5 Small Cap Highlights From Reporting Season

Ron Shamgar

TAMIM Asset Management

The August Reporting season was a hectic one. The majority of small caps report their results in the last 10 days of the month, which makes for a very busy period for Fund managers and investors alike. Pleasingly 19 of the 20 stocks in the TBF Small Cap Value Growth Fund reported results that either met or exceeded our expectations. In this wire we highlight 5 stocks that stood out from the pack. Find out which stocks below.

Spirit Telecom (ST1) is an emerging fixed wireless telco player that provides high speed internet services to residential and business clients and is non reliant on the NBN. ST1 announced the acquisition of World without Wires for $4.6M. The business is a high-speed wireless broadband provider in Southeast QLD. The acquired business will bring $2.6M of revenue and $1.1M of EBITDA and is 55% EPS accretive. More importantly this strategic acquisition will bring over 12,000 square Kms of wireless coverage and significant engineering expertise.

ST1 now has line of sight to more than 400 new buildings in the Gold Coast in order to potentially deploy and sell its high-speed Internet services. On a pro-forma basis, ST1 starts FY18 with $14.7M of revenues, $3.4M of EBITDA and 0.82c of EPS. That’s without any further sales growth this year. We estimate that EBITDA for this year will exceed $4M and EPS will exceed 1.2 cents. This places the company on a PE multiple of 10x or less for a high growth, recurring revenue business with a huge market opportunity ahead of it. We value ST1 at 20 cents.

CML Group (CGR) is an invoicing finance company that continues to under promise and over deliver with EBITDA up 147% to $13.1M, NPATA up 280% to $3.8M and EPS up 190% to 2.9 cents. The company has now completed the integration of last year’s acquisitions, which should drive net margin expansion in FY18. In addition, the banking facility is now in place and we expect this will reduce interest costs significantly next year and beyond to almost halve the current levels. CGR is now well placed to replace its expensive debt and convertible notes over the next few months and is fully funded to continue to grow its $1 Billion of invoices funding book. We forecast underlying EPS in FY18 of 3.3 cents on a fully diluted basis with a step change in earnings in FY19 as it benefits from a full year of lower interest costs across its entire funding sources. We value CGR at 45 cents.

EML Payments (EML) is a global player in the process of payments for companies worlwide. EML delivered a stellar set of results for FY17 with Gross Debit Volume (GDV) across the group of $4.42B (up 348%), $58M of revenue (up 149%) and $14.5M of EBTDA. More impressively was the cash generation of the business with operating cash flows of $19.3M. Management has guided to GDV of at least $7 to $8 Billion in FY18 and a net margin of circa 1%. With a relatively flat cost base and over 90% of its revenues sticky and recurring in nature, we anticipate close to 100% in earnings growth next year. The company has closed the year with just under $40M in net cash and no debt.

We anticipate net free cash to balloon to circa $55M next year providing the company with significant firepower to either acquire a complementary business or return cash to shareholders. We anticipate that the reloadable and Virtual payments divisions of EML to grow significantly over the next couple of years. EML is fast becoming into one of the highest quality global growth businesses on the ASX, with over 90% recurring revenue, a diversified customer base with over 1,000 programs under contract, and a global market opportunity worth over $3 Trillion (that’s Trillion with a “T”). EML is now of the largest holdings in the Fund and we value the business at $2.40 for FY18.

ITL Health (ITD) reported a considerable year of profit growth with revenues up 12% to $34.8M, EBITDA up 200% to $4.8M and NPAT of $3.4M. Pleasingly net debt was also down by 52% to $2.6M as the business generated strong cash flows. ITD’s Biomedical division was the star performer with revenues up 23% to $13.8M and EBITDA growth of 76% to $4.5M. The Healthcare division delivered a solid result with revenues up 6% to $21.1M and EBITDA growth of 450% to $2.8M. MyHealthTest delivered an EBITDA loss of $0.8M as this division is still in start-up phase. Excluding MHT we estimate underlying EBITDA was circa $6M. Management has provided an outlook for FY18 for continued strong growth. We believe the company is undervalued but also misunderstood by the wider investor community. We value ITD at 80 cents.

QMS Media (QMS) is a fast growing digital outdoor media business. QMS reported revenue growth of 51% to $169M with digital revenue now at close to 60% of group media revenue. Underlying EBITDA was up 40% to $37.5M and underlying NPATA was up 31% to $22.6M. The company is continuing to execute well on its digital large format roll out across Australia and NZ. 72% of Australian revenues are now from digital compared to the industry average of 42%. QMS now has 78 operational landmark digital sites and is forecasting FY18 to exceed 100. This should underpin FY18 growth and help the company exceed its EBITDA guidance of at least $43M next year.

QMS is now trading in line with its larger listed peers in OML and APO and so any further consolidation in the industry between those players and possibly HT1 will be driven more by synergy potential rather than an earnings multiple arbitrage. Since APO and OML have been blocked by the regulator from merging, in our mind QMS remains the only true, high growth digital outdoor media player left to consolidate. With media reforms on the verge of passing through the senate soon, we think this will bring more possible suitors for QMS from more traditional media players such as Seven Media and News Corp. Only time will tell, and in the meantime it is pleasing to see QMS directors buying more shares on market. We value QMS at $1.35.

The information above is an extract from the TBF Small Cap Value Growth Fund August 2017 monthly report

(The above does not constitute advice. Please seek independent personal financial advice and conduct your own research.)

Ron Shamgar
Head of Australian Equities
TAMIM Asset Management

Head of Australian Equities for TAMIM Asset Management. Previously Founder & Portfolio Manager of the TBF Small Cap Value Growth Fund. Ron has responsibility for research, company analysis, portfolio construction for the TAMIM All Cap Portfolios.

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