Corum Ltd: Why We Will Not Be Investing Anytime Soon

This story features CORUM GROUP LIMITED. For more info SHARE ANALYSIS: COO

by Shuo Yang (Investment Analyst) and Carlos Gil (CIO) at Microequities Asset Management

Recently we came across Corum Limited ((COO)), a software company specialising in real estate rental payments and pharmacy dispensary. The company has displayed consistent revenue over the last few years, although we acknowledge there has been no growth. Margins have also been exceptionally strong, circa 30% on a normalised EBITDA basis, which is outstanding even for a software company. Delving deeper, we noticed quarterly cash flows were consistently robust and capex was minimal. The balance sheet was pristine and had improved over time with no debt and cash as of 1H13 in the region of $6 million. At the time we first came across the company, its market capitalisation was $37m and was on a profit before tax multiple of 6 times. We also liked the scalability aspect of being a software company. To us, on paper, it ticked all the boxes of being a potential investment candidate. 

The next step of our due diligence process involved contacting the company and requesting a phone conversation and face to face meeting with management. This process allows us to better understand the background of the company, its operating environment and whether we feel comfortable with the executive team running the company, as they are effectively the managers of our investment dollar and our client’s hard earned dollars. It took numerous phone calls over about two weeks before we could get hold of the managing director, already not a very good investor relations sign. Once we eventually did manage to make effective contact we were told by the CEO “We are a subsidiary of a private company (Lujeta Pty Ltd) and do not provide selective briefings to analysts or investors”.

Further digging from our side revealed Corum was majority owned by Lujeta Pty Ltd, a private investment vehicle owned by one of the directors on the Corum board. In 2011, it would also appear that Douglas Halley, one of the independent directors on the board of Corum at the time, was facing a motion to be removed from the board from Lujeta. In a CFO World article published on 11 November 2010, Mr Douglas Halley said, ‘he felt he was the only truly independent director’ and that in his view, ‘it is my exercise of true independence as a director that is the reason for [the motion]’.

The reluctance of management to speak with us and the lack of independence on the Corum board sounded warning bells to us. It’s not to say that there is anything wrong with the company, its future prospects or the management but we have to follow our own investment philosophies. We perceive a greater risk with a non-independent board, a large controlling shareholder and management that seems to be unwilling to engage with the investment community. Corum Ltd might 57.9% owned by Lujeta Pty Ltd, but 42% of the shareholders are not related to Lujeta Pty Ltd. Effectively, 42% of the salary of the CEO is paid by those non Lujeta shareholders, and they have a valid right to engage with management. Furthermore, a public listed CEO should understand that part of his role as an executive of a public company entails liaising and engaging with investors, shareholders and the investment community at large. One wonders if the CEO takes call or provides private briefings to Lujeta Pty Ltd and its officers and if so, is this really treating all shareholders equally? Shouldn’t the minority shareholders interest be treated fairly? For Microequities Asset Management it is not only important companies possess strong business models and a valid investment case, the conduct of their key executives must befit that of a person who upholds the best interest of all shareholders, not only those that control 57% of the company. 
 

Microequities Asset Management is a value investor specialised in Australian microcaps. Its flagship fund –the Deep Value Microcap Fund– has a 5 star Morningstar rating. For further information visit microequities.com.au. Content included in this article is not by association the view of FNArena (see our disclaimer).

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