Well, another reporting season has come and gone. After sifting through literally hundreds of microcap results my assessment was that it was a very average reporting season for microcaps. A few standouts with good beats to guidance and strong outlook statements but the vast majority came in soft or missed totally.
No surprises then when you look at the performance of the S&P/ASX Emerging Companies Index which returned a negative 0.35% for August. As opposed to the S&P/ASX Small Ordinaries Index which returned a healthy 2.49% in August. The bigger end of town seems to be benefiting from decent Australian GDP growth and world GDP growth. This growth doesn’t seem to have really trickled down into microcap land as yet.
Alcidion Group Limited (ALC: ASX) had a busy end to the year with the finalisation of their 2 acquisitions and the announcement of either new contracts or contract extensions with new and existing customers respectively. Post a busy FY18 it leaves ALC with a much bigger business providing clinical and patient management platforms to medical facilities in AUS, NZ and the UK. This year’s acquisitions were all synergistic to ALC’s existing business and transformative for the company. Now as a caveat transformational acquisitions in my experience don’t have a great track record. However, we can’t let our biases cloud our judgment in the here and now. To that end, I think if ALC can get these acquisitions bedded down and integrated successfully (a real live risk) over the course of FY19 I think it will make the ALC look interesting moving forward. ALC has early runs are on the board in this regard and I await an update on progress with above at the AGM.
BuildingIQ Inc (BIQ: ASX) showed significant and pleasing progress in getting to cashflow breakeven and profitability. All metrics were up and heading in the right direction. However, the most eye-catching figure in their results was even though revenue was up 71% compared to the PCP opex expenses only increased by 12%. Demonstrating some of the inherent scalability and operating leverage of their 5i building management platform. While there were some one-off costs associated with its expansion into the greenfield building market, initial results have been solid with 29 of the 91 buildings added in the half being greenfield buildings. The nice part of BIQ’s results is they give a few clear measurable objectives for the half and then measure up how they have done. All objectives were met or exceeded this half and it will be interesting if they can deliver again in the next half. More microcap companies should follow such reporting in my view. BIQ still has a little way to go but it appears to be on the right track and I will be monitoring their progress with interest.
Universal Biosensors Inc (UBI: ASX) continued to show steady if albeit slow progress. The company does, however, look like one which has a nice bit of value and optionality built into it. Its main blood glucose testing product LifeScan One Touch Verio which is a JV with Johnson & Johnson continues to be its bread and butter. A JV milestone passed last year where J&J now have the option to buy out UBI form the JV at 2X the annual revenue of the Lifescan product in the year the option is exercised. 1H18 revenue from the LifeScan product was AUD$12m (up 5% on the prior year) implying a buyout price of circa (2 * AUD$12m * 2 = AUD$48m) compared to the current market cap of circa AUD$41m. Now J&J just offloaded the business unit the JV sits in, to private equity for USD$2.1b with the deal only concluding the end of the year. In the interim quarterly services fee will need to be paid by the JV business unit to UBI. If these quarterly services fees keep rising so does the option takeout value. UBI has a USD$15m term loan due 1st of July 2019 hanging over their heads but with USD$19.6m in the bank and set aside for the payment that leaves them with circa USD$4.3mil free cash post payment and no debt outstanding. This residual cash balance equates to 15% of its current market cap. UBI has also launched another product in the market in a JV with Siemens and is working on other products. Given its proven ability to bring products to market through JV’s with leading medical device companies, the Lifescan buyout option and current net cash levels, from a value perspective it seems interesting.
ASX Microcap Takeovers
Ok, I am calling it, as 3 is definitely a trend right? Just as we were about to pull up stumps for reporting season we saw a board supported bid come in for Zenitas Healthcare Limited (ZNT: ASX) from a PE-backed consortium which includes some of the company’s board of directors at a 34% premium to the previous share price. I have heard from a few ZNT long- term followers that this price, despite board support undervalues the latent value in the business so possibly one to watch as this bid might not be game set and match just yet.
This bid for ZNT is on top of bids for Mituala Group (MUA: ASX) and Spookfish (SFI: ASX) which we have talked about previously.
This suggests to me that international buyers/PE investors are seeing value in ASX microcap companies where equity market investors are not. We have now seen a bid in a non-tech space and these things tend to build a head of steam. I wonder if we are starting to enter a period where we see undervalued ASX listed microcaps attract more attention from outside buyers and end up getting taken private.
If boards and management feel they are not getting “adequately valued” versus local or international peers then why wouldn’t you take the money.