Small Cap Reporting Season Wrap Up

The Small Cap team gives a quick wrap up of three stocks that had mixed reporting seasons.

Kip McGrath Education Centres (KME)
A well-executed birdie 

At its 2018 AGM, Kip McGrath, Chairman of KME, a leading tutoring company, noted that its FY18 result (41% increase in profit) was the seventh consecutive year of increased profits. Further, based on results to date, FY19 would likely continue that trend. At the time, we suggested EPS should increase by around 20%. Well, it looks like that initial assessment will prove to be far too conservative. 

In H1, revenues were up 18% driven by an increase in marketing spend. A key feature of the result was the fall in royalties after KME bought back a number of master franchises and are now servicing the franchisees directly. This trend should continue over the next year. Online tutoring rose 50% off a low base. Overall, KME reported a 50% increase in EBITDA and a 41.3% increase in NPAT. The dividend is also up 50% on last year. 

KME results are seasonal and we expect a stronger second half. Kip McGrath stated in the outlook statement “we expect this increase in EBITDA and Net Profit to continue in the second half”. 
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With a strong balance sheet and proven IP and systems, KME is very well positioned to continue to take market share as the leading national player in what is very much a cottage industry. 

​​CML Group Limited (CGR)
A solid par 

CGR provides invoice and equipment finance to Australian SMEs through its brand Cashflow Finance. It is the number two player in invoice factoring after Scottish Pacific. In last month’s report, we outlined what we would be looking for in the report: 

• That invoices purchased are tracking to full year guidance ($1.7b); 

The invoice purchases for the half year came in at $838m. Our analysis indicates that the company should come in close to that target. 

• The margin on invoices purchased reverts to Pre-Thorn book levels; 

Gross Margins fell. The company stated that it …“anticipates an opportunity over time to improve on current Gross Margin of 2.3%”. We will keep a close eye on this metric in future reporting periods 

• The company announced the entry into invoice discounting at the AGM. While we expect this to be initially loss-making, we will be monitoring how this new business is tracking; 

As predicted, the division was loss-making, but is expected to break even during 2H19. 

• Growth in the Equipment Finance division;

Receivables increased from $14m as at 30 June 2019 to $21m as at 31 Dec 18. 

• The level of arrears has not deteriorated. 

Bad and doubtful debts did increase broadly in proportion with the invoices purchased. Aging analysis was not provided. 

The company presented new charts that highlight the growth potential of the company. With new business segments and digital transformation of its business, CGR are able to widen the size and type of lending they perform. This will allow for a 300% increase in the total addressable market. 

Given the nature of the business activities (lending), growth usually comes with the prospect of a capital raise. However, in this case, the company has sufficient headroom to expand its invoice volumes by more than 30%. 

Pleasingly, CGR reaffirmed its forecast of an Underlying NPATA in FY19 of $9m+, which will be up 38%+ on FY18. This leaves the company trading on a PE of around 11x with plenty of scope for growth. 

Overall, this was a par result with a couple of items to monitor. We will be catching up with management in March where we will discuss progress, and we remain excited about the growth prospects of the business. 

Pioneer Credit Limited (PNC)
A double bogey

Following a positive AGM, we were expecting financial services company Pioneer Credit to report, as it historically has, a strong report ahead of market expectations. Unfortunately, the market reacted negatively to the PNC report, where there was two key issues:
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• Despite cash collections being up 10% to $50.5m, an undisclosed issue with ‘operational strategies’ resulted in collections being $4.5m short of PNC’s $55m H1 target. It has been suggested that this may relate to an unsuccessful technology-based collection strategy. PNC has advised that these liquidations are not ’lost’ and will be recovered in subsequent periods. However, this shortfall in revenue had a flow on impact on H1 EBITDA (flat) and NPAT (down 37%). PNC reiterated its full year guidance (i.e. no FY19 downgrade) but will likely require a heroic second half effort to meet this guidance. 

• PNC is also working through a potential accounting policy change. PNC has historically accounted for its portfolios at fair value, having used this method (which has been signed off by its auditors) since it listed on the ASX in 2014. The alternative position now being considered is for portfolios to be accounted for at cost and then amortised. Whilst we remain comfortable with fair value accounting, and ultimately this is a non-cash issue, this uncertainty will continue to impact PNC until a resolution is reached. 

Our position in PNC is under review, and we are meeting Management this week to better understand a number of outstanding concerns.