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A fresh approach to value investing in
undiscovered, quality businesses.


The end of each financial quarter is a busy time for us as many of our portfolio companies release an update of their activities and cashflows. Some new ideas can also be generated by trawling through the numerous reports released.


The third quarter of FY 20 was a challenging one for small companies. The quarter started with bushfires across much of Australia, and ended with the increasing threat of COVID-19. In comparison to previous quarters, stand-out results were few and far between. While the full impact of COVID will be captured in the June reporting quarter, there were some initial observations highlighting some of the impact COVID will have on  companies:

1. A number of companies reported lower than expected cash receipts. This is likely to relate to customers holding back paying their suppliers during March in order to conserve cash given the uncertain operating environment.

2. There was also plenty of commentary from companies around claiming the various state and federal COVID 19 subsidies available, and in particular Jobkeeper. This would suggest many companies are expecting a greater than 30% fall in revenues in the current quarter.


Despite the doom and gloom, there are many small companies that continue to perform well and offer interesting opportunities in the nano-cap space. For this blog entry, we discuss four companies  that had notable developments during the quarter.


Stream Group (ASX:SGO)


In its March quarter 4C, SGO confirmed receipt of $1.63m in cash relating to an earn-out from a business that it had sold in 2017. The earn-out payment had been under negotiation for some time so it was pleasing to see a resolution here. As a result, SGO’s cash balance now sits at over $4m versus its market cap of $4.5m. In addition to its  cash, SGO owns Qusol, a small insurance claims SAAS business focused on the NZ insurance market. Off balance sheet, SGO has ~$3.5m in franking credits. For a company with a market cap of less than $5m, there seems to be plenty of value here.


In addition, as a clean listed shell,  there is also potential for corporate activity, in particular to take advantage of this shell for a back door listing. The company has a very tight register (with the top 20 controlling over 86% of the issued shares) which is an important consideration for any back-door listing. During April, a total of 800 SGO shares traded – highlighting how tightly held it is.


DMXCP owns shares in Stream Group.




Security services and technology company, AVA, reported a pleasing positive operating cash flow for the quarter of $1.1m. This represents a significant ($3m) turnaround from the corresponding quarter last year when AVA reported a $1.9m cash shortfall from operating activities. AVA reported their maiden NPAT result in 1H20, and this cash flow result is further confirmation of the transformation within the business over the past 12 months. In particular, the cost base has been restructured and manufacturing efficiencies have been achieved which has improved technology division margins to 72%.  AVA’s technology solutions continue to have an encouraging outlook, in particular AVA’s Aura IQ conveyor health monitoring solution.


AVA’s international security logistics business has adapted to COVID, using this opportunity to innovate and to offer bespoke solutions to its customers to ensure currency, precious metals and valuables continue to be transported around the world. AVA noted that client activity significantly increased during Q3, with the addition of both new clients, and a wider breadth of services offered. Subsequent to the end of the quarter, AVA confirmed the receipt of $1.5m from its Indian Ministry of Defence contract, resulting in a strong pro-forma cash position of $5.2m and no debt. The company is forecasting EBIDTA of at least $5m for FY20.


DMXCP owns shares in AVA Group.


Babylon Pump and Power (ASX:BBP)


Specialist resources services company, BPP, back-door listed at the beginning of 2018. The company operates under two areas:

1. Rental of specialty diesel driven pumping and power generation equipment, and

2. Maintenance and rebuild services for diesel driven equipment.


Revenue growth has been strong with proforma revenue run-rate of $4m in 2018 growing to $11.5m in 2019.  2020 growth will be aided by the acquisition of Primepower. March 2020 revenues were an impressive $2.5m.


The company uses EBITDA as a key profitability metric.  This is clearly inappropriate given this is a capex heavy business that has used debt to fund equipment to service contracts.


With a market cap of just $15m, this appears to be an under the radar opportunity to buy a fast-growing business.  The company’s track record of winning contracts may reflect contracts that don’t provide an adequate return of capital. We will not know this until we get a longer track record of results.


Techniche (ASX:TCN)


Software company, TCN, has been listed on the ASX for a number of years. The company has two products:


1. Urgent : Facilities Management SAAS specialising in Fuel Retail

2. Statseeker : Network monitoring software

Earnings have been inconsistent over that time and the 10-year share price chart (below) no doubt reflects the frustration of many investors.



The recent half year result was encouraging with solid revenue growth of 8.7% an increase in NPAT  from $27k to $213K.  A quarterly update on May.1 confirmed progress for the full year. The big question for investors is can this turnaround be maintained. TCN has a market cap of just $6.5m and net cash of $4.3m. So, you are paying just $2.2m for an international growing software company with a high degree of recurring revenues. Chairman and CEO, Karl Jacoby, has been a consistent buyer of shares over the last few months.



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