Felix Group (ASX:FLX) : 1 Pager
Are structural tailwinds and increasing government infrastructure spending enough?
I’m introducing a new category of posts I will be publishing every month: the 1 pager.
Inspired by the likes of:
Tristan Waine @Hurdle Rate who publishes 1 pagers on interesting companies listed all over the world
Nick Maxwell 🧙♂️ @Max Wellth who publishes a weekly article of a similar style on a new company he’ll be watching
Neke @
who condenses a lot of quality thoughts in shorter posts about companies
These 1 pagers for me will be about a company I’m watching who needs to show further burden a proof to have the potential to be a real quality grower. The deep dives will also continue on a monthly cadence.
Whereas the deep dives are about companies that I think have reached a decent level of product market fit, the 1 pagers covers companies I judge may need a few more proof points, and are real up-and-comers.
As always, nothing you read from me will ever be financial advice. The best investors don’t take advice from nobody (I wrote about this here).
Let’s dive into today’s edition.
Business Summary
Felix group is built on a combination of my two favourite business models; it’s part technology creator, part network orchestrator (I wrote about these business models here).
At a high level, it offers construction businesses a vendor management platform with a built-in procurement software.
One way to think about it is as a one-stop shop for finding contractors, signing the paperwork, onboarding them onto a project, and managing the project’s financial journey with them.
What problem to they solve?
Felix helps solve a number of problems that would typically happen in a large construction organisation. You might consider Lend Lease, McMahon, CPB Contractors or Cimic as one of them (all Felix customers).
When an organisation like these bids for a government tender on a big piece of work, they will typically hire sub-contractors (these are vendors in the world of Felix) to do all the work for them.
The process of hiring these sub-contractors is typically very manual.
First, how do you find the right skillset you need?
You would typically spend time asking your colleagues, navigate through your phone contacts to refresh your memory of the people you worked with in the past, use Google, fire up your excel sheets, etc…
Then, once you’ve found a few contendants, you would need to gather quotes from all of them.
Where do you collect and store these quotes to cross-compare them and share them around? Typically in siloed systems (one sends you a Xero quote, another sends you powerpoint, another writes the quote in the email text body…)
Then, how do you conduct your due diligence on the successful applicant? How do you make sure they have all the accreditations they need for this project?
Another process that’s typically very manual.
There’s more to it, but you get the picture. Felix houses all of those processes in 1 platform. Less headaches, better compliance and a faster process in general.
Compelling Event
A recent compelling event makes now a good time to pay closer attention to Felix.
Growth is starting to kick in.
To understand the crux and the meaning of this, we have to dive a little deeper in the company’s history.
Felix initially started off with a different strategy. At the timing of listing, they were targeting the other side of the platform; vendors. The vendors are the ones fulfilling the jobs. Boral might be a good example here: they provide the construction materials alongside the labour.
Initially, Felix’ GTM efforts was on finding more of these and selling a subscription license to them.
What they found was that the other side of the marketplace (contractors) was experiencing the more painful part of the problem. Hence, they pivoted to focusing on selling to contractors (the joys of finding product market fit).
This has resulted in the top line ARR growth figure to look average in the past 2 years. Here’s what it looked like in January:
Source: Appendix 4C – Q2 FY23
But, now that contractor ARR has started to outweigh vendor ARR significantly enough, we’re starting to see growth kick in. Here’s what it looked like in April:
This recent quarterly result was the first to show growth above 20%.
What needs to happen
#1 - Movement towards cashflow positivity. Whilst I’m not sure it’s fair to assume Felix can become cashflow positive on current reserves and in the next few quarters, it would be useful to see some form of operating leverage become visible.
Movement in the right direction here is necessary.
In the last few quarters, staff costs alone have tended to outweigh cash receipts. This would indicate that cashflow positivity is still a little while away.
In their half-year results, they mentioned a number of improvements needed on the platform: Architecture updates to facilitate local hosting in new regions & the development of AI-powered document information extraction and validation.
These will require an investment, so monitoring the cash cushion is important.
#2 - International Customers. Felix still has a good growth runway ahead of itself in ANZ, but for the potential to become a real high-growth compounder, it needs to unlock key massive markets overseas.
They made some noise about their key partnership with InEight; the value of the partnership would be proven when some international customers get onboarded on the platform.
They mentioned “active discussions ongoing with joint-bid Contractor prospects”
We need to see them land overseas logo to see the signs that international scale is possible.
Conclusion
I believe that Felix is correct when they state the tailwinds they have going for themselves; increasing government infrastructure spending, tightening legislative & compliance environment and ESG requirements.
But tailwinds alone aren’t going to be enough to propel the business into its scale-up phase.
They look like they are solving a real problem for their customers, so I have faith in them that they can cross the chasm, but will need to see evidence of this in the next 6-12 months.
If they reach these milestones, I will revert back with a full deep-dive in 1 year.
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Nice write up as always mate. A good summary of what the business does without digging too far into the weeds. Appreciate the mention to mate, very kind!
Good article and as strategic advisor to two private manufacturers in the construction industry I am going to check out the Felix model. That said, in todays economic environment it’s difficult to beat low price when tendering.