RIWI Corporation

RIWI Corporation (RIW, Canadian Securities Exchange)

RESEARCH SUMMARY

Report Author(s):

InvestorsFriend Inc. Analyst(s)

Author(s)’ disclosure of share ownership:

 The Author(s) hold no shares

Based on financials from:

2020 Y.E.+ Q2 ’21

Last updated:

August 9, 2021

Share Price At Date of Last Update:

 $                               1.04

Currency:

NOTE U.S. dollars including the share price!

Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual):

Weak Sell / Hold at CAN $1.31 , U.S. $1.04

Qualifies as a stock that could be bought with confidence to hold for 20 years?

No

Has Wonderful Economics?

Not clear

Has Excellent and Trustworthy Management?

Not clear

Likely to grow earnings per share at an attractive rate over the next decade?

Not clear

Positive near-term earnings outlook?

Unknown

Valuation?

Speculative

SUMMARY AND RATING:  This is a very small software company that appears to have trustworthy management and good potential. But earnings have declined to about zero in the trailing year and therefore there is not much to go on in terms of valuation. The  current value ratios, in isolation, would suggest a rating of Sell. It provides and sells a complex data service that is not easy to understand. Its data is intended to provide timely indications of changes in public attitudes. This can be used to predict elections. It can also indicate changes in attitudes towards carbon taxes, virus lockdowns, vaccinations and many other things. It has a relatively small but growing number of customers. The insider trading signal is quite negative as an early venture capital investor and one executive have been selling shares regularly and recently at low prices. The earnings trend has turned quite negative. The company explains that the lower profits are due to investments in sales employees and in technology to grow the business. Executive compensation appears to be reasonable. Overall, we were attracted to this investment due to its potential and due to the apparent trustworthy nature of its founder / CEO. But the most recent three quarters have been quite disappointing. On a positive note, the company has ample cash and no debt and therefore is in no danger at all financially for the foreseeable future.  At this time we would rate it Weak Sell / Hold. This is a speculative position and a tiny company and suitable for only a modest investment at most.

LONG TERM VALUE CREATION: Too new to say

DESCRIPTION OF BUSINESS: RIWI is not an easy company to understand. It uses machine learning and massive data collection to track global trends and make certain predictions. It sells these predictions and trend monitoring and the data mostly on a subscription basis. We understand that it conducts a huge amount of “interviews” or short online surveys (1.6 billion so far) on an automated basis. Their surveys can help governments, government agencies and corporations with  current data on changing attitudes towards things such as carbon taxes, tax rates, vaccination mandates, deficits and many other things. They are also able to predict election results and unemployment rates. It sells its data services largely on a recurring subscription basis. It appears to have just a small number of customers. These are corporate and government entities. It now focuses on four areas: public health security, global citizen engagement, China truth seeking, and investment and economic insights. This is a very small company with assets of just U.S. $5.5 million and 2020 revenues of just $4.6 million. Note also that the stock trading liquidity is very thin.

ECONOMICS OF THE BUSINESS: The economics previously appeared to be reasonably strong with profit before tax at 20% of revenue but this has deteriorated in recent quarters.

RISKS: The main risk would appear to be the ability to continue to grow sales and convince existing and potential clients of the value of its service.

INSIDER TRADING / INSIDER HOLDING: In the period January 1, 2021 to August 30, 2021: BP Capital which apparently provided venture capital funding, likely at a low share price sold 79,000 shares in January and February  to hold 2,075,000 (11% of the company) . Prices were as low as $2.75. It hen sold 95,000 shares in June at $1.55 and 130,000 shares on July 21 at $1.30  (when it should have been in blackout?) to hold 1,830,000 shares. An Officer sold 149,000 shares in mid-August at prices as low as $1.07 to hold 196,000 shares. Overall, the insider trading signal is quite negative.

WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is  simple to understand and predict (fail because the service is not easy to understand), has favorable long-term economics due to cost advantages or superior brand power (pass because they claim to have a unique and valuable data service), apparently able and trustworthy management (pass based on the candid annual report), a sensible price – below its intrinsic value (probably pass based on potential), Other criteria that have been attributed to Buffett include: a low  debt ratio (pass – no debt), good recent profit history (pass) little chance of permanent loss of the investors capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (pass)

MOST RECENT EARNINGS AND SALES TREND: The company indicates that quarterly revenues and profits are volatile due to the lumpy acquisition of contracts and the front-loaded revenue recognition. In 2021 revenues per share were down 18% in Q1 and up 33% in Q2 (boosted in Q2 by a lower diluted share count due to options coming out of the money). In 2020, revenues per share rose 46%. In 2019 revenues per share rose a modest 10%. In the first half of 2021 profits were too close to zero to calculate any meaningful change. Profits per share declined in 2020 but rose about 30% pre-tax which is more representative. Profits per share in 2019 rose 64%. The revenue and profit trend appears to have stalled and turned negative respectively in the past six months.

COMPARABLE STORE SALES  OR INDUSTRY SPECIFIC STATISTICS

Earnings Growth Scenario and Justifiable P/E: The profit is currently very low such that the P/E ratio is not meaningful.

VALUE RATIOS: The price to book value is somewhat unattractively high at 3.75 but the company is ultimately expected to be valued for its earnings. The ROE is not meaningful due to current low profits. The P/E ratio is not meaningful due to current near-zero profits. There is no dividend. Overall the value ratios are not attractive and in isolation would indicate a Sell rating.

TAXATION FOR SHARE OWNERS: Nothing unusual.

SUPPORTING RESEARCH AND ANALYSIS

Symbol and Exchange:

RIWI, TSX Venture Exchange

Currency:

NOTE U.S. dollars including the share price!

Contact:

0

Web-site:

0

INCOME AND PRICE / EARNINGS RATIO ANALYSIS

Latest four quarters annual sales $ millions:

$4.6

Latest four quarters annual earnings $ millions:

$0.0

P/E ratio based on latest four quarters earnings:

457.4

Latest four quarters annual earnings, adjusted, $ millions:

$0.0

BASIS OR SOURCE OF ADJUSTED EARNINGS: No adjustments made

Quality of Earnings Measurement and Persistence: The earnings are small but appear to be of high quality in that they are earned in cash and there is no amortization expense.

P/E ratio based on latest four quarters earnings, adjusted

457.4

Latest fiscal year annual earnings:

$0.7

P/E ratio based on latest fiscal year earnings:

30.1

Fiscal earnings adjusted:

$0.5

P/E ratio for fiscal earnings adjusted:

41.8

Latest four quarters profit as percent of sales

0.9%

Dividend Yield:

0.0%

Price / Sales Ratio

4.27

BALANCE SHEET ITEMS

Price to (diluted) book value ratio:

3.75

Balance Sheet: What is notable about the balance sheet is that RIWI has not capitalised the value of its investments in software. Virtually all of the investments and expenses of establishing the business have been expensed. 74 percent of the assets consist of cash and an additional 22% consists of receivables and unbilled revenue. Therefore current assets represent 96% of the assets. 2% consists of capitalised leases(s). 1% represents intangible assets – largely domain names that were purchased. The assets are financed largely by common equity at 90% of assets. 9% is short-term payables and 1% is a longer term lease obligation. Notably, there is not debt. This is a strong (but small) balance sheet. Total assets are only $5.5 million.

Quality of Net Assets (Book Equity Value) Measurement: This is a small company with assets of only $5.5 million. The assets are on the books are certainly high quality as they are mostly cash.

Number of Diluted common shares in millions:

                                 18.0

Controlling Shareholder: The founder and chairman of the Board owns about one third of the company and controls it. Management and directors as a group own 52% of the shares.

Market Equity Capitalization (Value) $ millions:

$18.8

Percentage of assets supported by common equity: (remainder is debt or other liabilities)

93.6%

Interest-bearing debt as a percentage of common equity

0%

Current assets / current liabilities:

17.6

Liquidity and capital structure: Strong liquidity with ample cash and no debt.

RETURN ON EQUITY AND ON MARKET VALUE

Latest four quarters adjusted (if applicable) net income return on average equity:

0.9%

Latest fiscal year adjusted (if applicable) net income return on average equity:

10.5%

Adjusted (if applicable) latest four quarters return on market capitalization:

0.2%

GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE

X years compounded growth in sales/share

not available

Volatility of sales growth per share:

 $                                  –  

X Years compounded growth in earnings/share

not available

X years compounded growth in adjusted earnings per share

not available

Volatility of earnings growth:

 $                                  –  

Projected current year earnings $millions:

not available

Management projected price to earnings ratio:

not available

Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in (adjusted)  earnings per share?

Too new to say

Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained:

10.5%

More conservative estimate of compounded growth in earnings per share over the forecast period:

10.0%

More optimistic estimate of compounded growth in earnings per share over the forecast period:

20.0%

OUTLOOK FOR BUSINESS: The company appears to be set for continued revenue growth as of mid 2021. But profit may remain low due to “investments” in sales personnel and in technology to growth the business.

LONG TERM PREDICTABILITY: As a small growth company the company is not highly predictable as to future growth and profitability.

Estimated present value per share: Earnings are too low for this calculation.

ADDITIONAL COMMENTS

INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Barriers to entry (pass). No issues with powerful suppliers (pass). No issues with dependence on powerful customers (marginal pass as the U.S. government appears to be a large customer), No potential for substitute products (pass) No tendency to compete ruinously on price (pass). Overall this industry appears to be attractive for an established incumbent but note that RIWI is small and still working to become established.

COMPETITIVE ADVANTAGE: The company claims that its processes, unlike competitors, leads to very low or zero risk of privacy breaches and that they are more efficient.

COMPETITIVE POSITION: The company claims to have unique data but this is a very tiny company which overall is not in a strong competitive position. But it has a niche product.

RECENT EVENTS: As of September 13 a new CEO will be in place with the founder and current CEO stepping back to the Chairman position. Revenue growth has slowed. It was 47% in 2020 but the trailing year revenue growth slowed to 16% in Q1 2021 and 18% in Q2 2021. Profit is lower than previous with a small loss in Q1 2021 and a small profit in Q2 2021. The company explains that it is making investments in sales and technology needed for growth. The stock has recently “graduated” from the smaller Canadian Securities Exchange to the TSX Venture Exchange.  A investor relations firm was hired but as of August 31, 2021 the stock price is down significantly since the investor relations firm was hired.

ACCOUNTING AND DISCLOSURE ISSUES: The annual report included substantial and candid and clear explanations of the business beyond the standard required information. Overall, the disclosure appears to be good. However the manner in which contract revenue is recognised seems to be front-loaded and therefore may be aggressive and that is a possible concern.

COMMON SHARE STRUCTURE USED: Normal, one vote per share.

MANAGEMENT QUALITY: Appears to be strong but a new CEO is taking over as of September 13 with the founder stepping back to the chairman role.

Capital Allocation Skills: They appear to be quite cautious and prudent in making investments in the business.

EXECUTIVE COMPENSATION: Appears to be reasonable.

BOARD OF DIRECTORS: Warren Buffett has suggested that ideal Board members be owner-oriented, business-savvy, interested and financially independent. RIWI has seven directors who appear to be reasonably well qualified and who have all been directors for at least five years and who all own shares in the company.

Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed  analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.

DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.

© Copyright:  InvestorsFriend Inc. 1999 – 2021.  All rights to format and content are reserved.