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Collaborate Corp (ASX:CL8) Aims to Disrupt the P2P Sharing Economy

Collaborate Corp (ASX:CL8) Aims to Disrupt the P2P Sharing Economy
In Australia the investable universe for the collaborative economy is quite limited. The exception is Collaborate Corporation Limited (CL8), owner of the peer-to-peer sharing platform DriveMyCar
Apr 13, 2017 By Simon Herrmann Tags: ASX, Sharing Economy, CL8

Awareness and popularity of the collaborative economy have increased significantly in recent years through the rise of widely known brands such as U.S. based real-estate sharing platform, Airbnb, and the transportation focussed technology company, Uber.

In Australia the investable universe for the collaborative economy is quite limited. The exception is Collaborate Corporation Limited (CL8), an ASX-listed technology company focused on peer-to-peer sharing. The company has established partnerships with major brands and our valuation of $0.06 represents a significant premium to recent trade.

Collaborate's owns DriveMyCar, a peer-to-peer marketplace which allows car owners to rent vehicles to third parties. Founded in 2010 and acquired by Collaborate in 201, DriveMyCar's strategic focus on corporate partnerships with companies like Orix, InterLeasing, Subaru, Trivett Automotive and Uber are rapidly demonstrating scalability.

Using the Discounted Cash Flow (CDF) and CFME valuation methodology and taking into account all expiring options in the April tranche, we arrive at an aggregate valuation of $36.5 million or $0.06/share and issue a spec buy recommendation.

What is Collaborate's growth strategy and who is the team behind the success story? More importantly, is it possible that a website focussed on 'collaborative consumption' can challenge the traditional rental market?

DriveMyCar a Pioneer in the Sharing Eocnomy

Collaborate  has  developed a proprietary technology platform to facilitate the peer-to-peer rental of assets. This platform is capable of enabling multiple online marketplaces targeting different asset classes. Collaborate currently operates three businesses being DriveMyCar, MyCaravan and Mobilise (to be launched in 2017).

The most advanced asset is DriveMyCar, a peer-to-peer marketplace which allows car owners to rent vehicles to third parties. DriveMyCar is tailored for both private and corporate clients. DriveMyCar was founded in 2010 and acquired by Collaborate in 2014.

Image: Screenshot of DriveMyCar

The DriveMyCar platform allows car owners to generate income from renting their vehicle to other people. The platform was initially designed for private consumers, however Collaborate’s strategic focus on corporate partnerships with companies like Orix, InterLeasing, Subaru, Trivett Automotive and Uber are rapidly demonstrating scalability.

Car rentals are available for a minimum of four days and up to a maximum of 12 months. Suppliers have the ability to generate income from their vehicles, while consumers are incentivised to use the platform through competitive rates and a wide selection of vehicles. As at February 2017, DriveMyCar had over 880 listed vehicles and its total fleet is valued at over $20 million. The website has over 32,000 registered users.

The MyCaravan and Mobilise (to be launched in 2017) business units leverage Collaborate’s existing technology. MyCaravan is focussed on peer-to-peer sharing of caravans, camper trailers and motorhomes and is in a start up phase. Mobilise is a platform to rent any underutilised asset and will launch in 2017, in partnership with Aon, the worlds largest insurance brokerage firm.

Each of  these platforms is supported by the Company’s identity   verification technology, PeerPass. We understand PeerPass is a crucial risk mitigation tool which has enabled DriveMyCar to witness claims loss ratios substantially below industry benchmarks.

Background: The Rise of the Sharing Economy

Collaborative consumption, also known as the sharing economy, refers to an industry where mostly private owners rent out under-utilised goods or assets to consumers. The sharing economy allows these owners to generate income from goods or assets they are not using, while consumers have the ability to rent assets without the need to purchase them. Goods can be anything from real estate to vehicles or less valuable assets such as bicycles or a fridge.

Awareness and popularity of the collaborative economy has increased significantly in recent years through the rise of widely known brands such as U.S. based real-estate sharing platform, Airbnb, and the transportation focussed technology company, Uber. These companies own the IP to allow users to share their assets and do not own any of the underlying inventory available for rent.

In Australia, over 60% of the population are aware of the collaborative economy and over 50% have indicated that they have participated in some way in peer-to-peer sharing.

Willingness to participate in the sharing economy is particularly high in Asia-Pacific with 78% willing to share and 81% willing to rent assets. This compares to the global average of 68% and 66% respectively. The industry has witnessed a shift in consumer behaviour where consumers increasingly trust ‘strangers’ despite a lack of regulation.

Will P2P Lending Work for Car Rentals?

Having recognised the rising demand for collaborative consumption, Collaborate has developed proprietary technology to enable peer-to-peer transactions. DriveMyCar is its most mature application of the technology, targeting peer-to-peer car rentals.

The Australian car sharing market is an alternative to traditional car rental services, which include commonly known brands such as Avis, Thrifty or Hertz. The car sharing market can be split in three pillars: Ridesharing, car sharing and peer-to-peer car sharing. The leading provider of ridesharing services is Uber and industry leaders for car sharing include GoGet, GreenShareCar or Hertz 24/7. DriveMyCar is focussed on the third pillar of the industry, peer-to-peer car sharing.

Peer-to-peer car sharing refers to a market where vehicle owners make their own vehicle available for rent. DriveMyCar has developed processes and technology to cater for specific needs of the motor vehicle market to ensure that owners and renters needs are met. It holds unique insurance coverage designed to specifically cover the peer-to-peer rental of assets, which encourages car owners to transact via the DriveMyCar platform rather than privately.

In 2015, the New South Wales Government released a position paper on the sharing economy, welcoming the “positive impacts” of the collaborative economy.

Growth Strategy: Build Trust & Leverage Technology

Core technology has been developed over six years and supports the DriveMyCar and MyCaravan business, while Mobilise is currently in development for launch in 2017. The objective of Collaborate is to scale revenue in each of its business units through organic expansion of its existing channels, strategic partnerships as well as horizontal growth within the peer-to-peer sharing economy.

The identity verification platform, PeerPass, was developed by Collaborate to verify customers before the first transaction occurs enabling a thorough vetting process to improve 'trust' and provides asset owners with more confidence to monetise their assets through the Collaborate marketplaces. The introduction of PeerPass has resulted in a rapid reduction in insurance claims to a level substantially below industry benchmarks, whilst simultaneously building a database of verified customers. Collaborate has identified the potential to license the PeerPass platform to other online marketplaces.

The DriveMyCar business unit is the most mature business generating the majority of Collaborate’s revenue, targeting car rentals of between four days and one year in the Australian market. Whilst competition in the short-term car rental market is high, there are few providers focussed on medium to long-term segment, for which we understand DriveMyCar commands a dominant market position. 

The Company aims to grow the total value of transactions across its platform by expanding the available fleet. With vehicle supply being the major historic constraint on growth, management are strategically focussed on expansion via corporate partners holding large underutilised fleets.

DriveMyCar has been successful in engaging corporate fleet owners and providing opportunities to create rental income streams for ex-lease and under-utilised vehicles. The partnership with Subaru Australia announced February 2017 witnessed a 20% expansion of DriveMyCar’s fleet which was completely rented out in just 13 days.

In parallel, management aims to leverage the technology and marketing strategies of DriveMyCar to grow the MyCaravan and Mobilise business units. The Mobilise business unit is preparing for launch in 2017 and benefits from the existing peer-to-peer back end processing technology developed by Collaborate. The Company has announced a strategic partnership with Aon to promote the Mobilise marketplace, whilst it is planning to engage with further strategic partners.

Case Study: Sharing Economy to Challenge the Car Rental Market

The domestic car rental market is estimated at $3 billion per annum, and is currently dominated by conventional short term rental agencies which typically own their own vehicle fleet. Peer-to-peer rentals currently represent a small yet fast growing segment.

Collaborate generates revenue when a customer makes a booking on one of its peer-to-peer sharing marketplaces. The value of the transaction is correlated to the market value of the asset and the duration of the confirmed booking.

Depending on the type and value of the asset, Collaborate retains a commission whilst paying back a portion of the fee to the owner of the asset. The average value per transaction on the DriveMyCar platform currently stands at $1,390 per contract with gross revenue earned by DriveMyCar of approximately $550 per contract. Users rent cars for 38.3 days on average.

Collaborate does not own the inventory offered for rent on its platform, hence there are no upfront costs associated with the procurement of the fleet. Collaborate has created a marketplace for users to exchange goods and revenue is derived from the total value of goods offered across all platforms and users’ willingness to make bookings. We estimate that DriveMyCar recorded approximately ~1,200 bookings during FY16.

The total value of inventory that is available for rent is estimated at over $20 million as at December 2016 and we understand that approximately half of the fleet is actively being used. Management has been able to generate revenues equivalent to between 4-8% of its active fleet value over the past two years. We understand this “utilisation rate” is improving on the back of management’s corporate partnership strategy and favourable claims loss ratio’s within the DriveMyCar ecosystem.

Collaborate has the potential to reach a cash flow breakeven position within the next 12-36 months, albeit contingent on further growth and management expects the more advanced DriveMyCar business to break even at an earlier date. Whilst supply on the platform has historically been a limiting factor, discussions with commercial partners are positioning the Company to accelerate uptake.

The Company’s verification platform PeerPass provides Collaborate with a competitive advantage by reducing risk and encouraging growth in the supply of assets and creating a pool of verified customers. PeerPass adds the ‘trust’ component to Collaborate’s platforms and can be monetised further through Collaborate’s marketplaces or those owned by third parties.

Valuation: Attractive Value Proposition

Collaborate’s investment appeal rests in the current and future revenue streams generated by its peer-to-peer sharing platforms.

We have considered the Company’s potential pre-tax worth using the Discounted Cash Flow (‘DCF’) and Capitalisation of Future Maintainable Earnings (“CFME”)  methodologies. Our appraisal is based on an expanded share count of 604 million, reflecting the sum of all existing shares and all expiring options in the April 2c/sh tranche.

Exercise of all the April options would provide a working capital surplus of $1-$2million above our projected funding requirement. This surplus has not been credited to the valuation, but provides a buffer for the model in the event of a delay.

Our DCF approach arrives at a valuation of $48.8million, or $0.081/share. Our CFME method arrives at a valuation of $24.3million, or $0.04/share Applying equal weightings both methods deliver an aggregate valuation of $36.5million or $0.06/share.

 

CL8 Valuation Summary

Method

Assumption

Valuation

Per Share

DCF

10% Discount NPV

$48.8m

$0.081

CFME

7.7x FY19f Revenue

$24.3m

$0.04

Average

$36.5m

$0.06

 

Wise-owl's Take

Collaborate offers speculative exposure to demand for peer-to-peer sharing. We are attracted to its growth trajectory, corporate partnerships and funding clarity which the upcoming option exercise can deliver.

Principal hurdles include the Company’s need to reach a self funding position and competition. Access to a ~$1.8 million equity facility and $1.26 million via April options underwriting mitigates near term funding risks as the Company builds toward to a critical mass.

With management demonstrating their ability to forge and leverage corporate partnerships, we anticipate a re-rating in the stock as DriveMyCar witnesses benefits of scale and its favourable insurance record attracts strategic interest.

As our valuation of $0.06/share represents a 150% premium to recent trade (as of April 2017), we initiate coverage with a ‘speculative buy’ recommendation.

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Simon Herrmann Author: Simon Herrmann Apr 13, 2017

Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.

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