Analyst Research

Interesting Small and Micro Caps Annual Results Roundup – Part 1

September 3, 2019

Interesting Small and Micro Caps Annual Results Roundup – Part 1

Most weeks this year, I have written articles on interesting small and micro caps. Now that the annual reporting season is behind us, this week’s article takes a quick look at the results from six of these companies with my initial thoughts. I will cover another group next week – Interesting Small and Micro Caps Annual Results Roundup – Part 2.

COMPANY DATA

Date of ReportASXPricePrice TargetAnalyst Recommendation
03/09/19IOD$0.086N/AN/A
Date of Report03/09/19ASXIOD
Price$0.086Price TargetN/A
Analyst RecommendationN/A
Sector: Technology52-Week Range: $0.012 - 0.098
Industry: Software - ApplicationMarket Cap: $45.27 million

Source: Commsec

IODM (ASX:IOD)

Accounts receivables management software

  • Revenue +122% to $0.49 million
  • Operating loss +25% to $1.1 million.
  • Operating cash burn amounted to $1.1 million.
  • Cash balances at the end of June were $132K.  About $625K in new capital was raised in June so current cash balances are less than $700K.

The company is now building traction and is primarily focussed on commercialisation and business development. Both key business indicators, being invoices processed and invoice value, rose sharply off low bases.  Having established a foothold in Australia it is now extending its operations to the UK and Western Europe. The company appears to be making good progress in validating its value proposition but has a long way to go to prove its business model.

It’s great that traction is building but scale is still very, very small and evidence of the company’s potential is still lacking. More particularly, the company appears to lack the financial resources to fully ramp up sales and marketing. More capital will be required just to cover cash burn in FY 2020 let alone boost business development to ratchet up revenue growth.

The share price has jumped from around 2 cents at the beginning of 2019 to a current level of 7.5 cents. Market cap is currently $36 million. There are some big believers and it would seem some high expectations. But without considerably more financial resources, the company and stock may disappoint.

The company reports that annualised revenue is currently about $650K. It needs to be well in excess of $2 million by this time next year to provide confidence that expectations could be realisable.

 

COMPANY DATA

Date of ReportASXPricePrice TargetAnalyst Recommendation
03/09/19ST1$0.20N/AN/A
Date of Report03/09/19ASXST1
Price$0.20Price TargetN/A
Analyst RecommendationN/A
Sector: Communication Services52-Week Range: $0.080 - 0.28
Industry: Telecom ServicesMarket Cap: $69.58 million

Source: Commsec

Spirit Telecom (ASX:ST1)

Ultra high speed internet services

  • Revenue +7.4% to $17.4 million
  • EBITDA down 50% to $1.4 million
  • Admin costs jumped 37% and marketing costs were up 55%.
  • FY 2019 was a year of two very different halves with a recovery and a big improvement in the second half following a weak first half.

Despite the operating loss, net operating cash flow actually increased by 38% to $2.3m. However, capex was high due to network expansion as was spending on acquisitions. As result about $5.7m in additional capital was raised during the year. With cash reserves at $3.4m, more capital may be required if capex and spending on acquisitions remains high. Having said that, with only $4m in debt, I would think there is some additional borrowing capacity, especially with profitability expected to rebound in FY 2020.

The fall in profit was largely attributable to the delay in network expansion and the build up in costs as the company restructured its management to support the next stage of growth and larger scale. During the year, two acquisitions were completed although coming late in the financial year they had little impact on results.

In financial terms, FY 2019 was clearly disappointing, however, there was considerable strategic activity which should impact over the next year to two. Initiatives put in place include the two completed acquisitions as well as another two undertaken in July which will broaden the company’s geographic base and product offering; contracts were secured with the Victorian Govt to provide communications services to two towns outside of Melbourne which will extend its model into the regions without the capital risk; and a greater focus on commercial rather than residential properties which has the potential to markedly boost the potential yield from each property serviced.

I like the very high speed internet value proposition and strategic position but the company needs to markedly increase scale, which network expansion and acquisitions are clearly designed to achieve. I would think revenue of more than $50m needs to be achieved within a 2 year target. At 20 cents, the share price is about double its level of the beginning of the year and market cap is nearing $70 million.

 

COMPANY DATA

Date of ReportASXPricePrice TargetAnalyst Recommendation
03/09/19BPP$0.017N/AN/A
Date of Report03/09/19ASXBPP
Price$0.017Price TargetN/A
Analyst RecommendationN/A
Sector: Industrials52-Week Range: $0.015 - 0.032
Industry: Diversified IndustrialsMarket Cap: $8.02 million

Source: Commsec

Babylon Pump & Power (ASX:BPP)

Diesel engine maintenance and overall and leasing of power and pump equipment for mining and exploration

  • Revenue +607% to $11.5 million
  • EBITDA $108K (loss previous year)
  • Net Loss +100% to $2.2 million.

Notwithstanding the loss, this was an excellent result. From effectively a standing start in December 2017 the company has rapidly built scale with a high-quality client base of WA based miners and explorers. Babylon is a capital-intensive business and the loss was attributable to a large increase in depreciation and finance charges as equipment was acquired for supply to clients.

Since the end of the year, the company has acquired Queensland based PrimePower for $4.2 million. PrimePower is a specialist rebuilder of diesel engines and operates from facilities in Mackay, not far from a major mining province. Revenue has been stable for the past three years at around $9 million and it has been consistently profitable. The business is highly complementary with Babylon and there are considerable opportunities to grow the business which has lacked the resources to drive growth. PrimePower is now the east coast beachhead for Babylon.

Combined annualised revenue in FY 2020 is likely to be around $25 million. EBITDA should show good growth although the overall result may be impacted by acquisition  and fund raising costs.

This is the first of what I expect to be more initiatives to build a national presence and much greater scale. I would not be surprised if revenue of around $100 million is achieved or within reach in 2 to 3 years.

 

COMPANY DATA

Date of ReportASXPricePrice TargetAnalyst Recommendation
03/09/19CV1$0.15N/AN/A
Date of Report03/09/19ASXCV1
Price$0.15Price TargetN/A
Analyst RecommendationN/A
Sector: Technology52-Week Range: $0.044 - 0.24
Industry: Internet Content & InformationMarket Cap: $43.81 million

Source: Commsec

CV Check (ASX:CV1)

Credentials verification and validation

  • Revenue down 1% to $12.4 million
  • Operating loss down 62% to $328K
  • Net Loss down 57% to $1.0 million

The lack of revenue growth in FY 2019 masks fundamental changes that have been occurring in the business model that are now having a huge operational and financial impact which will become more apparent going forward. More specifically, the company has pivoted away from its original B2C model to a B2B model. This has been underway over the past two years but in FY 2019, the Business market contributed 70% of revenue. What happened in FY 2019 was that strong growth in the Business market offset declining revenue from the Consumer market but with markedly lower marketing costs the operating loss fell.

CV Check is building a high quality client base and is becoming embedded within business HR and recruitment functions. We expect growth to pick up in FY 2020 with potentially a breakthrough to operating profitability during the year.

The company has gone a long way towards validating its business model which should get the tick in FY 2020. Having achieved this, I think the company will be looking to venture offshore towards building a global platform. Whilst there is still plenty of growth to be had in Australia, a global platform will vastly increase the potential scale of the business and enable high rates of growth to be sustained well into the future.

After climbing strongly between April and July, the share price has slipped back to 13 cents still higher than most of the last year. I would guess that the biggest issue is future capital requirements. However, the company was positive cash flow in FY 2019 and had cash reserves of $3.1 million as at 30 June which has since been boosted by a placement which raised another $3 million. So, there shouldn’t be any need for further capital in the short term in the absence of an acquisition or a major ramp up in marketing/business development.

 

COMPANY DATA

Date of ReportASXPricePrice TargetAnalyst Recommendation
03/09/19CHL$0.065N/AN/A
Date of Report03/09/19ASXCHL
Price$0.065Price TargetN/A
Analyst RecommendationN/A
Sector: Technology52-Week Range: $0.043 - 0.076
Industry: Software - ApplicationMarket Cap: $8.06 million

Source: Commsec

Chant West (ASX:CHL)

Data and research, consulting and software services to the superannuation and financial planning industries

  • Total Revenue down 7% to $84 million
  • Customer Revenue  +17% to $8.2 million
  • EBITDA $0.8 million (loss previous year)
  • Net Loss down 78% to $372K
  • Net cash flow from Operations +55% to $1.9 million

The fall in revenue was due to a $1.5 million reduction in the R&D grant following the abandonment of a development project. The abandonment of this project enabled the company to refocus its activities (hence the strong increase in customer revenue) and reduce associated costs.

There has been some restructuring which has improved efficiencies and a strategic refocussing on the digitisation potential of its market leading databases. Accordingly, the company has now launched a series of data analytics products and is providing API’s (Application Protocol Interface) to its databases which will be new sources of growth.

With no debt, cash reserves of $3.6 million and strong operating cash flows, the company is well placed financially to drive growth, which it has struggled to do in the past.

The stock has been steadily trending northward over the past year and at 6.4 cents is over 50% higher than a year ago.

 

COMPANY DATA

Date of ReportASXPricePrice TargetAnalyst Recommendation
03/09/19FZO$0.18N/AN/A
Date of Report03/09/19ASXFZO
Price$0.18Price TargetN/A
Analyst RecommendationN/A
Sector: Technology52-Week Range: $0.11 - 0.47
Industry: Software - InfrastructureMarket Cap: $36.11 million

Source: Commsec

Family Zone (ASX:FZO)

Cyber security protection for families

  • Customer Revenue +80% to $4.2 million
  • Net loss down 21% to $14.4 million

As evidence by the strong growth in revenue and other KPI’s, the company achieved validation of its value proposition in FY 2019. With over 800 school clients (including 400 in the US) and over 134,000 retail clients, the company is building a significant market presence. The challenge is now to prove the business model

The company is aggressively ramping up its business development including its international operations. Momentum is building in the huge US school’s market, and the UK school’s market was entered in March 2019. Partners are driving entry into consumer markets in Asia. There are a lot of levers moving at the moment and cash burn has been around $10 million in each of the past two years. $12 million in new capital was raised in FY 2019 and we assume a similar amount will needed this year, assuming the cash burn is comparable with previous years. Cash reserves were $5.1 million as at 30 June.

At 17 cents the stock is well below the 50c level of a year ago. I expect very strong revenue growth this year but with a high cash burn and equally high cash requirement it may be a challenging year for the share price.

 

 

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