Fargo Enterprises Limited

FGO Details

Announced a Small Shareholding Sale Facility: Fargo Enterprises Limited (ASX: FGO) is a Software as a Service (SaaS) company. It is a developer of AI platform– Flamingo, cognitive virtual assistants and a knowledge engine for enterprises to enhance their service, sales, and internal knowledge processes. As on 19^th February 2021, the market capitalisation of the company stood at ~$14.22 million. On 15 February 2021, ASX raised a price query with respect to the change of FGO’s securities prices from a low of $0.003 at the close of 8 February 2021 to an intra-day high price of $0.009 on 15 February 2021. The query also pertained to the significant change in volume of securities from 8 February 2021 to 15 February 2021. In its response, FGO clarified that it is not aware of any information that has not been announced.  On 10 February 2021, FGO announced the establishment of a small shareholding sale facility for shareholders holding <$500 worth of fully paid ordinary shares. Using this facility, small shareholding investors can sell their shares without any brokerage or handling cost. The company plans to sell these small shareholdings on-market acting as their agent for these small shareholdings.

Update on Sale of Flamingo BU, Q2FY21: During December 2020 quarter, FGO updated on the activities post signing the binding share purchase agreement (SPA) with BDNM Investments Pty Limited (BDNM I). The binding SPA pertains to the sale of FGO’s subsidiaries Flamingo Ventures Pty Limited and Flamingo Customer Experience Inc. BDNM I is continuing talks with FIRB (Foreign Review Investment Board) and will engage in further discussions for the approval in February 2021. Presently, FGO is running the business with the assistance of BDNM I and catering services to customers such as HSBC Bank Australia. Moreover, BDNM I is also developing Flamingo AI Smart Hub product and will promote it to its prospective clients in the US and Australia. FGO has estimated ~$1.3 million of cash in hand at the completion of the deal. The company holds $947,000 cash as on 31 December 2020.

Net Cash Used in Operating Activities, Q2FY21 (Source: Company Reports)

Outlook: In case the deal is not materialised or approved, FGO will continue to look at all options in relation to the Flamingo AI business operations. FGO has already started a process for acquiring additional assets. It has notified shareholders that as per Guidance Note 12, ASX will generally allow quotation of FGO’s securities for a period of 6 months to close the deal and declare a suitable new business. Based on the size and timing of the transaction, FGO may need to re-comply with Chapters 1 and 2 of the Listing Rules.

Stock Recommendation: The stock of FGO gave a positive return of 233.33% in the past three months and a positive return of 400% in the past six months. The stock is currently trading slightly lower than the average of its 52-weeks’ price band of $0.001-$0.025. The stock of FGO has a support level of ~$0.007 and a resistance level of ~$0.015. On a TTM basis, the stock of FGO is trading at a price to book value multiple of ~10.8x as compared to industry (Software & IT Services) median of ~6.5x. Considering the uncertainty of the deal completion subject to FIRB approval, uncertain outlook regarding FGO’s existing business, volatility in stock price, and valuation on TTM basis, we give an ‘Avoid’ rating on the stock at the current market price of $0.010, down by 16.667% on 19^th February 2021.

FGO Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Smart Parking Limited

SPZ Details

Resignation of Tiffany Fuller: Smart Parking Limited (ASX: SPZ) is a developer of SmartPark, a real-time vehicle parking sensor solution under its technology products division. Under its managed services division, SPZ manages car park spaces across the UK via complementary License Plate Recognition or Automatic Number Plate Recognition (LPR/ANPR) technology. As on 19 February 2021, the market capitalisation of the company stood at ~$50.29 million. The company has informed the market regarding the retirement of Tiffany Fuller as the Non-Executive Director and her being the registered holder of 386,668 securities in SPZ as on 31 December 2020.

FY21 Update: SPZ believes it has started to yield positive results with measures taken in FY20 to strengthen and streamline the business. The company reported positive operating cash flows from July-October 2020 (consisting of lease payments) of $1.2 million amidst the pandemic lockdown restrictions in many areas in the UK. The company has proposed a framework for the resolution of the ongoing with HMRC (Her Majesty’s Revenue and Customs). Under this framework, SPZ estimates to receive up to $7.1 million, a one-time benefit to be recognised in FY21 with ongoing benefit to future years due to change in the VAT calculation methodology. The company’s sales team in the UK was restructured and has undertaken 67 new site installations till 31 October 2020. During the last four months, SPZ commenced its New Zealand (NZ) managed services business with two sites installations. SPZ held cash on hand of $10 million (including $2.7 million of UK COVID-19 business interruption loan draw down) as on 31 October 2020.

Financial Highlights, July-October 2020 (Source: Company Reports)

Outlook: The company has announced to release results for 1H21 on Thursday, 25 February 2021. SPZ aims to deliver 200 new ANPR installations in FY21 for its UK managed services division. For NZ business, it is looking to expand its service model and geographic reach.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of SPZ gave a positive return of 22.72% in the past six months and a positive return of 35% in the past nine months. The stock is currently trading slightly below the average 52-weeks’ price band of $0.07-$0.023. The stock of SPZ has a support level of ~$0.119 and a resistance level of ~$0.148. We have valued the stock using Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of double-digit upside (in % terms). For the purpose, we have taken peers like Dubber Corp Limited (ASX: DUB), Adacel Technologies Limited (ASX: ADA), rhipe Limited (ASX: RHP), to name a few. We believe that the company can trade at some discount as compared to its peer median, considering the ongoing pandemic restrictions in the UK, its potential impact on SPZ’s installations, remote risk of seeking equity funding in next 1-year, higher debt to equity ratio in FY20 and ongoing COVID-19 business interruptions. Considering the current trading levels, improved cash balance, increase in operating cashflow, valuation and associated risks of the pandemic restrictions in the UK, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.135, down by 3.572% on 19 February 2021.

SPZ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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