This blog post first appeared on the OS3 Digital website on 21st December, 2018. OS3 Digital is one of the core investments Quob Park has invested in with over 75% being under the control of either Quob Park or its founder. You can read the original blog article at http://www.os3digital.com/os3-digital/os3-digital-completes-deal-for-bikers-care-approved-joint-venture/

Trading Update

OS3 Digital is pleased to issue a trading update prior to the close of the year ending 31 December 2018.  This period has once again exceeded expectations for profitable growth ahead of plan.

 

Key Performance Indicators

  • £100+ Share Price Target for Initial Public Offering, increased by 25% from £80+ target set in July 2017
  • £25+ Average Equity Issue Price Target for investments, increased by 66% from £15 average in 2017
    • Funding pre-commitments and multiple acquisitions/investments using shares issued at £25 per share, validating a £0.25bn current valuation of OS3 Digital
  • £29m in Net Assets (estimated), demonstrating strong growth of 53% compared to Net Assets of £18.9m in 2017

Other Key Metrics (approximated)

  • £7m Revenue, increased by 67% from 2017 revenue of £4.2m
  • £5m Adjusted Profit Before Tax, increased by 61% from £3.1m in 2017
  • £5m Statutory Profit Before Tax, increased by 61% from £3.1m in 2017
  • 59p Statutory Basic EPS, increased by 61% from 36.6p in 20171

 Notes

  1. ­£25 per share for OS3 Digital equity implies a historic P/E ratio of 42x based on historic earnings. An average forward looking multiple for publicly listed Insurance Technology sector companies (sub-sector of FinTech) of 32.6x has recently been published by GCA. Clearly it is not fair to compare OS3 Digital’s historic P/E with the published average forward looking multiple for the sub-sector, as this could only be applied to predicted forward looking earnings, not historic.  To make a fair comparison of future earnings vs forward looking multiples, we need to consider OS3 Digital’s future targeted earnings. The relevant profit profile is highlighted within the OS3 Digital 2017 Annual Report (Post Balance Sheet Events), along with anticipated share numbers. The implied earnings profile this highlights is £5 per share in 2022, inferring a multi-year forward-looking P/E for OS3 Digital of 20x, to reach an initial valuation of £100+ per share.  This fairly based comparison is extremely encouraging for OS3 Digital’s share price, as £100 per share represents a significant discount when compared to a 32.6x forward looking multiple. However, even though targeted earnings per share are a fair comparison, it should be noted that current unconsolidated profits, and therefore current earnings per share of OS3 Digital, are not considered by the OS3 Digital board to be valid KPIs for the company during its investment and growth phases.

 

Funding

OS3 Digital is intending to conduct a general fundraise in early 2019.  The pre-marketing of this fundraise has already resulted in several million pounds worth of ring-fenced funding commitments being offered to OS3 Digital for North American expansion at £25 per share, subject to contract and OS3 Digital board approval.

In the North American market, certain areas of commercial activity related to the Care Approved business model have been identified as being attractive and suitable for market/digital disruption.  These areas are particularly lucrative in Canada and Nevada, USA, as well as in a number of other US states.

Whilst Care Approved’s North American expansion is not key to delivering OS3 Digital’s initial 2022 target valuation of £100+ per share, it is central to our second phase of very significant growth.  As previously announced, the initial valuation is effectively underpinned by the Bikers Care Approved Joint Venture and associated development of the Care Approved business model in the UK.

As part of the planned general fundraise to accelerate growth towards the 2022 initial valuation target, existing investors will be able to purchase additional shares at a discounted price of £15 per share should they wish.  New investors looking to invest £2m+ will also be able to benefit from the discounted £15 per share level.  Both of these opportunities are conditional on the total number of shares issued at this price not exceeding the 10m fully diluted shares in issue target for 2022, and will therefore be offered on a first come, first served basis.

Taking existing warrants and options commitments into consideration, only circa 660,000 shares will be available at the £15 per share level, or an amount equal to circa £10m in value of the total £20m that OS3 Digital is open to raising as part of the general fundraise.  The remaining circa £10m is targeted to be raised at £25+, subject to demand.

In the 2017 Annual Report, the OS3 Digital board confirmed that all currently anticipated funding requirements up until 2022 were covered.  This remains the case, due to the access that is available to OS3 Digital to fund the business via Loan Notes from its founders, though it was also stated that OS3 Digital’s strategy could be accelerated by up to two years if additional significant funding could be secured in the short term.  With this opportunity now clearly evident, the OS3 Digital board are delighted to announce this update on funding, and the potential adoption of this accelerated strategy for the initial growth phase and beyond.

In the pre-launch period of the general fundraise, OS3 Digital has also already received indications of pre-commitment on up to £3m worth of shares at the £25 per share level.  The OS3 Digital board is also yet to hold meetings with many of its largest existing investors, so funding commitments are anticipated to increase accordingly.

General update meetings are planned for existing investors in March 2019 at the company’s head office location, Quob Park, and shortly thereafter in Toronto, Canada.  At these investor meetings, all three planned phases of growth for OS3 Digital will be explained in detail, outlining our strategy and anticipated timescales beyond the initial valuation target, for reaching £625+ per share.

In the 2017 Annual Report, the OS3 Digital board confirmed the possibility of exceeding the 10m shares in issue by 2022 target if funds could be raised in line with, or better than a £25+ per share level in the short term, or at least £33 per share as further progress is made, and as 2022 approaches.  This in no way lowers the £100+ share price target for an Initial Public Offering but does potentially increase the market cap at such time to beyond £1bn.

 

Acquisitions and Investments

Using OS3 Digital shares valued at £25 per share and the OS3 Digital board’s investment methodology, a number of acquisitions and investments have been reached in principle, and/or heads of terms have been signed.  These transactions are being progressed to full contracts for OS3 Digital board approval.  These transactions all relate to the acquisition of the supply chain to be utilised by the Care Approved business model, primarily in the UK (including Bikers Care Approved).   To illustrate the size of these late stage transactions for our investors, the total potential consideration is over £10m in value, satisfied by issuing OS3 Digital shares priced at £25 per share.

Investment in Agile Group

On 13 December 2018, the OS3 Digital board completed its second investment using its own equity priced at £25 per share.  OS3 Digital have purchased 19.7% of the Agile Network 360 Group of companies (“Agile Group”), for a total consideration of £4.125m, satisfied by issuing 165,000 new OS3 Digital shares priced at £25 per share, implying a value for the Agile Group of circa £21m.

The Agile Group is already working with many of the world’s leading Communication Service Providers (“CSPs”). Agile Group’s teams have over two decades of experience in helping organisations transform their operations through the deployment of modern B/OSS (Business/Operations Systems Support) platform architectures and adoption of leading practices. Agile Group also hold the exclusive rights to distribute certain elements of OS3 Digital’s underlying solutions for this market until 2022.

During 2018, Agile Group has scaled up its consulting business significantly, reaching a multi-million-pound run rate in service revenues associated with the implementation of OS3 Digital solutions to blue chip CSPs.  In addition, from 1 January 2019 until 31 December 2021, Agile Group is contractually responsible for the provision of all support and maintenance services for OS3 Digital solutions’ installed base of CSPs.

Whilst we cannot provide a complete client list for OS3 solutions due to confidentiality, the installed base of customers covered by this area includes the following previously publicly disclosed major end users: Arqiva (UK), Bell Mobility (Canada), Cablevision (USA), Fairpoint (USA), Frontier (USA), SingTel (Asia), TalkTalk (UK), Telus (Canada), Virgin Media (UK) and Vodafone (EMEA).

Also previously disclosed into the public domain, the following major managed service providers are using OS3 solutions, supporting a number of organisations around the world: Ericsson, Nokia Siemens Networks and Aviat Networks (with the latter two having TM Forum case studies on their OS3 implementations).

During the last few years, other OS3 successes have included the most significant license contract signing in the product’s history for one of the top three carriers in the USA, a large Swedish telecoms group operating in seven European countries, and a major Middle Eastern based telecoms group.

The OS3 Digital board is also pleased to confirm that the distribution and support arrangements referred to above have already generated significant profits for OS3 Digital in 2018, and this trend of profit generation from these areas is expected to continue for the duration of the contract up to 2022 and beyond.

As previously disclosed in the OS3 Digital 2017 annual report, Agile Group, which was referred to as ‘a key business partner for this area of our technology solutions’, is led by Philip Brooks, its Chief Executive Officer.

During 2016, the primary operating business of Agile Group was established.  During 2017/18 the Group was restructured to incorporate third party developed intellectual property related to the telecoms sector, and to meet a number of the obligations of Brooks Consulting Partnership Limited. This company was primarily used as a consulting vehicle by Philip, and a number of related consultants, often working alongside OS3 Digital during Philip’s time as OS3 Digital’s Chief Strategy Officer for Telecoms solutions.

Agile Group experienced a meteoric rate of growth, and consequently OS3 Digital announced in the 2017 annual report that Philip would transition to concentrate full time on his role as Chief Executive Officer for Agile Group.  The principals of Agile Group, including its Chief Executive Officer and Chief Technology Officer, are therefore well known to the directors of OS3 Digital, who have acquired businesses from them in two prior ventures and have successfully worked alongside them.  Agile Group’s directors are extremely confident in delivering on the opportunity for the companies, due to the size of their current business pipeline, and are therefore prepared to warrant future performance, and personally guarantee Agile Group’s obligations to OS3 Digital.

In line with the OS3 Digital board’s methodology for investments, certain targets for performance have been warranted by the Agile Group, with a pro rata portion of shares due to be clawed back from the Agile Group should warranted targets not be met.  These warranted targets include initial license sales of £3m for OS3 Digital’s solutions, and Profit Before Tax of £3m to be generated in 2021.  The implied circa £21m valuation for Agile Group is based on an extremely conservative 7 times multiple being applied to the £3m Profit Before Tax level, targeted to be achieved in 2021.  Any potential downside to this target PBT-based valuation is fully protected for OS3 Digital’s shareholders by the use of the OS3 board’s methodology, and the associated warranty provided by Agile Group and its Directors.  In addition, the growth profile and continued investment by Agile Group in OS3 Digital’s solutions during the warranted period will provide additional benefit for OS3 Digital.

This transaction follows the partner-based approach identified in the 2017 OS3 Digital Annual Report, ensuring the focus of OS3 Digital’s core team can be maintained on areas of the business identified as part of the strategic review as having the highest growth potential and greatest potential profits for our investors, whilst also ensuring prior investments are still leveraged to the benefit of all stakeholders.   This deal once again demonstrated the scale of the growth opportunity available to both OS3 Digital and its investors through using its investment methodology.