Orion Health

[GoldenStag]

If it has listed last year when everyone was bullish on tech stocks, it would have been different. They could have sold at over $1B and everyone would have been piling in.

Yep. I was quite thankful that the instos stood up to Hirepool and voted with wallets closed. It helped bring perspective again.

As I've said before, I view Orion more like Gentrack than Xero with the same traits - software, growth, lumpy sales, sticky customers, potential moat. So, let's look at GTK here...

Market capitalisation
GTK = $150m versus Orion = $720m - $915m ( x 4.8 - x 6.1 )

Revenue
GTK = $40m versus Orion = $160m - ( x 4)

EBITDA
GTK = $14m versus Orion = -$5m - ( x -0.4 ) but looking further back to be generous Orion 2012 = $8m ( x 0.6 )

Don't get me wrong, I really like Orion and its prospects above that of Gentrack. But in a comparison all of the good things like EBITDA and Revenue don't have big multipliers, and all of the bad things like price do have big multipliers. So, stacking one software company against another software company with similar lumpy customers and global growth, you get some strange comparison numbers.

It leaves me wondering where the good stuff is for the investors. Are we just supposed to go "Okay we'll give you money based on how much you say it is worth and when you feel like it, you can give us some money later if you reach your goals in 2020".

[GoldenStag]

Market capitalisation
GTK = $150m versus Orion = $720m - $915m ( x 4.8 - x 6.1 )
Revenue
GTK = $40m versus Orion = $160m - ( x 4)

The interesting this is that if you kept the revenue multiplier of 4 for GTK to Orion and applied it to market capitalisation, then you would get Orion = GTK x 4 = $150m x 4 = $600m.

Now this is an okay price number and would be in the original mooted $550m - $800m price range.

I'd be keen at $600m and also happy to pay a bit of a premium above that because I like Orion's prospects. But it still wouldn't get up to the $720 - $915m range of the IPO.

[kiora]

Yep. I was quite thankful that the instos stood up to Hirepool and voted with wallets closed. It helped bring perspective again.

As I've said before, I view Orion more like Gentrack than Xero with the same traits - software, growth, lumpy sales, sticky customers, potential moat. So, let's look at GTK here...

Market capitalisation
GTK = $150m versus Orion = $720m - $915m ( x 4.8 - x 6.1 )

Revenue
GTK = $40m versus Orion = $160m - ( x 4)

EBITDA
GTK = $14m versus Orion = -$5m - ( x -0.4 ) but looking further back to be generous Orion 2012 = $8m ( x 0.6 )

Don't get me wrong, I really like Orion and its prospects above that of Gentrack. But in a comparison all of the good things like EBITDA and Revenue don't have big multipliers, and all of the bad things like price do have big multipliers. So, stacking one software company against another software company with similar lumpy customers and global growth, you get some strange comparison numbers.

It leaves me wondering where the good stuff is for the investors. Are we just supposed to go "Okay we'll give you money based on how much you say it is worth and when you feel like it, you can give us some money later if you reach your goals in 2020".

Yes I agree with what you are saying Goldenstag. In my view investors also need to assess the potential market and the ranking of the Company in that market.There are others in Orion Health space but they have first mover advantage particularly in the USA ? Which also carries its own risks etc

[Harvey Specter]

As I've said before, I view Orion more like Gentrack than Xero with the same traits - software, growth, lumpy sales, sticky customers, potential moat.

Good comparison. Do you know what GTK historical growth looks like?

[GoldenStag]

Good comparison. Do you know what GTK historical growth looks like?

GTK revenue
2012 $13m
2013 $40m
2014 $38m (forecast)

[Tomtom]

Obviously I'm terribly old fashion in expecting goals and forecasts...all that stuff that holds companies to account and sets expectations. Similarly in expecting to earn a return on my investments. Clearly I'm not clever enough to invest in this new paradigm.

[Beagle]

Two examples of egregious greed in IPO pricing in one year, who'd have thought that those promoters wouldn't have learned from the Hirepool fiasco...

[Joshuatree]

From Market analysis James Cornell

Orion Health Group Ltd, a software company established 21 years ago, is seeking to raise $120 million in new cash from the issue of 21.1 - 27.9 million new shares at a price of 430-570 cents per share.

Existing shareholders will also sell $5.0 million worth of shares (i.e. 0.9-1.2 million shares) to the public in the Initial Public Offering.

Orion Health Group was a profitable business through to March 2013, earning a net profit of $7,750,000 but since 2012 has been “strategically focused on aggressively growing market share” in the United States, which has “required us to scale our delivery at a speed which has generated challenges, which in turn has adversely impacted our margins in the short term”.

In other words, they have had to spend a lot more on Research & Development and on Sales & Marketing to grow in a very competitive market. Expenses have increased faster than revenues and the business has become unprofitable.

Why would you want to buy into a company that had been “adversely impacted” by events? Perhaps because that might depress the share price and offer a low buying opportunity? Well, that does happen on the stockmarket, but not in the IPO market!

How “adversely” has Orion Health Group been impacted? Judge for yourself. The prospectus uses the word “adversely” no less than 42 times. Investors may be a little “adverse” to invest in a company with that many problems.

So lets look at some valuation statistics.

The market capitalisation after this Initial Public Offering will be around $720-915 million (depending upon the issue price of the shares). That is 93-118 times the net profit earned in 2013 (i.e. a P/E of 93-118) but the company became unprofitable in the year to March 2014 with a loss of $1,137,000. In the half year to 30 September, the company lost $14,756,000. Unfortunately, there is no suggestion that the company will return to profitability in the foreseeable future!

At least the brokers selling this IPO don't have to worry about a ridiculously high P/E ratio - but perhaps investors should worry.

Annual revenues to March 2014 were $153.0 million. Only 29% were recurring revenues, although these will increase in the future as the company moves from one-off, upfront, perpetual software sales to recurring annual Software as a Servicerevenues. Unfortunately this transition adversely - yes, that word again - impacts on revenue growth and profitability in the short to medium term.

We like software companies but profitable software companies can be purchased on Price/Sales ratios of 3-5½ (or lower). Orion Health Group's $720-915 million market capitalisation is a Price/Sales ratio of 4.7-6.0. That looks a little expensive, especially as most revenue growth has been from lower margin “implementation services” and “managed services” while high margin “perpetual licence” revenues will decline significantly (i.e. from more than 30% of revenue to just “10-15%” over the “medium term”).

For an unprofitable software company, we might be more interested at a P/S of 2-3. That would value the shares at about halftheir proposed IPO price.

Summary and Recommendation

Software is a great business, especially companies (like Integrated Research and Technology One) that can finance Research & Development (to improve and expand their services) and Sales & Marketing (to win new customers) out of revenues to generate profitable growth and also pay dividends!



Unprofitable software companies involve much higher risks, so are less attractive for investment. Logic is inverted when they are priced at a higher valuation. Why would investors pay more for a company that fails to earn a profit and is unable to finance its growth from internally generated cashflows?

So Orion Health Care may be a great company, but at a high valuation and with an unprofitable business it is not something we shall be buying for our portfolio.

[Harvey Specter]

Thanks JT.

Has anyone read the IM to see what lockup is for existing shareholders.

[kiora]

Thanks JT.

Has anyone read the IM to see what lockup is for existing shareholders.

Interesting article from JS .Plenty of reasons why not to buy ! Lock up is 3 months from listing HS