A Net-net that could turn into a compounder
A Net-net that could turn into a compounder
Onfolio Holdings is a nanocap listed on NASDAQ
A Net-net that could turn into a compounder
Onfolio Holdings Inc is a nanocap listed on NASDAQ
Disclaimer: The author owns shares in Onfolio Holdings. This article should act as an introduction to the company and not be seen as investment advice. Please do your own due diligence before investing in any company.
If you would prefer to read this research as a PDF you can download it here.
This is just a brief write-up about a company I have recently invested in.
Executive Summary
Onfolio Holdings trades on the Nasdaq under the ticker ONFO. It’s a tiny under-the-radar company with a market cap of $8.23m.
ONFO buy small profitable cash flowing online businesses such as WordPress plugins, content sites, marketing service companies, and small display advertising brands.
At time of writing their market cap is roughly the same as the cash they have in the bank. They are trading well below net asset value.
As more investors learn about the company, and overall market sentiment improves, the discount to net asset value should close. This provides a near term +65% upside.
Over a longer time frame it could become a multi-bagger if they can successfully execute an acquisition strategy within the very fragmented space of small online businesses.
Introduction
Onfolio Holdings is engaged in fully acquiring profitable websites and apps, and then growing the traffic and profit.
They also take stakes in online businesses (joint ventures), and manage websites for third parties, of which they receive a monthly management fee plus a percentage of revenue generated from the site.
However, the main focus post IPO is to buy and grow its own portfolio of online businesses, and eventually to transition into a fully decentralised serial acquirer.
The company was founded in 2018 by CEO Dominic Wells. In 2020 they pivoted to a holding company and raised $822k from private investors.
The company listed in August 2022 at $5 per share, and raised $13,768,750.
So far it has used the cash to make three acquisitions - SEO Butler, Proofread Anywhere, and BWPS.
Acquisition Strategy
The strategy is to acquire websites which they can optimise and take to the next level of profitability. This extra growth comes from improving marketing, conversion rate optimisation (CRO), as well as operational efficiency.
The size of the sites they buy are between $1m to $5m. It’s in this size bracket where ONFO feel they can find many online businesses that have not been optmised to their full potential.
A Typical Purchase
One such example is Fish Keeping World, a content site bought in 2020 for $410k.
For those unfamiliar with the jargon a ‘content site’ is a website that contains lots of information built around a certain topic such as fishing. These types of websites mainly generate their revenue through affiliate commissions and display advertising.
Once Fish Keeping World was purchased more content was added, the SEO (search engine optimization) improved. This all resulted in more traffic and higher revenue generated through more affiliate commissions.
Source: IPO Prospectus
Another example is Outreach Mama, a marketing services firm purchased in October 2020.
Source: IPO Prospectus
Pre-IPO it seems the focus was on acquiring content sites.
The majority of content sites don’t have high barriers to entry. They are heavily reliant on Google search for traffic which is a risk. Google is always rolling out new algorithms in an attempt to make the search rankings better for the user.
One month your site can be at the top of page 1, the next month it could be at the bottom of page 1, and this of course has a dramatic effect on traffic and revenue. And as an SEO marketer you have no idea why your site dropped and how to reverse it (despite many SEOs claiming they do know).
However, the three acquisitions ONFO has made since going public make me optimistic they will buy online businesses with higher quality revenue with subscription business models.
Listening to a recent podcast with CEO Dom Wells(1), he hinted that the focus will be increasingly on marketing services and apps, rather than content sites and ecommerce businesses. This makes a lot of sense.
The recent purchase of BWPS is an example of this. BWPS develops security plugins that allow bloggers, creators, agencies, and SMBs to protect their digital assets, products, and content.
BWPS offers two plugins that focus on file and password protection for WordPress sites, named Prevent Direct Access and Password Protect. Both plugins have excellent reviews and thousands of downloads.
This is the Prevent Direct Access plugin within Wordpress…
And this is Password Protect…
As a shareholder I would be happy for them to buy WordPress plugins all day long, especially in the security niche as these plugins are extremely important for website owners - no one wants their site getting hacked right? This creates a very sticky user base with stable recurring revenue.
The ONFO team have a lot of experience in online marketing, so buying online marketing apps and plugins is firmly in their area of expertise too.
According to data from W3Techs, WordPress will be used by 43.2% of all websites on the internet in 2022. This is an increase from 39.5% in 2021. That means that two out of every five websites on the web use WordPress(2), so this is a giant market to tap.
WeCommerce, a publicly listed company in Canada, has adopted this acquisition strategy but their focus is on the Shopify app ecosystem rather than Wordpress.
Business Model of the Online Businesses
ONFO breaks the revenue generation down into four segments - Website Management, Advertising and content revenue, Product Sales, and Digital Product Sales.
Website Management are fees paid to ONFO from the sites they manage on behalf of third parties (as stated before, this part of the business is being phased out).
Advertising and content revenue is generated from affiliate commissions and display advertising via their content sites.
Product sales is revenue derived from Vital Reaction, the ecommece business they own.
Digital Product Sales is the online course businesses, as well as subscription revenue from their wordpress plugins.
Current Web Properties
They currently have 21 businesses in the portfolio, listed below.
Opportunity to Compound
Online business is a broad term. Lets not forget that companies such as IAC and Rightmove are online businesses.
However, much like microcaps in the equity markets, the world of micro online businesses is a highly fragmented market where valuation mispricings can be found. This is the field where ONFO plays.
If you look at the businesses for sale on FE International, a broker who specialise in this space, and Empire Flippers, an online business marketplace, you will see many sites sell for between 1x to 6x EBITDA depending on the business.
As previously mentioned the Onfolio team plans to acquire online businesses for 4x EBITDA and then grow the business to its full potential.
Being a listed company means once ONFO is profitable, they will be rewarded with a higher PE multiple. This means the businesses ONFO acquire immediately get re-rated to the Onfolio Holdings valuation.
Source: IPO Prospectus
Basically the ONFO strategy is…
LOW MULTIPLE + BUSINESS GROWTH + MULTIPLE RERATING = COMPOUNDING MACHINE
Management with Skin in the Game
Having been involved in building, buying, and selling websites myself I’m familiar with the work of Dominic Wells, he is a well known person within the digital marketing/website investing community.
In 2013 Wells started Human Proof Designs, an online marketing services company which he eventually sold before founding Onfolio.
His background as an entrepreneur turned investor highlights his passion for website investing and online marketing, so it’s great to see him given the opportunity to grow something more substantial.
Of course just being a decent entrepreneur does not always translate to being a decent capital allocator. Only time will tell regarding this.
However, it was interesting to see this slide in the IPO prospectus…
The slide mentions a book which readers may be familiar with called The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.
The book details the capital allocation decisions of eight company CEO’s who knew how to compound value for shareholders over the long term. Onfolio models themselves on this philosophy/strategy.
Being a serial acquirer is not easy, unfortunately many businesses destroy value for shareholders rather than create it. However, I applaud their ambition, and feel they have a great chance of fulfilling their mission.
Wells (CEO), van Heerden (COO), and Byalik (Acquisitions & Strategy), own a combined 28% of the company.
Elliot Travis is the second largest shareholder. Mr Travis has been acquiring shares over the past few months and now holds just over 6% of the business. He is another well known figure within the digital marketing community and manages a portfolio of online businesses, as well as the popular investing.io community/newsletter.
Travis published an article on his blog called A real-world example of buying $1 for $.50 where he compares his investment in Onfolio to that of Warren Buffet buying into Sanborn Map Company back in 1958. It’s a great article and well worth a read.
The shareholder base is as follows…
Risks
There are plenty of risks and potential bumps in the road with an investment like this. The team is young and have not proven over a full business cycle how good they are at capital allocation.
Most of the assets in their portfolio are content sites. Sites like these have an enormous amount of competition, are too reliant on google search, and have no pricing power. If the sites begin to perform badly it will damage revenues going forward. However, they are diversified so that should lessen the risk.
One more thing to note is that the shares are thinly traded, so if you own a big amount it may be hard to sell if required.
Valuation
ONFO is still loss making, but this is backwards looking. Becoming a listed company and raising all that green cash is a game changer. The three new acquisitions will greatly increase revenue and hopefully means they will start producing free cash flow early in the new year.
Once the cash starts flowing from the new acquisitions we will be able to add more colour to the potential valuation of the business.
For now I'm treating this investment as a simple net-net buying opportunity.
ONFO is currently trading under book value. The company received $12.1m in net proceeds from the IPO in August 2022. So far it has deployed $5m of this.
So on the balance sheet the company now has assets of $5m, and cash of around $7m. I’m keeping things simple here and not including their current assets. ONFO has no debt.
According to Refinativ the book value per share is $2.65, however the current price at time of writing is $1.61 per share, that’s around +65% upside just to close the gap.
Conclusion
I think the reason for the low valuation is the timing of the market listing. We have been in a savage bear market all year. Not exactly the best time to transition to a public company. But let's not forget it’s in bear markets when great future returns are made.
With the market cap being so small this is an excellent opportunity for private investors and small funds to buy into a net-net nanocap. If ONFO can execute their acquisition strategy successfully we could be looking at a multi-bagger.
ONFO has only just started promoting themselves to the investing community. As they do more events and podcasts the word should spread about the company's value proposition and low valuation. Improving market conditions will have a positive impact too.
Being a listed company provides ONFO access to investment opportunities perhaps not open to other private buyers within the space.
There are risks as I have already outlined, but at this valuation there is a big margin of safety if things go wrong. You could essentially buy the whole company for $8.23m, and you would receive most of that back in cash with all the online assets chucked in for free.
From a personal point of view, having been involved in the world of building, buying, and selling websites myself, it’s nice to be able to invest in a holding company like this.
Much like the world of microcap investing there are some wonderful opportunities in this space if you’re prepared to search among the rocks and the dirt.
This is a young company with a young team and there will be plenty of bumps along the way, not every acquisition will be a success.
However, I am looking forward to seeing what the Onfolio team can achieve over the long term.
***
As I was doing this research I had a few questions which I emailed to the CEO Dom Wells. Very kindly Dom emailed me back within a few hours with the answers.
Instead of fitting the answers into the above research I thought it would be better to just copy and paste the answers directly from Dom below.
Questions for Management…
Jon: Do you see yourself moving further away from being operators to being solely capital allocators?
Dom: For the first question about capital allocation, the short answer is yes. We're already moving to a more decentralized model, in the vein of constellation software and the other big holdcos.
The management's main role from here will be deciding where to spend capital, in terms of investment in existing portfolio companies, acquiring new ones, buybacks etc. I already see that as the key to success for this model, and it's also the key to achieving scale.
Jon: Can you clarify what type of online businesses/business models you want to focus on going forward?
Dom: Any online business where the ability to cashflow the business, or grow it profitably without deploying a large amount of risk capital. This also means there's a lot of emphasis on diversification of the business.
We wouldn't want an "SEO content site" that relies on Google rankings for 99% of its revenues, or an Amazon FBA business for example.
In the past we have owned businesses like this and still have a couple in our portfolio, but we aren't bullish on those businesses anymore. We are largely agnostic to the niche or the business model.
It could be ecommerce, it could be an agency, it could be software, or digital products, but it needs to be something where we can say with a degree of comfort that the business will still be around in a few years, can achieve modest organic growth, and can be run by a decentralized CEO.
Jon: How many acquisitions will be made per year?
Dom: It's less about a certain number and more about doing the right acquisitions. There's no real ceiling to the number of businesses we can acquire or the growth we can achieve..but there are some physical restrictions, such as how many businesses can we safely perform due diligence on, can we migrate/takeover on, and can we raise the capital for. There's no real "We'll do 5-10 per year" answer I can give. It's just as many or as few as we can safely acquire. We don't want to be too slow or too aggressive, so it's about balance.
One thing I'll say though is that we don't anticipate increasing the size of our acquisitions anytime soon. We are in the $1-5m valuation range and there are a great number of businesses for sale at this size. Moving up to larger deals may cause lower returns or more mistakes. So, the short answer is "As many as we can find and afford in that range that meet our criteria".
Jon: Are you going to fund new acquisitions from existing cash flows, and go at a slower pace ‘slow and steady wins the race’ philosophy? Or are you going to issue new shares? Or take on debt?
Dom: All of the above, depending on the situation at the time. Right now there's no way we'll issue new shares, because our share price is significantly undervalued. (Hence why members of management are buying more on the open market). If we were to trade at a premium, then issuing more shares may be the cheapest source of capital.
As for debt, again it's about the cost of capital and the risk, and the opportunities available to deploy capital on. If we can raise capital at 10-12% and deploy it for 20-25%, and we find the right deals, then debt can make sense.
Once we are cashflowing more heavily in a few years, deploying existing cashflows for acquisitions also makes sense, as long as that's what will give the highest ROI compared to organic growth or buybacks or dividends (and most likely it will be the superior ROI).
Jon: When do you expect to show free cash flow for the holding company as a whole?
Dom: We'll hit that before the end of Q1 2023.
Written by Jon Kingston Twitter / LinkedIn
Sources:
Bibliography:
Onfolio Investor Presentation November 2022
A real-world example of buying $1 for $.50 by Travis Jamison
Growth Stocks To Build A Profitable Portfolio : Interview on Benzinga with CEO Dominic Wells (interview starts at 22mins)
The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success
Thank you for a very nice write up. You used some slides from a presentation you refer to as coming from the IPO Prospectus. I must be blind as I cannot find this presentation. Would you be so kind to direct me to where I can find this?
Thank you.
Regards,
Sjoerd
Great writeup! I recently finished reading The Outsiders by Thorndike so this obviously piqued my interest ;) I had a look at the filing and what I couldn’t quite figure out is:
1) Are the founders of the acquired businesses mostly staying on? I think the idea of a decentralised organisation (eg Constellation) was to have the founders operate the business going forward and that synergies are largely a waste of time.
2) Why are the expenses so high? SGA of $3m sound a lot if the thesis is to buy a business and immediately start getting the cashflows at ~ 25% ROI?
3) If the stock is so undervalued, why wouldn’t they just buy it back? I guess the answer is they would have less money for acquisitions but if the discount is apparently 50%?
Overall, I think it’s a really interesting idea.