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

1Q21 NANO-CAP UPDATE

 

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.

 

That strength among smaller companies over the last few months has meant that it is now a much harder exercise to find interesting very small companies. In our portfolio, the likes of AVA Group (AVA), Sequioa (SEQ), Knosys (KNO) & Australian Family Lawyers (AFL) have all re-rated from sub $20m market caps to much larger market values.

1Q21 results were generally positive, although cash flow analysis on a normalised basis remains difficult because of the impact of stimulus payments and continued lockdowns.

 

Australian Family Lawyers (ASX:AFL) -  market cap $24m

 

AF Legal Group provides family legal services including divorces and child disputes. The company listed on the ASX in 2019 and has been expanding its locations since then. During the quarter, the company reached an important milestone by opening its Perth office and completing its ambition to have offices in all the key cities across Australia. This allows AFL to further leverage their technology-focused marketing efforts. Below we include a slide from their FY20 presentation. It highlights the type of investment being made in technology to find new customers. Traditionally firms have a relationship-driven marketing model.

 

 

While AFL is not required to complete a 4c report to the ASX, they did provide a market update on Q1 progress. Revenue and Operating EBITDA was up 34% and 86% respectively. While the result does benefit from previous acquisitions, this was remarkable given their strong presence in Victoria. It is perhaps a sad outcome of some of the well-publicised pressures on families as a result of the COVID lockdowns.

 

The company likes to use Operating EBITDA and Underlying EBITDA as key metrics. Both metrics exclude non-recurring or unusual costs with Operating EBITDA excluding corporate and listing costs. The company applies AASB.16 to these numbers therefore they also exclude office leasing costs. This is clearly a recurring and important cash expense, so should really be included as many other companies report EBITDA excluding AASB.16. For more on this issue, you can check out our blog. After accounting for rental costs, we estimate the EBITDA(as a proxy for operating cashflows) to be more like 700k for Q1.

 

Growth looks to be a feature going forward as the company commented on a “Strong pipeline of organic, lateral hire and acquisition growth opportunities currently under review”. With just a 1% market share, AFL has a huge opportunity to become a major player in the $1.1B market

 

DMX CP owns shares in AFL

 

Rent.com.au (ASX:RNT) - market cap $15m

 

Rent.com.au is a B2C business that provides solutions to Australian renters to make their rental experience easier. The company was reverse-listed in 2015 by founder Mark Woschnak. Mark stood aside in 2016 and was replaced with the current CEO, Greg Bader.

 

The company’s revenues come from renter products such as rentBond (finance product), rentConnect (utility connections), and advertising from agents. They have plans for multiple new products to serve the Australian renter population.

RNT listed with 87m shares@20c in 2015. Five years later, there are now 340m shares at 4.5c. It is fair to say that this has been a disaster for shareholders. But this type of scenario is not unusual and should provide a reality check for investors of the “story” companies that are currently being IPO’ed. Many will be loss-making for years to come and will require new capital on an annual basis.

 

Shown below is a chart of half-year revenues since listed. The drop off in revenue since 2018 was attributed to lower advertising revenue. However, growth appears to be improving with a 22% improvement in quarterly revenue in Q121 over Q120.

 

 

The October update highlighted that, while still negative, the cashflow trend is improving. The company also highlighted that the relatively new RentPay business is holding back the business from being profitable at an EBITDA level.

 

 

The key to the company strategy is to have an enduring relationship with the renter with products that continue past the initial move into the rental property. The RentPay product is key to that strategy. RNT has teamed up with listed company Navatti (ASX:NOV) to provide a flexible payment product to renters. The company will charge fees for allowing renters to pay via an app (up to 1.25% on credit card). It is easy to see strong revenue growth if this takes off across their 800k plus renter base. It is far from clear if it will be successful as both the tenant and the renter need to be on-boarded.

 

It is an interesting story that is worth watching, but with just $2.3m cash available, another cap raise may well be on the cards in the not too distant future.

 

Corum Limited (ASX:COO) market cap $46m

 

We introduced COO in our previous nano-cap update when 4Q20 saw COO become cash flow positive after a long period of negative cash flows.

1Q21 has proved to be a transformational quarter for COO with a number of interesting and generally positive developments:

  • The acquisition of the 57% of Pharmx that COO previously didn’t own. Pharmx is the market-leading electronic ordering gateway for Australian pharmacies.
  • The resolution of outstanding distributions that were due from PharmX to Corum, adding $3m to COO’s cash balance.
  • A $5.6m capital raising, which saw COO finish the quarter with over $10m in cash.
  • The appointment of a new CEO and retirement of the long-serving David Clarke, who had overseen significant value destruction and cash depletion over recent years.
  • Further refreshing of the board.

Subsequent to the end of the quarter, COO announced a placement to Arrotex, Australia’s largest generic and private label OTC company servicing 3400 pharmacies, to raise $3.3 million. Experienced industry player and Arrotex Executive Chairman Dennis Bastas will join the Corum Board  – a strong vote of confidence in the future direction of COO.

Together, these developments substantially change the COO investment proposition.

 

COO exits 1Q21 with an annual revenue run-rate of ~$15m of predominantly annuity revenue from platform fees and subscription revenue. The business is expected to be cash-flow positive in FY21 with a very strong balance sheet. There is a strong organic growth profile as the new management team looks to improve sales performance and regain market share in its core pharmacy software, as well as drive growth in Pharmx. Longer-term, the platform is being put in place for further health-tech acquisitions to leverage off COO’s core pharmacy position and relationships.

DMX CP owns shares in COO

 

Global Health (ASX:GLH) market cap $16m

 

GLH listed on the ASX over 20 years ago, and in recent years has developed a wide range of digital health solutions including electronic medical records, patient administration systems, and consumer health records. After many periods of inconsistent and underwhelming results, GLH reported an encouraging FY20 result, when it delivered revenue up 9% to $6m and a positive EBITDA result.

 

GLH has now followed this up with a very impressive 1Q21 result. 1Q21 highlights included monthly SAAS recurring revenue up 13%, total revenue up 21% and EBITDA up over 315% to approximately $262K.

GLH has historically had a focus on servicing Victorian health agencies.  COVID-19 has impacted new sales and project revenue, particularly in Victoria. Contracted projects and associated billings from several new Victorian contracts have slipped by six months.

 

Pleasingly, GLH has been able to expand its customer base outside of its traditional Victorian base, and despite the challenges in Victoria, has been able to maintain strong sales momentum. Recent wins outside of Victoria have included a new partnership with Asthma Australia to promote GLH’s Lifecard consumer health platform, and an agreement with NSW Department of Communities and Justice for the implementation of GLH’s MasterCare Client Management System.

This expanded customer base suggests GLH has the ability to grow at a more rapid rate than it has previously. With a track record of profit delivery, high-quality recurring revenues, and a more encouraging growth profile, GLH’s outlook appears promising. However, its cash position, although improving, remains low, and a capital raising would not be unexpected.

 

 

 

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