Gritty offer for tough investors

TIM HUNTER
Last updated 05:00 16/06/2013
Richardson

Hanging in the shadows: Wynyard chief executive Craig Richardson under Auckland’s harbour bridge.

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Scene: Under a bridge in gritty shadows, a tough, middle-aged guy in suit looks into the camera.

Gravelly voice: In a world, full of crime, and terror, one small team, stalks the gritty shadows, to rid the world of crime, and terror.

Scene: A dark, gritty, European street, a younger man in buttoned jacket walks purposefully.

GV: They are unarmed. Their weapon is . . . information.

If prospectuses came as movie trailers, that's how Wynyard Group would sell itself. You can tell by looking at the way it photographs its executives as serious, purposeful people in gritty urban shadows.

It's a good time for a business like Wynyard to offer its shares on-market, not just because investors seem to be in a sharemarket frame of mind, but also because big data is big news.

From Edward Snowden to Huawei and British Virgin Islands tax files to Facebook, security and privacy are all we're talking about, apart from X-Factor and cats.

Wynyard is in the security business, specialising in software that analyses vast quantities of raw data, such as emails or documents, to generate clues that help catch criminals or protect against threats.

If you want to know more about what it does, there is a useful video on its website, demonstrating how its software would analyse thousands of internal emails from corporate fraudster Enron. It's an eye-opener.

However, for all Wynyard's credibility in the market, investors should be under no illusions - the Kiwi company is a young, small player in a space others have occupied for some time.

Take the late Hank Asher for example. Asher was a former house painter and, briefly, cocaine smuggler, who discovered a talent for computer programming.

He built his first data mining business in 1992, using public records to create a search tool linking car licence numbers with personal details. As legend has it, within days of the World Trade Center attacks in 2001, Asher had built a tool to identify terrorist suspects by analysing information in public records.

From 450 million people in the database, Asher narrowed his suspects to 419. He sent his findings to the FBI, who realised several of the names were indeed likely terrorists.

Asher went on to work closely with the US authorities, and over his career built several businesses focused on tapping big data. One was sold to Thomson Reuters and one to Reed Elsevier subsidiary Lexis Nexis.

Before he died he created TLO.com, a "data solutions provider specialising in custom, scalable investigative and risk management tools", according to its website.

TLO isn't listed as a competitor in Wynyard's prospectus, but Thomson Reuters is, along with BAE Systems and IBM, and several less well-known names.

Along with the competitor list, Wynyard provides an estimate of how big the market is for its services and comes up with a figure of US$5.3 billion, with double digit growth.

This is good for Wynyard - it means the company has a big opportunity. The flipside is that Wynyard is expecting revenue this year of $21.5 million, implying a market share of microscopic proportions.

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And despite its fashionable line of work, Wynyard is not projecting super soar-away growth - the revenue projection for 2014 is $27m - and two of its business units are so new the company says it is hard to estimate their future results.

This proposition is valued for the purposes of the initial public offer at $116m-$141m.

To my mind that's a lot for a small, loss-making company with such large, well-established competitors. The amount is apparently supported by a valuation from Ernst & Young, but this was done for the benefit of Wynyard's creator and erstwhile owner Jade Corporation. New investors are not permitted to see it.

In addition, just over half of the $60m-$65m being raised in the IPO is going straight out the door to Jade.

Wynyard reckons it will clear about $26m from the offer to fund its growth plan. This looks plenty to be going on with, but by December 2014, Wynyard is expecting to have a cash balance of $11m.

However, although about $7.5m of the company's annual software costs aren't counted as costs because they are capitalised as investments, it's still cash out the door, so if Wynyard doesn't generate decent positive cashflow in 2015 it may need to ask shareholders for more cash.

There's nothing wrong with that - it's why growing companies come to market - but it underscores why Wynyard is likely to have only niche investor interest, at least initially.

Even for those who don't buy in this time, it's good to have businesses like Wynyard come to market because it may have wider appeal in years to come. Let's hope it does well at the box office.

Tim Hunter is deputy editor of the Fairfax Business Bureau.

- Sunday Star Times

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