The Shoeshine Column: E-opportunities: pie in sky or ready for take-off?

Friday 28th July 2000

Who says the kamikaze spirit of the small New Zealand investor is dead?

The Nasdaq index may have been sliding this week amid fears the US technology sector is still overpriced but down in these parts you can still get the punters chasing a speculative loss-making startup's shares up into the blue yonder.

New shares in e-opportunities, the second offering of the Stock Exchange's New Capital Market, began trading this week with little fanfare but apparently plenty of buying interest.

As the company's market capitalisation exceeds $10 million, its NCM status will be brief. It will move up to the Stock Exchange's main board early next month and will change its name to Selector Group.

Since the original issue at 50c the shares have traded as high as 72c, a 44% premium. Selector last year lost $1.4 million on revenue of $47,000 so the demand from investors clearly reflects their view on how it will do, not how it has done.

And if the company does half as well as it thinks it will the current price will look dirt cheap in a few years' time.

Selector is a member of a not-terribly-select band of companies flogging "psychometrics" which, the blurb says, marries the sciences of psychology and statistics to provide a tool for predicting how someone will behave in certain situations.

It's been around for quite a while and has been used by armed forces around the world. But only in the last 15 years has it been employed to test the fighting spirit of warriors venturing out on to the corporate battlefield.

Today around 1500 commercial psychometric tests are available from 90 suppliers so Selector is playing on a somewhat crowded field.

Its biggest competitors are the likes of Britain's Saville & Holdsworth, with a turnover of £65 million, and CPI (California Psychological Inventory).

But psychometrics, it seems, hasn't yet caught on in a big way. Common complaints are that the results of tests are vague and of dubious accuracy or validity.

Selector reckons it has overcome these perceived problems. It also says it has an advantage over most of its competitors in that they are paper-based and have to be administered by trained staff. Its own tests are delivered electronically via the internet, giving the operation "scaleability" onto world markets.

Minimal specific training is needed although they need to be administered by human resources (HR) professionals. Customers don't pay for the tests themselves; they pay for an encryption key which enables them to read the results.

Its key products are SelectorPA, aimed at large organisations; e-Profiler, aimed at employment and recruitment agencies; and CareerPath, a "do-it-to-yourself" test aimed at school leavers and other jobseekers.

Selector's issue documents paint a bullish picture of the potential size of the markets for this stuff. According to Valutech, the independent appraiser hired to value Selector, "research" indicates 96% of all IT companies will use the internet for recruiting next year while 58% of IT professionals use the internet first when looking for a job.

Selector quotes a survey this year showing 79% of the world's largest companies recruit on their websites. A report by Computer Economics reckons 16 million resumes will be on the web by 2002.

Needless to say, Selector reckons it has the products and the business model to cash in on all this.

It charges $US100 ($217) for SelectorPA and expects to reap annual revenues of $3 million to $5.8 million in five years' time, suggesting it will sell 14,000 to 27,000 sets.

It picks sales of 200,000 sets of e-Profiler at $US25 ($54) each, generating $10.8 million, and 50,000 sets of CareerPath at $US40 ($87) each, making $4.35 million. All up that's revenue of $18 million to $21 million in 2005.

Its current "cash burn rate" (costs) are $1.2 million a year, suggesting a future profitable enough to make investors' eyes water - if it reaches its targets.

Plainly that will happen only if users think it has superior products at the right price. Among its current customers it lists Sky City Casinos, the Australian Defence Force and, interestingly, the Treasury.

In 1999 its revenues were only $25,000, growing to $47,000 in the March year. The projected growth path from here is practically vertical. Its June-quarter revenue was $44,000 and it expects $72,000 in the September quarter, $363,000 in the December quarter and $685,000 in the March 2001 quarter.

And all this, it says, is from "an orderly build-up of product use generally" - no success with a major client is assumed.

It says it has made initial contact with a job site with 560,000 jobs from over 45,000 employers; a recruitment software developer with 100 corporate clients; and a British trade association with 50,000 members.

As the Valutech report points out, with 1500 products on the market already, new products will need to be marketed strongly and be differentiated clearly from competitors.

Selector has made a start. Its tests are being sold in New Zealand and Australia by Greene Hanson and Clark Hummerston, both owned by US giant Manpower. And it has "strategic alliances" with University of Auckland, Wilson & Horton and EMA Central.

But investors should bear in mind that a company is worth only the net present value of its future cash flows. Selector's cash flows are still, as far as Shoeshine can tell, firmly negative.

Punters should wait to see if the company hits those early revenue forecasts before they push the shares to ridiculous levels.

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