This week the team at DMX review some of their portfolio holdings and the meetings they have had with the Small Cap companies they are invested in. Identifying these types of businesses is both the passion and the bread and butter of the manager of the TAMIM Australian Equity Small Cap IMA. We continue to believe that the addition of a small cap portfolio to your overall investment strategy adds a strong return and diversification benefit.
September Small Cap Stock Review - October 2016 -
Elanor Investors Group (ASX:ENN)
Elanor Investors Group (ASX:ENN) is busy securing assets for its two new funds (a $250m ASX listed retail property REIT and an unlisted commercial property fund) to be launched towards the end of 2016.
Management have advised that they have a strong pipeline of potential asset acquisition opportunities across the hotel, commercial and retail property space.
ENN’s Hospitality and Accommodation Fund ( http://www.elanorinvestors.com/hospaccomfund.php ) is performing well, with ENN focused on implementing initiatives to continue to improve the operating performance of the underlying hotel assets. We expect at some point ENN to list this fund on the ASX, which would make it one of the few ASX hotel exposures, and, as such, would be likely to be well received.
ENN’s two operating businesses (Featherdale Wildlife Park and John Cootes Furniture) continue to have good growth outlooks. The challenge for ENN is to continue to identify and acquire attractive assets at good prices in order to continue their FUM expansion.
Konekt Limited (ASX:KKT)
Konekt Limited (ASX:KKT) reported a strong FY16 result, driven by strong organic and acquisition growth.
As has been widely reported in the financial press, there has been a number of recent corporate transactions in the injury management sector as private equity and other corporate players look to build their presence.
Acquisition multiples and vendor expectations are likely to have risen as a result of this activity, which may impact the acquisition activity of the likes of KKT in the short term.
KKT’s management have a strong track record of generating organic growth. Management have a number of initiatives in place in order to continue to grow the business organically, including rolling out nationally their corporate mental health offerings, the opening of new offices to provide KKT with further scale; and targeting the provision of pre-employment services to corporates that attract high workers compensation premiums such as construction firms and aged care services.
KKT see themselves as an important provider of corporate health initiatives, servicing numerous large Australian corporates.
Pioneer Credit Limited (ASX:PNC)
Pioneer Credit Limited (ASX:PNC) reported a strong FY16 result, although it was masked somewhat by PNC’s investment in new products and overhead support.
When we met with PNC they reiterated the difference in their business model versus others in the sector – PNC is focused on acquiring debts with ‘long dated’ collection profiles (primarily personal loans and credit cards) to enable PNC to develop deeper relationships with their customers over a longer period of time (this is in contrast to telecommunication and utility debts which are often one off in nature and don’t provide an opportunity to build a relationship with the customer). The other advantage of having a longer collection cycle is that it provides PNC with a lower turnover portfolio, meaning that PNC is not under pressure to constantly replace/purchase more ‘short dated’ utility type debts.
Over the medium term, PNC is focused on using these customer relationships to offer a wide range of financial services. PNC expect these financial services products (including personal loans and credit cards) to contribute meaningfully to its profit over time.
We also spent some time discussing with the MD and CFO PNC’s valuation approach for PNC’s purchased debt portfolio, and the discount rates they have adopted. We are comfortable with the valuation approach.
SDI Limited (ASX:SDI)
SDI Limited’s (ASX:SDI) Management team conducted a national roadshow following its annual results.
SDI is focused on positioning itself in its markets as an innovative dental supply company with a strong technology focus (as opposed to the traditional amalgam supplier that many in the industry still see it). This corporate re-positioning is expected to be complete by the end of the calendar year.
To further its innovation, Management expect to invest approximately 5% of sales on research and development initiatives as they look to continue to develop high quality dental products to sell to their customer base in over 100 countries. As an example of their innovation and unique product offering, SDI note that a major multi-national competitor continues to purchase a high end glass product from SDI that is not available elsewhere.
SDI’s product portfolio will be enhanced during FY17 with the release of two new products that Management are positive about - a new LED curing light and a new Riva Glass Ionomer product.
SDI’s share price continues to perform well on the back of its FY16 result, a positive outlook, improved investor relations and wider market recognition.
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