Our Order Pad | Dusk Group (DSK) & Nitro Software (NTO)

Candice: [00:00:00] Talk money to me. Welcome to talk money to me. I'm Candace Burke. [00:00:07][7.1]

Felicity: [00:00:08] And I'm Felicity Thomas. And this is a Need to Know Wealth podcast, where we make the complex simple. Now, Talk Money to Me is a podcast designed to help educate you on all aspects of your financial landscape, where we draw on our extensive expertise and experience in wealth management and capital markets, [00:00:24][16.4]

Candice: [00:00:25] even though we are registered financial advisors. Please note that this podcast and the content discussed does not constitute as financial advice, nor is it a financial product. The content on these podcasts is general in nature and you should seek appropriate professional advice before making any decisions. You know, our financial disclaimer is probably more important than ever because today it's our very first Audibert episode where we're going to be talking about certain stocks that we are looking at the moment. So firstly, I just want to explain what Orthopod means to us. It's something that Felicie and I use on an everyday basis in order to place trades for our clients. You know, we can set alerts on our trading platform called EIRIS. We can do cool things like place iceberg trades and a lot of other fancy things. [00:01:13][47.6]

Felicity: [00:01:13] Yeah, it's great. So we thought what a fitting name for this episode, because in these episodes we want to share with you whether you should buy, sell, hold or buy more of a particular stock. So Candace, what do you have for us today? [00:01:26][12.7]

Candice: [00:01:27] So my company is a well known Australian retailer, which has been booming of late due to the increased online sales thanks to the current lockdown measures. It's a small cap growth company, which I think is going to grow into the mid capsis hopefully in the next few years. So hence today I brought a buy recommendation based on the growth outlook. The company is this group. The code on the ASX is DSK market cap teensy weensy 185 million. So probably even more considered. So a microcap? [00:01:58][31.9]

Felicity: [00:01:59] Yeah, definitely. I think it's definitely a microcap under 300 million is what we usually say for our client. Yeah, but we love the small fish in a big pond because there's plenty of room to grow. [00:02:08][9.2]

Candice: [00:02:09] Exactly. So if you don't know what the company does, dusk essentially provides home fragrance products. So think candles, diffusers, essential oils, you know, home wares, they sell them through their physical stores and their online channel. Dusk has been around since 2014 and it came onto the market back in November. Twenty at the issue, share price of two dollars per share. [00:02:32][22.8]

Felicity: [00:02:32] Yeah, I know you have a lot of their candles and diffusers in your house. So I guess what do you like the company apart [00:02:38][5.4]

Candice: [00:02:38] from the nice smelling candles? As you know, Felicity, I love buying companies, you know, seen as a discount to the market or to the peers, you know, call me old fashioned. It's also a profitable company. They run it, but our margins of plus 40 per cent and have a solid Kaga growth rate since 517 of like plus 60 per cent, it's not overly leveraged. Another thing that I look for in a company, so right up my alley, pretty much no debt on the balance sheet. Added bonus. The company is paying a great dividend, roughly around eight per cent yield at the moment. The company has a super strong management team, all having long ten years in the business. I also understand this business right. I'm a personal consumer of the desk products and I really appreciate their organic and new store growth footprint. You know, for me personally, I also have a rule where I only want to invest in companies that I understand have an interest in or want to learn more about. The company's top line growth rate from established stores is very impressive. But as I kind of hinted to the major growth engine of this business is their online sales. The online sales growth and acceleration is driven primarily by the growth in transactions and their conversion rates. So what I mean by that, they have a loyalty programme and you can see the trend once you become in the ecosystem of of the dust group and you become a member, you continually go back to repurchase their products. Yes. [00:04:09][90.9]

Felicity: [00:04:09] I mean, I think you're probably one of their No.1 customers. Might be. The company recently reported their full year FII 21 numbers in recent reporting season. And so how did they go? Did they beat market expectations? [00:04:23][13.1]

Candice: [00:04:24] Yeah, I mean, the FSA 21 results were large in line with previous guidance the company gave in their trading update of April this year, the FSA. Twenty two year to date guidance shows that there will be a decline in like for like sales of about 11 percent. But that's not a major concern, given that the companies cycling off a huge and massive, you know, bumper and growth of like 60 plus comp like for like sales from the initial period Covid. The numbers were impressive. You know, growth was up solid. Forty seven per cent on the previous period, which is about one hundred and fifty million. Sales like for like sales up 32 percent. Hello, that's impressive like those numbers. And if we look at the same store sales, that's up 32 percent online was up 27 percent, which is roughly 12 million in their total sales. So let's break it down by each quarter. Like for like sales growth in Q1 was up about five percent Q2. This is where the numbers get really impressive, 43 percent, Q3, forty four point five per cent and Q4 down slightly, 17 percent. [00:05:33][69.2]

Felicity: [00:05:34] So that's double digits. I guess everyone's probably thinking he Candace. Why did Q3 jump so much? [00:05:40][6.0]

Candice: [00:05:41] Yeah, it's hard to pass those Q2, Q3 numbers, in particular Q3. And the reason is, is because it's the company's biggest earnings potential and biggest sales period. So you just coming off the back of the Christmas holiday period and you're entering one of their biggest sales day, which is Mother's Day. I'm personally guilty of shopping online. Super last minute. Sorry, Mom, for a lovely candle and home gift, you know, and let's just break down where I see the major growth engine right there. Online segment. So candles representing 33 per cent of all online sales, diffusers and those nice consumables, 32 percent, most impressively. Again, this is the segment part of the business that's grown five times since F5 17. So that's that Keeghan number of 66 percent. That is just huge. That's massive numbers. You know, refills of the consumables now representing 14 percent of the total sales. So I see that two segments, candles and diffusers, as their major growth engine home was a little bit less of about 11 percent. And all the rest is making up the difference. [00:06:46][65.5]

Felicity: [00:06:47] Okay, so how has dusk been trading in the market post the FII 21 results and I guess what share price decirte it getting to in the future? [00:06:55][7.7]

Candice: [00:06:56] Yeah. So heading into reporting season, the share price has come off roughly six per cent given the lockdown measures. You know, they're pretty obvious reasons, right? I think the market's quite rightly factoring in the fact that you've got less foot traffic going into the physical stores. You know, continuing covid pandemic restrictions are lockdown's it's not going to go away any time soon as we know. So there's definitely a risk in there, you know, supply chain as well that we can't ignore. So that explains the recent share price weakness since reporting only a few days ago. It's actually come off another eight per cent. But I actually see this as a huge buying opportunity for the company. You know, just to recap, dusk is a buy, in my opinion, as it's ideally positioned for the long term growth. It's super attractive in a very addressable market, which is super fragmented. In fact, they're already the leading company in this space. So they've got more area to just keep pushing the growth and scaling up the business. It's been recently recapitalised for growth. No debt. You know, that tick that I like on on a balance sheet, super healthy dividend yield as well. Management are really impressive and it's a high risk reward equation. So in a nutshell, yeah, not great to see the recent share price drop, but I see it as a good buying opportunity. And long term, you know, if you compare us to the competitors, it's actually trading at like a fifty per cent discount to its peers like Lavis, Sermonic, Scali or Shaver's shop. And you know me, Felicity. I love buying companies either at a discount to its peers or in comparison to the market. [00:08:30][94.0]

Felicity: [00:08:30] Yeah, you definitely do love a discount. [00:08:32][1.3]

Candice: [00:08:32] I mean, who doesn't? When I see those candles come from thirty five dollars down to 30 or 29, I'm like, I'm buying. [00:08:38][5.4]

Felicity: [00:08:39] You're one of the suckers where it's like one for thirty or two for sixty and you're like, OK, great, I'll get two. [00:08:44][5.6]

Candice: [00:08:45] Exactly. But they know their target audience, right? They speak my language. The other part of your question. Right. In terms of upside and where we see the share price going on a long term basis and I mean twelve months, you know, the share price is sitting around the three dollar level, mark. We have as insurance partners research has placed a target price of three point eighty, which is up from the previous guidance of 360. And the market consensus sitting out there is around three point eighty two. So that's roughly 27 per cent, 30 per cent upside from current levels. So I feel like I've been hogging the mic at the moment. But before we hear your stock pitch, Felicity, let's quickly hear from our sponsors. And I promise it's going to be worth a 30 second ad break before we hear Felicity's company. All right, so without further ado, Felicity, what stock did you bring to today's what about [00:09:38][52.6]

Felicity: [00:09:39] OK, so I have a very exciting business. It's called Nitro Software. Now the code is n t o on the ASX, and this is definitely a buy or potentially a buy more in my case. So the market cap is 750 million, which is considered a small cap. You know, I consider anything under one billion as a small cap. And it's also a part of the old Australian technology index, which is very exciting. [00:10:03][23.9]

Candice: [00:10:04] Yep. And as we know, Felicity Tech, you know, anything in the cloud SAS part of the business is just going crazy at the moment in the market. There's also a great ETF which actually gives you access to this market sector. Nitro falls under in this ETF and you know, it gives you the diversified exposure in the Australian Tech Index. We will share more about that ETF in another episode. [00:10:26][22.1]

Felicity: [00:10:27] Yeah, exactly. We can't give away too much now. So back to Nitro. The company was founded in 2005 in Melbourne, Australia by Sam Chandler, and it's headquartered in San Francisco in the USA. Now, Nitro engages in the development and provision of document productivity and digital signature software to mid-market and enterprise customers globally. The company is driving digital transformation in organisations across the world. They've recently rebranded and now operate under the following key brands. We have Nitro, PIDF Pro, we have Nitro Sign and we've got the new nitro productivity platform. So their sales point with this is it's an escape. The complexity and expenses of Adobe Acrobat with one intuitive and easy to use solution that combines the power of PDF productivity and a signing. [00:11:16][49.6]

Candice: [00:11:17] So you've hinted there Niarchos a direct current DocuSign in Adobe, right? [00:11:21][4.3]

Felicity: [00:11:22] Yes. So the way I would describe it, it is if Adobe PDF Productivity Suite and DocuSign a signing had a child, it would be the nitro productivity platform TUD. They have key wellknown customers like Exxon, Mobile, Toyota and Continental Hotels. [00:11:38][15.6]

Candice: [00:11:39] All right, so why do you like the company? And if you could sum it up in a few words, why is it worthy of you adding it to today's Afterpay? [00:11:45][6.4]

Felicity: [00:11:46] OK, so I started buying this position when it started listing on the ASX in December 2019. Its IPO price was a dollar seventy two. And honestly, it's been a great buy ever since. You know, like all stocks, it went off a cliff during the Covid crash of 2020 with a low of 73 cents. But I really saw this as an opportunity to buy more of a quality business. I mean, surely a signing will be even more important. Not that we're all working from home. I know we personally use Nitra sign in the business and love that the package includes unlimited assigning and you can't charge an exuberant price per envelope like DocuSign. It is fast. It's easy to navigate from both the user and client perspective. And they've had a recent acquisition of PDF pen, which adds iPad and iPhone capabilities, which is fantastic as well. You know, you use a Mac computer. We know we both have iPhones. And an announcement recently is the integration with Salesforce, which, you know, we know undoubtably is one of the world's leading serum's. Now, Nitra also has an impressive management, with the CEO having more than twenty years of global technology leadership experience in both Australia and Silicon Valley. You know, he started his first company at age 16. Wow. Which is impressive. Right? And the executive chairman Johnson has public and private company leadership, in particular, a strong background in mergers and acquisitions and strategic investments, which is something that I think is super important in a leadership team that is looking at high growth. Right? [00:13:21][95.0]

Candice: [00:13:22] Definitely. And even, you know, having that expertise in the M&A space, because they can always have their radar out for potential acquisitions, that makes sense for nitro, [00:13:30][8.2]

Felicity: [00:13:31] exactly like the recent Peter Pan. And I guess from a valuation perspective, Nitro continues to represent really good trading value. It's trading on a FII y one of revenue multiple of nine point six times versus USPI doc, you sign and adobe trading on multiples of thirty times and twenty times respectively. [00:13:50][19.3]

Candice: [00:13:51] Yeah, I like the sound of that. Take that any day. Massive discounts to its peers. Right. So what are the key highlights from the recent results. [00:13:59][8.0]

Felicity: [00:14:00] All right, so Nitra delivered solid first half twenty one results with better than expected revenues. The first half twenty one revenue of twenty four point one million, which is 27 per cent year on year, is actually six percent better than what we forecasted due to the stronger perpetual maintenance and support revenue. Now, the A R or annual recurring revenues were in line with our expectations and they grew an impressive 66 percent year on year. Further to that, the first half revenues are approx. Fifty per cent of the midpoint of 521 revenue guidance, which put Nitro in a very strong position to deliver potentially even at the upper end of the current 47 million to 49 million full year range. I think this is also important. The company is cashed up with net cash of thirty eight point six million. Its soon to drop a little bit to thirty three million post the six million that we've paid for PDF in the second half of 2001. But again, doesn't put a huge dent in the balance sheet. I think the key risk to really look out for is the failure to deliver on the IRR growth expectations, failure to achieve. Expect your long term margins, the competitive response from dominant category vendors i.e. DocuSign and Adobe, and potentially the broader tech rotation risk may impact short term sentiment. [00:15:23][82.7]

Candice: [00:15:23] And I think the first two points and key risk you've highlighted is really just general blanket rule for major risks in any growth company. Right. If you've got the BA super high and expectations are high, if you missed by one dollar, you know, it's technically still a mess. But the last point you said, you know, I see that as a minor risk, right? Because part of our daily lives as we live in this pandemic world is really working from home and using products like nitro in, you know, new working from home environment. So looking ahead, Felicity, you know, what do you think's in store for the company and what share price do you potentially see it reaching? [00:15:58][34.4]

Felicity: [00:15:59] OK, so we have recently increased our 12 month price target from fatales, 20 to 40 plus 35. Now our price target is based on a 10 year discounted cash flow analysis that assumes terminal revenues of 200 million and adjusted about our margin of 30 per cent at terminal enterprise value and free cash flow multiple of 20 times and a discount rate of eight per cent. So that being said, it's quickly maturing into global relevant ASX listed enterprise software vendor. It's a really tough act to follow in such a short space of time. It's currently floating around the throat, all the five levels, so there's approximately 33 per cent upside from its current prices. So with that in mind, Nitra is a screaming buy, you know, and this is just saying a 12 month price target. I honestly think that this company is one that you want to be invested for for the next five, 10, 20 plus years because they're constantly evolving. So with that in mind, Niekro is a screaming buy and so is Dask, which kind of brings us to another investment philosophy where we like to use like we used sign or buy like Candace, Bryce candles from Dask companies that we're actually investing in, you know, try before you kind of buy. [00:17:11][72.2]

Candice: [00:17:12] Exactly. So that's a wrap on our first order pad episode. We plan to track our order pad as we go on and add in each stock that we've mentioned so we can continually check back in with the share price and see how the companies are going. [00:17:25][13.2]

Felicity: [00:17:25] And remember, although we have financial advisors, please note, the investments mentioned today in today's episode do not constitute as financial advice. As always, you should seek professional financial advice before making any financial or investment decisions. But if we did spark your interest and you want to find out more, please get in contact with either Candace or our details are in the show. Notes below until next time I [00:17:49][23.2]

Candice: [00:17:49] a dirty