Cash Is King For Small Caps

Small Caps | Oct 31 2022

This story features AGENCY GROUP AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: AU1

Tim Boreham notes small caps with cash on the balance sheet are the safer bet compared to ‘pre-revenue’ companies, and highlights several examples.

-‘Pre revenue’ plays without enough cash will wither away
-Capital raised pre rate hikes a benefit
-Valuation de-rating offers opportunity

By Tim Boreham

Charles III might be Britain’s new reigning monarch, but in the realm of small caps cash is very much king in the harsh fund raising climate.

Put simply, ‘pre revenue’ plays without enough cash will wither away, no matter how compelling their story may be. That’s the circle of life in the perennial pattern of bull and bear markets.

Fortunately, many companies took advantage of the amenable capital raising conditions and have stored some nuts away for winter. At the same time, declining valuations mean that many stocks are trading only modestly above – or even below – their cash backing or net tangible assets.

Here are a few that have caught your columnist’s eye. Bear in mind that investors fundamentally are rational, so there might be a good reason for the steep discounts.

The Agency Group Australia ((AU1))

From its Perth stronghold the listed realtor has expanded into the eastern states – northern Sydney’s leafy ‘burbs and – more recently Launceston (by way of acquisition).

The Agency is seeking to shake up the old agent franchise model with a more direct hiring approach that confers more generous commissions on the individual agents.

The thinking is that the current franchises interpose too many management layers and costs, including unrequired office space.

The Agency reported a net profit of $1.59 million for the year to June 30 2022, compared with a previous $1.85 million loss. Adjusted underlying earnings gained 26%, to $3.85 million.

Revenue surged 24% to $72.7 million, with gross commission income rising 27% to $102.5m.  The firm sold 5709 properties worth $5.9 billion.

The Agency’s balance sheet has improved markedly, with a previous $12 million debt to Macquarie now whittled down to $5 million. Taking the $8.2  million cash into account, the company had net cash of $3.2 million- a handy war chest for more agent acquisitions or investing in organic growth.

The company conservatively estimates the ‘real’ value of these assets at $22.8 million, compared with the recognised value on balance sheet of $10.1 million.

The dampener on the valuation is five million $1 convertible notes held by Peters Investments, which are repayable in January 2026 or exercisable at 2.7 cents per share (depending on certain conditions).

Still, with a market cap of a little over $15 million, this one’s a true renovator’s delight.

Orexplore Technologies ((OXT))

Orexplore develops hardware and software allowing miners to scan orebodies and samples in situ and thus more efficiently and effectively.

The company listed in January this year, having demerged from Swick Mining.

The company’s turnover was a modest $237,000 in the 2021-22 year, but in July the company won a $2.35 million contract with OZ Minerals to assay 30,000 metres of historic core samples at one of its mines.

On a bum note, gold mining client Wiluna Mining entered voluntary administration in July, with Orexplore recognising $162,067 of non-recoverable income in the 2021-22 accounts.

Orexplore posted a -$3.7 million loss, up from -$1.1 million so that’s one likely reason the stock is out of favour.

The company’s trading at a -17% discount to its net cash of $10.6 million (as of June 30 2022).

On another metric, the company’s net tangible assets of 12 cents compares with the share price (at last glance) of 8.5 cents.

Pharmaxis ((PXS))

The fibrotic diseases specialist offers extraordinary bang-for-one’s-buck as it pursues treatments for conditions including Parkinson’s disease, myelofibrosis and skin scarring.

The company already sells Bronchitol, an approved treatment for cystic fibrosis although most investor interest lies with its emerging clinical programs.

Recently the company struck a deal with Parkinson’s UK, by which the organisation funds a Parkinson’s disease trial to the tune of $5 million over 18 months.

Carried out at sites in Australia, South Korea, Taiwan and the US, a 24 patient phase II myelofibrosis study began dosing in March last year and initial results are promising.

The company also has a promising clinical trial underway for burns scarring, overseen by legendary Perth burns surgeon Professor Fiona Wood at Perth’s Fiona Stanley Hospital.

After a $10 million placement this month, the company has cash of $30 million and a $37 million market cap. The company made an underlying loss of -$1.3 million last year, but reckons it should be profitable this year as cystic fibrosis clincis open post pandemic.

Our only objection is the company has been around for a long time and so it’s been a slow burn, if you’ll pardon the pun.

Still on life sciences, Universal Biosensors ((UBI)) specialises in portable finger prick blood test devices, to manage conditions such as diabetes and coagulation.

The company is also developing tests for cancer and viral biomarkers and has launched an all-in-one wine assay platform for vignerons to test six elements – including sulphur dioxide and malic acid levels – in their barrels.

Universal Biosensors has $28.4 million in net cash and is currently valued at $54m. We hasten to add the company lost -$5 million in the September quarter on $679,000 of sales, so this one’s a play on some decent top-line growth coming through.

Spacetalk ((SPA))

The dreaded founder’s syndrome has struck again, with the board “terminating the employment contract” of CEO and 21-year veteran Mark Fortunatow.

Formerly known as MGM Wireless, the company focused on schools communications systems, such as for recording absences. It then pivoted to its kids’ wearable tracking devices, Spacetalk and changed its name to such.

Spacetalk has made great progress on the top line with last year’s revenue climbing 37% to $20.7 million, $18m of which is attributable to the wearables growth.

Spacetalk is now under the interim stewardship of former Urbanise CEO Saurabh Jain and we’re guessing the cost cutting will be a numero uno priority.

Valued at less than $10 million, the company ended the year with $5.6 million of cash but lost -$6.57 million, compared with -$1.79 million previously.

At that run rate, the company won’t be cash rich for much longer.

Senetas Corporation ((SEN))

Similarly, the high-speed encryption specialist and erstwhile market darling lost a cool -$10.8 million in the 2021-22 year, which on paper would wipe out its $10.7m cash kitty if repeated.

But there are some intricacies to consider beyond the reported bottom-line number. One is that the core Senetas business was profitable to the tune of $1.6 million, with the red ink attributable to the -$12.7m loss incurred by the Votiro Cybersec business.

Senetas holds 61% of the Israel-based Votiro, which is a leader in “disarm and reconstruction”. This is not a military term but refers to taking apart digital documents and then reassembling them without any viral nasties, which sounds like something hacking victims Optus or Medibank Private should have been doing.

Excluding non-cash items, Senetas’s ‘real’ loss was a more palatable -$2.7 million.

Senetas last week said that Votiro had increased its new customer pipeline by 60% since July this year, with annual recurring revenue expected to double in calendar 2022. What’s more, the business is expected to be cash flow break even by July 2023.

Overall, Senetas’ revenue is humming along nicely, up 9% to $25.1 million in 2021-22. Votiro is the growth engine that will determine whether the company should be worth more than its beaten-down $49 million market cap (albeit circa 20% higher over the last week).

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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CHARTS

AU1 OXT PXS SEN SPA

For more info SHARE ANALYSIS: AU1 - AGENCY GROUP AUSTRALIA LIMITED

For more info SHARE ANALYSIS: OXT - OREXPLORE TECHNOLOGIES LIMITED

For more info SHARE ANALYSIS: PXS - PHARMAXIS LIMITED

For more info SHARE ANALYSIS: SEN - SENETAS CORPORATION LIMITED

For more info SHARE ANALYSIS: SPA - SPACETALK LIMITED