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

1Q20  NANO-CAP UPDATE

 

The end of financial quarter is a busy time for us as many of our companies release an update of their activities and cashflows. Some new ideas can also be generated by trawling through the numerous reports released. In this update we discuss 4 nano-cap companies that we thought were of interest, and comment on market conditions.

 

Market conditions appear to be quite buoyant in the nano-cap space with plenty of investor interest in many of our portfolio companies. Of particular note was a number of large (compared to market cap) equity raisings. For instance IME raised $10m from investors when it’s market cap was just $40m. In our portfolio, we saw VLT, CV1, and TNY all go to the market. This contrasts with some larger IPOs being cancelled. We believe smaller companies are raising successfully because the market is seeing value and growth in smaller opportunities compared to the upper end. We see plenty of upside across our own portfolio positions.

 

For most companies (those with 30 June balance dates), the first quarter is the weakest from a cashflow perspective because many of the listing and head office costs are born in this quarter. 1Q20 has been no different with many cashflow statements on the weaker side.

 

AVA Risk Group (ASX:AVA) – market cap $28m

 

Security technology and risk management company, Ava Risk Group Limited (ASX: AVA) was discussed AVA in our May 2019 update. After an underwhelming FY19, AVA has commenced FY20 strongly, with both its divisions reporting profits. Pleasingly, it represents an example of an opportunity that we supported pre-profit, and that is now generating profits.

AVA Progress

AVA’s technology division improved its gross margins from 66% in FY19 to 72% in Q120. Meanwhile its service division, which it has built up from scratch, continued its growth trend, expanding its  gross margins from 21% in  FY19 to 25% in Q120.

 

We have recently met with the AVA management team, and the company appears re-focused and re-energised under new management, and with a large number of potential large-scale global opportunities to execute on. It is on track to deliver FY20 EBITDA of around $5m, meaning it is trading on approximately 5x EBITDA without any revenue from a major Indian deal announced last year. The profit from the Indian MOD deal is very high margin and will likely exceed over half the market capitalisation of the company and provide on-going maintenance revenue.  Whilst we are still cautious here, we believe that the valuation is on the low side for a fast growing, profitable, sizeable ($40m+ revenues), global business operating in fast growing markets, with some unique, market leading IP and Tier 1 customer base.

 

We have recently added to our position.

 

1ST Group (ASX:1ST) – market cap $22.3m

 

1ST Group’s core business is to provide an appointment service for partners such GP’s, Dentists, Pharmacists, Vet’s, and Allied Health. The partner embeds the booking service within their corporate website to customers can book on-line with full visibility to their professional’s availability. One of the key competitive advantages of 1ST Group is their integration with the partners patient management system.

 

 

The company released their quarterly update and 4c in the last week of October. For the first time, the company has reported Annualised Recurring Revenue (ARR). This showed a big uplift over the previous quarter $4.2m to $4.9m.

However, receipts were muted, and this resulted in relatively large cash outflows of $1.8m for the quarter. With just $1.5m in cash and facilities available, there appears to be a high risk of capital raise in the near future.

 

 

Earlier in the year, the company won large deals with Medibank, Benestar, and St Vincents hospital. The revenues from those deals will flow from Oct 2019. Therefore, the next quarterly in January should see strong ARR growth.

 

We hold a small position in the portfolio.

 

 

Pacific Knowledge Systems (ASX:PKS) – market cap $21.8m

 

PKS is a software company that owns a Clinical Decision Support (CDS) system called RippleDown which improves operational efficiencies within healthcare laboratories. It is a recent listing with an IPO back in June 2019.

 

While growth was quite muted in FY19, the current financial year appears to be off to a stronger start with recurring revenue up 15% while still remaining cashflow positive. This growth should continue with a deal announced earlier in the month with ACT Pathology. There is little visibility on full year profit, however management have guided for lower EBITDA in FY20 as a result of increase business development and sales resources.

 

With over $4m cash, another area of growth appears to be via acquisition. Mr Brad Lancken has joined the board and will be assisting the company with the review and project management of complimentary acquisitions.

We will watch this company with interest as it has high quality revenues with a strong thematic.

 

 

K2 Fly (ASX:K2F) – market cap $15.1m

 

K2 Fly provide software and consultancy services to the resources industry. While the bulk of revenues are from lower quality consulting revenues, the SAAS revenues are accelerating through the acquisition of RCubed and organic growth with new contracts with high profile miners Newcrest and Glencore.

 

 

One of the tailwinds for the software business is the impact of the U.S. Securities and Exchange Commission (SEC) adopting a rule that overhauled its existing disclosure requirements for mining company issuers. This has resulted in “unprecedented demand” for the RCubed solution.

 

Of interest to us is their reseller agreement with ESRI, a leading Geospatial Software company. Aeeris (ASX:AER) has also signed a similar agreement last year. While both have yet to show much traction in terms of sales, we understand ESRI had made quite an investment to integrate the Aeeris software into their product.  

 

If K2F can get further sales traction in its software business, it could attract the market’s attention. Fellow listed mining software company RPM Global (ASX:RUL), attracts a high multiple for a company with similar attributes.

 

We will keep this on the watchlist.

 

 

 

 

 

 

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