Small Cap AGM Season Review

​This week the team at DMX, managers on the TAMIM Australian Equity Small Cap IMA, review some of their portfolio holdings following AGM season. They discuss their positions in Fiducian, Konekt, SDI, Pioneer, Paragon & Joyce Corporation.

Small Cap AGM Season Review

November saw some significant news flow and material share price movements across the portfolio. Key positive contributors to the November results included ASX:KKT and ASX:FID, while ASX:SDI and ASX:ENN were key negative contributors.

Our cash levels remain elevated at month end which is a function of exiting/reducing several positions during the month, and in part to provide funding for some opportunities we have committed to in December.
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Annual General Meeting season for ASX listed companies continued through November. Below we comment on AGM highlights and trading updates from a selection of our previously discussed positions.

Paragon Care Limited (ASX:PGC)
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Paragon Care Limited (ASX:PGC), a leading provider of consumables and equipment to hospitals and aged care facilities, advised that it had enjoyed a strong start to FY17.

Strong growth was being delivered across key financial metrics. In the first quarter of FY17, the company’s EBITDA on a like for like basis was 12% up over the prior corresponding quarter.

PGC reaffirmed expectations of strong earnings growth for FY17, with FY17 being the first full year of earnings capture from it 2015 acquisitions. Paragon is targeting strong growth in FY17 across all key metrics.
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​PGC also provided medium term ‘targets’ for revenue of $250m and EBITDA of $37.5m, to be driven by strong double digit organic growth and value accretive M&A transactions. This would represent a significant step up from FY17 expectations(Revenue: ~$120m, EBITDA: ~$17m).

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Fiducian Group Limited (ASX:FID)

Fiducian Group Limited (ASX:FID), the financial planning and funds management group, advised that it has significant capacity and strategies in place for further growth in its traditional revenue base. It expects its funds under administration to continue to grow and, in particular, benefit from recent financial planning acquisitions.

FID advised that its unaudited profit for the first quarter of FY17 is ahead of budget, and funds under administration have grown since June as a result of both good inflows and funds performance.
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Medium term growth for FID will be delivered by:

• Growing funds under advice organically and through strategic acquisitions of financial planning businesses;
• Expanding its platform administration servicesto IFAs and capture of market share where value accretive;
• Building its SMSF services and continuing to deliver superior investment performance through its funds and attracting IFAs.​

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Konekt Limited (ASX:KKT)​
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Konekt Limited (ASX:KKT) advised it had commenced the first four months of the year strongly, with revenue more than 35% ahead of the prior corresponding period (which only had marginal acquired revenue included). KKT had previously advised that it expected FY17 revenue of between $50m – $53m driven by both organic growth and the full year impact of acquisitions completed in the year. KKT now upgrade this to a range of $51m - $53.5m.

Despite a significant investment in a range of business improvement initiatives in the first half of FY17, KKT expects to hold its EBITDA margin for the first half at around its FY16 level (10%). On the back of these first half investments, KKT expect a strong improvement in margins in the second half, such that full year EBITDA is expected to be in the range of 10.5%- 11.5%.
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We attended the KKT AGM, and noted that the company was very confident of further growth. The CEO, Damian Banks, advised that “more upside remains available to us and we have a strong company leadership group building our business”.​

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Pioneer Credit Limited (ASX:PNC)

​Pioneer Credit Limited (ASX:PNC) advised at its AGM that it was excited about the way in which FY17 had commenced, and that another year of high quality growth was underway.

PNC has approximately 85% of its forecast investment of $50m for the year under contract, and about 40% of its expected investment for the following year also contracted – a significant improvement in visibility on prior years. PNC reiterated its guidance for the full year of statutory NPAT of at least $10.5m.​
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PNC continues to work towards the launch of a range of new financial products, with the launch of a white label credit card nearing finalisation. The expansion of PNC’s new venture focused on funding, Pioneer Credit Connect, is taking shape as can be seen from its new website: http://www.pioneercreditconnect.com.au/.​

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SDI Limited (ASX:SDI)​
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Prior to its AGM, dental products manufacturer SDI Limited (ASX:SDI) reported that not-withstanding good sales growth, it was on track to report a lower first half profit than the previous year.

A key reason for the disappointing fall in profit was surprisingly strong sales growth in the UK (+18% on PCP) resulting in relatively lower gross margins due to the weakness of the pound. Currency translation and tax timing issues also are expected to impact after tax profit – unfortunately this was not clearly disclosed to the market by SDI in its trading update, and its share price fell materially.

The core investment thesis for SDI remains unchanged: it is a growing, vertically integrated global dental manufacturer with quality IP, high margins and a strong pipeline of new products.
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However, the episode certainly highlights (again) the need for improved market communication from SDI, and re-focuses the market on the currency risk inherent in the business and the resultant impact on profit.​

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Joyce Corporation Limited (ASX:JYC)

Investment company Joyce Corporation Limited (ASX:JYC) noted at its AGM a strong start to the year, maintaining a relatively high rate of revenue growth for the first quarter.

Total written sales across the JYC businesses (including franchisee sales), is expected to be within the range of $180m- $200m in FY17. “At this early stage it appearsto be tracking toward the higher end of this range.” This represents an upgrade on the previously advised level of $170m.

In FY17, JYC will benefit from the earnings contribution from its Lloyds business (~$1.4m EBITDA), and (from January 2017) savings of $380k p.a. when it moves into its new wholly owned property, and we expect its FY17 NPAT to exceed $3m (FY16: $1.9m; +58%). The company continues to hold a large cash balance and property assets and is on a +7% dividend yield.
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JYC remains very cheap, but suffers from poor liquidity, complicated accounting and poor market awareness. With its strong balance sheet, JYC has the capacity to acquire a further business with EBITDA of up to $1.5m without taking on any operational debt. A fourth business would further diversify revenues and put JYC on target for an NPAT (after minorities) of north of $4m.


Happy Investing,

​The team at TAMIM

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