Takeover twists and transforming fundamentals in ASX small caps

In a market captivated by megacaps like Nvidia (NASDAQ: NVDA) and the allure of AI, our focus remains steadfast on the fruitful terrain of ASX small and mid caps. Two recurring themes have emerged in our portfolio: unearthing small-to-mid-sized businesses with improving fundamentals that have either been overlooked or remain unrecognised, and identifying potential takeover targets within this group.

As our earnings coverage continues, Superloop (ASX: SLC) serves as a prime example, where the latent value becomes apparent, leading to a notable surge in share price. It's a matter of time before either sentiment shifts or acquirers take notice, transforming the "old story" into a new narrative, with share prices rising to reflect the improved fundamentals and/or takeover value.

Sometimes these opportunities converge very quickly within a portfolio, as seen in the unfolding story between one TAMIM’s largest holdings, Aussie Broadband (ASX: ABB), and Superloop. Other narratives, like that of ClearView Wealth (ASX: CVW), may take time to materialise, but strong results keep us buoyed, affirming our conviction in the long-term potential of these companies.

We unpack recent updates below.

Aussie Broadband Ltd (ASX: ABB)

TAMIM-held Australian telecommunications and technology company Aussie Broadband released a strong first half result, continuing on its impressive 12 month share price performance.

The company grew its revenue by 17.7% compared to the first half of 2023 to $445.9 million. Operating earnings (EBITDA) prior to non-recurring items increased 12.7% to $46.3 million. Encouragingly, operating cash flow continued to move in the right direction improving a spectacular 57.8% to $40.7 million.

While the residential segment flourished, contributing to a 15.4% revenue increase to $283.9 million and 38,318 new connections, strategic realignment, and marketing investment fueled growth. Despite temporary challenges in gross margins, strategic measures are in place for a rebound. The Wholesale segment experienced strong growth, with revenue increasing 52.5% to $72.3 million, demonstrating the company's resilience and anticipations of further growth with NetSIP and Symbio integration.

Symbio Acquisition

The proposed acquisition of Symbio (ASX: SYM) back in September 2023 has since been approved by shareholders in February this year.

The acquisition allows Aussie Broadband to fast track its presence in the Wholesale and Enterprise & Government market segments while at the same time further diversifying revenue streams and strengthening the Company’s financial profile.

Leadership Changes

Following the acquisition, Aussie announced a number of management changes to take the company into its next growth phase.

Phillip Britt, the current Co-founder and Managing Director, is slated to assume the role of Group Managing Director for the Aussie Broadband Group. In this capacity, he will oversee Group Strategy, Merger and Acquisition activities (M&A), and maintain an active role in technology divisions. Effective February 23, 2024, Brian Maher, the current Chief Financial Officer, will step into the role of CEO for Aussie Broadband. Simultaneously, Michael Omeros, the current Executive Director, will assume the position of CEO for the Symbio business starting February 28, 2024. The current CEO and Co-founder of Symbio, Rene Sugo, will continue as an advisor during the transition to Aussie Broadband. Additionally, starting March 11, 2024, Andy Giles Knopp will serve as Interim CFO until a permanent replacement is found through an executive search for Brian Maher's successor.

Outlook

Aussie Broadband delighted shareholders with an upgraded FY24 EBITDA guidance.

The company expects EBITDA in the range of $105 million to $110 million, a sharpening of the range from the previous $100 million to $110 million. Aussie also expects a reduction in capital expenditure and has guided outflows of $40 million to $45 million, down from $47 million to $52 million. The above guidance excludes any impact from the Symbio acquisition. It is expected that Symbio will contribute $11 million additional EBITDA for the four months it is owned by Aussie Broadband, bringing the total EBITDA range for the group to be between $116 million to $121 million.

Superloop Proposal

Aussie Broadband is continuing to explore avenues to expand its market presence submitting a non-binding indicative proposal to acquire Superloop (ASX: SLC). Under the offer, Superloop shareholders would receive 0.21 Aussie shares for each Superloop share, translating to a value of $0.95 per share based on the last closing price of Aussie Broadband.

Despite the initial enthusiasm from Aussie Broadband, Superloop promptly dismissed the proposal, characterising it as opportunistic and asserting that it fundamentally undervalues the company. The combination of solid 1H results from Superloop and the takeover proposal from Aussie Broadband has seen the company's shares surge over 31% in the past week.

Aussie Broadband contends that the transaction holds numerous strategic advantages, including the creation of a sizable player in the Australian market, boasting broadband access services catering to over 1 million subscribers. The proposal also highlights a robust wholesale offering, well-positioned for growth through improved scale and investment. There are a number of synergies achievable through the elimination of network cost duplication and other customary cost areas.

Aussie Broadband continues to execute for its shareholders while also providing great optimism for future growth.

ClearView Wealth Ltd (ASX: CVW)

ClearView Wealth is an ASX-listed life insurance business that partners with financial advisers to help Australians protect their wealth. The company released a strong set of financial results last week, we’d previously covered why we think it is undervalued and a potential takeover target.

ClearView reported a $17.3 million increase in Underlying Net Profit After Tax (UNPAT) up 37% on the previous period equating to an UNPAT margin of 10.9%. The higher interest rate environment suits ClearView with a significant impact on its investment earnings.

Managing Director Nadine Gooderick emphasised the company's commitment to simplification and ongoing investment in technology and transformation:

“We are solely focused on delivering high quality life insurance solutions and excellent service to our customers. We have invested significantly in people, processes and technology, and this investment underpins our long-term growth profile.”

“We are already starting to see some scale and efficiency benefits, as a result of our multi-year transformation program, and we expect material improvements from the end of FY25.”

After an increased FY23 final cash dividend of 3 cents per share, ClearView has now declared its first interim dividend, fully franked and payable on 22 March 2024. The payment represents a payout ratio of 57% which is at the higher end of the 40% to 60% range. The dividend payout ratio will continue to be monitored post the company’s technology and wealth management changes.

ClearView remains focused on exiting its Wealth Management business by H1 2025. The company’s strategy to increase its share of the life insurance market remains on track with a focus on core life insurance functions of product, underwriting, claims and rehabilitation. Management has not ruled out exploring potential growth and diversification opportunities.

The TAMIM Takeaway

A focus on uncovering businesses with improving fundamentals and potential takeover targets continues to yield results. The unfolding narratives of Aussie Broadband, Superloop and Symbio exemplify the rewards of patience and a keen eye for underlying business potential. We encourage patience when observing the underlying business of stocks, understanding that true value often lies beneath the ebbs and flows of share price movement.

Disclaimer: Superloop (ASX: SLC), ClearView Wealth (ASX: CVW), Symbio (ASX: SYM), and Aussie Broadband Ltd (ASX: ABB) are currently held in TAMIM portfolios.