As noted in my previous article on Livewire, keeping an eye on what other professional active fund managers are doing can be a great source of new ideas. So, when I saw not one but two recent substantial shareholder notices lodged by both Lanyon Asset Management and Spheria Asset Management in a stock that had been on my watchlist for while, it piqued my interest even further. 

Both fund management teams are well regarded and one can assume that they wouldn’t have committed their investors' capital unless they thought the stock was worth more than where it is currently trading today. That is not to say their respective investment theses will play out successfully, and both them and their investors will exit with a healthy profit, but it’s a flag that should make one sit up and take notice.

Change of Tempo

The stock in question is Tempo Australia Limited (TPP) and it has been on my watchlist for about a year. Its large cash backing of $22mil (now circa $15 mil after a recent acquisition) meant cash on its balance sheet had been hovering around 50% of its total market cap for the last year or so. The company provides maintenance and construction services (roughly split 50:50 currently) to energy, resources, industrial and commercial clients. TPP has specific skills in providing structural mechanical piping, telecoms and data comms and electrical services for existing assets or new capital projects.

The company has been heavily involved in the Gorgon LNG project for the last few years but that work is now tapering off substantially. However, while the company has been quietly going about managing the business through this difficult transition phase with the vast ramp down in its work from Gorgon LNG. TPP has been simultaneously doing some acquisitions to diversify its business and enhance TPP’s product and service offerings to allow it to target a broader range of customers.

Getting in new blood

As alluded to above, TPP has made a number of acquisitions in recent years to try and diversify both its product offering and customer/industry sector base. This was a concerted strategy to avoid being so dependent on its tier 1 energy and resources customers in effort to de-risk its overall business. Its acquisitions of Corelogic and more recently KP Electric have allowed it to build out its telecoms and electrical divisions respectively. The most recent acquisition (July 17) of KP Electric looks on the face of it to be a solid acquisition. It gives TPP instantaneous national coverage in the electrical maintenance space and access to a whole list of tier 1 commercial and industrial customers to which possible cross-selling opportunities may present themselves from other divisions over time.

We must nevertheless be cautious as all acquisitions are fraught with a plethora of associated risks. We won’t get a clear line of sight of the KP Electric acquisition impact on TPP’s results until they report their full year numbers in Feb 18. TPP are December year-end company as opposed to a June year-end. This result will give us a better indication of the quality the of the KP Electric acquisition. Yet at a purchase price that implies a 2.5 times EBITDA multiple KP Electric looks good value and is earnings accretive immediately to TPP.

Board and management aligned

The annual report should also give us some indication how management see the business tracking in 2018. Given the revival of the resources sector and the ramp up in government-backed infrastructure spending there should be a decent cyclical/industry tailwind behind TPP. I would also advise reading in the annual report the career history of the current board which have prior management experiences at much larger outfits such as UGL, Clough, Woodside and Monadelphous. This breadth of experience and industry networks and contacts are significant assets in TPP’s efforts to grow the company to at least a mid-tier player in the industry. The board and senior management also hold circa 36% of the share register so they are well aligned with minority shareholders. This is something I always look for when looking at microcap stocks.

Looking for a pickup in Tempo in 2018

I am not expecting a profit for the 2017 full year results coming up in Jan/Feb 2018 given the Gorgon LNG roll off. However, with hopefully a positive, possibly cautiously optimistic outlook statement in the annual report from management coupled with the full year impact of recent acquisitions 2018, cyclical/industry tailwinds behind it, $15mil in unrestricted cash still sitting on its balance sheet and respected fund managers taking decent positions in the company, to me TPP at this point looks interesting.