Alec brings two interesting ASX stocks

Bryce: [00:00:14] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing and whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. Now, if you have just joined us, welcome to the Equity Mates community. A massive congratulations on starting your investing journey. If you are still getting up to speed, we do have a second podcast. Get started investing that you might find helps you get up to speed with all of the basics. Now, while we are licensed, we are not aware of your financial circumstances. So please keep in mind that all information on this show is for education and entertainment purposes only. Any advice is general. With that said, my name is Bryce. And as always, I'm joined by my equity buddy, Ren. How are you?

Alec: [00:00:55] I'm very good, Bryce. Very excited we are recording this on a Thursday afternoon and this time next week we will be in the United States on our way to Warren Buffett's annual general meeting. 

Bryce: [00:01:09] Absolutely. Well, we'll be in L.A.. Warming up. 

Alec: [00:01:12] Yeah. 

Bryce: [00:01:13] Getting ready to fly across to Omaha, Nebraska. 

Alec: [00:01:16] I think Alf booked our L.A. accommodation and he's chosen a hostel in Hollywood. So let's go over to our Instagram to follow our journeys over there. But this is a real bucket list item for you and I and something we cannot wait to go and do. And we'll be bringing it back to the Equity Mates community. We're taking recording gear over there, so stay tuned to the podcast. And if you want to follow us day to day, head over to Instagram at Equity Mates because we're going to be producing some content. 

Bryce: [00:01:47] Yeah, coming at you live. Well, very close to live on our Monday episode on the 8th of May, we're going to be doing a pretty hot off the press. First reaction from the Berkshire Hathaway AGM. They've got a fun run the following morning, which we will probably hopefully get some interesting content from us also. Yes, make sure you tuned in and dialled in. Tell your mates if they want to get an insider's view into what goes on at Warren Buffett's Berkshire Hathaway AGM alongside 40,000 other investors from around the world. Over the next month, we're going to be having plenty of content, both on socials and on our podcasts. 

Alec: [00:02:22] Yeah, but Bryce, you started this episode the way you start all episodes by saying something about investing journeys. I don't know. I kind of try it out with the intro sometimes. 

Bryce: [00:02:32] Fair enough. 

Alec: [00:02:33] But we have been doing a segment that has been continuing our investing journeys and we've each found a coach, a mentor, a sensei, a guru, whatever you want to call it, to help us on our investing journeys. And I guess also hold us accountable a little bit to keep doing the work, keep becoming better investors, keep finding new ideas. You have been working with Henry Jennings of Marcus today. Yes. And I've been working with Andrew Page of Strawman. Earlier this week I sat down with Andrew and had a mentor session and we've got some of the clips from that for today's episode. 

Bryce: [00:03:10] Yeah, I'm looking forward to it, Ren. I haven't heard how it goes, but I know that the homework for you was to bring a few ideas to go through with Andrew. So keen to hear how that pans out. 

Alec: [00:03:20] Yeah, so we get to that. There's two companies that we go through in this episode are Ordinates AD8 is the ticker and Net Wealth NWL is the ticker. In my last mentor session, Andrew and I had this conversation about a company that was pretty popular in Strawman, his investing community. So he didn't tell me what the company was, but I went away and I wanted to try and figure out what it was. And so I did some work on that and I kicked off this session with Andrew throwing out my guess as to what the company was. Andrew thanks for joining me. 

Andrew: [00:03:58] Yeah, I'm psyched for a man. I mean, I'm enjoying the journey.

Alec: [00:04:01] Yeah. Yeah. Well, last time we spoke, we unpacked investing philosophies and I had a bit of homework to go away and bring a couple of ASX listed companies to discuss. We got a lot of feedback. People loved your quick breakdown of HitIQ just on the fly. Oh cool. Yeah, yeah, yeah. So I'm excited to talk about a couple of companies now that I've given you a heads up. And um, but before we get into them, part of our conversation actually got edited out. But you mentioned that there was a company that was doing the rounds on Straw Man that had it was about a $10 million market cap and was profitable. And I said, Don't tell me what the company is. Let me go away and see if I can figure it out. So I want to throw a guess out there. If it's wrong, don't tell me. I'll try and figure it out again. Okay. Well, the other piece of information you gave me was it was based in WA, so I went on ticker and they have a stock screener. So I went. ASX listed less than 15 million US dollar market cap. Who knows how it would have moved and greater than $0 operating income. There are 55 companies on the ASX that come back when you search for that. 

Andrew: [00:05:11] Can I just. Can I just pause on that for a moment? Surprising, right? Like, that's that's a that's a pretty small it's a pretty tight filter in terms of size and profitability. But I guess I just underscore that is just like that's that's a lot of stuff to dig into. Maybe you'll dismiss some quickly, but this is always sort of my my, my the thing that I want to impress upon people that there is wonderful opportunity at this end of the market. Right. It's not all unprofitable cash burning scams. Yeah, there, there, there. But there is real business is there too. And you know what? No one else is looking at them. 

Alec: [00:05:46] Yeah, I was surprised because. Yeah, you're right. My perception is the companies that are losing money because they're failing or they're losing money to grow. I was actually a little bit disappointed because I was hoping the filter would return like ten companies and I'd be like, that's what. And yeah, I guess the other thing is if you're a $10 million company and you're profitable and you're not, you know, try to like burn money to grow or anything, you're probably not listing. You're probably just a small business that's operating. Yeah, Yeah.

Andrew: [00:06:14] So, I mean, we were talking off air. I mean, there's a lot of downsides to listing. The only reason you would list two reasons. One is you want access to equity capital. So the market is a great mechanism for raising money when you need it without having to borrow from a bank. But let's be real. The other main reason is exit liquidity for founders, right? So it's good. And then with that comes a whole bunch of extra costs, regulatory requirements. You got to deal with bloody investors all the time, get to produce quarterly reports, you know, as soon as there's any kind of a wobble, everyone punishes you. It is not always a good thing. 

Alec: [00:06:52] Any material thing that happens in your business, you have to tell everyone straight away.

Andrew: [00:06:57] And the market's just like really myopically short term focussed as well. So it's just like I think anyone who's run a business knows the reality of that. Even great businesses, they just you just, you know, that nothing goes in a straight line. There's always challenges. But you as a private business, you get to you, you get to run it. Well, I was going to say for yourself, but for your small group of investors, I think you get to operate in a much longer timeframe basis where the incentive structures drive you towards very narrow short term. What are we doing this quarter? What are we doing this quarter? What are we? And that's generally not a good thing for for the long term viability of a business. Most businesses that do really well are planning years and years out and they're the overnight success that is ten years in the making kind of thing. You just never going to get there if you just continually you know bending to the whims of the market. 

Alec: [00:07:48] Yeah yeah. So I scroll down that list of 55 companies and it was pretty quick to veto some. Like I have a general sense that you're not going to be investing in like a spec mining company or a spec like a bio pharmaceutical company or something like that. Maybe I'm wrong, but that was. 

Andrew: [00:08:10] Never say never. But now you know. 

Alec: [00:08:12] Yeah, yeah, yeah. That was my general perception. So my guest this week, the company that met that filter based in WA, Advanced Braking Technology, ASX Ticker ABT, give me a quick yes or no. 

Andrew: [00:08:27] No. 

Alec: [00:08:27] Okay.

Andrew: [00:08:28] But but like you sent it, you know, I thought, wait a second, this is actually kind of an interesting company. 

Alec: [00:08:36] Really? Okay. 

Andrew: [00:08:37] Well, I mean, I may have come across my radar at one point in time, but I sort of forgot about it. But I mean, you know, as you say, it's sort of profitable, it's growing, It's got no debt. It's got some cash on the balance sheet.

Alec: [00:08:52] Let me give you the numbers. So this is okay. This is why I thought it could have been your company. So calendar 2022. So last 12 months, 12.7, $6 million in revenue, $1.3 million in profit and a $15 million market cap. So about $0.12 e most and it's growing. So revenue has grown from 6.8 million to 11 million between financial year 19 and financial year 22. So the compound annual growth rate of 17% for revenue first turned a profit in 2020 and has been profitable ever, ever since. It seems to have all of the major miners as customers BHP, South32, Fortescue, Rio, Newcrest, Glencore all by the way, what it actually does is it makes sealed breaks for heavy vehicles, $2 million cash on the balance sheet and zero debt, as you said. And songs like that seem to take a lot of the financial boxes for Andrew. My question was around what this could be like. How big a business could this advanced breaking technology pay? Could it expand outside of mining, or is it just a great small mining services business?

Andrew: [00:10:06] That's an excellent question. I don't know the answer to it. I mean, there is something. To be said for knowing your nation, staying within it. A lot of companies undo themselves. They have wonderful little core operations and in the pursuit of growth, they go into other areas where they don't possess the same kind of competitive advantages. Or if they do, they've got to spend a lot of money and time building that up and breaking that into the market, which just, you know, dampens what what the other part of the business is doing. And if it doesn't ultimately work out, you end up burning a bunch of shareholder capital. So you've got to be you've absolutely got to ask that exact question. The big picture is really nice. Like, as you say, it's profitable, it's growing robust balance sheet. You know, So the natural question here is, is this what we'll get into in later episodes is like, okay, it's something that the next question is sort of like, well, as you say, how how big can it get? And it might not be any like just as a theoretical exercise here, it might be that it never grows from here. But, you know, if it's unlike some if the multiples are low enough, that can still be a phenomenal investment. If you had a business that only made, you know, $10,000 each year and that's all it was ever going to do, there's still a bit still a price you would pay for that, right? It doesn't have to grow. But yes, I think I think I think that is the absolute right question. So yeah, definitely one to look into.

Alec: [00:11:35] So you manage a great community of investors of all types, but I think there's probably a focus on some of the smaller companies in the market. If you look up advance breaking technology, is there any chart on Strawman about it. 

Andrew: [00:11:50] I did have a quick look actually, no. So there was one note there from two years ago. No one's holding it in their sample portfolios, but three people are following it. Right. This is the thing, right? Like I'm surprised at how long I've been in this game and particularly running Straw Man, where we really focus on the small micro caps and there's a lot of smart people out there hunting for these things. It's just amazing how many things you can still miss. And like as you when you first sort of suggested AbbVie, it was like, huh, Yeah. Why isn't this getting more attention? And by the way, I'm being very, I mean, there might be something that if anyone's, you know, gone beyond a high level look here, that maybe there's a whole bunch of real things you need to worry about here. But, but at a top level that I can think of far worse starting points, put it that way. 

Alec: [00:12:35] Yeah. Yeah, right. Well, maybe, maybe throw it out to the straw man community and say what they think. But I will continue on my quest to figure out what this company is. I guess I'll have to keep scrolling down that list. 

Andrew: [00:12:45] I'll give you another clue to help you. It's trailing 12 months. Revenue would be in excess of 100 million.

Alec: [00:12:54] Wait what? And it's trading for less. It's trading for 10 million. 

Andrew: [00:12:57] Well, sales are one thing, profits are another. So the margins are pretty small at this point. 

Alec: [00:13:03] So more than 100 mil. 

Andrew: [00:13:06] More than 100 million revenue. 

Alec: [00:13:07] Well, that's going to massively reduce the number of companies I have to scroll down.

Andrew: [00:13:12] Be aware too, I'm not familiar with take out, but you will sometimes miss some of these things depending on the data provider and how they've sort of scored all of that kind of stuff. So sometimes these things, which is why I'm always such a big believer in going to the source material, it's free and I'm very tight so that the pricing is right. But you just go to the ASX website, it goes straight, get it straight from the horse's mouth, right? And you'd know this very well because we've used Morningstar, we're currently using Standard and Poor's for our data provider. We pay a fortune for that bloody data, I can tell you which is a whole other rant for, for another day. But you'd be surprised at how many inconsistencies there are in the data. So it's really useful, these tools, but just always, always do a sanity check with that with the source machine. 

Alec: [00:13:59] Yeah. I'm not going to name and shame the platform, but there's one platform that I used that had that problem in spades and I eventually had to leave them. When you say you go to the ASX website though, does the ASX have a stock screener or something like. 

Andrew: [00:14:15] I don't think so. I just made the announcements page. 

Alec: [00:14:17] Yeah, okay. Yeah. So this is for my for my investigative work. The ASX website is going to help me too. 

Andrew: [00:14:23] No, no. I mean that's where, that's where scans can be helpful. It's just like it's, it's a good first step. 

Bryce: [00:14:30] Okay, so now you've got more pieces in the puzzle. 100 mill rev. 

Alec: [00:14:34] Yeah, 100 mill rev at a $10 million market cap. 

Bryce: [00:14:37] Okay. And you're going to go away and find out what this company is. Yeah. 

Alec: [00:14:41] Now you're the retail whisperer. And all it made me think was if some company is making more than $100 million in sales and is profitable but has a market cap of less than $10 million. 

Bryce: [00:14:57] That's gotta be resources. 

Alec: [00:14:58] Australia's best retailer comes out of WA. 

Bryce: [00:15:02] Wesfarmers yeah. 

Alec: [00:15:03] Yeah.

Bryce: [00:15:04] It's not Wesfarmers it's. 

Alec: [00:15:09] Yeah but mining would have better margins now, wouldn't it? 

Bryce: [00:15:12] What's the margin I thought was the most. 

Alec: [00:15:13] It's over $100 million in rev. Yeah. And is profit will be less than 10 million. Because if it's market cap of 10 million. 

Bryce: [00:15:22] Okay. Okay. 100 million rev, 10 million. Ten mil profit? 

Alec: [00:15:26] No. Ten mil market cap. 

Bryce: [00:15:27] Market cap. I mean, it's just seriously undervalued. Yeah. Isn't that the whole point of Andrew? Like he finds this stuff? 

Alec: [00:15:34] Maybe. Maybe. Yeah. Maybe. Anyway, so that's my homework. So I've got to go away and figure that out. But then we got to the rest of this mental session. I had done some work, started researching some companies and wanted to present. You know what, Andrew and I and I think you and Henry as well, really chasing sort of long term compounders that's. 

Bryce: [00:15:54] Not we're chasing six week. 

Alec: [00:15:56] Oh, yeah. Okay. Well, Andrew, what I the reason that I wanted Andrew to be my mentor and what I want to get better at and be more disciplined is that deep stock research and trying to find those few high quality companies. And so I've done some research and I brought two companies to Andrew that I thought could be good ideas. And so this is me presenting the two to him. So let's turn to. So I brought two companies today that I want to chat about. The first one is Ordinate ASX ticker AD* and then the second one is Netwealth, ASX NWL, both of them are smaller companies, not tiny. And both of them seem to have compelling stories. And so, you know, in our pursuit of trying to find smaller companies that have potential to compound for years into the future, they both seem like ones that are worth talking about. I assume you're familiar with both of these companies. 

Andrew: [00:17:08] I am. I'm more familiar with ordinate, But yeah, I mean, really interesting choices, man. I'm happy to dig into them. 

Bryce: [00:17:16] Ren, We've just got to jump in and quickly pause here. I wouldn't say that. Interesting is the tick of approval that you're looking for from Andrew.

Alec: [00:17:23] Yeah, I was hoping for a bit more like two great choices. 

Bryce: [00:17:27] Investing is Hard. 

Alec: [00:17:31] Two interesting choices, but we get into it. 

Bryce: [00:17:35] He's probably already looked at than you would imagine. 

Alec: [00:17:37] Well, you'd think so. Yeah. Yeah. Hopefully he means interesting in a good way. Like, yes, these are stimulating choices. So we start with Ordinate. All right, well, let's start with ordinate because you're more familiar with it. So they develop and sell audio visual networking solutions to the leading equipment manufacturers. That's the jargony way of saying they create the software and hardware that a whole bunch of different audio manufacturers, the, you know, the Bowsers and the Sonys and the Yamaha's of this world then put it into their technology, like put into their equipment stuff. 

Andrew: [00:18:22] It is. But the point I would emphasise here, and this is what's always interesting, if ever you see a what you might term a structural disruption within the industry, in other words, a new way of doing things comes along that threatens to completely upend and displace the existing incumbents. Huge amounts of value was created that way. I mean, you only need to sort of look at the Amazons of this world and what the Internet has done to places like, you know, retail and media and everything. You you have these industries that operate for decades. Eventually, you know, if you rise to the top and just dominate it and they're very hard to displace. But when a new way of doing something comes along. Often these companies dismiss them. I mean, Kodak, I think we may have mentioned before, great classic example. They invented the digital camera, you know, but it threatened their business. And, you know, just like in retrospect, the smart thing to do was to kill their own business because it was somewhat it was going to do it. You might as well kill it yourself and then own the new normal. The reason I mention this is that ordinate. They're not they're doing it in a completely different way. So anyone who's ever worked in the industry would know that there's a lot of cables, there's a lot of analogue kind of stuff, and it can be an absolute nightmare setting up any kind of recording system. So this is digital, and it feels funny to say that in the year 2023 is like, what? It wasn't digital was like, No, it was. It was it was analogue kind of technology. So they, they invented this platform called Dante. And by the way, there's lots of companies that sort of promise to do this where ordinate is really fascinating is that they've done it like they won. Right? It's kind of. And there's still a long way to run. So that's really interesting. The other thing that's really interesting is and this is probably my two favourite words in investing is network effects, because these guys' tech is being integrated into some of the major producers and because people want to talk to different parts of tech. If if Dante has become the standard within the industry, any kind of related product needs to be interoperable with all of that. So it becomes it really doesn't become a choice like smartphones or what are going to use Android or Apple. What's your third choice? There is no third choice. If you want digital audio networking, what do you use? There's alternate and there's like two or three others. And all I would ask you to do, I know you've done this, but for those those playing along at home, open up one of their recent press shows and I'll show you exactly like there's them and then there's daylight. As each day goes past, they're increasingly difficult to displace, and it looks like they've kind of won this race. 

Alec: [00:21:11] Well, yeah, that was probably the thing that was quite compelling because you look at the financials and, you know, the share price is up almost 50% in the past year, more than 20% compound annual growth rate over the past five years, great revenues tripled since 2017. Great. But the whole point around the adoption of that technology was the thing that was quite compelling. And this feels like a winner takes all market, as you said, like there would be a standard protocol that audio engineers are trained on and that, you know, different pieces of technology need to talk to each other. And there was a chart in one of their proposals and it tracks the they call it audio products per protocol. And it's basically how many audio products are using their Dante software and hardware. And then some of the competitors, if I can read this text, Ravenna, AVB Milan and then others, and the chart for them is just up and to the right. It's now 3688 products are using the protocol. Next biggest is 300 and then 130 after that. So it's just game over. Yeah, the stories they're in that show, they won. 

Andrew: [00:22:21] Yeah, they've won. I mean, they could completely stuff it up. There's always something to come out of left field that displaces everything, but it looks like they're an incredibly strong position in audio. 

Alec: [00:22:31] I guess the question then becomes and this is a question I have for both companies I want to talk about today, because they're very different in terms of financials, Ordinate, not profitable, net wealth, very profitable. How would you then go about saying, okay, or tonight look like they're winning this race for, you know, audio protocol, supremacy management, think that there's a $1,000,000,000 market opportunity there, but management are always going to give you the rosy picture. Currently not profitable. How do you go about starting to think about, well, what's the right price to pay for a company like this? 

Andrew: [00:23:09] Yeah, it's a great example, a great question, and this is a great example. There are really good reasons as to why you wouldn't be profitable. In fact, why you might not even want to be profitable because it's not so much. I mean, think about anyone who's done a business, right? I mean, until you sort of get everything set up, I mean, you by definition not profitable, but that work isn't wasted. You've made an investment and that return might not come in any given financial year. But it's the whole the whole thing that you're trying to do is ask as an investor, what's this economic machine taking in and what's it going to spit out now the industry and analysts. And that will always focus on this year, next year kind of thing. But you've got to look out over the life of the company. I mean, would you buy a company off me if I was bleeding $1,000,000 a year for five years? But then in year six, I made 10 million, and then year seven I made 20 million. And then, you know, yeah, that's probably it's probably really good. And it just and if I spent that money, if I was quote unquote, losing that money because what I was really doing was investing in a foundation that would support incredible growth down the track, that is not that is not a loss at all or wasted money at all. And so I think the bull case with ordinate is that, well, when you're disrupting industry in what is seemingly a winner take all market if you if the guys at ordinate were focussed only on profitability and they weren't getting out there as to as many people as they could, they might be profitable, but they might just be overtaken by the by the team that's got the capital to continue to invest in and ultimately win. Remember, the customers don't give us stuff, right? I guess they want to know that you're going to be around, but they're not they're not looking at it from this point of view. So you've got to put you've got to solve the most problems and create the most value for your customers. And if you can do that, and it's very difficult pivot to make, but if you can do that, then pivot to profitability. Once you've won the market. That's what Amazon did. It's what Uber did. It's what like? It's the story of when, when, when there's so much. It's the land grab is the term that's used. And so, by the way, you've got to be careful because that is a reasonable narrative. It's actually a good cover for a lot of companies that are pretty crappy. Yes. It's like, oh, well, losing money, but it's only because we're doing this. It's like, yes, you've just got to have confidence that that pivot will come with ordinate. If you dig into it a little bit more, you realise that that profitability is a big part of it was the capture of that land grab, but also that they're spending gazillions on trying to disrupt the same kind of thing in video. So they've, they've, they've kind of won the audio side of things and they now they're trying to do video which is a market size it's about equivalent is the what is the audio market size. And it too needs to sort of be brought into the to the modern era. And that's why. So the question we the ordinate is not whether it's making money or not, it's whether this investment, big investment in the video will pay off. If it does, I suspect the current share price will look cheap. They've got $35 million and no debt there, so they've got a bit of a runway so they can afford to sort of lose money for a little bit with without having to be urgently dependent on capital raises or extra debt or anything like that. So that's the question here.

Alec: [00:26:35] Are you someone who cracks out Excel or Google sheets these days and models or forecast out what you think will happen and then does a discounted cash flow? Is that your valuation? 

Andrew: [00:26:46] I've actually moved away from that. I think they're really helpful in understanding the mechanics, the machinery of a business. So what you really want to see is businesses that have operating leverage. So that is their fixed costs can support a much higher level of top line sales than they currently do. So as those sales come in, the margin gets wider and wider and wider. So earning revenue might be growing at 10%, but earnings grow at 20% and it's earnings that really matter at the end of the day. So that's what I would be looking at here in terms of modelling it out. So okay, what are their main costs? This is their current revenue. Here are their main costs. What are their gross margins look like? What are their current net margins look like? Okay, great. Let's roll that forward and let's you can't grow without increasing costs. It costs money to make money. But it's interesting to sort of see how that can evolve, not how it will evolve this year, but how it can evolve. I think, though, that that is there's nothing wrong with that except that, as I mentioned before, you do fall into the trap of of false specificity where it's sort of like you've got so many assumptions and so much detail in there that it just sort of like little inconsistencies, little errors multiply up to be huge. So I think if you're going to do that, you can always apply some really easy sanity checks. So if you've done a model and it turns out that your net margin is 60% at the end of it, it's like, well, it's not impossible. But very few companies managed to make after tax, after costs, after everything, 60% of every dollar that they sell. So I tend to go these days with I mean you go into as much detail as you like, but I think there's a lot of value in keeping it simple. So I would sort of say, here's their revenue. How do I think that can grow? What's the kind of net margins a business like this might be able to operate on? And then the calculus is much easier. So it's like, well, here's the sales and a 10% net margin and we can talk about how you might come to a figure, you know, seven divided by ten, there's a profit. What multiple do you think the market would pay for a company that's grown like it has and has existing opportunities in front of it? You know, maybe that's a PE of 20, you know, if the growth outlook remains strong. So I've got the earnings, I've got the multiple if you re-arrange the PE ratio, you sort of, you know, that you can multiply those two numbers together to get a target price. Super easy, it's super. And then I can just discount of backs if I think, if I think earnings are going to be a dollar in ten years time and I think the market's going to pay up of 20, well therefore the share price is going to be 20 bucks in ten years time under my assumptions. And then it's like, well, if I want a 10% return, I just divide 20 by 1.1 ten times for each year. And so I'm trying to do this on the five year. It's something like what it means if I pay $9 now and I get $20, then I'll get a really good return overall. Right? And I've just done something really rough and ready there. It's only going to be as good as the assumptions I used. But it's, it now gives me something to focus on without getting hyper, hyper specific, i.e. sales margins and multiples. They're still still susceptible to bad guesses. And maybe the reality of it doesn't unfold as it is, but that is, I think, for people to starting out is a much easier proposition than working out well. What's the full time equivalent cost of this business? What? The R&D budget of this business. What's the marketing cost of this business is trying to work out 500 different line items and then lab, by the way, do that. But just just, you know, it's sometimes easier. 

Alec: [00:30:22] Yeah, yeah, yeah. So your numbers that $21 earnings, 20 multiple discount back $9 share price, is it just a coincidence that that nine is very close to Ordinates current 8.67. 

Andrew: [00:30:35] Yes it totally is. I didn't realise that when I did that. Yeah. All right. All right. Good to know. But I mean, I mean, the other thing, the other way you can approach it is not trying to come. Well, I think it's always worth trying to have a stab at value. But you can, you can flip it around and say, well, what does the market think? So if I look at ordinate now, I don't own shares in it, by the way, it ranks very well on Stromness ranked number six. A lot of people really like it, so I've only got positive things to say about it. The only negative I have is that currently it's on about ten times sales that's up there. Again, not necessarily bad because they are growing very, very, very fast. I never put too much weight in analysts forecasts, but it's interesting to see what they say. And when I look at ordinate, the 2025 consensus estimate, this is covered by quite a few people. It's about $0.10 per share. So they're on 85 times FY 25 zoning. So an 80, 80, 80 PR is high. Yes. You know, unless unless you're going really fast as they are. So it's not necessarily but I'm not talking on 80. Well the PE right now is infinity because there is no earnings. But even if they managed to flip into profitability in the in the coming next couple of years and earnings grow very rapidly, you're still got a pretty elevated pay That's that that's not bad. But it tells you that a lot of the things we're talking about favourably with ordinate is not a secret like the market gets. Yeah, right. Yeah. So now you've got a more difficult proposition. It's not like will this company succeed? I think I tend to be a believer in. I mean you can't guarantee anything, but it's kind of like it needs to do better than the market is already expecting. That's the key thing.

Alec: [00:32:14] All right, Equity Mates, We're going to pause there. That's the conversation on ordinate after this quick break. We're going to talk about net wealth, a company that has tripled its revenue in the past three years and has improved its profit margin from about 20% to over 30%. Will Andrew give me the tick of approval? 

Bryce: [00:32:32] No. 

Alec: [00:32:38] Alright, welcome back Equity Mates. We are listening to my recent conversation with Andrew Page where I had homework to go away and bring a couple of companies that I thought were interesting and I thought had hallmarks of high quality companies for us to discuss and really for Andrew to tell me why I was wrong. First of all, we've just heard our conversation about Ordinate ASX ticker AD8. The second company that I brought to Andrew is Net Wealth, ASX ticker NWL. As I said before the break, it's a company that's tripled its revenue in the past five years and has improved its net profit margin in that time. Will Andrew give me the tick of approval? Bryce is shaking his head. Let's find out. Well, let's shift to Net wealth, which is a company that is certainly profitable. So for people who are unfamiliar, for people who don't have a financial advisor like myself, the they net wealth or one of the three sort of, I guess, disruptors in the Financial Advice Administration business Net Wealth Hub 24 and premium offer advisors a technology platform to manage their clients money and clients, an opportunity to log in and see how their accounts are going and see where their money. Its net wealth has 3200 advisors. Financial advisors sign up to their platform and those advisors manage 123,000 accounts on the platform and net wealth has $65 billion in funds under administration. Pretty big business. 

Andrew: [00:34:29] Yes, although they administer those. That's not their money. 

Alec: [00:34:32] No, no. 

Andrew: [00:34:33] They make a cut on that. Yeah, which is why. 

Alec: [00:34:35] They take a cut. The advisor takes a cut, the fund manager takes account. No wonder advice is so expensive. 

Andrew: [00:34:42] There's a whole podcast right there. 

Alec: [00:34:43] Yes. Yeah. But if ordinate is not profitable, net wealth is the opposite. They did 170 million in revenue last financial year. The five year compound annual growth rate is over 20%, almost 23%. So a pretty incredible topline growth story off that 170 million in revenue. They did about $55 million in profit and that profit five year compound annual growth rate is almost 3%. 

Andrew: [00:35:15] There's the operating leverage I was talking about. So profit growing faster than sales. Yeah. Which makes sense for a platform business, right? Because if they sign up someone tomorrow is like, well, here's your log in. I'm right like this There's not a lot of onboarding cost. Yeah. Brilliant.

Alec: [00:35:31] Now, speaking of operating leverage, and this is why I really wanted to talk about this business, pretty incredible margins, 32% net profit margins, huge. But the margins have actually got better over the last six years. So 22%, 25%, 35%, 35%, 37% and then back down to 32% in the last financial year, which is what I assume is a big growing tech. 

Andrew: [00:35:58] It shows you that not only is the business growing its sales, but it is becoming more efficient at converting those sales into profit. 32% net margins are very rare. Very rare. Yeah. 

Alec: [00:36:10] Yeah. And then finally, $88 million cash on the balance sheet, no debt. And something that we hear from a lot of expert investors, you know, you want founder owned businesses, then you want alignment between minority shareholders and management. How's this for alignment? The founder and his family own 53% of the business.

Andrew: [00:36:33] It's pretty cool. Yeah. So it's what you might call a sidecar investment in that regard in the sense that whatever the founder and family wanted to do, they will do it on the voting rights. There is nothing you can do. So as you get you kind of along for the ride, a lot of people probably look at that and go, Well, isn't that the case? I've got 2.1% of the companies. I'm pretty much not, but I just it just means that while it's great for alignment and all the rest of it, you are and you know, they're trying, it just means that they get to call the shots without without recourse.Not a negative by the way. I mean all that. They built the business, they've grown it. So I mean you know, again they credit where it's due. It's, it's not I'm not trying to put it as a negative at all but you know, they, they will they will do what they want to do. 

Alec: [00:37:14] Now, the reason that I wanted to talk about valuation is because it feels like there's a lot of green ticks in that story. Here's where the challenge, I guess, is for an investor that is currently trading at a 55 price to earnings ratio. So the market is certainly aware of them and they're not cheap. 

Andrew: [00:37:31] Yeah. I think it's also worth understanding the what's the word? The quality of those revenues as well. And this isn't a negative. I mean, well, there's just you've got to deal with the things as they are, not as you would have them to be. And the reality of it is, is that their customers, financial planners and financial types, actually operate in a pretty cyclical industry. So when markets are in a bit of a funk, the fund flows don't do that well. The financial planning outfits don't want to onboard a new platform. So I think and again, I'm not trying to throw shade on this at all, but I think it's something to to bear in mind that if if we were ever get into a negative environment for investing, then, you know, it's not a question of if but when, because that's just what markets and in the investing world does. We sort of move in cycles. These tens of thousands of businesses can move around a little bit. The counterpoint to that would probably be with net wealth is I think they had like six or 7% of the market share. You know, so there's a lot of room to sort of grow within that. It's not as though they are a mature business. So maybe the industry overall does it tough, but they continue to steal a larger and larger part of the pie and so they can still work out pretty well. But I just make a mention of it though as well, because I have seen it in this space before. You see it when we said it with Magellan recently. Right. With fund flows and how quickly things can turn around when you're forced to sell a bunch of stuff to meet redemptions and the rest of it. It's kind of madness because you kind of think in a lot of ways, if people were saying that these would be the times that money would be flowing into the market because things are cheaper, but it just doesn't work. I just, I just say bear in mind that that cyclicality and what you what you might have here the the challenges for these businesses that are on ostensibly high multiples is that when there is a little bit of a turn, let's say there is a bit of a turn and they hold up rather well. So FY 20 two's earnings, I'm just looking here on calm say per share was there wasn't a lot of growth from the year before, even though sales went up quite a bit. So there's probably a big investment in tackle. 

Alec: [00:39:47] Yeah. Then margin also got squeezed. It went from 37% to 32%. 

Andrew: [00:39:51] That's right. You said yes. I mean, I'll give you and I ran this business. It's not a disaster giving the landscape and what's what sort of happen. But what happens is the market being very flighty and fickle goes, oh, it's a disaster. And it's like we go from a p a 55 to 40. Now 40 is still a high P, but you do the maths on that. It's just sort of like it can squeeze you down a bit. So it's sort of just, I mean it's something to be aware of is what the business is doing and then again what the market is expecting that business to do. So I sort of look at a business like this and go, Yeah, incredible history. That's really great. The market is definitely pricing in some growth. Will they grow more than that? I mean, for what it's worth, the forecasts look pretty decent 2025 estimate of $0.43 per share. So you can do it. And he's a nice easy hack, right. So I can always just go I don't know. Well I want you every business. As the more successful it gets, the more dominant it becomes, the less the growth opportunity becomes. Really, because you kind of you're winning the market. So the multiples tend to come down because as they as they fulfil on their promise, the opportunity set gets smaller, you know, in a lot of cases. So you can kind of go Thumbsucker right here. So let's say I do it backwards. So the current share price is 1326. Let's say I want a 10% return over five years. So one, two, three, four, five. That means I need if I buy it today, I want to share price about 2135 In five years time. I'll give me a 10% return if I do that. And let's say that shares are on a PE of 30 and you make you do a variety of scenarios here, but this is just a thumbsucker to sort of see what if that means that in five years time per share, earnings need to be about $0.70 per share. Now you can question those inputs and you can change them. And I encourage people to do that and play around with it. But you're looking at a business that at the moment on $0.23 per share. So what you really saying here, it's near enough, a triple in profit in five years. Now the great opportunity often happens because the growth is even more extreme than people expect and longer lasting than people tend to expect. So again, I'm not throwing shade here just to just sort of to be nasty. I think you can go through this really basic math to sort of say, well, what needs to happen? I can tell you right now what needs to happen. One of two things for me to get my 10% return. I either need earnings to grow at that quantum that I have expected or I need the multiple to expand even further. That's the math, right? Equals price equals four times the earnings. So one of those two things have to be at a certain level where when you multiply it together, I get what I say. 21 bucks a show. Yeah. You don't know whatever the market's going to value at that, but at least you can kind of say, well, I think this is not an unreasonable rate of growth. And then as I did, I just worked. Out of that, well, this is the kind of payday that I'm that I'm looking at. So the question is, do I think the market can support a pay for this kind of company that's demonstrated this kind of growth to get me to where I need it to be to get a return. Now, you might do a bunch of different assumptions and scenarios and come up with a with a different price, but that's great. You've now worked out a target price. I might tell you that. It's sort of like, Well, not now. But I tell you what, if it ever got to, I don't know, 1130 now I'm interested. Yeah, right.

Alec: [00:43:06] I like that. I like the thumb suck valuation methodology. Let me take that as a bit of homework and let me maybe I'll do it for those companies. Maybe if I find anything else that I think is interesting. But I think that's a good thing to go away with and work on. 

Andrew: [00:43:21] Yeah I've it helps mean there is, there is such an allure with sophistication and spreadsheets and I don't want to dismiss them there They certainly but but but you know you can Buffets are famous for never using spreadsheets and this kind of stuff I mean he uses these heuristics as far as we can tell. Yeah, right. And he's not doing a DCF in his head, but he's just doing these big broad assumptions. And it is like you can start broad, then narrow down. When do you if your first port of call is to crack open a spreadsheet and started trying to predict what the R&D budget is going to be four years out and what the you know, it's sort of it's not that it's not a noble goal, it's just that it's it's diabolically hard, right. So keep it simple. 

Alec: [00:44:03] Love it. Thank you for your time. And I can't wait to do it again now. 

Andrew: [00:44:08] I'm looking forward to it. I'm really enjoying these chats. 

Alec: [00:44:11] All right, Bryce. Well, that's the conversation that I had with Andrew. I learn a lot. The valuation stuff for me is really interesting and something that I'm going to go away and work on. I'm loving this series. 

Bryce: [00:44:23] What we set out to achieve is sort of coming to fruition with us actually having more time and spending more time looking at individual stocks. I don't know about having more time, but trying to put away more time, trying to be better at individual stock picking. 

Alec: [00:44:36] Well, it's something that your time can often be filled with. Other things go to make a name for Instagram. Got a full inbox but knowing that this mentored session, this coaching session is in the calendar, it means you make the time to do it. Yeah, and it's something that I find really fascinating, but I often just don't make the time to do so I'm loving it. 

Bryce: [00:44:56] Yeah, well, I'm going to try and beat you to the punch and find this company as well. 

Alec: [00:45:01] Okay. See, So. Well, I mean, let's. I mean, people are listening. Let's say if they know it as well, hit us up on Instagram or contact at Equity Mates via email or equitymates.com/contact if you know the company or you can figure it out. As a reminder, the things that we know did more than $100 million in revenue in the past 12 months. Its market cap is about $10 million. It's based in W-A and I think that was one of its profit profitable for things we know. 

Bryce: [00:45:31] Sounds like an answer. Yeah, I'll put my filters on. 

Alec: [00:45:34] Yeah. So that's what I did. I just went to tick off and if people want to go on ticker and try and beat us to the punch ticker dot com slash Equity Mates is the link. 

Bryce: [00:45:43] Nice. All right. Well, we're going to have a bit of a break between sessions. I'm going to pick my next session up with Henry towards the end of May when I land land back in Australia?

Alec: [00:45:54] Yeah. You're just going to try and get good stock tips from the Berkshire Conference. 

Bryce: [00:45:57] Don't need good stock tips Ren. I'm full of them. So I'm looking forward to my next conversation with Henry. But as we said at the top, over the next few weeks, we're going to be coming at you with content from America, Omaha, New York, And we're also doing a Wealth Builders series where we look at some of Warren Buffett's best long term investments and some of the key lessons that we have learned from him over the past few years of investing ourselves. It's been an absolute pleasure listening to you there in a call out and a shout out. If you're listening, can you please share this episode with one of your friends who would love to join the journey of investing and join the Equity Mates community? It will go a long way to helping us continue to grow the Equity Mates audience. But I'm super pumped for the US. Make sure if you're listening at home, following along and our channels cannot wait, we'll pick it up next week.