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

2Q20  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.

 

Finding highlights from this quarterly reporting season was difficult as many of the companies we follow failed to grow their revenues/receipts at historical rates. This is similar to the broader market where we have already seen more downgrades than upgrades. We did however note positive outlooks for 2020, but we would like to see some evidence before initiating new positions. 

 

For this blog entry, we discuss three companies that are on our watchlist. In addition, in our January monthly update, we have highlighted three nano-caps in our portfolio that are cashflow positive with bright outlooks.

 

 

Collaborate Corporate (ASX:CL8) – market cap $16m

 

The shared economy has transformed the way we get around. Uber and its competitors have made owning a car less important through lower costs and convenience. But not all Uber drivers own their own car. In many cases, they lease their car from companies like Carly for under $200/wk.

 

Carly, along with DriveMyCar (a car sharing service), are owned by listed ASX nano-cap Collaborate.  In their recent 4c, the company highlighted receipts from customers increased by 20% over the September quarter. When we compare to the PCP, receipts growth is just 10%. The company burnt through over 600K of cash during the quarter but did secure additional funding in January.

 

The company has recently launched in NZ with cars supplied by a large second-hand dealer, Turners (TRA:AX). They have also reached an agreement with SG Fleet (SGF:AX) to provide cars. Both companies have injected capital into CL8 providing some credibility to the business case.

 

While we find the business model interesting, there is no shortage of competitors. This website highlights 8 companies offering the same sort of product. Hertz also provides a product designed for Uber drivers. We find this disconcerting as the viability of the business may well be determined by how deep the pockets are of their competitors' funders and their desire to gain market share.

 

CL8 is probably too early for DMXCP to invest at this point given it is cashflow negative and there is little visibility of when that might change.

 

 

 

iCollege (ASX:ICT) – market cap $21m

 

There are several small cap education providers on the ASX. These include Red Hill Education (RDH:AX), Academies Australia (AKG:AX), and UCW Limited (UCW:AX). One of the smaller providers is Icollege. ICT owns a portfolio of training institutions covering building and construction, hospitality, energy, healthcare, IT, and an international student recruitment company called Istudy. It also owns TestEd, an authorised Linguaskill agent in Australia for Cambridge Assessment English.

 

The company seems particularly excited about the TestEd opportunity with 50 customers already in their pipeline and potential for government regulation to force more testing of international students. They provided the following table of the opportunity.

 

 

Operationally, the company reached it first EBITDA profit in 1H20. Moving into 2H20, we should expect contributions from TestEd and the recently acquired Hacking School.

 

Looking across the peer group, ICT is the minnow when it comes to revenue. As we have seen with UCW, EBITDA growth accelerates when they pass $20m in revenues, so ICT is one to watch. For now, our portfolio already contains UCW and AKG and we believe they provide better investment cases, so we will leave this on the watchlist for the time being.

 

 

Ambertech (ASX:AMO) – market cap $6.6m ($4m debt)

 

Distribution companies are generally considered average businesses with little in the way of competitive advantages.  There are exceptions with DDR and EBO showing that well managed companies can succeed in the sector. Given their revenue track record, Ambertech, a distributor of Audio Visual products, appears to be an average business. 

 

 

 

Last year the company made a significant acquisition with the purchase of the Hills AV business supported by a capital raise at 11c. The main rational for the acquisition was the economies of scale the acquisition will bring to the group.  Ambertech expects revenue and EBIT of approximately $71.6m and $2.8m respectively in FY20, which includes 7 months contribution from Hills AV to the combined group. Ambertech also expects revenue and EBIT of $43.2m and $2.4m respectively in 1H FY21, including cost synergies. The Board has agreed to pay a final dividend going forward, targeting a pay-out ratio of between 45 – 55% which equates to a dividend of 1.2 cents per share in year 1 and 2.5 cents per share in year 2. This implies eps=5c in FY21. With the current share price of 8.7c, the company would be trading on a pe=1.74 and a dividend yield of 28%!

 

It seems too good to be true. These forecasts were presented prior to the company raising capital, so we should be sceptical. AMO was loss making in FY19 and Hills classed their AV business as “non-performing”, yet they are forecasting profits going forward.  The company does not have a history of issuing forecasts, so we can’t gain any confidence here.

This a dilemma that we often face as investors in companies with unproven track records. Do we accept company forecasts that support a very cheap story, or do we forgo the opportunity because we have concerns about the forecasts? We think a prudent approach is to wait for some evidence that the business is on the right track.

 

 

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