SLI CEO Ryan bemoans low share price, says it should be $2-plus

SLI Systems [NZX: SLI] chief executive Shaun Ryan says the company's share price is "significantly underpriced" and could be at least four times higher based on other public software-as-a-service valuations.

The Christchurch-based company's share price has sunk about 42% since the start of the year, closing at a record low 70 cents yesterday, less than half its offer price of $1.50 in 2013 and not quite a quarter of the $2.85 high in January 2014. The stock is the second-best performer on the NZX main board today, up 14.3% to 80c, albeit on thin volume, with $77,132 worth of shares traded.

"I'd like to see it much higher. I do believe it's significantly under-priced," Mr Ryan, who owns about 12% of the firm, said during an online briefing for the company's annual results. "At our current valuation our market capitalisation is sitting at about $42 million and we have $35 million of high margin, recurring revenue that has a high retention rate.

"When you look at any other comparable software-as-a-service companies that are public we have an extremely low valuation," he said. "We're confident this is going to change at some stage."

The company today reported a loss of $7.1 million in the year ended June 30, increasing from a loss of $5.7 million a year earlier. Operating revenue increased 27% to $28.1 million, in line with the $28 million guidance given in April, when it flagged that second-half sales would be lower than expected. Annualised recurring revenue (ARR), its preferred financial measure based on forward subscription revenue, rose 39% to $34.6 million.

"When you look at comparable software-as-a-service companies they're typically [trading at] four or even 10 times recurring revenue so there's a lot of room for the share price to move up when currently our multiplier is one times our current revenue," Mr Ryan said.

Based on today's figures, if SLI had a valuation four times its ARR, it would imply a market value of $134.8 million, or a share price of about $2.20. At Mr Ryan's upper limit it would have a market cap of $340.6 million, with shares at $5.56 apiece.

SLI is forgoing profits and dividends to fund growth in the expanding e-commerce market, particularly in the US, and says its software is the second biggest after Oracle to provide online retailers with suggestive search engines.

At balance date the company had $5.6 million of funds on hand. SLI said it is on track to be at cashflow breakeven in the near term and won't require further investment. Annual cash outflow was $5.8 million, with $1.8 million of that spent in the second half, slowing from the first half's $4 million outflow.

"The real positive out of that was they believe that they're almost past the hump where they've got enough capital to meet their growth targets," James Smalley, director at Hamilton Hindin Greene said in explaining today's share price jump. "There's no signs of a capital raising or anything like that, and that would obviously weigh on a share price."

The company's shares have been under pressure after growth and momentum stocks fell out of favour with investors last year.

"It really is, in the absence of pure earnings or a dividend – the beauty is in the eye of beholder," Mr Smalley said. "The market really has gone to a 'I'll believe it when I see it type' valuation rather than pricing companies for growth. It could easily turn around – it's all about sentiment. That's the thing about sentiment, it can change on the flip of a coin."

SLI's stock dropped last September after shareholders sold some 6.8% of the company at the end of a 16-month lock-up period at 23% below the offer price. In the results briefing Mr Ryan said the company has an employee share option programme to encourage staff to think like owners of the company, rather than just workers.

"We've been told there is a perception that staff are exercising their options and selling and that's part of the reason our share price has performed so poorly," Mr Ryan said. "Of current staff, only two sold options in the last year," which amounted to about 80,000 shares while there were 4.3 million in vested options not sold.

(BusinessDesk)

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