Three Small caps that delivered on growth

Andrew Mitchell

Ophir Asset Management

The recent ASX reporting season was a true "stock pickers" period,  where the bulk of performance came from not only owning the right businesses, but avoiding those names that were unable to deliver on expectations.

In the absence of any broad based sector tailwinds (excluding the resources space), the ability of management teams to successfully execute on their growth strategy becomes increasingly important. In this months' Ophir   Asset Management -  Letter to Investors,  we highlighted  three businesses that performed well for the Ophir portfolios:

Travel services operator Helloworld (HLO) delivered a terrific result that reaffirmed the excellent turnaround of the business under new CEO and major shareholder Andrew Burns. Readers of our investor letters  will already know our preference to back businesses where senior management hold a material stake in the business personally, therein aligning their financial interests with those of shareholders. Andrew and his wife Cinzia speak for more than a third of the HLO register (after backing in their own wholesale travel services business AOT into the Helloworld structure in 2015).

The Helloworld investment has certainly been a  case of backing the individual – Andrew has taken his own highly successful private business (AOT Travel – previously generating ~$15m EBITDA pre the merger) and rolled it into the listed franchise travel agency business  which at the time of the merger resembled a fairly sleepy and cost-heavy business struggling to compete in a tough agency market. Since taking the reins in 2016, Andrew and team have twice upgraded the expected merger synergies, removed an onerous defined benefit superannuation scheme, re-signed exclusive wholesale distribution agreements with Qantas and Jetstar and made significant technical improvements to their IT platform. This is clearly a team that can execute.

While the bulk of the early gains have come on the cost side, one gets the sense Andrew still has plenty of runway ahead to drive the top end harder. They have already flagged the prospect of renegotiating a number of supplier contracts, introducing new innovative travel package products in addition to a new agent incentive arrangement for their franchisee agents.  There are very little listed businesses on the ASX that can claim meaningful leverage to the increasing inbound tourism thematic in Australia and the AOT business inside HLO (as a wholesale provider of travel packages) provides real exposure to the theme. While other listed travel and leisure names reported difficult results through the half (Flight Centre, Ardent Leisure, Village Roadshow), the solid result highlighted the underlying strength returning to the business. Despite the growth runway ahead, the market isn’t asking too much of the valuation at just 8x the FY18 cash EBIT here – we continue to remain happy backing Andrew and team.

The retail sector proved a space of mixed fortunes with  structural headwinds and a softer pre-Christmas trading period creating some significantly weaker results across  a number of the speciality retailer names. Despite  the softer environment, Super Retail Group (SUL)  handed down a pleasing set of numbers, driven again by the jewels in the crown SuperCheap Auto and Rebel Sports.  Both businesses have continued to deliver solid like-for-like sales growth at healthy EBIT margins, however it was the turnaround in the struggling Leisure business that really impressed at this result. SUL has been one of those businesses in the past where issues in one division have  impacted the positive performance of  the broader Group, however the business as whole now appears to be entering a period where all 3 divisions are firing well.

This has been a testament to SUL management making the required changes across the Leisure portfolio following a sustained period of underperformance from the Rays Outdoors and BCF businesses. BCF, in particular, had suffered from store cannibalisation after a period of over-expansion into areas that had seen rapid income growth through the mining boom. That footprint has now consolidated with a more focused offering and we expect to see margins begin to rebase to higher levels. In what is still a reasonably patchy retail environment, a business delivering solid double digit organic growth with a strong return on equity continues to look impressive, albeit we will continue to watch the consumer trends closely.

Finally, we were equally impressed with the Breville Group (BRG) update and feel new CEO Jim Clayton (ex Head of Innovation and New Markets for LG Electronics) continues to  execute  well on their growth acceleration plan . Jim delivered his first major milestone this half in reducing inventory by ~20% on the prior period, resulting in a solid cashflow number and pleasing outlook guidance. This has been the first pillar in a multi-step transformation process designed to streamline product delivery globally. The business is now delivering growth in the region of 8%, inclusive of the headwind they are facing from the higher AUD - we continue to feel both revenue and profit can continue to accelerate from here as Jim and team continue to execute.

This snippet has been taken from the  Ophir  Asset Management Letter to Investors - February 2017. To read  the full note, please click here:  (VIEW LINK)

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Andrew Mitchell
Director and Portfolio Manager
Ophir Asset Management

Andrew has over 15 years’ experience in portfolio management of listed companies, stockbroking and economic analysis. Prior to co-founding Ophir, Andrew worked from 2007 to 2011 as a portfolio manager at Paradice Investment Management.

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