Small Cap Reporting Season Highlights

This story features AIRTASKER LIMITED, and other companies. For more info SHARE ANALYSIS: ART

Tim Boreham, with some help from Ausbil, lines up his small-cap favourites from the August reporting season in Australia.

By Tim Boreham 

Not for the first time, a hotly-anticipated profit reporting season hasn’t quite delivered a definitive message about the market’s prospects, although the small to mid cap industrials have fared ok.

Put another way: if soaring interest rates and input costs spell pending doom, CEOs are doing a convincing line in deep denial.

 “So far, small cap earnings results have not been anywhere near as bad as expected,” says Arden Jennings, the portfolio manager for small caps and microcaps at funds manager Ausbil.

He adds: “we remain cautious on companies with significant debt levels which are now facing headwinds from rising interest costs. The market has begun to reflect this in earnings forecasts.”

What caught our eye in the torrent of numbers? Like raindrops on roses and whiskers on kittens – and with apologies to Julie Andrews – here are a few of our favourite things.

Airtasker ((ART))

The odd jobs platform is an overlooked beneficiary of inflation, given a strong uptick of the average price for a task.

The Airtasker Wage Price Index – yes, there is such a thing – showed an average 10.5% rise in the cost of pick-up and delivery tasks in the June quarter, while carpenters nailed down 18% more.

Rising fuel and other input cost mean the toilers are unlikely to be better off, but with Airtasker clipping the ticket on higher volumes, the bottom line benefits are apparent.

Airtasker reported June quarter earnings of $9m, up 31% on gross market value (that is, turnover) of $54m (up $38m).

In pushing up Airtasker shares by 22% on the day, investors were happy to overlook cash outflows of -$3.5m.

Good job!

MyState ((MYS))

Investors yawned, but the Tassie-based financial institution outperformed its peers with a 25% surge in home lending and deposits, to $6.8bn and $5.6bn respectively.

The home loan growth was three times the system average.

MyState posted a $32m net profit, it’s second best ever. Another way of stating this is that earnings fell 12% from last year’s record $36m.

But we quibble.

We like MyState because it is surfing the revival of the island state which is rapidly shedding its reputation as an economic laggard to the natural home of professional, boutique whisky drinking, art loving telecommuters.

By virtue of its 2015 merger with the The Rock Building Society, MyState also has a strong presence in the Rockhampton region and is leveraged to booming cattle prices.

A special mention as well to the Bundaberg-based Auswide Bank ((ABA)), the smallest ASX-listed bank that has consistently grown earnings and embraced technology more ardently than a skivvied Silicon Valley geek.

Auswide grew net earnings by 8% to a record $26.1m and expanded its loan book by 7% to $3.85bn.

“We are nimbler than our bigger competitors and we are able to quickly seize opportunities in the competitive banking landscape, including the roll out of new technologies which have provided new distribution possibilities and efficiency benefits,” chimes CEO Martin Barrett.

Kelly Partners Group ((KPG))

Boom or bust and inflation or recession, companies still need decent strategic advice or simply a helping hand to guide them through the morass of compliance.

With an SME focus, the Sydney based chartered accounting chain is as close to a no-brainer as one could get – on the proviso that some listed accountancy groups have failed in the past.

Since listing in 2017, the acquisitive Kelly Partners has doubled its operating business to 31 and grown its client base from 5300 to 13500.  

Kelly’s full year net earnings grew 22% to $13.3m, with revenue surging 33% to $65m.

The company hasn’t issued any new shares since its IPO, but last year did double debt to -$31.4m.

But don’t worry – they’re accountants and it all adds up.

Kelly shares have surged 22% over the last month and are five times higher than the $1 IPO price.

Mach 7 Technologies ((M7T))

This one’s moving at warp speed, with record sales of $33m for the FY22 year, up 30%. Operating cash flow has also improved by almost 500%, to $6.7m.

The US-focused Mach 7 provides medical imaging software and is often mentioned in the same breath as home-grown hero Pro Medicus, whose imaging tools have been adopted by a slew of august medical institutions such as University of California and University of Vermont Medical Centre.

The difference is that Mach 7 is valued at $160m, including $25m of cash, while Pro Medicus is worth $5.5bn.

Given the vastness of the small tech sector, investors have a cornucopia of choice and they can be – and must be – selective as to where to plonk their precious capital.

Johns Lyng Group ((JLG))

Floods? Fires? Famine? Perhaps not the latter, but natural disasters are manna from Heaven for Johns Lyng, which focuses on clean-up rebuilding jobs.

The Ausbil team notes management’s “incredibly resilient” growth outlook, especially in the clean-up of recent northern NSW and southeast Queensland floods.

Johns Lyng reported a 40% net profit boost for the full year, with revenue up 57% to $895m. Management highlighted the eastern seaboard floods, our costliest disaster with $4.4bn of insured losses (and rising).

Johns Lyng shares have bucked the soggy market trends, rising by more than 20% over the last 12 months.

The shares have gained sevenfold since listing in October 2017, so kudos to its boat, plane and helicopter-loving founder Scott Didier.

The key risk, we guess, is that we don’t have any more floods, fires, cyclones or hailstorms. Fat chance of that.

Life 360 ((360))  

This one’s not so much our favourite thing at fluffy kitten level, but a value tech play if management can reign in its losses as promised.

The San Francisco-based Life 360 is in the family protection game, which means using tracking devices to keep tabs on youngsters – in the nicest possible way.

In the case of an accident, for example, the app will call for an ambulance before the victims even realise they are injured (14,349 times in the June half, so stuff sure does happen).

In a company-transforming move, Life 360 late last year paid circa US$170m ($240m) for the tracking device outfit Tile and raised $280m of equity.

In the first (June) half, Life 360 generated revenue of just under US$100m and management guides to US$245-260m for calendar 2022. The company also lost an underlying -US$30m in the first half, with full year guidance of an adjusted -US$35-38m.

This deficit compares with the previous year’s -US$13m, but to be fair subscription-based companies need to spend money before they reap the revenue.

Life360 has lost more than half its value year to date – including 8% on Monday alone – with its $900m market cap supported by US$79m of cash.

The stock should be worth more if management can fulfill its assurance of “sustainable positive cash flow” by late 2023.

This article does not constitute share recommendations and readers should seek their own financial advice from a property qualified party.

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