representing voting interest of 11.3%)
The AASSF is represented on the board of UPMG
The UPMG unsecured convertible notes have attractive features as follows:
- A cumulative coupon yield that steps ups from 8.5% to 11.4% per annum from 1 July 2015
- A vote per each convertible note (that is equal ranking with ordinary shares)
- Redemption date of 30 June 2018 (with cash redemption premium of 5%)
- First ranking (as there is no bank debt) with strong covenants (including make good clause)
Ubiquity Power Maintenance Group 6.0 UPMG business description and overview as per above
(“ UPMG”) The AASSF acquired 2,000,000 convertible preference shares at $3.00 each (represents voting interest of 11.3%)
The UPMG redeemable preference shares have attractive features as follows:
Convertible Preference Shares
- A non cumulative preferential dividend yield that steps ups from 8.5% to 11.4% per annum from 1 July 2015
- A vote per each preference shares (that is equal ranking with ordinary shares)
- Redemption date of 30 June 2018 (with cash redemption period of 5%)
- First ranking (as there is no bank debt) with strong covenants (including make good clause)
VivoPower Group (“VVP”) 2.4 VivoPower is an alternative energy PPA (power purchase agreement) company that is focusing on Australia and Asia (www.vivopower.com)
The business has an exponential growth outlook with qualified long term contract opportunities in Western Australia and the Philippines
Ordinary Shares
This investment also presents a strategic opportunity to attract potential direct investment into the AASSF and co-investment from family offices
The AASSF’s shareholding represents a 39.9% economic and voting interest
The AASSF is also represented on the board of VVP
1 As at 31 December 2014
18AASSF INVESTMENT SUMMARY (COMMITTED)
AASSF Investments A$m Comments
Arowana Inc. (“ARWA’) 1.1 Arowana Inc. is a special purpose acquisition company (SPAC) to be listed on NASDAQ
It was originally seeking to raise US$60m but in light of strong interest is upsizing to US$72m (with oversubscriptions up to a total of US$80m)
Foundation Ordinary Shares
In December 2014, AWN committed to being a foundation sponsor shareholder and can hold up to a maximum 5% of the ARWA shares at
an average issue price of US$2.00 per share (versus IPO price of US$10.00)
ARWA will need to consummate an initial business combination (IBC) that is approved by shareholders; if it fails to do so, sponsor
shareholders (including AWN) will lose all of their equity
ARWA’s objective is to consummate an IBC (this alternative energy sector (as opposed to AWN) is 5 fold:
- The US institutional market understand this sector well given comparables such as Sun Edison, Solar City and Vivint, amongst others
- The US listed comparable stocks trade at revenue multiples
- There will be no dividend yield (which is not a priority for growth focused US investors)
- The risk reward profile for this investment in general better matches US investors
ARWA is expected to IPO in April 2015 and will be worth approximately 5 cents per share (of US cash backed ARWA shares) to AWN
Evolution Road Maintenance Group TBA ERMG is a leading Australian HQ provider of infrastructure services specialising in the road corridor
(“ERMG”) It provides traffic control, civil maintenance and training services
ERMG generated revenue of approximately $100m in the 2014 financial year with attractive profitability and free cash flow
Pre IPO facility
On 31 January 2015, AWN entered into an agreement to procure or provide funding of up to $10.2m for ERMG to enable it to finance its
expansion program (including bolt on acquisitions) prior to a potential IPO on the ASX
As consideration, AWN will receive a minimum commitment / arranger fee of $0.2m
As there are common directors on the boards of AWN and ERMG, an independent corporate advisor, Deloitte Corporate Finance
reviewed the agreement and compared it to market based funding agreements to ensure it was fair and reasonable to both parties
Should ERMG pursue an IPO, AWN shareholders may be able to participate in a preferential or priority allocation offer
On this note, the AWN board and management as a policy moving forward will likely ensure that AWN shareholders do receive a
preferential or priority allocation in all future IPO transactions involving Arowana related companies
1 As at 31 December 2014
19AAVOF INVESTMENT SUMMARY
AAVOF Investment A$m Comments
Listed Securities - Proceeds (net of capital raising fees and costs) only received on 29 December 2014
Accordingly, no investments were made in listed securities as at 31 December 2014
Cash at Call 23.0 Represents cash held at call
Interest rate of 2.5%
Term Deposit (1 month) 12.0 Represents 1 month term deposit
Interest rate of 2.92%
Term Deposit (3 months) 12.0 Represents 1 month term deposit
Interest rate of 3.14%
1 As at 31 December 2014
20Arowana International
Half Year Results Presentation
February 2015
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