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

3Q19 Nano-cap update

 

A number of small ASX-listed companies have recently reported their third quarter cash flow reports and trading updates. With the financial year fast coming to a close, these 3Q updates provide valuable insights as to how the full year results for these companies may look. Among the group of nano and micro caps on our watchlist (businesses that are either cash flow positive or very close to it), we considered the updates to be generally positive. On the back of some strong updates and increasing market interest in these smaller capitalised stocks, there were some significant share price movements. 8Common Limited (ASX:8CO) (we do not own) moved up strongly on the back of a cash flow positive quarter and some good traction with its travel and expense management product. Tiny Beans Group Limited (ASX:TNY)(we own) also re-rated on the back of a substantial improvement in revenues and cash receipts.

 

In this post, we look at three interesting, under-the-radar, nano-caps in our portfolio that reported pleasing 3Q updates. All three had cash flow positive quarters, have strong net cash positions, and good quality revenue streams. We think that these companies are nicely placed to finish FY19 strongly, and their progress could be worth keeping an eye on. 

 

Chant West Limited (ASX:CWL)

Market cap $7.5m

Net cash (31/03/19): $3.7m

 

CWL announced another quarter of positive EBITDA and positive operating cash flow. CWL is a leading provider of research, consulting and software services to the superannuation and financial planning industries. CWL’s clients include the majority of Australia’s leading superannuation funds, institutional wealth managers and financial planning dealer groups, and approximately 90% of its revenue is subscription, annuity style, revenue.

 

In the nine months to 31 March 2019, CWL has recorded a 20% increase in cash receipts to $7.4m. Operating cash flow for the nine months (before R&D payments and tax refunds) stood at $1.3m – an impressive achievement for a company with an enterprise value of less than $4m.

 

Following the Royal Commission, CWL is seeing growth in demand for independent research data and software to compare super fund products. This provides some nice tailwinds for the company for the rest of the year.

 

UCW Limited (ASX:UCW)

Market cap $14m

Net cash (31/03/19): $2.1m

 

Private education provider UCW reported a very strong 3Q19 trading update, with its cash balance increasing $1.6m during the quarter. UCW’s key business is Australian Learning Group (ALG) which provides vocational education courses in the health and community services sector (childcare, aged care and disability care etc). ALG grew its international student enrolments by 29% on the previous corresponding quarter. Its new Melbourne campus, which opened in July 2018, achieved run-rate break-even in 3Q19, three months ahead of what was outlined at the time of UCW’s half year results.

 

Ikon, UCW's higher education business that offers community services courses such as Bachelor of Psychotherapy, achieved a record student intake for the 2019 academic year, with enrolments up over 50% on the prior year. This should support an improved profit for Ikon for 2H19 (and 1H20), relative to the break-even result achieved in 1H19.

 

Full year group revenue guidance of between $19m and $21m was affirmed, with UCW expecting an improved EBITDA in 2H19, compared to both 1H19 and the PCP, as it benefits from organic initiatives and sees operating leverage come through.

 

Knosys Limited (ASX:KNO)

Market cap $10m

Net cash (31/03/19): $3.3m

 

Knosys is a cloud-based software company with a leading knowledge management platform product offering. KNO delivered a positive operating cash flow for the quarter ($0.4m), with its cash balance a healthy $3.3m at the end of the quarter. Encouragingly, KNO forecast another cash flow positive quarter ahead, which will see it finish the year with a strong net cash position.

 

Annualised recurring revenue was $2.8 million as at 31 March 2019, while licenses on issue were 38,780, up 95% in the past 12 months. For the first half of HY19, revenue increased 179%. With a multi-million dollar pipeline, KNO is well placed to continue to grow its ARR and licensed user numbers.

 

Having secured long term contracts with some significant Tier 1 customers (ANZ Bank, Singtel, Optus), KNO has launched a new Software-as-a-Service product, KIQ Cloud, to broaden its offering and to target the mid-market space. This is important to diversify KNO’s customer base away from its existing large value customers in the Enterprise market. KNO have stated that they have seen early success in this strategy, so we look forward to seeing further evidence that this is expanding their customer base. KNO also are opening a Singapore office to take advantage of emerging sales opportunities in the Asian region, and to capitalise on their successful Singtel customer win and implementation.

 


 

In a market where value is generally hard to find, we continue to see plenty of interesting undiscovered opportunities at this end of the market. We continue to add under-the-radar businesses to our portfolio with strong growth outlooks and high quality revenue streams.