Money Talks: Here’s the low-down on why B2B software stocks are a safer bet than B2C
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Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to see what’s hot, their top picks and what they’re looking out for. Today, we hear from Justin Rosenberg, executive director, corporate finance at Gleneagle Securities.
Rosenberg is focused on the Software As a Service sector. He is attracted to such models with high margin and recurring revenue. Rosenberg likes the B2B software space in particular because it is easier for companies to get to breakeven than the business-to-consumer (B2C) software space.
“It’s difficult to launch a B2C company in Australia and then spread it globally to get critical mass,” he explained. Hence, Australia has WAAX (WiseTech, Appen, Aconex, Xero), all B2B, to the US’s FAANG (Facebook, Apple, Amazon, Netflix), all B2C.
Further, Rosenberg focuses on the microcap end where you can find better value if you’re prepared to look for the needles in the haystack. With these smaller companies, the attraction of B2B, according to Rosenberg, is companies can get a re-rating by locking in a major new deal or two.
“For example Bigtincan (ASX:BTH) floated with effectively one key account, which was AT&T, and each time it signs up a key account it gets a significant uptick in its valuation,” he said.
Rosenberg added that the other attraction to software is “optionality”.
“Companies can redirect their commercialisation efforts based on vertical and geography, based on where they’re getting traction,” he said.
In B2B tech, Rosenberg advises to watch out for sales cycle times.
The bigger the opportunity, the longer the cycle.
A related issue is the company’s runway: the cash the company has left assuming no new revenue.
Extended sales cycles can deplete the runway, beginning a downward spiral in the share price as the market expects a discounted capital raising.
Lastly, Rosenberg suggests to stay on the sidelines when a stock is “priced for perfection”.
“One hiccup and the stock can be hit hard,” he said. “Similarly, the market can be fickle and oversell such a stock, creating attractive buying opportunities.”
Rosenberg notes two such cases below: SE1 and FLC.
Israel is a “geographical hot bed” right now, according to Rosenberg, so one of his picks is advanced connectivity technology company Elsight (ASX:ELS), which has a market cap of about $54m.
Halo is the latest secure data transmission tech from Elsight’s suite of products.
It is essentially a credit card-sized receiver and sender of data over cellular networks, which can be inserted into any device – making it applicable in a wide range of markets and technology.
“Companies like Elsight are allowing these robots to see, giving them eyes over cellular networks removing the need to purchase frequencies and build expensive base stations which military agencies needed to do in the past,” Rosenberg said.
He said Elsight is gearing itself up to be the standard in “communications-on-the-move”: data and particularly video connectivity for unmanned or mobile devices.
Rosenberg also likes Internet of Things player Sensera (ASX:SE1), which he predicts will go cash flow positive by the September quarter this year.
The company has a market cap of $31m at a share price of 11.5c.
“Our goal is always to invest in the last raising before cashflow neutrality,” he explained.
“I say ‘neutrality’ because I don’t need start-ups to be profitable as long as they enjoy the high margin and recurring revenue, while they’re reinvesting their money in growth.
“The strategy is often a land-grab — securing the market to dissuade competition. US investors have supported such strategies with healthy valuations for some time.
“Australian investors have been more conservative. I believe this led to an undervaluation on the ASX of promising start-ups and an overvaluation of later stage tech companies.
“I participated in a placement in SE1 at 11c a few weeks ago after watching it since listing a couple of years ago.”
Sensera makes microsensors for the human health, animal health and mining sectors.
“Interesting technology, certainly in a growth area at the right time so it ticks the boxes,” Rosenberg said.
His final pick is water tech company Fluence (ASX:FLC), which has a market value of around $250m.
The company, which makes low-energy, water treatment systems, has secured a $100m deal to provide drinking water to the Ivory Coast.
“It’s already done the hard work to go global,” Rosenberg said.
There were several disappointments along the way such as missed targets, but a merger has made it more attractive, according to Rosenberg.
Fluence emerged from a tie-up in mid-2017 between ASX-listed Emefcy — the company that had the tech — and RWL Water, a New York business founded by Estee Lauder heir Ron Lauder, that had the global connections.
“You end up getting the two companies at an attractive valuation because the market has been disappointed and in the meantime the company is only getting stronger,” he said.
“But the real uptick expected is riding the wave of the water recycling mandate in China.”
Fluence has locked in a deal to install its water recycling units at rest stops along a highway in China’s Hubei province.
“That’s exactly what their technology is perfect for and so we invested recently at about 36c when they came for a non-deal roadshow in Australia,” Rosenberg said.
Fluence reached as high as 58.5c in early April and is currently trading at 46.5c.
Gleneagle Securities has clients with shares in Elsight, Sensera and Fluence.
Since working as a chartered accountant with Arthur Andersen, Justin Rosenberg advised and raised capital for start-ups for over 20 years. Among his current projects, Rosenberg is corporate adviser for Israeli technology company, Elsight Ltd (ASX: ELS) and Managing Director of ASX-listed LGO, overseeing its conversion from an oil shell to an infant milk powder company.