Small Cap AGM Updates November 2018

The Tamim Australian Equity Small Cap team provide an update on a number of their holdings following their Annual General Meetings.

​Portfolio Annual General Meetings (AGMs) have continued through November. On the whole, trading updates provided at these AGMs have been very positive, with portfolio companies delivering strong growth and encouraging outlooks. We discuss six AGM  updates below. 

​CML Group (CGR) AGM Update

Financial services company CGR provided a detailed financial update and is tracking well. Q1 19 EBITDA was $5.1m (up 28% on Q118). The Q1 update highlighted growth in the core invoice financing business, offset by lower margins. This is due to the lower margin Thorn book that was acquired in 2H18. Technology enhancements are at the forefront of this division. Using automated credit checks, integration into the customers accounting system, and a pricing engine, pre-approval can be made in under five minutes.

The company is experiencing strong growth in the equipment finance business. Started in FY17, this division is expected to contribute $1.5m+ EBITDA for FY19. Equipment finance can be risky, but CGR are taking a cautious approach. This means that they only lend up to the valuation of the equipment. Items are independently valued at the price expected from an auction. This division is also providing cross-sell opportunities to the Invoice factoring business.

The most interesting announcement is CGR’s entry into Invoice Discounting. The company sees an opportunity as the banks are tightening lending criteria. While still early days, it is a logical extension to their offer and will provide growth with larger transactions.
​
FY19 EBITDA guidance was upgraded to $21m+ (previously $20m-$21m) and up 20%+ on pcp. CGR are trading on a FY19 pe circa 11X. This is a significant discount to the takeover offer of competitor Scottish Pacific at 18.7X.

Traffic Technologies (TTI) AGM Update

Traffic solutions and software provide Traffic Technologies (TTI) released a detailed AGM update. 

In relation to its traditional activities, TTI noted that it remains the largest supplier of traffic signals to the Australian and New Zealand markets, with exports being made into the UK, Middle East and Asian markets. It is also the only national manufacturer and supplier of road signs to the Australian market.

TTI also highlighted the progress it is making in commercialising its “Smart Cities” technology. This includes its proprietary software Smart City platform “TST”, which enables road authorities and local councils to connect their street lighting together with other infrastructure assets to a central control system via a secure private network.  Authorities in NSW, QLD and VIC are now using this platform. The TTI platform has the potential to monitor traffic flows, waste management, parking availability and monitoring of government infrastructure. In relation to FY19, TTI advised that they are expecting new export sales of the platform into TTI’s current customers in the UK and Hong Kong, where live trials will commence shortly.

In addition to its proprietary software, TTI provides the hardware to support the platform. In its AGM address, TTI noted during FY18 it completed the deployment of over 15,000 intelligent IoT nodes, and 8,500 “smart” street lights. The “smart” street lights have sensors in them that have a number of different powerful monitoring functions, as well as controlling the brightness of the street lights and reporting failures.

With a market cap of $15m and an underlying FY18 NPAT of $1.5m, and a promising outlook on the back of its increasing recurring and diversified revenues,  we believe TTI continues to trade on an undemanding multiple.

UCW Limited (UCW) AGM update

Tertiary education provider reported a pleasing AGM update, indicating it was making good progress in building a growing education business of scale.  

For the first time UCW provided revenue guidance,  expecting their existing businesses to generate between $13.5 million and $14.5 million in revenue in FY19 (FY18: $12.5m). This growth is driven by international student enrolments which are up 20% compared to the PCP, as a result of the national rollout of the 4Life course offering and the opening of UCW’s newly opened Melbourne campus. Management also advised that letters of offers for next year courses are currently up 30%, so depending on conversion of acceptances, organic growth for the year for international students could be north of 20%.

With the contribution from its recent acquisition IKON, UCW expect total FY19 revenue to be between $19 million and $21 million. This is important as we have previously mentioned that revenue of ~$20m marks the point at which the business has the scale to be producing ~10% EBITDA margins. If we adjust for UCW’s 25% investment in Gradability (which offers Professional Year Program to international accounting and information technology graduates from Australian higher education institutions), then UCW’s enterprise value is ~$10m. 

Easton Investments (EAS) AGM update

EAS provided a positive update with significantly more disclosure than previous presentations. The company is making some key investments in training, but is also enjoying tailwinds from the changes in the wealth management industry. 

While stopping short of providing FY19 guidance, pleasingly the company disclosed strong growth in key metrics and medium term targets including:

• Sept Q1 19 Care FUM $1.025B. (pcp $707m ) 
• An increase in Limited Authorised Representative’s (LAR) to 660 by June 2019 (pcp 406). To put this in context, each LAR pays $4.5K in subscription revenue
• Solid growth in Accounting subscribers to 3,000 by June 2019 (pcp 2,669)
• An increase Training Hours  to 43,500 by June 2019 (pcp 37,632). Easton are now offering training to the wealth sector 

Using these key metrics, expected cost synergies from GPS Wealth, and part year contributions from recent acquisitions, we are modelling FY19 EBITA to be greater than $6m (vs 4.4m in FY18) leaving EAS on a PE of 7x.

Clearly the Easton board are keen to see increases in the share price. We understand that much of the selling is by the GPS Wealth vendors. 

The Chairman statement included two positive developments:

• No formal guidance, but based on year to date trading, directors are flagging a lift in dividend
• A buyback has been announced. Directors believe the current price is undervalued (reflected by their on-market buying).

Janison Education Limited (JAN) AGM Update

Janison Education’s AGM highlighted the company’s focus on driving strong growth across its target sectors and geographies. JAN advised it is working toward securing a number of contracts and projects which will deliver long-term growth in recurring platform income particularly in its Assessment division. In particular the company noted the following opportunities:

Schools Assessment – development of new assessment capabilities for an existing partner to improve delivery of formative and summative assessments and the completion of new, innovative technologies to provide an advanced solution for low band-width and offline delivery in Australian schools; 
​
Language Testing – expansion of testing services including the addition of mainland China based services to increase growth potential of products in the region;  

Higher Education Assessment – completion of a foundation project in Singapore and the development of new functionality to support further expansion into the Higher Education sector in Australia, Singapore and the UK; 

Certifications – completion of a foundation project for a State Government agency which includes the development of new strategic intellectual property which will support further expansion in this market segment.

In relation to guidance, JAN advised it expects platform and content (ie recurring) revenue growth in excess of 30%, with more than 30% of revenue sourced from offshore. For the first quarter of FY19, JAN recorded revenue of $5.1m, which puts it on track to deliver FY revenue of more than $22m, which represents a 30% uplift from FY18. 

Blackwall Limited (BWF) Update

Prior to its AGM this month, property manager and work-space operator BWF, announced a number of upcoming transactions, that, in our view, will have a very positive impact on BWF.

1. BWF manages (and is the largest unitholder) in the ASX listed property trust BWR. BWR is receiving a capital injection through the effective merger with the unitholders of a fund that is winding up (as a result of a property sale). This will result in BWR’s asset base growing by $110m (from $272m to $382m). BWF is entitled to a 0.65% management fee on gross assets, which sees BWF’s recurring annual management fee growing by $0.7m to $2.5m.
2. The transaction will also result in various indirect and direct property assets currently owned by BWF being purchased by BWR. This will mean a cleaner balance sheet for BWF, as well as generating $15m cash for BWF.
3. As part of the transaction the net asset value of the property trust (BWR) has been independently valued at $1.55 per unit. BWF owns 10.8m BWR units, equating to a look through value of $17m. Combined with the cash referred to above, and deducting current debt of $2m, generates an enterprise value of $20m ($55m less $17m less $15m plus $2m). We believe this materially undervalues BWF’s two operating businesses (its property funds management business (that generated $6m in management fees and $8m in one-off fees last year), and its fast growing WOTSO work-space business (that grew its revenue over 50% to $10m last year).
4. BWR (property trust) will exit the transaction having ~$100m cash to fund further property purchases, including, as we understand, a focus on buildings to house WOTSO workspace businesses, that will provide further management income to WOTSO/BWF. BWF also receives a 2% acquisition fee on properties that BWR purchases.