Mark Tobin

In this second edition of the IIR Microcap Monthly Newsletter, we list four microcap stocks to watch, review some very noteworthy results from S&P on the performance of Small & Midcap managers, and highlight WAM Microcap Limited in our microcap fund snapshot.

Microcap Stocks to Watch

Tinybeans Group Limited (TNY: ASX) Released it latest set of user numbers and showed it continuing to attract users to its platform at a rapid rate. It now has nearly 900k active users on its family safe social platform. Think Facebook without the privacy concerns. Its rapid user growth has attracted brands like Walt Disney and Walmart along with a host of other US baby and family related brands to advertise on the platform. IIR was recently commissioned to compile a research report for TNY. The report gives a good overview of this New York based Aussie tech company.

Fertoz Limited (FTZ: ASX) Announced it has secured sales contracts exceeding 10,000 tonnes target for its organically certified phosphate fertiliser. The company had previously guided to a sale target of 10,000 tonnes for full-year CY18. Their target was already a lofty one given the company only sold 2,500 tonnes in CY17. Fertoz has been one of the best performing microcaps in 2018 this far rising from around $0.08 to $0.19 on the back of a slew of positive announcements regarding sales growth and distribution agreements.

Cirralto Limited (CRO: ASX) updated the market that it had entered into an agreement with a major pool franchise business to roll out its PoolBox cloud-based solution to its franchisee network after a successful pilot phase. Cirralto has actively targeted the pool servicing industry after observing that no integrated software solution was available to pool servicing industry participants. In some cases, 6 pieces of poorly inter-operable software were being used, resulting in high levels of additional admin. The company is targeting other industry verticals where a fully integrated cloud-based solution would be attractive. Having come to market in Sept 2017 it has been flying somewhat under the radar.

Scout Security Limited (SCT: ASX) communicated that it had achieved record monthly sales of its wireless alarm system in each month of the March 2018 quarter. Scout continues to grow its sales through its network of reseller and distributors. The sales of its wireless alarm hardware are a Trojan horse for its ultimate goal which is the monthly monitoring fee revenue that comes with each unit sold and installed. Scout has advised that monthly recurring monitoring revenue is now up to $900k on an annualised basis. The recurring revenue now represents approximately 50% of its revenue on a monthly basis. It’s monitoring revenue has tripled in the last 2 years. The monitoring business is much higher margin business and thus the key to the company’s future profitability. However with sales growth running at 20%+ per annum currently it heading in the right direction.

Microequities Successful IPO

Fund manager Microequities Asset Management (MAM: ASX) listed their fund management business at the end of April. The company raised the full $19m at the $0.80 offer price as planned. The share has traded in and around the IPO price giving it a market cap of circa $100m. This makes MAM a microcap stock in its own right.

Microcap Managers Outperform ETF’s

We recently published our FY183Q performance review of active microcap managers. Despite a tough quarter for both microcap managers and equities markets generally, the majority of microcap manager held their own. On a more medium term, 3 year view active microcap managers have delivered excellent alpha to their investors. Our FY18 full performance review should be out in early August so watch out for that.

SPIVA Australia 2017

The results are in from S&P and the evidence for Small & Midcap managers is very noteworthy. Some of the striking findings from this year’s annual review are as follows;

60% of Small & Midcap managers outperformed their benchmark on a ten-year basis on both an absolute and risk-adjusted basis

Only 24% of large-cap managers managed to outperform their benchmark and only 12% of international equity managers over the same timeframe.

Small & Midcap managers on either an asset or equal-weighted basis are the only group of managers in the survey to produce a positive cumulative average relative return versus the benchmark over the 15 years SPIVA has been compiling reports on the Australian market. All other manager groups were actually negative.

In terms of fund survivorship, large caps funds are disappearing the fastest. This is in my view is a result of poor alpha generation and investors voting with their hard earned bucks to switch to a simple & cheaper ETF for large cap equity exposure in their portfolios.

The best fund survivorship was seen from Small & Midcap funds. This, in my view, is because they actually deliver consistent alpha and are less affected by ETF’s, but there are small cap ETF’s available to investors who seek passive small cap equity exposure.

Now, think of all the ETF and Super ads you see telling you how an X% drop in fees affects your end value by some big number. This is, of course, true, subject to a few caveats. Well, now think of the reverse what would be the effect of additional returns (after fees) on that end value? The SPIVA report highlights that Small & Midcap managers delivered an average excess annual return of 2.9% after fees over a 15 year period. Just, think of the impact of this excess return on the end value.

Yes, people, despite what you hear that active fund managers can’t outperform and active fund management is dead! There is some cold hard evidence to the contrary at least where Small & Midcap managers are concerned.

If you are making an asset allocation decision for a portfolio on either a personal or a professional level or indeed, you are a Small & Midcap manager dealing with asset allocators on mandates then this report is well worth reading.

Alas, microcap managers are not covered as a manager group but we are pressing S&P to try and get them included in future reports. My suspicion, however, is based on our rudimentary overview (compared to the SPIVA reports) the results won’t be far away from the results recorded by the Small & Midcap managers.

Microcap Fund Snapshot

We tally up the performance of all the Australian microcap funds in our quarterly microcap fund performance review. As part of this new monthly newsletter, we will pick out one microcap fund and give a quick snapshot of the fund along with one stock that looks interesting currently from the fund’s portfolio.

This month’s microcap fund snapshot is of WAM Microcap Limited (WMI: ASX). I asked Oscar Oberg Portfolio Manager at Wilson Asset Management what was one of the more interesting stocks from the current microcap portfolio and he highlighted 3P Learning Limited (3PL: ASX).

3P Learning is an online education provider for primary and secondary students. Its key products include Mathletics for Mathematics, Reading Eggs for reading and Spellodrome for spelling.

Why does Wilson Asset Management think 3P Learning is interesting at this point in time?

Valuation: The stock is on 20x PE and 9x EV/Ebitda in FY19 on WAM’s numbers. The share price is down 11% following a strong half-year result in February 2018 which saw them deliver an earnings beat relative to consensus expectations.

Turnaround Story: 3P Learning is two years through a three-year turnaround story let by Chief Executive Officer, Rebekah O’Flaherty. In this time 3PL has strengthened and refocused its product portfolio, reduced costs and developed a scalable sales model to expand offshore.

Transitioning to growth: A more targeted sales and product strategy has the ability to reduce churn, generate new licence growth across 3PL’s regions. New products such as Readiwriter for writing and Spanish Mathletics will assist growth and the use of resellers in key regions such as the US should ensure that 3PL’s cost base should remain relatively fixed despite a strong prospect for organic top line growth.

The possible sale of Learnosity and deleveraging balance sheet: At the half-year result in February 2018, management confirmed that it was actively looking for options in relation to its investment in Learnosity. In the event 3PL is able to sell Learnosity for its book value (A$46m), 3PL will be in a strong net cash position that will position the business for capital management or acquisitions.

WAM view 3PL as a growth story that has just transitioned out of a turnaround phase, with strong management and an attractive valuation relative to other software as a service (“SaaS”) businesses.


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Claude Walker

Interesting to read about some microcaps that are very much under the radar, thanks Mark

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Mark Tobin

Hi Claude, Many thanks for the feedback. That’s is my ultiamte goal. To bring industrial type microcaps to a wider audience. I hope you enjoy future editions as much as the current.

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Graeme Holbeach

When SPIVA say "outperformed their benchmark", are they using a benchmark that is applicable to what category the fund is in, to what type of stocks the fund holds or the benchmark that the manager chooses to use? Why I ask is that some funds that specifically do not hold mining stocks use the Small Ordinaries Index that does and at least one uses the All-Ordinaries index, which basically being large banks, miners and retailers has little relevance.

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Mark Tobin

Hi Graeme, Many thanks for the feedback. Please see an extract from the SPIVA report as to the benchmark used for small and mid-cap managers below. The choice of benchmark used by the funds or by investors for performance comparisons is a subjective area. Some managers use the Small Ords as you say but don't invest in junior miners & resource companies. So in 2016 that would have been great as industrial stocks were doing well and miners & resources couldn't catch a bid. Today, the same fund would be finding it difficult to match benchmark returns as the performance of the two sectors has inverted. The All Ords Index has still returned 7.86% over the last 5 years. That's still a decent absolute hurdle for a manager to outperform net of fees. So while the makeup of the index I agree might not be applicable or comparable the index can still provide a decent hurdle/benchmark for an active manager to overcome. "The S&P/ASX Mid-Small is designed to measure the performance of companies included in the S&P/ASX 300, but not in the S&P/ASX 50. It is a combination of the S&P/ASX MidCap 50 and the S&P/ASX Small Ordinaries."

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Peter Williams

Hi Mark Thanks for the report and comments. In one of your tables on micro fund managers you have listed Peak Micro Opportunities Fund. I have not been able to find them and would appreciate contact details. I have found a similar named Peak Asset Mgt but they appear to be private equity syndicators rather than offering a managed fund Also on researching other names on your table quite a few are either closed and not accepting new funds or are wholesale only. Notations indicating these restrictions would help others like me with limited time available Thanks for your help Peter Williams

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Mark Tobin

HI Peter Please see a link to their website. I would email the principal Niv Dagan or Richard Rouse head of Business Development about becoming an investor or requesting an information pack.

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