Butn Limited (BTN.AX)

Sep 11, 2022

In Australian dollars unless specified otherwise

• Market cap - $20 million
• Share price - $0.125
• Cash - $15.8 million

One sentence

Butn is a founder-led illiquid nanocap that has potential to exponentially grow revenues in coming years while demonstrating operating leverage.

How does the company make money?

Let’s say there is a business that provided a product or a service to its customer. The business did not get the money from its customer immediately but has an invoice which will be fulfilled by this customer within 30 to 90 days. However, the business needs the money right now. This is where Butn comes in. It provides money (invoiced amount) to this business for a fee and then collects the receivable from the end customer. Where does Butn get the money to give out? Through a debt note. Butn makes money because the fees they collect are higher than the interest on debt note. There are also write-offs – situations when customers do not pay back for one reason or another.

Inputs to the money-making equation are:

• Fees charged – 2-5% of invoiced amount. Company’s receivables book turnover is high – 6 times a year on average. That would bring the total annual fees charged to 12-20%.
• Cost of capital – 7%, weighted. This figure has been going down as the company has successfully refinanced its debt a few times. As the company grows and borrows more the cost of capital will keep going down.
• Write-offs – 0.1%. 
• The total amount of originations (money Butn’s customers received in total). For FY2022 it was $274 million.

The key for success is to grow the number of SMEs that use Butn while keeping the expenses relatively the same. This is where MYOB partnership comes in handy. MYOB is a large software company that provides accounting services. MYOB was acquired by KKR – a private equity firm - in 2019 and at the time had 628,000 subscribers. Butn tapping in into MYOB’s customer base is the backbone of the investment thesis. MYOB is a 19.9% shareholder in Butn. Bloomberg article mentions that the number of MYOB subscribers crossed one million in 2022.

Numbers

Let’s have a look at the FY2022 numbers. Total originations were $274 million with revenue of $5.6 million. That is a 2% revenue margin. Butn paid $3 million in interest which is roughly 1% of total lending amount. The difference is 1% - let’s call it “transactional” cash from operations.

July revenue margin was 2.3% and I am sure Butn hopes this figure will continue to grow.

Will the company be able to achieve a billion in originations annually in 3-4 years? Nobody knows for sure but I think they will. Why? At the moment 20% of all originations come from Butn platform. Average transaction is $8,000. That is roughly 7500 customers. I am sure not all of the platform customers are coming from MYOB but even if we assume all of them are the number would make up mere 1% of MYOB subscribers. How many of MYOB customers need loans? I bet the answer is more than 1%. Much more.

So, if we assume 2.3% revenue margin and the same cost of capital of 1% at $1 billion in originations transactional cash would be $13 million. Payments to suppliers and employees in FY2022 were $7.2 million and $3.2 million was capitalized for intangibles. That’s a $10.4 million expense which in a few years I am sure will grow. Plus, write-offs at 0.1% become $1 million. With current margins we are looking at a roughly breakeven operation with $1 billion in originations annually. These numbers don’t look like a screaming bargain.

If the delta between revenue margin and cost of capital grows to 2% then at $1 billion in annual originations the transactional cash figure becomes very attractive.

Market

Xero – MYOB’s winning competitor - acquired Waddle for $80 million ($31 million cash plus payout under performance circumstances) in 2020. By 2019 Waddle crossed $275 million in lending – almost the exact number Butn closed FY2022 with. Waddle seems to be the closest peer-to-peer fintech competitor with backing of a big guy (Xero). Although they are likely way ahead of Butn now. They claim to be on many platforms including MYOB.

Prospa is an ASX listed company that does business loans and recently opened up credit line offering. Prospa is valued at $130 million after closing FY2022 with $750 million in originations, $150 million in revenue and $1.6 million in net profit (before income tax benefit).

Timelio – private company backed by Goldman Sachs - did $2 billion in lending in 2021. This is a bigger player with average loan of $1 million.

Overall, the space is definitely very competitive. Getting customers through large partners is a smart move.  

What is important?

• Business model is not new. What’s new is the tech behind the process which makes it very easy to process loans.
• SMEs will always need money to loan. 40% of SMEs fail because of cash flow problems. It is super convenient to get these loans with a click of a button for MYOB customers. And there are a lot of them.
• Butn is a founder-led company. Rael Ross and Walter Rapoport each have a 22% stake in the company and it is in their best interest to make this company a success story. What is a success story? Company that grows revenues and earnings meaningfully without dilution.

Conclusion

This is a risky bet because the revenues and originations need to grow significantly for this investment to appreciate. However, this is a fintech in a semi-hot invoice financing industry with a great operating leverage potential. With signs of good progress, it can get overvalued really quickly (tight register with top 20 shareholders holding 88% will help).