This article has not turned out as I had expected.
I was hoping to study a quality growth business that had seen its share price slump to attractive levels…
…but instead I have ended up untangling some very awkward accounts and guessing whether management changes are signalling problems ahead.
Sit back and brace yourself.
The shares went from 3p to £30
The share in question is Accesso Technology.
I found Accesso after screening for companies that offered an attractive growth history as well as respectable future prospects.
To narrow the field down further, I looked for share prices that had fallen since the start of the year and balance sheets that carried net cash.
The exact SharePad criteria I used were:
1) A negative share-price performance since 31 December 2018;
2) An average 5-year earnings growth rate of 10% or more;
3) A forecast 1-year earnings growth rate of at least 0%, and;
4) Net borrowing of zero or less (i.e. a net cash position).
(You can run this screen for yourself by selecting the “Maynard Paton 12/03/19: Accesso Technology” filter in SharePad’s amazing Filter Library. My instructions show you how.)
SharePad returned 11 matches.
I selected Accesso because its share price had fallen the furthest on my list, while the forecast P/E of 15 did not look too demanding given the group’s past and expected earnings growth.
Accesso’s 43% share-price drop so far this year extends a plunge that commenced during September. The price is 72% off the £30 high:
The longer-term chart appears more dramatic:
The shares were as low as 3p during 2005. Anyone buying at the bottom and then selling at the top would have been blessed with an astonishing 1,000-bagger.
Anyway, I discovered Accesso has delivered remarkable long-term progress…
… and found good reasons for the recent share-price collapse.
The history of Accesso Technology
Accesso began during 1998 when Leonard Sim designed a ‘virtual queuing’ system for theme parks. He floated his firm, then called Lo-Q, during 2000 to help fund the product’s development.
The system was based on a pager-type device called a Q-bot, which allowed theme-park visitors to book times for rides electronically and therefore avoid long queues.
Theme-park owners liked the Q-bot as, in theory, their visitors could spend less time queueing and more time spending money in the park’s restaurants and shops. The Q-bot was first used by US group Six Flags during 2001.
The Q-bot has since been accompanied by a smartphone-based equivalent and also a watch. The latest devices now offer additional functions such as cashless payments, locker access and attraction alerts:
The Q-bots are not cheap to hire. The following prices were taken from the Legoland Windsor website:
The Q-bot charge is on top of your Legoland entry ticket.
Accesso’s new watches are used at The Bear Grylls Adventure in Birmingham:
According to the venue’s designers, visitors spend 18% more with the ‘BearTag’ than they would using conventional payment methods.
Accesso’s watches are included in the Bear Grylls ticket price.
Accesso’s revenue and profit history are shown below:
(All figues in $millions)
Becoming so profitable after those early loss-making years is extremely impressive. Very few tiny, profit-less companies that join the stock market ever achieve such a feat.
I should add that acquisitions have supported Accesso’s remarkable growth. Indeed, the name change from Lo-Q to Accesso Technology was prompted by the purchase of Accesso during 2012.
Accesso’s acquisitions have allowed the group to expand into online ticketing facilities, and also widened the customer base to include theatres, sports stadia, ski resorts and music events.
During 2017 some 77% of revenue was earned from customers located in the United States, most of which operate theme and/or water parks.
Accesso has never paid a dividend.
Accesso’s Summary raises questions
My article now starts to become a little complicated.
Here is Accesso’s SharePad Summary:
The Summary raises a few questions:
* Why is turnover forecast to fall when profit is forecast to advance significantly (second row)?
* Why is interest cover at a lowly 4.9x when the business is cash rich and interest payments ought to be small (third row)?
* Why are the operating margin and return on equity (ROE) so modest when the business appears to have performed so well (fifth row)?
New accounting rules and plenty of adjustments
Investigating the Summary figures is not straightforward.
For a start, a switch of accounting rules means Accesso now declares its revenue after (rather than before) theme parks have taken their share of the Q-bot/ticket income.
Under the old (IAS 18) accounting standard, turnover for 2017 was originally $133m. Under the new (IFRS 15) standard, turnover would have been $104m:
Importantly, the rule change does not really alter reported profits and does not affect cash flow at all.
Looking at the forecasts within SharePad:
Projected sales of $123m equate to an 18% advance on the restated $104m — which seems a much more respectable growth rate.
Staying with the SharePad forecasts, the profit projections range from 25% to 265% depending on which estimate you choose.
The wide variance is due to taxation and acquisition-cost distortions.
Accesso recorded a tax credit during 2017 following a reduction to the US tax rate:
The group also recorded a handful of acquisition-related charges, which — to skip a long bookkeeping story — can be overlooked to arrive at an underlying profit figure.
Going on the above adjustments, Accesso argues its operating profit for 2017 should have been $19m rather than the stated $9m.
And that $19m profit would mean the $27m EBIT forecast for 2018 would equate to 42% growth.
Plus… those acquisition adjustments explain why the margin shown on the Summary page was rather modest.
In fact, Accesso’s operating margin for 2017 may well have been a worthwhile 18% based on the $19m adjusted profit and the restated IFRS 15 turnover figure of $104m.
Oh, and the lowly 4.9x interest cover was due mostly to a further acquisition-related payoff being included as an interest expense:
As I mentioned earlier, I was not expecting these accounts to require so much untangling.
Unfortunately, there is more accounting to come.
Acquired intangibles dominate the balance sheet
You may now appreciate how acquisition-related charges have affected many of Accesso’s ratios.
Let’s therefore use SharePad to discover the significance of Accesso’s acquisition activity.
This next chart displays Accesso’s net asset value, the value of the group’s intangible assets and the cash expenditure on acquisitions:
(All figues in $millions)
Intangible assets clearly dominate Accesso’s balance sheet.
Between 2013 and 2017, the company spent approximately $120m on acquisitions while intangibles went from near zero to $200m.
My own research reveals $174m of the intangibles were created by the acquisitions (that is, by Accesso effectively purchasing goodwill, ‘customer relationships’, ‘internally developed technology’, and so on).
You may now be wondering how a $120m cash expense can create $174m of intangibles.
The answer is another long bookkeeping story — summarised mostly by Accesso purchasing businesses with negative tangible assets and bolstering the cash expense with shares issued direct to the vendors.
Anyway, that low ROE from the Summary page is explained by all the acquisitions and intangibles.
SharePad calculates Accesso’s ROE by taking the adjusted 2017 earnings of $14m…
…then dividing that $14m by the $127m average equity figure for the year ($78m + $175m)/2)…
… to arrive at a so-so 11%.
I do hope all this accounting investigation makes sense!
If not, all you need to know is that Accesso’s acquisitions and intangibles have not yet delivered superior levels of profitability.
A $26m difference between profits and cash flow
Oh dear — I must now continue delving into Accesso’s accounts with a closer look at those intangibles.
Similar to many software businesses, Accesso capitalises certain development costs onto the balance sheet rather than charging them immediately against reported earnings.
These capitalised costs are then expensed against earnings during future years through an amortisation charge.
Investors have to be vigilant with this sort of accounting.
You see, hefty intangible development costs alongside tiny amortisation charges can flatter earnings and give an optimistic impression of profits versus the actual cash costs.
My spreadsheet summarises Accesso’s intangible development costs and the associated amortisation:
(All figues in $thousands)
During the past five years, Accesso has diverted development costs totalling $35m away from the income statement and onto the balance sheet.
Meanwhile, the amortisation charge relating to that $35m cash expenditure came to $9m.
The total five-year difference is $26m, which is significant given Accesso’s aggregate adjusted operating profit during the same time was $62m.
For 2018 the company predicts development expenditure of $30m, of which $20m will be capitalised as an intangible on the balance sheet:
Capitalised intangibles of $20m less an associated amortisation charge of, say, $10m would arguably leave 2018 profits flattered by $10m.
Again, the potential difference is sizeable given the earlier SharePad forecasts showed a potential 2018 pre-tax profit of $26m.
I did say Accesso’s accounts required some untangling.
Let’s now leave the accounting and turn our attention to management.
Acquisitive executives decide to step down
Changes within Accesso’s boardroom make me nervous.
Steve Brown — who was once in charge of all ticketing at Walt Disney World, Orlando — departed from the role of chief executive last year.
Meanwhile, Tom Burnet — who joined during 2010 and oversaw the group’s expansion first as chief executive and then as executive chairman — became a non-exec this month.
I am concerned the two architects of Accesso’s growth/acquisition strategy have stepped down from their executive duties.
I can’t help but think both men have made their moves before the acquisition strategy falls apart.
In my experience, sizeable or ‘transformational’ acquisitions often go wrong for shareholders because:
* the directors become carried away and overpay;
* the directors have run out of ideas to grow the existing business;
* the integration hits trouble;
* the anticipated ‘synergies’ fail to emerge;
* the acquisition suffers trading problems, and/or;
* the acquisition diversifies the group into unfamiliar markets.
Let’s just say Accesso’s directors were decidedly bold to spend $120m on acquisitions during a period when the group’s adjusted operating profit was $19m at most.
(I am particularly concerned $70m was spent on a business that develops “data orchestration” software for US hospitals — which seems beyond Accesso’s leisure-venue speciality.)
Underlining my anxiety is some notable director selling:
Mr Burnet sold half of his shareholding last year at £23 a share. The finance director has been a keen seller, too.
The aforementioned Leonard Sim retired as a director and sold out during 2016.
February update provides mixed messages
A trading statement last month did not reassure the stock market (my bold).
“2018 was a year where the Group continued to make good progress. Full year results are expected to be broadly in line with market expectations for FY18.”
“These results are before taking account of one-off exceptional costs of approximately $1.7m, relating to professional fees associated with a significant and well-advanced acquisition opportunity, which was ultimately terminated by the Board of accesso in October 2018.”
Ah ha… Accesso had been intending to make another “significant” acquisition.
This next paragraph appeared positive (my bold):
“The Group has entered 2019 in good health with strong positions in its chosen markets and established customer relationships. These customers continue to respond well to the Group’s increasingly integrated product offering, recognising its potential to drive revenue by elevating the digital guest journey.”
However, the paragraph below was left open to interpretation (my bold):
“In this light and following a sustained period of growth, the Board has recently initiated a review of the Group’s investment priorities in the context of the significant future opportunities available to it and the current areas of business momentum.”
The board now appears to be pausing the acquisition strategy to take stock of what to do next. I do wonder whether “current areas of business momentum” implies some areas are not showing any ‘business momentum’.
This final paragraph is also open to interpretation (my bold):
“The Board expects to provide an update on this review and the Group’s outlook as part of the full year results announcement on 27 March 2019, which will also set out a number of new enhanced disclosures relating to the Group’s operational and financial performance.”
At the moment Accesso lumps together the revenue collected from the Q-bots with the commissions earned from selling park tickets online.
Perhaps shareholders have been asking how the original Q-bot subsidiary has fared. They may be concerned that past growth has been derived mostly from purchasing other companies.
Something Accesso has disclosed is its largest customer represented a chunky 34% of revenue during 2017. That customer paid Accesso $45m — versus $51m for 2016 and $49m for 2015.
Summary
So, there you go. Not quite the quality growth business I had imagined when I chose Accesso from my screening shortlist.
All told, the acquisitions, the adjustments, the intangibles and the management changes are just too complex and concerning — at least for me.
Mind you, I can appreciate why Accesso’s share price rallied so high before dropping like a stone.
Earnings compounding at 19% or so for several years will always attract many investors.
Throw in good revenue ‘visibility’ — maiden client Six Flags is under contract until 2025 while Merlin Entertainments has a deal until 2022 — and you might understand why somebody thought paying 50x possible earnings at £30 was a solid investment.
Ever since Accesso revealed its half-year results — in which underlying like-for-like sales growth was revealed to be just 11% — the market has become rather more circumspect.
And to be frank, investors have a lot to be circumspect about.
Accesso’s full-year results are due later this month and should be a fascinating read — if only as practice for further accounts untangling.
Until next time, I wish you happy and profitable investing with SharePad.
Maynard Paton
Disclosure: Maynard does not own shares in Accesso Technology.
