Quality small-caps battling the headwinds

Out of the top 12 companies held by the Monash Absolute Investment Fund, 7 beat analyst earnings expectations during the recent reporting season. However, the headwind against smaller growth companies that started in October continues. So despite a “good” results season, the fund went backwards.

Taking an arithmetic average of the price moves, the good outweighed the bad and the stocks went up by 1.4% on the day of their result, on average. This was not enough to offset the market’s bias against smaller growth companies and on average these stocks actually went backwards by 1.7% over the month of February.

It is pleasing that our investment strategy has led us to find stocks that beat expectations however, and despite the headwinds we have no intentions of changing our strategy of identifying undervalued stocks with a sustainable growth profile.

We’ve provided a brief summary below of the results for each of our 12 core positions.

EML Payments: Transaction Cards

Beat expectations, rose 5.1% on day of result, fell 6.4% for the month

• Reported $10m EBITDA vs $8m expected.
• Outlined a strong pipeline of new business and new business opportunities. 
• Management indicated that recent new business signings are expected to increase the loads in the business by more than 50% in FY18. 
• Of particular note management guided to $700m in loads from the new Australian salary packaging vertical following the signing of 4 new clients.  This vertical was only created 2 months ago and management guidance has doubled since then.

G8 Education: Childcare

Beat expectations, rose 3.7% on day of result, rose 7.8% for the month

• Strong operating improvement in second half, saw business back on track.
• Management targets lifted to 40c EPS FY19 up from FY16 EPS 25c.  The FY19 target is 25% above current consensus expectations.
• Share placement at an 8% premium to a strategic investor. The capital raising will be used to fund a pipeline of childcare center acquisitions over the next 2 years, refocusing the market attention on the non-organic growth opportunities available to the business.  These acquisitions will add $50m to EBIT as a point of reference EBIT for FY16 was $161m.

Speedcast: Marine Telco

In line, fell 6.3% on day of result, fell 0.3% for month

• Earnings in line with guidance.
• Weaker revenue than analysts expected offset by stronger EBIT margin.
• Management commentary strongly indicated widening margins and improving market conditions in the oil & gas market.

Challenger (CGF): Retirement Incomes

Beat expectations, fell 2.2% on day of result, rose 3.8% for the month

• Yet again another solid result from CGF demonstrating the strong organic growth in its business, while maintaining all operating metrics within historical norms. 
• Announced distribution relationship with BT Financial Group.

Greencross: Pet Retail / Vet

Beat expectations, rose 6.8% on day of result, rose 5.8% for the month

• Delivers a solid 4.3% LFL sales growth, against a generally tough retail environment. 
• Further confirmation of the benefits of its integrated pet store / vet business model.
• Re-affirmed store rollout strategy and long runway of opportunities.

Lovisa: Jewelry Retailer

Beat expectations, rose 5.3% on day of result, rose 3.1% for the month

• Impressive LFL sales growth of 12.6% and lift in gross margins to 77.8%
• 7% increase in store foot print and plans in place to grow it martially, i.e. UK expansion.
• Flagged that 2H LFL sales would soften on 1H, which comes as no surprise given the strength of 1H.

Silver Chef: Rent, Try, Buy for SMEs

In line, fell 9.4% on day of result, fell 20.0% for the month

• Revenues and earnings in line with management guidance
• Market reacted to an increase in the bad debt charge and the large uplift in earnings required in 2H to reach full year guidance.
• The increase in the bad debt charge while large, was within historical levels for the hospitality business and but reflects a cleaning out of the GoGetta business. 
• Management provided a detailed earnings bridge showing how it would achieve full year guidance.  This level of detail is almost unheard of and underscored management confidence in its guidance.

Netcomm: Telco Hardware

In line, fell 3.7% on day of result, rose 3.5% for the month

• EBITDA in line with management guidance
• Indicated pipeline of opportunity strengthening

Catapult: Sport Technology

Beat expectations, rose 9.1% on day of result, fell 8.0% for the month

• EBITDA ahead of analyst forecasts, first EBITDA positive result for the business.
• Strong growth across its wearable product range and flagged the expectation of signing numerous league wide deals over the coming months (northern hemisphere off season)
• Strong business momentum with new product rollout ahead in the prosumer market.

NextDC: Data Centres

Beat expectations, rose 12.3% on day of result, rose 20.5% for the month

• Strong result across every business metric
• Reminded the market of a) the material growth opportunities ahead for the business and b) the huge operating level in its business.

Yowie: Confectionery

In line, fell 1.0% on day of result, fell 11.4% for the month

• Underlying result in line with market expectations
• Corporate governance issues being resolved

Paragon Care: Aged Care/ Hospital Equipment Supplier

Below expectations, fell 11.6% on day of result, fell 8.1% for the month

• Strong growth but guidance was 10% below analyst forecasts
• Following a number of acquisitions and the seasonality in the business it was challenging to forecast near term earnings.
• Critically Paragon Care achieved strong growth in revenue and improving margins

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Important Information

This document is issued by The Trust Company (RE Services) Limited ABN 45 003 278 831, AFSL 235 150 (“Perpetual”) as responsible entity of, and issuer of units in, the Monash Absolute Investment Fund ARSN 606 855 501 (“Fund”). Monash Investors Pty Limited ABN 67 153 180 333, AFSL 417 201 (“Monash Investors”) is the investment manager of the Fund.  The inception date of the Fund is 2^nd July 2012.

The information provided in this document is general information only and does not constitute investment or other advice. The content of this document does not constitute an offer or solicitation to subscribe for units in the Fund or an offer to buy or sell any financial product. Accordingly, reliance should not be placed on this document as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation. Neither Perpetual or Monash Investors accepts liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information.