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Accesso Technology: A Big Autumn Short Part 1

By Tom Winnifrith | Tuesday 2 October 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

In this two part series I shall explain why the valuation of Accesso Technology (ACSO) is quite simply insane. At £29.20 the market cap on the AIM Casino is £791.2 million. That is bonkers. In part two I shall look at the “interesting” way it generates profits and its dire cash generation.  But let us start with sales growth for this is valued as a mega growth stock.

The point I make is that Accesso's growth may not be what the market thinks it is, based on the H1 2018 numbers released on 19th September.

The headline growth number was 17%.  This compared H1 2018 reported revenue with H1 2017 reported revenue.  However, management explained that this was after a change in the accounting standards employed and the “underlying growth” was much higher.

The company moved from IAS18 to IFRS15, impacting revenue recognition.  Previously, the company had been booking some of its revenues on a "gross market value" basis: the whole price of the ticket was booked as revenue, rather than the amount they receive in commission.

Management explained that if you apply IFRS15 revenue recognition to the H1 2017 figures, the "underlying revenue growth" was actually 47%.

The market seems to have liked this argument with the shares trading strongly and the poodle sell-side brokers reiterating their buy recommendations.  However, the calculation seems to ignore the two transformational acquisitions of Ingresso and TE2, which occurred during 2017 (March and July).

By my calculations, if you include the Ingresso and TE2 revenues of H1 2017, the true like-for-like revenue growth was only about 3.9%.

To make this calculation, you have to do two things:

1. First, you have to adjust the H1 2017 reported figure to include the revenues booked by Ingresso and TE2 before they were acquired.

The following sentence helps:

“Had Ingresso and TE2 been part of the Group for the full period, revenue would have been $148.7 million, with profit before tax of $10.8 million.”  From 2017FY accounts, page 56.

Given that FY2017 reported revenue was $133.4 million we can calculate that TE2 and Ingresso generated a combined $15.3 million of sales during 2017 before they were acquired:

(Total revenues including a full year of Ingresso and TE2) – (Reported Revenues)  =  (Revenues of Ingresso and TE2 prior to acquisition)

$148.7 million - $133.4 million  =  $15.3 million

Therefore, adding $15.3 million to the H1 2017 reported revenue figure provides you with a decent view of the combined entity’s revenue generation in that period.  (This estimate works because Ingresso was purchased in March and TE2 was purchased in July.  Therefore, almost all of their pre-acquisition revenues fell in the first half of the calendar year).

2. We also have to adjust the H1 2018 revenue number to put it on the same IAS18 standard.

Fortunately, deeper in the notes of the H1 ‘18 earnings (page 8), Accesso makes the following clarification: 

“If reporting under IAS 18 for the period [H1 2018], revenue would have been $9.9 million higher, and operating profit $1.6 million lower. There was no material impact on the Group's interim statement of cash flows for the six-month period ended 30 June 2018.”

So, to make a like-for-like comparison, you have to adjust the H1 ‘18 revenue figure upwards by $9.9 million.

When you make these two adjustments, which allow you to see the organic growth of the current Accesso group of companies, you get the following picture:

H1 2017 revenue (IAS18):  $61.86 million

H1 2018 revenue (IAS18):  $64.27 million

This equates to just 3.9% growth.  The stock trades at 39 times consensus forecast earnings on a next twelve months basis.

I'm surprised the market is happy with this.  Ingresso and TE2 were really high growth businesses when purchased. That seems to have changed a bit. This is a stock valued to deliver sloaraway sales growth but which, in reality, is not.

If you think that was bad wait till we come to profits ( very much a matter of opinion) and cashflow ( grim reality).  This stock is a slam dunk sell.

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