ASX Microcap Early Reporting Season Results

Well, another reporting season is on us and results are starting to come in thick and fast. As investors, August and February represent the 2 months of the year when we find out does our investment thesis get proven or disproven. I have previously done a guide on how to prepare for reporting season in order to better deal with the helter-skelter nature of the next few weeks. While the majority of microcaps will report in the last week of August a few companies have already come out with results for FY18

Kip McGrath Education Centres (KME: ASX) announced that it expects FY18 NPAT to be at least 30% higher than FY17 in the range $1.7m - $1.8m. The fruits of their many internal programmes and franchise buyback programme are starting to be realised and further evidence of this should flow through in FY19. They also pay a small dividend which is currently unfranked but they are quickly soaking up historic tax losses and franked dividends are possible in the not too distant future. Not many microcaps even pay a dividend so this marks KME out from the crowd. 

Energy Action (EAX: ASX) has committed to a full strategic review of the company in which the full gambit of options are on the table including the sale of the company or assorted business units, mergers, JV's etc in order to maximise value for shareholders. While not disclosing the FY18 results they did highlight in their announcement that they continue to trade profitably and had reduced debt by a further $3m in FY18. EAX is profitable, generates good cash flow and dividend paying. It also holds an AFSL license and has circa $6m in franking credits sitting on its balance sheet. 

TinyBeans (TNY: ASX) released some FY18 operational highlights which shows that the company is still on track and resonating with its target customers. MAU's were up 37% to just under a 1m. Premium paying users generated almost $0.5m in revenue a 30% YOY increase. Revenue from brand partnerships was up 115% YOY to just over $1.0m, proving brands are seeing the value in partnering with niche platforms like TNY. A recently completed placement should allow them to execute on their strategy and push towards cash flow breakeven.  

MSL Solutions (MPW: ASX) provided strong results update with NPBT improving $11.3mil YOY to an almost breakeven for position for FY18. The company saw revenue growth of 44% to just over $35mil for FY18. MPW stated that over 50% of its revenue now comes for offshore and that recurring revenue was $16.8 at the end of FY18. This should provide a nice stable platform moving into FY19. Overall a very solid year from the company. 

ASX Tech Cheap?

We have seen another foreign buyer come in for an ASX listed microcap tech company with Spookfish Limited (SFI: ASX) receiving an offer from one of its US shareholders Eagleview Technologies who was also a long-term commercial partner of SFI in the US market. The offer price was a whopping 56.9% higher than the previous close and 55.9% higher than the prior 15-day VWAP and a 60.9% to the 30 day VWAP.  This follows hot on the heels of the takeover offer for Mitula Limited (MUA: ASX) by a Japanese suiter. The MUA offer was also at a very hefty premium.

This suggests international buyer/investors are seeing value in ASX listed tech companies where local investors are not. It is not just microcap tech where this is being reflected lest we forget Oracle's takeout of Aconex not even 2 years ago at a 47% premium to the prior closing price.  

Ok, 3 foreign takeovers may not be a trend but it certainly raises questions of why foreign buyers are prepared to pay big premiums for ASX tech companies but local investors are not. Value is in the eye of the beholder I guess.   

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 The Eley Griffiths Group Emerging Companies Fund, which returned an impressive 41.88% for FY18. The fund was launched by the group in March 2017 and follows on from the longstanding and successful Eley Griffiths Group Small Companies Fund. I asked Ben Griffiths, Senior Portfolio Manager at Eley Griffiths Group for one of the more interesting stocks from their portfolio and he highlighted Alliance Aviation Services (AQZ: ASX) 

What does Alliance do?

AQZ is Australia’s largest national air charter company for the mining/resources industry. The airline first took to the skies in 2002 and listed its shares in 2011.

AQZ performs aviation services for Virgin Airlines in Queensland through various arrangements, ‘wet lease’ flights for Qantas as well as operating private interest charter flights. Unique in that they operate an exclusively Fokker fleet of 32 aircraft which was sourced largely via an attractive deal with Austrian Airlines. 

The airline is somewhat beholden to successful contract renewals and to this end can boast a near perfect strike rate in retaining customers for lengthy durations (Oz Minerals Prominent Hill contract was regrettably lost during a year of operational contraction for the mining house).

Board/management have significant shareholdings in the group with Austrian Airlines prominent with an 8% holding in the company.

Why do Eley Griffiths Group Like Alliance?

AQZ is arguably the preeminent air charter company in Australia. Through reviews of annual accounts, management briefings and third-party validation we have carefully built up a level of comfort with the operating business, its value proposition and its likely position in the industry moving forward.

The Australian mining industry has been progressively repairing itself from the funk of 2012-2016 and this will greatly benefit service providers to the industry such as AQZ. Depressed commodity prices, mining company privation and abandonment of mine expansions are slowly unwinding. The WA iron ore majors have collectively recently committed to ~ $9bn worth of brownfield expansions, mining volumes are improving and staff turnover at the mine site is once again being seen.

One of AQZ's key competitive advantages is to be found in its fleet management practices. 

From fleet procurement, maintenance and utilization, the group could be regarded amongst the most conservative operators in aviation today.  AQZ spent ~ $20m for 21 aircraft from Austrian Airlines, with an extra ~ $1m/aircraft required to bring the fleet up to CASA standards, so cost $2m each. Potential resale value ~ $5m each. At current rates, each aircraft would generate ~ $1.8m in EBITDA pa plus $500k-$600k in maintenance-a very reasonable payback for the capital outlay. Management believes the current fleet to have a 10-year operating horizon. The present 32 active aircraft is tipped to move to 35 by end of CY18. This might make the targeted 35000 full year flying hours a little light on.

Net debt continues to be reduced ($60m at Dec 2017) and ongoing attention to working capital management is making for an improved balance sheet. The company reinstated its interim dividend this year, underscoring the board's commitment to growing dividends moving forward.

Who is the management, team?

The executive team is led by Scott McMillan, who has been with the group since its inception. He has over 25 years experience in the aviation industry gained from a number of operating disciplines from a number of different airlines. He owns just shy of 4% of the company. Scott epitomizes the passion, experience and high energy that often sets small company leaders apart from the big end of town. 

The board is chaired by Steve Padgett, who like Scott, has been on the board since the company’s founding. His aviation wrap sheet is inordinate. 

Eley Griffiths Group has met Scott and a number of his management team on many occasions since the company went public and have never failed to be impressed. 

Valuation. Does it stack up?

Valuation reflects the capital-intensive nature of the business but undercooks the earnings profile for the group looking forward. For FY19, Alliance is on a PE ratio of ~9.8x for ~ 25% eps growth or including debt, an EV/EBIT of 9x. Both multiples have room for expansion in our opinion. The company could pay an FY18 dividend of 6.5 cents per share, conceivably growing to 8 cents in FY19, meaningfully franked dividend yields of 3.5% and 4.3% respectively.

The stock reached a high of $2.35 on its last up-leg in 2012 and this is reasonable share price target given the improving outlook for the group's operations and expected earnings delivery.