Portfolio Complete

On Thursday 5/5/16 I put the remainder of the 20k to use. It wasn't in the way I had been planning, but an opportunity presented itself which I couldn't pass on.

Prophecy International (ASX:PRO) released updated guidance for FY16. The guidance was (on the face on it) a significant downgrade. After reading a bit further into the update however, it became clear this was just a blip on the radar.

Updated Figures:

Revenue $15-17.5m (down from $20m)

EBITDA $5-7m (down from $8.9m)

Management also gave a breakdown on the new guidance and where it differed from previous guidance. My quick analysis:

$0.7m is from a change in revenue model from upfront to subscription based. This is actually a positive as the lifetime value of the sale has increased.

$0.8m (possibly up to $1.3m for lower end of guidance) is from delayed orders that will now fall into FY17. I am first and foremost a long term investor (this one year timeframe makes things a bit tricky though), and the accounting period that revenue falls into is largely irrelevant as long as it is earnt.

The lower end of guidance allows for another $1.2m due to sales being below expectations. I see this largely as a safety net rather than actual guidance. Management have been stung by ambitious guidance once and I doubt they will do it again.

$0.4m comes from lost contracts. That is (assuming I am correct about the above point) actually the only negative part about the announcement. 

Now in a number of situations a downgrade is seen to be the first indication something is going wrong. I am always sceptical when these things happen. However, in this case I believe management. The chairman bought shares a month ago. They have overseen some seriously impressive growth and incorporated a new business into the company. The original guidance represented a forecast revenue growth of 67% but actual growth may be closer to 50%. That's still pretty impressive! If it wasn't for previous guidance the market may see this as a good result and have the SP a lot higher. I think management just got a little too ambitious after such great success, it happens. I will give them the benefit of the doubt here. 

Now let's look at the earnings:

Guidance is likely to be approximately 5-7cps once it reaches the bottom line. At the time of buying the SP was 103c. That's a PE of 20-15 for this FY (finishing in 2 months). The company is cashflow positive, paying a steady dividend and growing revenue and earnings at greater than 50%! I think next FY revenue will be >20m comfortably which will see the SP closer to $2 if not significantly higher, just a bit later than expected.

My 20k portfolio is now half PRO, which wasn't part of the original plan. However, when value presents itself as it did last week I had to take advantage. If the SP gains significantly I will reevaluate and consider taking profits. So far the SP is back at 118c so the market seems to be seeing the same value as I am.