Micro Cap Rising Stars – QMastor

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By Greg Peel

Microequities is an Australian financial adviser specialising in in-depth research of listed “micro caps” – those companies of low capitalisation too small to register on ASX indices or to attract research coverage from leading stockbrokers. In June Microequities hosted its Rising Stars conference, at which selected companies presented their wares. FNArena was invited to attend, and over a period of time will provide conference highlights. This is the first.

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QMastor ((QML)) listed on the stock exchange in 2001 and is currently capitalised at around $11m on a 27c recent share price. The company provides supply-chain software and solutions for the global mining, port, power generation and bulk commodity industries, encompassing bulk material tracking, mine logistics management, mine planning and scheduling, stockpile management, stockpile modelling, grade control, blend management, mine reconciliation, process plant management, commodity marketing, contract management, systems integration, mine consulting and training services.

QMastor counts among its current customers BHP Billiton, Rio Tinto, Fortescue Metals, Xstrata, OneSteel, Peabody, Anglo Coal and Ok Tedi Mining, and others. The company can currently boast penetration of around 17% of Australia’s mining companies, servicing an average 10% of those company’s businesses. (In the case of the big diversifieds, there are many more businesses to tap into belonging to the one client). As far as the world is concerned, QMastor has only begun to scratch the surface. Recent contract wins have been achieved in Indonesia, PNG, New Zealand, New Caledonia and South Africa, and North and South America are in the crosshairs.

Until the commodity boom began this century, mining companies were mostly focused on using available software to control input costs. Now that the rush is on to maximise export capacity, and infrastructure management has become a burning issue, the demand for output management software has ballooned. Prior to specialised software being provided by companies such as QMastor, most companies ran their mines/ports/power stations using purpose-built Microsoft Excel spreadsheets. Smaller companies still rely on Excel today.

“People are knocking our door down,” claims QMastor CEO Trent Bagnall. “We are receiving around thirty qualified enquiries from prospective customers every month, and we are selecting to present to around five or six”.

Moreover, since its inception QMastor has not lost a customer to this day, other than those no longer active. Of the last five tenders put out by mining companies for requisite software solutions, QMastor has won every one. Yet it is not the cheapest on the market. And the company operates amongst respected competition from the likes of MinCom and SAP.

The model works on providing a software package that is 80% generic, or “off the shelf”, and 20% tailored to specific needs. The company currently has seven purpose-built generic packages to suit various customers, the last of which has just been released. The new Horizon APS product is a bulk commodity supply chain planning and scheduling tool.

A tailored package is sold to a customer only once at one site, and the average sale at present ranges in the order of $0.5m to $1m. Thereafter QMastor provides servicing and software updates, and attracts an ongoing servicing fee of around 20% of the sale price per annum on a typical five-year contract. It has not adopted a Microsoft model of creating new versions of software, or completely new programs, and then forcing customers to “re-buy”. As one can envisage, the downtime risk involved for a mining company switching software is not an economic set-back that a company might afford to take, and the QMastor continuous service model acts as a barrier to entry.

In FY05 QMastor booked a profit of $203k on revenue of $2m. In FY06 the company spent heavily on research & development and began to ramp up its marketing budget. A loss of $85k on revenue of $1.9m in FY06 reflected that spending, but FY07’s profit of $25k on $2.7m showed the benefits beginning to accrue. In FY08, the company has posted a first half profit of $373k on a first half revenue of $2m. In this period the company added substantially to its forward order book, which is now at a record level. Given the number of recent enquiries and the level of tender responses awaiting decision, the company expects to substantially break that record in the second half.

Earnings per share in first half of FY07 were 0.24c and 0.93c in the first half of FY08. Guidance in the full year FY08 was for 1.0-1.5c EPS on a profit of $400-600k. This guidance is expected to be met or exceeded. A full order book bodes well for an even stronger FY09, Bagnall notes.

At the end of the first half the company had a cash balance of $770k and no debt, with net assets totalling $5.5m. It has no plans at present to issue any further capital.

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