One reason is that UI revenues are choppy and investors prefer companies whose revenues are growing quarter by quarter.
UI revenues are seasonable and equipment sales (Immersolution) are unpredictable ($369,000 - Q2 ; $298,000 - Q1 ; $577,000 - Q4 and $901,000 - Q3).
Clearly third quarter 2021 revenues will be less than last year's third-quarter revenues which were boosted by strong sales from Immersolution ($901,000). For the second quarter 2021, total revenues were $982,000.
UI has purchased three photographic agencies. All are base in Urbanimmersive home turf (Sainte-Therese, Saint-Paul and Saint-Eustache, province of Quebec).
By purchasing real estate photo agencies, UI is acquiring photographers who are de facto marketing agents, In order to grow their clientele, real estate photographers must market themselves to potential clients. UI photographers will now be able to market UI's solution to existing and future clients.
According to the CEO, he was surprised by the profitability of photo agencies. The purchase price for the three agencies is $3,025,000. ±62% was paid in cash ($1,870,000) and ±38% was paid in shares ($1,155,000). For the past year, these three companies had revenues of ±$1,600,000. Purchase price is equal to 1.89 times revenues ($3,025,000 / $1,600,000). If these companies generate 20% in operating cash flows (OCF) ($1,600,000 X 20% or $320,000), then the capitalization rate on the transaction is 10.6% ($320,000 / $3,025,000). If that is the case and given the current market for real estate photographers is showing signs of emerging from the bottom of the business cycle, the acquisitions and the timing appears to be favourable to UI shareholders.
So what is the impact on the valuation?
| Before transaction | |
| Shares outstanding | 151,143,762 |
| Share price | $0.175 |
| Market cap | $26,450,000 |
| Debt | $1,703,000 |
| Cash | -$4,000,000 |
| Enterprise value (EV) | $24,153,000 |
| Revenu second quarter X 4 | $3,929,000 |
| TTM OCF | $957,000 |
| Cash flow yield | 4% |
| EV / OCF | 25 |
| After transaction | |
| Shares outstanding | 151,143,762 |
| New shares - Acquisition | 6,600,000 |
| Total shares | 157,743,762 |
| Share price | $0.175 |
| Market cap | $27,605,000 |
| Debt | $1,703,000 |
| Cash | -$2,130,000 |
| Enterprise value | $27,178,000 |
| Revenu second quarter X 4 | $3,929,000 |
| Revenu acquisition | $1,600,000 |
| Total revenu | $5,529,000 |
| TTM OCF | $957,000 |
| Annual OCF acquisitions | $320,000 |
| Total OCF | $1,277,000 |
| Cash flow yield | 4.7% |
| EV / OCF | 21 |
In this example, I have made no effort to normalize revenues.
Based on this example, the three newly acquired businesses will increase revenues after the first year by 41% ($5,529,000 / $3,929,000). Enterprise value has gone up by 13% ($27,178,000 / $24,153,000).
If UI regularly purchases profitable agencies, then the current valuation is warranted.