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.
We were generally surprised by the strength of the 4th quarter cash-flow results given the COVID-19 disruptions experienced during the quarter. However, it is important to identify where tax deferment and JobKeeper may have distorted the results. What may seem like a turnaround in cashflows, may in fact be a government assisted one-off positive quarter.
Finding profitable nano-cap investment opportunities often means revisiting unloved companies that have such bad records that other investors have long since given up on. Taking on a fresh mindset is important to overcome your natural bias against owning something with an ugly history. Great examples of multi-bagger setups of unloved companies that were trading on very low market caps include KME (from $5m to $50m) and KKT (from $3m to $70m). For this blog entry, we discuss some of these potential turnaround opportunities.
Yellow Brick Road Holding (ASX:YBR) – 7.6c market cap $24.6m
Headed by Mark Bouris, YBR is a financial services company focusing on home mortgage broking. Long term shareholders have seen nothing but pain since the company backdoor-listed in 2010. However, there are some signs that the company is slowly now heading in the right direction. After divesting its loss-making wealth management assets over the last 12 months, the latest quarter was the first opportunity to get a handle on what YBR’s core mortgage broking business looks like. Positive operating cashflows of $2.7m were strong, although this was partly due to deferring PAYG tax. Based on the quarterly result, we estimate that the slimmed down, capital light, broking business could generate around $3m-$5m in free cash annually. This is impressive for a company with an EV of around $15m.
Mark Bouris made his name with Wizard Home Loans as it became Australians 2nd largest non-bank lender in the 90’s. Earlier this year, YBR formed a JV with Magnetar Capital (Resi Wholesale Funding) as a vehicle to originate home loans rather than use third party banks (much like Wizard). This model provides much higher margins than YBR’s existing broking business. Magnetar contributed $18m equity to the JV which, if successful, may become a new growth engine for YBR in the years ahead. The market would appear to be attributing no value to the potential of this new business at the moment.
DMX CP owns shares in YBR
Corum (ASX:COO) – 4.8c market cap $19m
Pharmacy software company, COO, has been listed on the ASX for decades (previously named Cosmos and Medicine Quantale Limited). Profitability (NPBT) peaked in 2013 but revenues and earnings have been on the decline since as it lost tenders with major Pharmacy groups for the use of its software. In 2015 the cash rich company ($12m in 2015) committed to redevelop its core pharmacy products. But in 2019, the company needed to raise $3.6m as it had subsequently burnt through its cash.
COO also owns 43% of an electronic ordering provider, PharmX. This system connects retail pharmacy with suppliers providing a digital ordering process. While little info is available on the financials of PharmX, it does appear to be quite profitable based on recent ASX announcements.
The current quarter saw an increase in receipts and a cashflow positive quarter which perhaps signals a turnaround in prospects. The pleasing cash result appears to be mostly driven by cost cutting and it is not clear if this is sustainable. COO have decent competition in the space with Fred (owned by Telstra) and a newer (low cost) product called Zsoftware, but certainly one for the watchlist.
Spectur (ASX:SP3) – 5c market cap $5.0m
SP3 listed on the ASX with an IPO price of 20c in July 2017 as a manufacturer and installer of solar-powered high definition security camera networks. The listing was initially well received, and the potential for strong revenue growth and offshore expansion saw the company raise further funds at 36c in November 2017. Since then however, its share price has been in a down trend as a result of continued selling from ex directors, as well as concerns over its cash position. More recently, during July, SP3 raised capital at 5c.
SP3’s strong revenue growth plateaued in FY20, however the launch of SP3’s next generation camera product STA6 in July 2020 provides an interesting potential growth opportunity for the company. STA6 has been internally developed by ST3 and offers improved functionality and a larger addressable market compared to previous models. With an EV of ~$4m, there is plenty of upside from here if SP3 is able to generate revenue growth from STA6.
DMX CP owns shares in SP3
Oneview (ASX:ONE) – 6.4c market cap $11m
Global healthcare technology company, ONE, is so unloved by the market that it trades below cash backing. ONE provides hospital bedside healthcare and entertainment solutions around the world (including USA). The company has $5m EUR ($8.2m AUD) on the balance sheet, and ARR of $8.2 (AUD) with revenue growing at circa 30%. It is not unusual to see companies on the ASX growing at this rate to be trading on at least 10X ARR. Unfortunately, even after recent staff cost-cutting, the company is still burning through plenty of cash. In fact, the company recently commented “we are mindful of the potential risk of a shortened cash runway as a result of these medium-term pressures. Accordingly, we continue to closely monitor the situation and have appointed financial advisors, to explore fresh funding initiatives”. This reads to us that a capital raise is on the way.
We have seen plenty of occasions where companies continue to raise capital at lower and lower prices. This can be devasting to existing investors and it causes dilution at often much lower prices. The problem is compounded when it become evident that a further raising is required as the price often weakens in anticipation. Since listing in 2016 at $3.58 ($62m), ONE has raised further funds at $2.00 ($30m) in 2017, and 25c ($25.8m) in 2019. With shares now trading at 4c, most shareholders are well under water and no doubt loathe the company.
Note: Since writing this note, the price rose to 10c, then has fallen back to 6.4c on no news.