With much attention being paid to market-wide drawdowns, it is understandable to be nervous about stock prices. One way to help settle those nerves is to ask yourself: am I an owner of businesses, or am I a short-term paper shuffler who constantly buys and sells securities?
Stocks are real businesses. Investors who do not wish to rent ticker codes and trade on momentum are owners. Why is an “Owner’s Mindset” crucial as an investor?
It forces you to think long-term, as opposed to quarterly increments.
An Owner’s Mindset also means you know or can explain succinctly what you own.
With that in mind, here is a look at three holdings within our Australia Small Cap Income portfolio.
Bravura Solutions (ASX: BVS)
Bravura Solutions (ASX: BVS) is a wealth management software business established in 2004. Bravura offers digital solutions and services supporting superannuation and pension funds, life insurers, investment companies, wrap platforms, private wealth advisers and funds administrators. Bravura is best known for its Sonata wealth management platform, which counts leading institutions such as Citi and J.P. Morgan as clients. This increasingly popular platform streamlines the administration of a full range of wealth management products. Bravura has several other solutions with large addressable markets, including the Rufus transfer agency solution, the Garradin back office solution, and the Midwinter financial planning solution.
What happened in FY22?
The company delivered FY22 results at the bottom end of guidance:
This was at the bottom of the downgraded guidance range given in the first-half result. Management noted that its operations suffered "unprecedented macroeconomic challenges caused by the COVID-19 pandemic". These were said to have affected investors' outlook for making long-term investments, affecting its top and bottom lines, driving up wage costs, and causing disruptions. A slowdown in rolling out its software projects was also observed due to the virus.
In terms of the company's operating segments, wealth management revenue grew by 6%, and fund administration revenue grew by 17%. Contracted recurring revenues also grew during the same period, growing 8% to $142.1 million. Bravura continues to build recurring revenue, giving the company stable income streams due to the contracts' long-term nature (7 to 13 years). Bravura also invested substantially ($21.2 million) into research and development (R&D). These funds were primarily used to develop its Sonata Alta wealth management software built to be used by Australian super funds. Additionally, there were two major leadership changes during FY22, with the appointment of Libby Roy as the new chief executive officer and Brent Henley as chief financial officer.
For FY23 and beyond, Bravura will continue to work on its flagship Sonata product to deliver business process as a service (BPaaS) offers to its key customers. The company also notes it has a strong sales pipeline for its Sonata offering to increase its growth in the future. As Bravura continues to innovate, develop and integrate solutions across the business, the company aims to leverage its catalogue of assets and strong global footprint, allowing for more cross-selling and upselling opportunities. In the short term, management also indicated an accelerated transition of its products to the cloud, which will help improve operating leverage.
Resimac Group (ASX: RMC)
Resimac Group (ASX: RMC) is a leading non-bank lender and multi-channel distribution business. It offers a suite of lending products to consumers and commercial borrowers across its wholly-owned subsidiaries. These products include residential home loans, consumer finance, and small and medium enterprises (SME) finance. It also offers home loans directly to consumers via its homeloans.com.au brand, with a range of smart and transparent home loan solutions that borrowers can apply for using its end-to-end online application. In general, non-bank lenders are often considered more nimble than traditional banks. They can also be regarded as adept at embracing technology and building and exploiting niche markets. Resimac was distinguished as Non-Bank of the Year by the Australian Mortgage Awards in 2020.
What happened in FY22?
Resimac saw record settlements of $6.3 billion in FY22, taking its book to over $15 billion for the first time. Settlements totaled $6.3 billion in FY22, driven by demand for Resimac's specialist offering (largely prime alt doc loans for "customers who fell on hard times during the pandemic but have since made a financial recovery"). In fact, the company's specialist offering outpaced its prime market for new settlements (with prime also seeing some runoff), which Resimac said reflected the "fierce" competition for prime borrowers, particularly as banks sought to attract clients with low rates and high cashback offers.
Additionally, Resimac maintains a strong balance sheet and has been conservative - while most banks have been releasing provisions, Resimac recorded a considerable $9.5 million provision expense in the 2H FY22. This leaves the company well covered for whatever economic challenges lie ahead and could provide an upside to profits as these provisions can be released in future results.
In late December 2021, the company reported undertaking an on-market share buyback to reduce the share count by up to 10%. According to the announcement release, "The Board considers that the company's current share price does not accurately reflect the underlying value of the company's assets and the share buy-back represents an opportunity to add value to the remaining shares on issue." The on-market buyback has been executed as intended thus far.
Management maintains the long-term outlook for Resimac's asset finance; AUM is on track for a targeted $1 billion annual settlements by FY24, supported by a new digital originations platform and funding line to support organic growth. Resimac is looking to further digitalise broker offerings via a new servicing platform that will give brokers "better end-to-end oversight of applications", as well as provide customers with "an improved omni-channel banking experience" to improve the post-settlement Resimac experience through a DIY relationship where we're giving them the tools to manage their loans. In the short term, the interest rate hikes have been getting priced into new loans but weren't reflected in FY22 results. The stock has been under pressure and trading at relatively low multiples, and we expect sentiment for the sector to shift in CY2023, leading to a re-rate of the shares towards our valuation of $1.80+.
People Infrastructure (ASX: PPE)
People Infrastructure (ASX: PPE), or PeopleIn, is a leading workforce management company founded in 1996 and listed on the ASX in 2017. It provides contracted staffing, business services and operational services in both Australia and New Zealand across three main sectors: health and community services, information technology (IT), and general staffing and specialist services. PeopleIn essentially acts as the middleman between a pool of over 25,000 candidates and its geographically-diverse client base of 3,500+, which typically engage over 5,000 candidates per day from the active candidate pool.
PeopleIn has consistently delivered for shareholders with a 27.6% CAGR for revenue since FY15. It's important to note how the company achieved such impressive growth rates. Indeed, its positive reputation for quality customer service complimented by its strong sales force, was undoubtedly contributing factors. However, it has also implemented a growth-by-acquisition strategy to expand into new key sectors. A growth-by-acquisition strategy has the potential to work exceptionally well, but what can also happen a lot of the time is that companies buy too many businesses or pay too much for their targets. In People Infrastructure's case, it has implemented a strategic plan to acquire at reasonable prices using a combination of existing cash reserves and a drawn-down debt facility.
What happened in FY22?
PeopleIn reported yet another consistent positive result in FY22:
The results were driven by favourable operating conditions, with the strength of the employment market (3.4% unemployment) and unprecedented demand from clients operating in defensive sectors. PeopleIn has continued to pursue acquisitions as part of its aggressive M&A strategy and contributed $6.6M in EBITDA in FY22. The acquisitions of Vision Surveys QLD Pty Ltd and GMT Group in 2021, alongside Perigon Group and FIP Group in 2022, were also accretive to both revenue and earnings.
Looking forward, PeopleIn is guiding towards a normalised EBITDA of $62-$66M, signalling over 30% growth in earnings.
They continue to benefit from low levels of unemployment and higher turnover of its clients' employees, driving demand for recruitment services. The company is also well placed in an inflationary environment as wage inflation will drive higher margins for the business. The PeopleIn M&A pipeline remains strong and has around $30M of balance sheet capacity. We value the stock at $5.00+.
Disclaimer: ASX:BVS, ASX:RMC and ASX:PPE are currently held in TAMIM portfolios
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.