I have for a long time been favourable about ENGIN, however things are starting to smell a little
these are my observations, so please make your own decision about the stock
i am not saying that the stock market will not do some crazy things to the price, like it did to OneTel, but I am saying the underlying value of the company is not that solid (like OneTel).
A Few Observations
Subscriber Numbers (paying) - taken from releases
-39000 at 30 June 2006
-43000 at 25 July 2006
-46000 at 29 September 2006
this means that in the 66 days from 25th July 2006 til 29th September 2006 there was 3000 lines added (only). ie 45 lines per day, ie 1363 per month!!! This is a very significantly less amount than the 4000 - 5000 per month
** comment - I rang Paul Jeronimo to ask if these figures for the 29th of Sep were correct, he confirmed that they were correct, and explained the problem was a "seasonal" problem, and that with further marketing spend the numbers would pick up again. Note also, that the market release dated 17 October 2006 quotes subscriber numbers as 43000 at the end of July 2006. ie, the company at the time of the release of this statement just used old subscrber number fiugures and not the most recent.... it seems that the company may have thought that the current subscriber numbers may not be flattering.... Note also, the company quotes in the 17 Oct release that the number of minutes per month is currently 15m per month (when the July figure was 13m per month)... ie they quote old subscriber numbers and new minutes per month. Please ring Mr Jeronimo and discuss with him
Performance Targets for 2006
from announcement 29 sep 2006
"Performance related bonuses
• Subscriber base – measured on subscriber numbers
• Reliability of network – measured on network uptime
• Customer service measures – measured on customer surveys and call centre statistics
• Employee satisfaction – measured by staff turnover rates and staff feedback
• Cashflow management to targets
• Successful capital raising
• EBITDA monthly breakeven point by 30 June 2006
• Subscriber base of 30,000 subscriber lines by 30 June 2006"
Performance Guides for 2007
"The criteria set for the upcoming financial year to 30 June 2007 are summarised as follows:
• EBITDA target
• Subscriber base in excess of 100,000 subscriber lines by 30 June 2007
• Reliability of network – measured on network uptime
• Customer service measures – measured on customer surveys and call centre statistics
• Employee satisfaction – measured by staff turnover rates and staff feedback
** comment - note the performance goal for 2006 for EBITDA breakeven was not achieved, note the EBITDA breakeven is not a goal for 2007 (just EBITDA "target"). I spoke to Mr Jeronimo about this statement. He said that with all the upgrades and future marketing spend that the company will be spending he does not see EBITDA break even this financial year. I asked him when he sees EBITDA breakeven, and he said that would be yet to be seen. I asked about dividends, and he said not for a while yet. We have been promised EBITDA breakeven before the end of the last fin year, then in the first quarter of this financial year, and now next year! I think it is a carrot that is forever out of reach
Financial Results (page 14 annual report)
first 6/12 of fin year loss = $5.1m
second 6/12 of fin year loss = $4.8m
(then there are tax benefits added to these)
** comment - despite increasing subscriber numbers from 5800 to 18000, then 18000 to 39000, there is minimal improvement in the financial results. This is exactly the situation that Vonage in the USA has seen. They now have some 2m subscribers and are still unprofitable. With Vonage, if you exclude the marketing spend, they are still unprofitable. With engin if you exclude the marketing spend the financial loss is $2.2 m less for the year... ie like vonage (even excluding marketing) then they are still unprofitable.
Other VOIP providers
look at MNF - unprofitable
look at Broap - just purchased by MNF
FRE (a wholesaler) - progressively increasing losses
Vonage - as above
** comment - I am not sure that VOIP is a profitable enterprise, well at least world wide it has not been shown to be profitable
Call costs
I use the engin phone, sometimes it is good and other times it is poor quality. I put up with it because to my friends it is free, but is does break up etc. I certainly have reduced the phone bill now down to $17 - $20 per month (of which it is $9.95 per month signup fee). I am paying much less per phone bill, which is good for me. According to the surveys, people are saving on average some 75% on their phone bills. Now broadly speaking, this reduction in costs is coming from margin of the phone company. I think perhaps the call costs are priced too low to be profitable. I note the average subscriber income is $30 per line, I note Vonage USA average income is $27US (ie $36 australian).
** comment - I am not sure that this level of cost of phone call is ever profitable
total of directors remuneration = $1,691,969 for 2006, plus now a request from the directors to approve an increase of director remuneration by $250,000 for next year (for the non exec directors) and who knows what for the executive directors
**** comment - seems a little much for a company that is still making a loss of $10m per year. Although the comany is making a loss, the directors are being paid very well indeed
directors options ... issue of some 6m options, the exercise price of these options are 0c, and there is facility present for a retiring director to claim these options early (read the current report). Note, also the quoted number of securities held my Mr Tales on page 75 of the annual report was 3.585901m, as per the share register 20 sep 2006 it was 1.5m. I am not sure if he owns shares in various names etc and hence things do not appear on the share registry but it would appear as though he has sold some 2m shares between 30/6 and 20/9. I thought that changes in directors holdings had to be notified so I am not sure if this is true.
**** comment - what kind of performance target is an option price of 0c, it does not encourage anything
Value of Seven Association
**** comment - personally I can not see exactly why there is so much value in the association with the seven network. The release called at a "watershed" and a "landmark change". Why? I do believe that engin has arranged to spend some $2.75m with seven in advertising per year (I think this was the figure from a report). I guess for $26m, seven has secured a 10.5% return of increased advertising for their $26m (ie $2.75m/$26m), but they have put their $26m at risk. I think the value of the seven association lies in the fact that $26m gives financial security for Engin for at least the next 2 yrs without the need to further capital raise
Value of Shares
the price peaked at about 50c a few months ago... for 230m shares ie value of the company was $115m. I think we would all agree that this was over valued! If nothing had changed then $26m more capital and 119m more shares ie value per share is $141/349 = 40c per share. Which, as above we would all agree is over priced.
For a different share price (see below)
share price post dilution price
50c 40.4c (as above)
40c 33.8c
30c 27.2c
24c 23.2c (the price was closest to here)
22c 22c (as expected because of neutral dilution)
Earnings model of expected share Value
the company is making losses so we can not predict
but consider to have a return of 1c per share in profit, this half year was $4.8m loss, ie at $30 per sub line, just to make the EBITDA neutral, the company needs a further 26666 subscribers ($4.8m / 30 / 6). To make 1c per share ie $3.49m (per six months) they need another 19388 subscribers, ie they need another 46000 subscribers . This calculation assumes no increased costs of managing the new subscribers and no cost of acquiring new subscribers. Add this to the average of 28500 lines for the 6 months of this calender year would make 74500 lines to make 1 c profit for the 6 months (ie 2 c per year). On a PE of 20 (very generous) this makes, 40c per share, more realistic PE would be 15, ie 30 c per share. This is an ideal situation, where there is no acquisition costs and no ongoing management costs. The company quotes marketing costs of $85 per new subscriber, hence to get those further 46000 new subs would cost $3.91m (some 11000 subs for that financial year), plus costs associated with managing the subscribers, plus management costs plus plus plus
One thing that took me a long time to grasp, was that the more subscribers DOES NOT MEAN more profit, as is demonstrated this financial year reports.
Reason behind money raising!
I think the company was running very short of cash, and they had to raise equity soon. This is why the company made such a deal with Seven. This is contrary to prior releases that the company expects to have enough case to progress to breakeven.
In any case.....
make up your own mind!!!
I do not think the underlying company is worth much, but make your own decision, perhaps 15-20c as a speculative buy
why don't you call Paul Jeronimo and discuss this posting with him (((Paul Jeronimo (Company Secretary) on 02 9004 4178))).
I think perhaps the company directors should be asked to make a statement about whether the company will ever be profitable (in their opinion) and quote figures to back up their assessment. They should at least be asked to give clear estimates as to how many subscribers would be necessary to make breakeven! This should be requested and provided prior to the arrangement with the Seven Network going ahead.
ij
ps: for the record, I have never been an employee of engin in any way, I do have an engin phone (and like it) and I was a shareholder of Eng until recently.
these are my observations, so please make your own decision about the stock
i am not saying that the stock market will not do some crazy things to the price, like it did to OneTel, but I am saying the underlying value of the company is not that solid (like OneTel).
A Few Observations
Subscriber Numbers (paying) - taken from releases
-39000 at 30 June 2006
-43000 at 25 July 2006
-46000 at 29 September 2006
this means that in the 66 days from 25th July 2006 til 29th September 2006 there was 3000 lines added (only). ie 45 lines per day, ie 1363 per month!!! This is a very significantly less amount than the 4000 - 5000 per month
** comment - I rang Paul Jeronimo to ask if these figures for the 29th of Sep were correct, he confirmed that they were correct, and explained the problem was a "seasonal" problem, and that with further marketing spend the numbers would pick up again. Note also, that the market release dated 17 October 2006 quotes subscriber numbers as 43000 at the end of July 2006. ie, the company at the time of the release of this statement just used old subscrber number fiugures and not the most recent.... it seems that the company may have thought that the current subscriber numbers may not be flattering.... Note also, the company quotes in the 17 Oct release that the number of minutes per month is currently 15m per month (when the July figure was 13m per month)... ie they quote old subscriber numbers and new minutes per month. Please ring Mr Jeronimo and discuss with him
Performance Targets for 2006
from announcement 29 sep 2006
"Performance related bonuses
• Subscriber base – measured on subscriber numbers
• Reliability of network – measured on network uptime
• Customer service measures – measured on customer surveys and call centre statistics
• Employee satisfaction – measured by staff turnover rates and staff feedback
• Cashflow management to targets
• Successful capital raising
• EBITDA monthly breakeven point by 30 June 2006
• Subscriber base of 30,000 subscriber lines by 30 June 2006"
Performance Guides for 2007
"The criteria set for the upcoming financial year to 30 June 2007 are summarised as follows:
• EBITDA target
• Subscriber base in excess of 100,000 subscriber lines by 30 June 2007
• Reliability of network – measured on network uptime
• Customer service measures – measured on customer surveys and call centre statistics
• Employee satisfaction – measured by staff turnover rates and staff feedback
** comment - note the performance goal for 2006 for EBITDA breakeven was not achieved, note the EBITDA breakeven is not a goal for 2007 (just EBITDA "target"). I spoke to Mr Jeronimo about this statement. He said that with all the upgrades and future marketing spend that the company will be spending he does not see EBITDA break even this financial year. I asked him when he sees EBITDA breakeven, and he said that would be yet to be seen. I asked about dividends, and he said not for a while yet. We have been promised EBITDA breakeven before the end of the last fin year, then in the first quarter of this financial year, and now next year! I think it is a carrot that is forever out of reach
Financial Results (page 14 annual report)
first 6/12 of fin year loss = $5.1m
second 6/12 of fin year loss = $4.8m
(then there are tax benefits added to these)
** comment - despite increasing subscriber numbers from 5800 to 18000, then 18000 to 39000, there is minimal improvement in the financial results. This is exactly the situation that Vonage in the USA has seen. They now have some 2m subscribers and are still unprofitable. With Vonage, if you exclude the marketing spend, they are still unprofitable. With engin if you exclude the marketing spend the financial loss is $2.2 m less for the year... ie like vonage (even excluding marketing) then they are still unprofitable.
Other VOIP providers
look at MNF - unprofitable
look at Broap - just purchased by MNF
FRE (a wholesaler) - progressively increasing losses
Vonage - as above
** comment - I am not sure that VOIP is a profitable enterprise, well at least world wide it has not been shown to be profitable
Call costs
I use the engin phone, sometimes it is good and other times it is poor quality. I put up with it because to my friends it is free, but is does break up etc. I certainly have reduced the phone bill now down to $17 - $20 per month (of which it is $9.95 per month signup fee). I am paying much less per phone bill, which is good for me. According to the surveys, people are saving on average some 75% on their phone bills. Now broadly speaking, this reduction in costs is coming from margin of the phone company. I think perhaps the call costs are priced too low to be profitable. I note the average subscriber income is $30 per line, I note Vonage USA average income is $27US (ie $36 australian).
** comment - I am not sure that this level of cost of phone call is ever profitable
total of directors remuneration = $1,691,969 for 2006, plus now a request from the directors to approve an increase of director remuneration by $250,000 for next year (for the non exec directors) and who knows what for the executive directors
**** comment - seems a little much for a company that is still making a loss of $10m per year. Although the comany is making a loss, the directors are being paid very well indeed
directors options ... issue of some 6m options, the exercise price of these options are 0c, and there is facility present for a retiring director to claim these options early (read the current report). Note, also the quoted number of securities held my Mr Tales on page 75 of the annual report was 3.585901m, as per the share register 20 sep 2006 it was 1.5m. I am not sure if he owns shares in various names etc and hence things do not appear on the share registry but it would appear as though he has sold some 2m shares between 30/6 and 20/9. I thought that changes in directors holdings had to be notified so I am not sure if this is true.
**** comment - what kind of performance target is an option price of 0c, it does not encourage anything
Value of Seven Association
**** comment - personally I can not see exactly why there is so much value in the association with the seven network. The release called at a "watershed" and a "landmark change". Why? I do believe that engin has arranged to spend some $2.75m with seven in advertising per year (I think this was the figure from a report). I guess for $26m, seven has secured a 10.5% return of increased advertising for their $26m (ie $2.75m/$26m), but they have put their $26m at risk. I think the value of the seven association lies in the fact that $26m gives financial security for Engin for at least the next 2 yrs without the need to further capital raise
Value of Shares
the price peaked at about 50c a few months ago... for 230m shares ie value of the company was $115m. I think we would all agree that this was over valued! If nothing had changed then $26m more capital and 119m more shares ie value per share is $141/349 = 40c per share. Which, as above we would all agree is over priced.
For a different share price (see below)
share price post dilution price
50c 40.4c (as above)
40c 33.8c
30c 27.2c
24c 23.2c (the price was closest to here)
22c 22c (as expected because of neutral dilution)
Earnings model of expected share Value
the company is making losses so we can not predict
but consider to have a return of 1c per share in profit, this half year was $4.8m loss, ie at $30 per sub line, just to make the EBITDA neutral, the company needs a further 26666 subscribers ($4.8m / 30 / 6). To make 1c per share ie $3.49m (per six months) they need another 19388 subscribers, ie they need another 46000 subscribers . This calculation assumes no increased costs of managing the new subscribers and no cost of acquiring new subscribers. Add this to the average of 28500 lines for the 6 months of this calender year would make 74500 lines to make 1 c profit for the 6 months (ie 2 c per year). On a PE of 20 (very generous) this makes, 40c per share, more realistic PE would be 15, ie 30 c per share. This is an ideal situation, where there is no acquisition costs and no ongoing management costs. The company quotes marketing costs of $85 per new subscriber, hence to get those further 46000 new subs would cost $3.91m (some 11000 subs for that financial year), plus costs associated with managing the subscribers, plus management costs plus plus plus
One thing that took me a long time to grasp, was that the more subscribers DOES NOT MEAN more profit, as is demonstrated this financial year reports.
Reason behind money raising!
I think the company was running very short of cash, and they had to raise equity soon. This is why the company made such a deal with Seven. This is contrary to prior releases that the company expects to have enough case to progress to breakeven.
In any case.....
make up your own mind!!!
I do not think the underlying company is worth much, but make your own decision, perhaps 15-20c as a speculative buy
why don't you call Paul Jeronimo and discuss this posting with him (((Paul Jeronimo (Company Secretary) on 02 9004 4178))).
I think perhaps the company directors should be asked to make a statement about whether the company will ever be profitable (in their opinion) and quote figures to back up their assessment. They should at least be asked to give clear estimates as to how many subscribers would be necessary to make breakeven! This should be requested and provided prior to the arrangement with the Seven Network going ahead.
ij
ps: for the record, I have never been an employee of engin in any way, I do have an engin phone (and like it) and I was a shareholder of Eng until recently.
I am happy to be patient on this one.
