HD's view: Small cap half year in review

While sentiment has changed quickly in just a month, the medium-term outlook for our small cap holdings remains positive. There is plenty of value out there if you look carefully and are willing to take a view longer than Trump’s next tweet.

Given the recent half yearly reporting season just wrapped up, we felt it was worth providing an update on the core holdings that we’ve previously disclosed here on Livewire, as well as touch briefly on a few new stocks.

Cuscal - Hiding In Plain Sight

Cuscal (CCL) reported its first result as a publicly listed company in February, stating they were on track to “meet or modestly exceed” FY25 guidance.

The result was a good confidence builder for the market and reaffirms the stable and predictable nature of the business. The company IPO’d in late 2024, and with nothing moving quickly in this industry, we were confident guidance would be achieved or surpassed.

Management emphasised the opportunity in accretive M&A and while CCL is the clear market leader (ex big 4), there are smaller competitors that would be highly synergistic if merged with Cuscal. Excess cash on the balance sheet provides plenty of capacity for acquisitions.

The ongoing consolidation in the banking and payments industries has been a net positive for CCL to date, although the recent news of Tyro’s (ASX:TYR) play for Smartpay (ASX:SMP) does represent a small risk. SMP is a client in CCL’s Acquiring division, representing an estimated 1% of group revenue, and it may be logical for TYR to transition SMP to their own switch, if a merger were to occur.

That said the TYR/SMP tie up is far from a done deal. Even if it is consummated, the timing of the revenue rolling off would be months to years away. The 1% of revenue is a conservative estimate given we’re unsure if TYR could also provide settlement (which requires an Exchange Settlement Account with the RBA), and in a year of expected top line growth (5-9%) per annum it should be more than offset by natural expansion in the rest of the business.

Meanwhile, several other mergers in the banking industry provide potential upside to CCL’s future prospects, both organic and inorganic, yet the market continues to ignore this.

HD's view on CCL is simple: we think it is a higher quality company than the current price implies, with predictable, infrastructure-like qualities, a substantial moat, tailwinds from the growth of digital payments and debit cards, and (now more clearly) substantial M&A opportunities. The extensive investments CCL has made over the past few years ($100m+) have widened their competitive positioning and should lead to significant operating leverage in the years to come.

Now management’s job is to keep hitting its targets and prove that consistent mid to high single digit volume growth can lead to low double digit EPS growth over the long term. If they can do this, we think the stock will move from trading at its current discount to market (12x Forward PE), to eventually trade at a significant premium.

Airtasker - A Small Cap Growth Stock for FY25

Airtasker’s business performance over the last twelve months has been largely as expected, and the recent results included some great new data points.

The Australian business has shown early signs of accelerating growth. Booked Tasks, GMV and even average task price all resumed growth, with Booked Tasks and GMV at their highest levels since Australia kicked off its fastest rate cycle lift in history a couple years ago, impacting consumer spending.

The UK and US have continued to grow rapidly, registering triple digit growth rates. The US business is admittedly still small scale, however the UK is becoming something real and substantial. If the current growth rates can be sustained, both the US and UK could become meaningful contributors to revenue, gross profit and cash flow over the next 2-3 years.

Despite solid operational performance the ART share price has been on a hell of a ride. From 25c mid-last year up to nearly 40c, back to 25c, another rally towards 50c and now back again! The joys of small caps.

It is worth remembering that ART is in a heavy investment period as they deploy the c.$50m of media for equity deals across the Australian, UK and US businesses.

These investments are in above-the-line brand awareness, not below the line ‘click-through’ type marketing. It is about building awareness of the Airtasker platform that benefits the business over periods measured in years, rather than expecting short term ramps of activity.

Another point worth noting is the ‘non-cash’ impact on the P&L from the media for equity deals. There is an impact both as the marketing is spent and as the equity deals are run through the income statement because, under accounting rules, ART is required to provide an estimate in the change of share repurchase liabilities assuming they are equity settled. I refer readers to our original wire outlining the asymmetry of these deals from ART’s perspective. We note the company remains free cashflow positive.

Despite the share price volatility, our view on ART has not changed. We continue to believe the current market capitalisation presents a substantial discount to the value of the Australian business, with the UK and US businesses comprising valuable ‘free’ options on top.

We have continued to acquire more ART shares on this correction and remain bullish.

Environmental Group – Undervalued Small Cap Growth Story

The Environmental Group (ASX:EGL) is a business we have held shares in for several years after first acquiring stock in early 2021. For much of that period it was our largest position in the Inception Fund.

The company and its management team have a stellar track record, as we’ve outlined in previous wires, and the business has grown considerably over the time we’ve held the stock.

FY25 looked like being another year of strong growth until, late last year, the company announced an earnings downgrade (from +25% growth to +10-25%) on the back of cost overruns in a single project within the Baltec IEC (gas turbines) business.

These things happen in business. We understand it was a simple staff error, and felt comfortable that it was a genuine one-off, with the company putting in processes to ensure it would not happen again. Management stated the rest of the business continued to perform well, and shortly after announced their long-awaited EPA licence for their PFAS treatment plant.

In January, after coming back refreshed from the break and with EGL rallying back towards 30c, we reassessed our position size. We had more ideas than capital and EGL’s healthy register of larger institutions meant there was demand for our stock, so we made the decision to exit.

Then the half year results. To us, there were no surprises, with a strong 2H required to hit guidance given the Baltec mishap in 1H. Perhaps cashflow was weaker than the market expected, but the stock sold off and our Fund, luckily, avoided this extra drawdown.

That said, prior to this, the management team had built a track record of beating expectations and deserves the benefit of the doubt for the restated guidance. EGL remains on our watchlist as a business we know well and will be able to move quickly to re-enter if the market provides us an opportunity.

Other Standouts from 1H25 Reporting

We provide the above summaries as they are stocks we have publicly shared our thesis on, and feel it is warranted to keep Livewire readers updated. But there were a couple of other standouts in half yearly reporting worth touching on.

CogState (ASX:CGS) provides software and services for the measurement and assessment of cognition, with most of the revenue derived from clients engaged in clinical trials. It is an Australian success story, emerging as a zero-revenue technology start up to now generate >US$10m of EBIT per annum.

CGS dominates its niche market of cognitive assessment in Alzheimer drug trials and maintains 100% market share for industry sponsored pre-clinical Alzheimer’s disease trials. This is a large and growing market that, while difficult to predict in the short term, is highly likely to be substantially larger over the medium and long term.

What impressed us with CGS’s 1H result was the diversification of revenue across indications and clients, tight cost control, expanding operating leverage and continued success with partnerships, particularly MediData. We think it’s a high quality business with a long runway for growth, and a potential takeover target.

We think PPS is trading on c.8x 1-year forward EV/EBITDA, the CEO has been buying shares and the market underappreciates both the quality of the business and the predictability around its future growth. We look forward to sharing our full investment thesis on PPS here on Livewire shortly.