I am interested in this float, does anyone know if they have engaged a broker to help with the sale and if so who.
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I am interested in this float, does anyone know if they have engaged a broker to help with the sale and if so who.
Seeking a possible valuation of $500m, possibly later this year. I imagine interest for this will be huge!
http://www.nzherald.co.nz/business/n...ectid=11277633
Not big on IPO's / not brave enough to stag but have been watching orion for the last couple of years hoping they would list, we see a lot of their software/influence through work (I.T company who specialize/do a lot of work for gp's and healthcare providers)
What are your general thoughts on the software that comes from Orion? Speaking with some colleagues at the DHB reveals mixed reviews, mostly surrounding buggy code and very slow improvement cycles.
I don't work in the healthcare sector, so I don't have any information to provide balance to their claims.
I found this article from today's NZHerald on Orion interesting, primarily because I worked on this sort of stuff (a digitized patient medical history) 20 years ago.
The main issue then was the [lack of] electronic communication between medical providers (GP, specialists, hospitals, pharmacies) so it used a smart-card which the patient carried round with them (for immediacy) with interesting methods of distributing and archiving patient data.
It worked surprisingly well on a fairly wide scale field test, but got canned soon after for reasons that were nothing to do with the project itself.
So I am surprised and yet not surprised that it is still an issue.
I look forward to any IPO documentation with interest.
Best Wishes
Paper Tiger
Are you able to divulge any further details about why it got canned?
(Not really relevant to orion, just for my own curiosity's sake :) )
Should have mentioned that this was not in NZ.
Who is to know the true reason?
Whilst it was generally regarded as good, no one seemed to want to invest the necessary to take it onwards.
Best Wishes
Paper Tiger
From the NBR today, Orion has engaged PR firm Senescall Akers who specialise in IPOs.
Had better start saving my pennies in earnest!
Anyone heard any more about this potential float? Seems to have gone quiet for a bit...
Wait until later in the year, we should hear something by late October
The Orion Health AGM is on 16 September. This may give some indication.
Ex-Fonterra boss Andrew Ferrier has been appointed chairman: http://www.nzherald.co.nz/business/n...ectid=11325685
https://www.orionhealth.com/20141003...unsel-auckland
- Demonstrate a good understanding of the New Zealand Companies Act, Securities Act and Listing Rules (required).
Suffice to say IPO is all go.
There is a special meeting on 17 October to approve the issue of new shares in anticipation of an IPO.
The Sunday Star Times had an article on the IPO.The lead brokers are First Capital NZ and Craigs.
Further details are not far away,[this week or next ]with listing expected before Christmas.
I saw an article in NBR and on scoop attempting to draw a comparison between Orion and Xero.
I speculate that this was Orion's PR company in the background orchestrating the article somehow to try and link Orion to high valuation multiples.
I certainly hope they don't get greedy with this one. I view Orion as more like Gentrak with large customer revenue lumps. GTK also listed well and weren't too greedy with the IPO price.
(Gtk order debacle excepted of course)
There revenues are ~$150 so twice XRO but growth this year will be lucky to be 30% so much less than XRO. Growth the most important if it can be maintained.
Just to throw some numbers around:
SAP is paying nine times Concur’s ratio of enterprise value to estimated sales for next year, Thill said. That compares with the 8.1 times multiple it paid for SuccessFactors Inc., the 3.8 times it paid for Business Objects, and the 3.2 times value that Oracle paid for Sun Microsystems, Thill said.
...
Including debt, the deal is valued at about $8.3 billion.
http://www.bloomberg.com/news/2014-0...3-billion.html
I'd be surprised if Ian didn't take at least some money off the table as having a very large shareholder restricts liquidity plus I am not sure what his salary is but he deserves to have a bit of fun after building such a large company. It would be a very bad look if he sold down post IPO so the IPO would be the best time to do it.
Having said that, he is already down to 58% so he might not want to be diluted too low.
I'd like to speculate that he should dilute down to 35%. If he is over 50% it spooks the instos because they are beholden to his voting rights and don't have sell down liquidity, and if it is too small % it makes everyone suspicious of the motives for the float. A 35% is big skin in the game, and plenty of cash taken out to have fun.
That said, I don't work for FNZC, so won't really get the chance to advise him on what to do.
Things have gone bit quieter on this one, anyone has more to add to the proposed IPO coming up later...
Refer post 17: http://www.sharetrader.co.nz/showthr...l=1#post510217
Once that goes ahead as planned, I assume it will be all on like Donkey Kong!
I have just rung my broker at Craigs.No details for me just yet,not far away.
21 October 2014
PROPOSED IPO OF ORION HEALTH GROUP LIMITED
Orion Health Group Limited (“Orion Health”), a global provider of healthcare software solutions, is considering an initial public offer of ordinary shares to clients of retail brokers in New Zealand and institutional investors.
Orion Health is looking to raise between $120 and $150 million in the offer and an entity associated with CEO Ian McCrae are looking to sell up to $5 million of shares in the offer. The new capital raised would be used by Orion Health to:
(a) Accelerate its Research and Development capacity for new opportunities while maintaining its investment in its long established global business.
(b) Improve its implementation and delivery capability for its growing customer base.
(c) Provide additional financial liquidity.
It is expected that a prospectus and investment statement will be available in late October with the shares to be quoted on the NZX Main Board and ASX in late November.
No money is currently being sought and no applications for shares will be accepted or money received unless the subscriber has received an investment statement. Indications of interest will not involve an obligation or commitment of any kind.
Orion Health has applied to NZX Limited for permission to list and to quote Orion Health’s ordinary shares on the NZX Main Board. Quotation is subject to approval by NZX and NZX accepts no responsibility for any statement made in this announcement. The NZX Main Board is a registered market operated by NZX Limited, a registered exchange under the Securities Markets Act 1988. Orion Health intends to apply to ASX Limited for permission to quote Orion Health’s ordinary shares on the ASX. Quotation is subject to approval by ASX and ASX accepts no responsibility for any statement made in this announcement.
From NBR paywall, if anyone is keen for more details:
UPDATED 10AM: Orion Health Group, a global provider of healthcare software solutions, has confirmed it will raise between $120 million to $150 million in an initial public offer.
Along with raising new capital to fund its attack on the US market, an entity associated with chief executive and founder Ian McCrae will sell up to $5 million of shares in the float.
It is expected that a prospectus and investment statement will be available later this month with the shares to be quoted on the NZX main board and ASX in late November.
It's understood broker reports issued earlier this month had a wide ranging valuation on the company from between $550 million to $900 million though most analysts are picking the valuation will end up around the $800 million mark.
A bookbuild process will be held in early November where fund managers and institutions will state what shares they want and for what price. Deutsche Craigs and First NZ Capital have been appointed lead managers for the offer. There is expected to be strong demand for the IPO which has been talked about for the past two years.
The new capital will be used to accelerate the company’s research and development capacity for new opportunities in the management of patient healthcare, improve the implementation and delivery capability, and provide additional financial liquidity.
Orion Health was founded in 1993 by McCrae who remains the majority shareholder and chief executive. Its cloud-based products and solutions are used by clinicians in more than 30 counties for patient data exchange and to improve co-ordination of their care.
The company is split into three groups: Intelligent Integration which is the original part of the business and allows different IT systems within hospitals to talk to each other; Smarter Hospitals which collects all the information on patients into one portal and allows them to be looked after from administration to discharge from hospital; and Healthy Populations which links all health providers in one area and allows patients access to their own health records.
Most revenue in future is expected to come from the healthy populations group with a drive worldwide, and particularly in the US under Obamacare, to reduce spiralling health costs while improving the level of patient care from birth to death and prevent them needing expensive hospital treatment.
Revenue has grown to $153 million in the year ended March 31, 2014 and though Orion Health has been profitable in the past, it’s not currently while it reinvests most of its healthy cashflow back into expansion globally. Most of that has gone into new hires with total staff numbers now at 1,100 worldwide. It has achieved high growth rates ranging between 25 percent and 30 percent for many years and has a revised target of hitting $1 billion revenue by 2020. Some 90 percent of revenue is derived offshore.
http://www.sharechat.co.nz/article/7...ipo-price.html
Quote:
The company has issued three lots of new shares this year, in June and August, with the shares priced on each occasion at $4 per share. That price multiplied by Orion Health’s current total shares of 140,033,954, values the company at $550 million.
Holy cow. I just looked at their careers page, and they're hiring like crazy all over the world right now. I'm going to get my kids learning how to code- the number of jobs available in NZ, and elsewhere, with these guys, Xero, and others is off the hook. In terms of ambition, I guess Orion are planning a major push toward global domination based on their hiring plans.
Extract from NBR website: Price set between $4.30 to $5.70 per share, thoughts??? Bit steep IMO...
"Orion Health Group, which develops software systems for patient health management, wants to raise up to $150 million in an initial public offer which would value the firm at almost a billion dollars and give public investors up to 17.4 percent of the company.
The Auckland-based company plans to sell between 21.9 million and 29.1 million shares at $4.30 and $5.70 apiece, raising between $125 million and $155 million, the bulk of which will be new capital, according to its prospectus. That would value the company at between $720 million and $915 million by market value.
Alongside the new capital chief executive and founder Ian McCrae selling up to $5 million into the float. (Mr McCrae, recently added to the NBR Rich List, owns 58% of the company). Existing shareholders are estimated to keep between 82.6 percent and 86.3 percent of Orion after the float.
The new funds will be used to accelerate the company’s research and development capacity for new opportunities in the management of patient healthcare, improve the implementation and delivery capability, and provide additional financial liquidity.
A final price is expected to be set on Nov. 7, with a dual-listing on the NZX and ASX scheduled for Nov. 26. The offer opens on Nov. 10 and closes on Nov. 21.
Orion’s revenue grew to $153 million in the year ended March 31 and while it has been profitable in the past, it’s not currently because it is reinvesting most of its cashflow back into global expansion.
The company is forecast to post a loss of $14.8 million in the six months ended Sept. 30, 2014 on sales of $80.5 million. Annualised recurring revenue, the favoured sales measure of software as a service firms, is expected to rise to $52.1 million in the first half of the 2015 year from $44.2 million as at March 31.
The software developer has reinvested most of its recent cashflow into new hires, with total staff numbers now at 1,100 worldwide. It has achieved high growth rates ranging between 25 percent and 30 percent for many years and has a revised target of hitting $1 billion revenue by 2020. Some 90 percent of revenue is derived offshore."
Looks like a great deal...for the promoter's.
"value the company at between $720 million and $915 million by market value."
I guess they must be happy to list at the lower end of their IPO range.
I was really looking forward to this IPO. I am quite deflated now. Why do some companies get too greedy whne they list? It ruins the IPO and hangs over the stock for months.
Annualised recurring revenue of $55m with a potential $915m sell tag?! This is nearly 20 times recurring company revenue - revenue! Not even talking about earnings!
Okay, my mistake about the 6 months, but the full revenue isn't realy the money earner, so using annualised revenue again (for the whole year) you would have $915m / $110m = 8.3 which still makes me choke on my coffee.
Full revenue number isn't so bad, so I accept my initial posting is incorrect.
fact sheet just released by FNZC
Their ARR is up about 30+% and historically over 25%. I heard their target for this year was $200m so it looks like they will be short of that. However, we dont know their sales profile. I knew one company that did 50% of their sales in the last month - it did this year after year.. i would be very surprised if growth this year was less than 20%.
That is for first half. Still the second half to go.
Well we will know the price before applications are due. Which probably means if its priced low, I wont be able to get an allocation, or if priced high, I can get as much as I want.
http://www.nzherald.co.nz/business/n...ectid=11349437
Definitely not for me.
I probably will as I don't have any tech stocks. It will be a bottom draw share but happy to hold quality.
What's the point of not wanting to over-promise and yet pricing in 25-50% growth?
Some back-of-the-envelope calculations of how much growth is priced in based on (growth rate % / 10) + 1 = forward revenue multiple formula.
Scenario 1 assuming 200m forward revenue
720m=3.6x P/S=26% growth
915m=4.6x P/S=36% growth
Scenario 2 assuming 160m forward revenue
720m=4.5x P/S=35% growth
915m=5.7x P/S=47% growth
Where is the discount/upside that hasn't been priced in?
What is Gentrack's P/S I wonder?
I was comfortable with a listing range of $500m - $800m, but ratcheting it up to $720m-$915m and then not providing any forecasts seems a bit out-there for me.
The way I look at it is this...
The company is being valued at roughly $1b based on the fact that in 2020 it could end up with $1b worth of sales. Putting a finger in the air, I deduct that they get a net profit of 10% of this, leading to about $100m of net profit, which is then paid as an 85% dividend, or $85m. Which we then value as at about $1b due to the returns.
err.... so, we are paying $1b for a company that in 2020 might be worth erm.... $1b.
Overly simple numbers, but the point is... where have you left anything on the table for me?
Greedy. I'm out.
I agree with Casino and GoldenStag - there is an awful lot of growth over a lengthy time period priced into the offer price. Even if the company delivers (the likelihood of which I am unable to assess based on information provided), I don't see where the upside is for the punters.
No interest whatsoever from me.
If they were on track for 200m, I could easily see them trade at 1.2B after a short while. Without any indication, we don't know if/how soon the raised money will put them back on a sustainable growth track or even above it. There is a lot to be liked here but I would like them to inspire more confidence and excitement.
I was really looking forward to this IPO. Another Hirepool though. Shame.
If someone put a gun to my head, (you'd have to because I wouldn't buy either), and said would you buy this or XRO ? I'd choose XRO in a heartbeat. At least that has genuine dynamic growth and is substantially made up of recurring business regardless of how over-priced it may be. I find it peculiar that such a small float would seek a dual listing with all the extra costs that incurs and the size of the company's loss $14.8m for the six months to 30 September 2014 on turnover of only $80m looks like a real worry especially seeing as how the company has been profitable before. How is it that the company has been able to grow at 25-30% growth in the past while remaining profitable.
All the low hanging fruit in this niche health sector already picked ? Floating a pup with little to no chance of making any money in the foreseeable future ?
Current growth rates slowing despite massive increase in new staff hire ? Pricing in the next six years prospective growth that may or may not happen into the present IPO price like reestablishment of consistent 30% growth in future years is a given ?
Have we got another Hirepool on our hands with a blatantly greedy promoter ?
I had a brief look
Biggest red flags for me are
-McCrae retaining between 49.15% to 51.43% giving him so much control over votes.
- No guidance, if they can't forecast it then how the hell am i supposed to haha.
-To hard to value for me by DCF or other methods and i'm not a fan of P/S multiples.
- Goal of $1b Revenue in 2020 from my calculations assumes a Forward CAGR of 35.3% which IMHO i can't see considering
the 10 year operating revenue CAGR of 26%. Even though new funds should raise this and between 2010-2014 the CAGR was 33.6%.
- This highly speculative growth seem's very much priced in.
-They seem to have stumbled and $185m FY2015 seems more likely than $200m In my opinion.
Good Points
- Directors have significant skin in the game.
- Growing industry, a lot of growth available.
Overall personally i feel its a great company, but not a great price where the indicative price assumes a great deal of speculative growth. I see fair value in the lower range about $4.43. There are other speculative stocks such as ATM which offer more value in my opinion. I will wait to see broker research but apart from maybe a stag i'll most likely be on the sidelines.
http://www.nzherald.co.nz/business/n...ectid=11349590
Herald article about the reaction to the weird "no forecast" decision by Orion.
I accept that software companies often have strange revenues. One I was working for actually had sales drop to $0 in one month during the Telco crisis. But Orion could have put a conservative sales forecast and then beat it. Why didn't they? I believe it is because it wouldn't then justify the silly price range they've gone for.
One has to ask why they are going to market? It is to rasie funds while they are losing money and trying to land grab. All good, but why wouldn't they just borrow the money for a small 150m? Well, rates are looking to rise, and going to market is risk-free capital for them, only downside is all the moaning punters who actually want a good investment. (like me)
I'm still somewhat bitter over this one. Why no forecasts and a stupid price range?
A great company, shame about the price.
Great companies grow in a disciplined and well managed manner. For a company to have previously been this profitable in 2013 and growing at circa 30% and then slide towards a substantial loss with a materially slower growth something has gone wrong. There's a lot they're not saying by refusing to give forecasts. Maybe they have very little immediate prospects for new customers ?Quote:
Salt Funds Management managing director Paul Harrison said the lack of prospectus forecasts - combined with the $14.8 million loss Orion has reported for the six months to September 30, up from a $4 million loss in the same period of last year - was "disconcerting". "It doesn't give investors much to go on, particularly in a business that you're expected to pay for growth opportunities."
However, Harrison reckoned investors would give Orion "the benefit of the doubt".
Another fund manager, who did not want to be named, said the lack of forecasts required a leap of faith by investors. "Personally, if I don't get forecasts I don't invest."
Andrew Ferrier, Orion's chairman, said forgoing forecasts was "the prudent thing to do" and a huge amount of financial information was included in the prospectus.
Orion was previously profitable, with profit rising from $385,000 in the 2010 financial year to $7.8 million in the year to March 2013, according to the prospectus.
Could it be as I suggested yesterday that all the easy low hanging fruit has already been picked ?
Why everyone keeps saying its a great company is a complete mystery to me. If it was so great they'd be building on the 2013 profit of $7.8m and still growing at 30% instead of now making massive losses and growing at a significantly slower pace...WTF ?
Love the fund managers comment who refused to be named who said, "personally if I don't get forecasts I don't invest", sums up a prudent person's thought processes in a lovely succinct way.
Investors rejected Hirepool promoters blatant greed and I was one of the first to call that the float might have to be pulled through lack of demand.
It wouldn't surprise me in the slightest if we see the same thing happen again. Just because something is in the racy sector of software and healthcare does not give promoters the right to stratospheric IPO pricing that already encapsulates many years of future highly speculative growth as though the growth had already happened.
Spoke with an investment banker who has dealt with Orion Health before. Arrogant and unrealistic are his comments.
Amen.
Unknowns = uncertainty yes
My view is they,re stepping on the gas this year to capture the market,just taken on 500? new staff to ramp this up.This would have a material affect on expenses of say $100,000/new employee ?($50,000,000)
This would affect bottom line initially until sales ramp up
In my view Ian McCrae has done a great job getting the co where its got to without markedly diluting his shareholding,taking on more debt,or continuing to go back to shareholders for capital raising
It has been farely cash flow neutral pretty well since its formation.That takes a great CEO to achieve that with this type of rapidly developing company
From what I,ve seen it also does not have any ? options to dilute shareholdings once it is listed
It is a shame that Brian Gaynor is already in the mix. He is often one of the more vociferous and dissenting characters out there and I greatly respect him for it. However; this time he sits uncomfortably on the sell-side (sort of) and it is unlikely we'll get to hear him go both barrels at the IPO documentation like I think he would.
I haven't seen anywhere that Milford are looking to exit ???
On the plus side for the float
1)Milford Asset Management have previously "voted" with there wallet.They supposedly liked something ?
2) This will be tightly held
3) NZX 50 inclusion ?
4)CEO has IMHO tightly managed cash flows to grow the business to where its got to.A remarkable achievement.
5)Fast growing Healthcare
6) Pricing at IPO relatively inexpensive to turnover compared to Xero
7)IPO will be at lower end of indicative range because of uncertainties regarding forward T/O & profitability ?
Disclaimer:Investor in Orion Health
1) Milford bought at a $550m valuation price. I'd buy too at this price.
2) Yes. Low liquidity though.
3) NZX50 has liquidity calculations for inclusion. So, with McCrae holding so much, it may mean it can't get into the index. Anyone able to confirm?
4) Hmmm. I'm not sure of this one. He has brought on investors throughout the time and sold their building etc to keep everything going. This isn't really a cashflow magician.
5) Absolutely!
6) Comparison to XRO is only due to being a growth stock, nothing more IMHO. Lumpy sales into big organisations like hospitals and power companies smacks more like Gentrack to me.
7) I like your crystal ball. This isn't a plus side, this is an issue. No forecasts is just plain weird.
No forecast means none of my money will head their way. I am not even going to bother reading their prospectus.
A single question though - are current shareholders required to escrow all or part for any period?
IMO, the most professional IPO seen in recent years was Synlait. The price left plenty on the table for the bright-eyed new shareholders, and existing holders were locked away for a declared portion of their holding. THAT IS CLASS
At a far lower price but at an earlier stage/risk in the companies development
I endeavor to invest in the Q of management not just the Co
I'm totally with Balance on the arrogant and unrealistic comment. Quality management make sensible conservative and pragmatic forecasts and grow their company is a disciplined and sensible way and bring a company to market with sensible financial ratio's. Taking on 500 staff and being unable to assure the market that growth will not even continue at previous rates when the company was profitable looks like a highly risky strategy i.e. like an all or nothing bet to me...with other people's money. Quality management...yeah right, is it too early for a Tui ? Thanks for disclosing your vested interest but with all due respect it was plainly obvious already.
Thanks for your pro view kiora and your equanimity. always good to get bit of balance and opposing views.
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".
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.
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
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.
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...
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 RecommendationSoftware 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.
Thanks JT.
Has anyone read the IM to see what lockup is for existing shareholders.