Silex Systems (SLX: ASX) a long time listed uranium play is cutting a forlorn figure these days on the ASX boards. SLX recently announced that it had failed to resolve all the due diligence issues with regards to its purchase of 76% of is GLE joint venture from its JV partner GE-Hitachi. The GLE JV project was a uranium enrichment project in Kentucky, the USA that the company has been working on for years.
We have seen a resurgence interest in Uranium stocks and Uranium bulls have reared their heads again in recent times but in SLX’s recent announcement one of the major factors in terminating its sole, major project, was the current poor and perceived poor future state of the commercial uranium market. Something which is quite contrasting to what the Uranium bulls have been saying recently about the future for Uranium.
SLX has also cancelled the technology license with its JV partner and will seek to bring its uranium enrichment tech back to Australia and is considering the future strategy for the company. The company is currently trading around cash backing and below NTA but has no defined future strategy as to where it goes to from here. Perhaps for the deep value investor, it might be interesting.
iSignthis (ISX: ASX) has a trio of services including remote KYC identification, payment authentication and payment processing. ISX is considered a “Regtech” player and made a slew of announcements in June which were by in large positive. ISX confirmed unaudited cash receipts for the second half were $3.5m which triggered some performance milestones for management. Backsolving the maths it also means they have seen continued growth in cash receipts from the March 2018 quarter and it should put them close to cashflow breakeven. This is a significant achievement if ISX has reached this point. It marks an interesting inflection point in terms of ISX’s development where they will perhaps cease to need external capital to fund future growth due to moving into a cashflow positive operating environment in FY19. The share price has been range-bound in terms of trading with the share price fluctuating in a band between 14c and 21c for almost 3 years. The next 4C announcement due out before the end of July and the FY18 full-year result due out in August will make for interesting reading as to what FY19 holds for ISX.
Garda Capital Group (GCM: ASX) made a multitude of announcements coming into the end of FY18 which saw GCM close at a new 52-week high right on the last trading day of the year. AUM has grown by 51% in the year and there is inbuilt growth for FY19 mainly due to the completion of its Botanicca commercial office building in Richmond Vic. The bulk of its assets are either in QLD or VIC. GCM also holds a 13.5% shareholding in the Garda Diversified Property Fund (GDF: ASX) and also acts as its responsible entity. GDF announced a pro forma NTA of $1.29 but closed out FY18 at a price of $1.165 so a discount to NTA with an LVR of just 37.0%. GCM indicated that it has $8m sitting cash and is actively looking for property debt investments. Given GCM only has a market cap of $31.5 and its shareholding in GDF at current market values is circa $21.75m add to this the $8m in cash sitting on GCM’s balance sheet and you could say you are only paying $1.25m for GCM’s asset management business. GCM’s asset management business is set to have $300m+ in AUM by the end of FY19. At this stage, both GCM & GDF are interesting in their own right and collectively.
121 Tech Conference Hong Kong
I recently attended the 2-day 121 Tech Conference in Hong Kong which had a mixture of ASX listed companies and a smorgasbord of private tech companies. Some overarching takeaways from the conference.
- ICO and Blockchain are super-hot (if you didn’t know already) with a lot of companies raising cash via an ICO to fund various projects. However, 2018 has not been a good year for the ICO space, whether this is temporary or not only time will tell but I tend to be wary of “hot” sectors?
- Tech investors are starting to specialise in certain areas, be that Medical (MedTech) Education (Edtech) Financial (FinTech) etc and are building a portfolio focused on a few selected sectors instead of more broad-based tech portfolio. In essence, they trying to capture a few big winners in 2/3 sectors instead of trying to have a few big winners from across a broader tech portfolio.
- Valuations are still difficult to ascertain and multiple methodologies and metrics are required to achieve a valuation that can be utilised either on a relative and absolute basis.
- Tech companies are becoming more niche. Instead of trying to be the next Amazon or Facebook startup tech companies are targeting a global market but whose total addressable size may be only 100m users but hey, any company who is servicing 100m customers is still a major business.
- Data and privacy are high on everyone’s agenda. How society can leverage data to bring the benefits and efficiency of tech in our daily lives while simultaneously addressing the concerns around data privacy and the sharing of data is the focal point of major debate. This conundrum is something that needs to be resolved between business, government and ordinary citizens on an inclusive basis and fast.
Microcap Fund Snapshot
This month’s microcap fund snapshot is of The Acorn Capital Investment Fund Limited (ACQ: ASX), which is a listed investment company. I asked Robert Bruce Portfolio Manager at Acorn Capital what was one of the more interesting stocks from the current microcap portfolio and he highlighted Redhill Education Limited (RDH: ASX)
What does Redhill do firstly?
Redhill is a provider of tertiary and vocational education courses with an even mix of domestic and international students. Redhill currently services 16,000 students through 4 operating businesses that each operate in focused sectors of Higher Education, Vocational Education, English Language and International Student Recruitment market. The business commenced in Sydney in 2006 provided specialized qualifications at purpose built campuses, rather than competing at the commoditised part of the mass market. In September 2015 they opened a Melbourne campus and with its success have now tripled its capacity to 63 classrooms. It also owns a Student Agency business, Go Study, which feeds students into its own and other third-party education providers.
Why does Acorn like Redhill?
The education industry was identified in the Deloitte 2014 Report “Building the Lucky Country #3”, which noted that international education as being one of the Fantastic Five industries to drive the next wave of growth. Aside from international education expected to grow at above global GDP, Australia has the competitive advantage of cost competitiveness (relative to leading US and UK institutions), relatively close proximity to major Asian markets, an enviable lifestyle, English is the spoken language of global business, specialist courses. Over the last 5-years, the number of international student enrolments has grown at 11.3% CAGR.
The private education industry has been volatile in recent years with the growth in government VET Funding enticing a number of operators seeking to exploit the generous bounty and adopting less than ethical marketing and recruitment techniques combined with poor education and low course completion rates. When the government belatedly clamped down there were some spectacular collapses, but Redhill was largely immune maintaining all licences and not reliant on State Government funding. Redhill has focused on controlling its courses and content with curriculums in specialist industries where there is growing demand for graduates. By operating from prime CBD locations with quality campuses it assists in drawing in both students and qualified staff.
Redhill is well positioned for organic growth through curriculum development and geographic expansion funded by operating cash flow. Redhill receives a majority of cash flow in advance of the semester commencement driving strong cash conversion and minimal working capital enabling an inaugural dividend to be paid in FY17.
Who is the management team behind Redhill?
Redhill is led by Glenn Elith who became the 3rd CEO of the business in the short time since listing, joining when the share price was 9cents following the impact of government changes to international students where the business was previously overly reliant. He has focused on building a more diversified and sustainable business. Specifically at Academy of IT he improved the quality of the courses significantly with the launch of Higher Education courses developed internally rising from 0% of revenue in FY10 to 67% by FY14, and has since demonstrated delivery of projects like the Melbourne campus and adding the Greenwich Management College which has grown to $8m in just 3-years.
Does the valuation for Redhill stack up in Acorn’s view?
Acorn expects revenue to grow 28% YoY in both FY18 & FY19 to $68m and with the maturity of courses and campuses operating leverage will see the EBITDA rise from $3.9m in FY17 to $6.7m and close to $10m in FY19. The strong earnings growth places Redhill on 15x FY19 PER and is matched by cash flow with 5.5% free cash flow yield and 1.7% dividend yield at a 40% payout ratio. We expect Redhill to be able to maintain medium-term earnings growth with underlying domestic and international student demand and the proven organic growth strategy they executed. Redhill is one of the few ways to gain exposure to quality education in the listed microcap market and comes at a significant discount to the two larger players IDP Education and Navitas based on consensus forecasts.