Well, the first quarter of FY19 is behind us and it has been tough for microcaps. As I alluded to in my newsletter last month, reporting season overall was pretty insipid as far as microcaps were concerned.
This is reflected in the performance of the index with the S&P/ASX Emerging Companies Index returning -2.50% for the quarter. As opposed to the S&P/ASX 200 Index which returned +1.53% for the quarter. So large caps have outperformed microcaps on a very recent basis.
Now, we must not get too despondent it is only the first quarter after all. As to how the active microcap managers performed in Q1FY19 or quarterly microcap fund performance review will be published later in October once all the numbers have been published by the relevant managers and we can collate the data.
Cellnet Group (CLT: ASX) announced an acquisition on the back of a solid set of results in August and this has seen the share price really take off in September. A mobile and electronics distribution company it’s not a real high-quality business but they have been quietly managing their debt (just about net cash at June 30 FY18) and optimising their categories and customers in recent times.
The company announced a reasonably chunky acquisition of a gaming software and accessories distributor for $6m ($4m cash & $2m in CLT Shares) With another $2m in cash possible if earnouts are achieved over the next 2 years. Given CLT’s management have guided that the acquisition made $2m EBIT on $30m of revenue it will add nearly an extra 50% to CLT’s EBIT figure for FY19.
The share price has popped on the news obviously but integration and synergies will be the key to watch for throughout the rest of FY19. Distribution businesses are all about the scale and associated economies that come with it. After its run-up to circa $0.50c, it looks fairly valued but I am interested to see how the integration goes and what the additional scale and possible synergies will do for overall profitability.
Legend Corporation (LGD: ASX) also displayed similar price action to CLT above. The company announced that EBITDA was running 70% ahead of the PCP in the first 2 months of FY19. Now, a word of caution of here it only the first two months but still a significant data point. Factoring in this update and the recent acquisition in Feb18 I think LGD can make around $9m (FY18 $6m) in NPAT in FY19. Now, this business has never been a high PE multiple businesses.
However, putting it on a PE of 11 times (which I don’t think is unfair) would give you a market cap of close to $100m versus the current post runup market cap of $80m. LGD gives a reasonable 4% fully franked yield and any yield in microcap land is welcome. Like CLT the integration of the recent acquisition is key and managing the increased debt that came along with it. However, LGD has reported strong cash generation over many years thus the debt shouldn’t be overly burdensome. The trading update certainly makes it an interesting story to follow in FY19.