ATHVisions/E+ via Getty Images
Diginex is generating huge losses with small and declining revenues
Diginex Limited (DGNX) has filed to raise $11.25 million in an IPO of its common stock, according to an F-1 filing with the SEC. registration statement.
Diginex provides ESG information and analytics software for enterprise customers.
The company's small revenue base is declining, it is producing large losses and cash burn, and the IPO is overvalued.
My opinion on the IPO is to sell (avoid it).
What does Diginex do?
Diginex Limited, headquartered in Hong Kong, People's Republic of China, was founded to develop an ESG data and analytics software offering, with offices in Hong Kong, Monaco, the UK and the US, although the US subsidiary is dormant.
Management is headed by Founding Chairman, Mr. Miles Pelham, who has been with the company since its inception in 2020 and previously worked at several unnamed global investment firms. Banks, according to the SEC Filing.
The company's key offerings include:
-
diginexESG: end-to-end reporting
-
diginexLUMEN – Supply Chain Risk Assessments
-
diginexAPPRISE – working conditions in the supply chain
-
diginexCLIMATE – carbon footprint calculator
-
diginexADVISORY – strategy and advisory services
-
diginexPARTNERS: white label versions of their ESG and LUMEN offerings
As of March 31, 2024, Diginex has recorded a fair market value investment of $3.8 million from investors including Miles Pelham, Rhino Ventures (Pelham), HBM IV, Nalimz Holding Limited and Natalia Pelham.
The Company seeks small and medium-sized customers interested in its various ESG-related assessment and reporting services and software through referrals, direct sales and through contractors, advertising and marketing efforts.
I could not find any reference to the number of clients the firm has or its client concentration, if any.
General and administrative expenses as a basis for gross revenue have been extremely high and have been increasing as revenue has contracted from a minuscule base, as indicated by the figures below:
|
General and Administrative |
Expenses vs. Income |
|
Period |
Percentage |
|
FYE March 31, 2024 |
720.5% |
|
FYE March 31, 2023 |
547.5% |
(Source – SEC)
The general and administrative efficiency multiple, defined as the number of additional new revenue dollars generated for each dollar of general and administrative spending, was 0x in the most recent reporting period. (Source: SEC)
The Rule of 40 is a commonly used metric in the software industry that says that as long as the combined revenue growth rate and operating margin are at or above 40%, the company is on an acceptable growth rate/operating margin trajectory.
DGNX's most recent estimate was negative (641%) as of March 31, 2024, so the company's performance has been extremely poor, as per the following table:
|
Rule of 40 |
Calculation |
|
Recent revenue growth % |
-20% |
|
Operating margin |
-621% |
|
Total |
-641% |
(Source – SEC)
Diginex Market Overview
According to a 2024 report market research report According to Grand View Research, the global ESG software market was estimated at $940.7 million in 2023 and is expected to exceed $2.87 billion by 2030.
This represents a robust projected CAGR of 17.3% between 2024 and 2030.
The main drivers of this expected growth are increasing regulatory requirements for companies to assess and report on their progress, increased investor scrutiny and a greater corporate focus on “sustainability and ethical governance.”
Various competitive and other industry participants include:
-
Maran data
-
EcoVadis
-
NAVEX Global
-
A trust
-
Refinitive
-
SAS Institute
-
Sustainalytics
-
TruValue Laboratories
-
Verisco 3E
-
Wolters Kluwer
Additionally, the chart below shows the expected trajectory of the ESG software market through 2030 based on the software product type:
Grand View Research
Another growth driver for ESG software is expected to come from the impact of AI technologies and their integration with big data sets, which will likely improve and transform the way companies assess and report their ESG metrics while automating the process to reduce costs.
Diginex's recent financial results
The company's recent financial results can be summarized as follows:
-
Reducing gross income from a small base
-
Severe and growing operating losses
-
High but less cash used in operations
The relevant financial results derived from the firm's registration statement are presented below:
|
Total revenue |
||
|
Period |
Total revenue |
% variation with respect to the previous |
|
FYE March 31, 2024 |
$1,299,538 |
-20.1% |
|
FYE March 31, 2023 |
$1,625,763 |
|
|
Operating profit (loss) |
||
|
Period |
Operating profit (loss) |
Operating margin |
|
FYE March 31, 2024 |
(8,063,807) |
-620.5% |
|
FYE March 31, 2023 |
(7,274,728) |
-447.5% |
|
Comprehensive income (loss) |
||
|
Period |
Comprehensive income (loss) |
Net margin |
|
FYE March 31, 2024 |
($4,879,071) |
-375.4% |
|
FYE March 31, 2023 |
(9,255,918) |
-569.3% |
|
Cash flow from operations |
||
|
Period |
Cash flow from operations |
|
|
FYE March 31, 2024 |
(5,856,708) |
|
|
FYE March 31, 2023 |
(6,591,318) |
|
(Source – SEC)
As of March 31, 2024, Diginex had $76,620 in cash and $24 million in total liabilities.
Free cash flow for the twelve-month period ended March 31, 2024 was negative ($5.9 million).
IPO details and valuation
Diginex intends to raise $11.25 million in gross proceeds from an IPO of its common stock, offering 2.25 million shares at a proposed average price of $5.00 per share.
No shareholders or potential investors have shown interest in purchasing shares in the IPO.
In addition, the company is registering for sale approximately another 3 million shares from existing investors who wish to sell in the IPO.
As the prospectus indicates:
The Common Shares registered for resale as part of the Resale Prospectus, once registered, will constitute a significant percentage of our public float. The sale of a substantial number of registered shares could result in a significant decline in the public trading price of our Common Shares and could impair our ability to raise capital through the sale or issuance of additional Common Shares.
(Fountain: SEC Filing)
Assuming a successful IPO, the company's enterprise value at the IPO would be approximately $107 million, excluding the effects of the underwriters' over-allotment options.
The ratio of free float to shares outstanding (excluding underwriters' over-allotments) will be approximately 9.7%, making the stock a “low float” stock subject to potentially high volatility.
The company will also be a “foreign private issuer” and an “emerging growth company,” meaning management will be able to produce substantially less information for shareholders.
Many of these companies' stocks have performed poorly since their IPO to public investors.
In addition, the public company will be a Cayman Islands shell company, meaning investors will not directly own stakes in the company's overseas operating entities.
Dilution of net tangible book value per share to investors in the IPO is expected to be $4.66 per share, while accretion to existing shareholders will be $0.40 per share, calculated at the average offer price of $5.00. This is within the typical range of dilution/accretion parameters.
Management says it will use the net proceeds from the IPO for “general working capital.” (Source – SEC Filing)
The company's roadshow is not available.
Regarding pending legal proceedings, the administration did not characterize the status of the legal proceedings or claims against the company, if any.
The listed bookrunners for the IPO are Dominari Securities and Revere Securities.
Below is a table with the main figures of the company's capitalization and valuation:
|
Measure (TTM) |
Amount |
|
Market capitalization at IPO |
$115,964,750 |
|
Business value |
$107,140,847 |
|
Price/Sales |
89.24 |
|
EV/Revenue |
82.45 |
|
EV/EBITDA |
-13.29 |
|
Earnings per share |
-$0.21 |
|
Operating margin |
-620.51% |
|
Net margin |
-375.45% |
|
Relationship between outstanding shares and floating shares |
9.70% |
|
Average price per share of the proposed initial public offering |
$5.00 |
|
Free cash flow per share performance |
-5.05% |
|
Revenue growth rate |
-20.07% |
(Source – SEC)
Diginex is a small company with declining revenues and large losses
DGNX is seeking funding from US public investors for its working capital needs as it burns cash at an alarming rate.
The company's financials have shown reduced revenue from a small base, high and increasing operating losses, and high cash usage in operations.
Free cash flow for the twelve months ended March 31, 2024 was negative ($5.9 million).
General and administrative expenses as a percentage of total revenue have been extremely high and are increasing in the face of declining revenue.
The company currently does not plan to pay dividends and will likely retain any future earnings for working capital and growth requirements.
Diginex says it has spent nothing on capital expenditure in the past two fiscal years.
The company's Rule of 40 results have been extremely poor, with declining revenue outweighed by heavy operating losses.
The market opportunity for ESG-related software and services sales is expected to grow at a strong pace in the coming years, so the company has positive industry growth characteristics in its favor.
Risks to the company's prospects as a public company include its corporate structure, use of contractors for key labor functions, small size, large cash burn and stock sales.
Management is seeking an enterprise value/revenue multiple of approximately 82.5x, which is extremely high for a small company with declining revenue.
My opinion on the DGNX IPO is to sell it (avoid it).
Expected IPO pricing date: To be announced.