We define a nanocap as a company with a market capitalisation of under ~$30m. These companies typically get very little coverage from analysts or interest from the investment community, and are often where we find some of the most interesting opportunities. A feature of smaller, early stage ASX companies is that they are required to release an Appendix 4C every quarter. This document details the quarterly operating, investing and financing cashflows of a business, and alongside this, we usually get a commentary of how the business is performing. For us, we look to scour these reports for clues that these often-embryonic companies are starting to grow into more investable opportunities. Below, we provide some thoughts on four companies that released interesting updates for the quarter ended 30 June 2023.
Ticker: TAL
Sector: Application Software
Market Cap $22.3m
Cash $1.0m
Talius Group Ltd – solving our aged care issues
Talius provides a suite of technology enabled care solutions to the aged and disability sectors across multiple verticals, including retirement living, residential aged care, home, and community settings. We met with the CEO, Graham Russell, while he was travelling on a sales trip so he was able to showcase the Talius software platform and the different kinds of devices it can integrate with. Notable among these are bed and toilet sensors, which enable the Talius platform to actively monitor and identify unusual behaviours, empowering nurses to take proactive measures to ensure patient well-being.
The key drivers for Talius are regulatory standards, demographic tailwinds, and the need for efficiency in care. While small, Talius is now a cash generative business. At this stage, most of the revenue is from reselling from lower margin devices. Talius’ platform ARR is less than $2m and the business needs to continue to drive new device sales to stay cashflow positive. On that front, this seems quite feasible given some large providers (e.g. Australian Unity) have already deployed their platform in several of their facilities and a full rollout would significantly enlarge the revenue base. For Talius, one of the challenges lies in sourcing the appropriate technical personnel to facilitate the deployment of devices in care facilities, where the implementation process can span up to a year.
There are many players in the sector with other ASX listed players (Careteq (CTQ), Intellicare (ICR), Austco (AHC)) and other non-listed competitors. It is not yet clear to us which companies will be the winners, but we will follow Talius with interest.
Ticket: COO
Sector: Application Software
Market Cap: $27.5m
Cash: $18m (estimated)
Corum Group – sale of under-performing software business
COO has agreed to sell its pharmacy software business to Jonas Group, a subsidiary of Constellation Software Inc (TSX:TSU) for $6.25m. We previously highlighted the possible sale of Corum’s pharmacy software business as being an important valuation catalyst. This sale, along with a resolution of some ongoing litigation, will leave COO with a cash-rich balance sheet (>$17m). The Corum board can now explore capital management initiatives, and focus on driving growth in its remaining higher quality operating business, PharmX, a B2B ordering gateway between pharmacies and suppliers.
The pharmacy software business is intensely competitive with Corum unable to raise prices, while having to add government mandated functionality to the product. With limited pricing power, a static market, and further capital investment required, we think the decision to sell this (less interesting) part of Corum is sensible.
In addition to the cash received, there are other benefits to the sale including:
- -Corum’s software business required significant ongoing capital investment – we would expect Corum’s reported free cashflows to improve following the sale.
- -As Corum is no longer competing with other pharmacy software vendors, PharmX can be seen as an independent service provider.
- -Selling to a new entrant keeps the pharmacy software vendors suitably fragmented. Again, this keeps the PharmX business in a strong position as there will be less incentive for POS vendors to develop their own version of PharmX.
- -It will allow management to focus on Corum’s PharmX and emerging PharmXchange businesses.
We expect Corum to provide more clarity on its total cash balance and the underlying profitability of the PharmX business when it reports in August, which should highlight the significantly improved fundamentals here.
COO is held with the DMXCP and DMXASF portfolios.
Ticker: 8CO
Sector: Application Software
Market Cap $17.8m
Cash $1.8m
8common – free cash positive quarter with contracted revenue building
Expense management company 8CO reported a very strong final quarter (revenue up 85%) with a 65% increase in revenue during FY23 and a 24% increase in SaaS Revenue. After a number of quarters of negative free cash as its federal government contract ramped up and capital expenditure remained high, 8CO was pleasingly able to deliver positive free cash this quarter. Importantly contracted revenue has increased three-fold as 8CO onboards new government clients onto its platform. As at 30 June 2023, only 32k of the potential 110k to 170k of government users have been onboarded, providing 8CO with a further two years of embedded growth in both implementation fees and recurring revenue as it rolls out its platform to additional government departments.
The market will be looking to see that this quarters’ result is repeatable, but with growth set to continue, we expect 8CO to generate free cash flow quarters from here, which should produce a meaningful free cash result for FY24. We think that the low point in 8CO’s cash position was 31 March 2023, and increasing cash from here should dispel the view that 8CO is cum-raise. We also note that 8CO has a listed investment of ~$1m that it is able to liquidate. Our view is in fact 8CO is more likely to look at capital management initiatives from here, than it is to raise equity.
COO is held with the DMXCP and DMXASF portfolios.
Ticker: RCW
Sector: Systems Software
Market Cap $6.3m
Cash $11.5m (after sale)
Rightcrowd– Trading on a negative EV
Rightcrowd, a developer of physical security, safety, and compliance software, listed on the ASX in 2017 at a 30c IPO price with revenue of just over $4m and a market cap of $40m. Since then, revenue has grown to nearly $16m, yet they announced they are selling their core physical security product for just $13.5m. After the sale, the company will be left with its Access Analytics software with has an ARR of just $400k, together with cash of $11.5m.
Rightcrowd has been investing for growth (i.e., loss making) and has been reliant on the market to fund that growth. With the capital market effectively closed for them and debt on the balance sheet, the board decided to accept the offer to sell the business. This is a terrible outcome for RCW investors with the value destruction quite remarkable. It is a good lesson to investors and boards that an adequate cash balance to fund growth is critical. Don’t rely on capital markets because sometimes they are closed.
For those ASX investors in the sub $100m market cap space, there has been significant volatility and underperformance compared to larger companies over the last 12 months. This has created interesting value opportunities such as occasions where companies trade with a negative enterprise value (i.e. a company’s net cash on its balance sheet is greater than its market capitalisation). This is the case with RCW at the moment. It is quite remarkable as at the current share price you are effectively paying 55c for $1 cash held today. But that cash today is likely to be spent on the ongoing growth of the Access Analytics software. Given the track record of the board and management over the last 6 years, the market is sceptical of the future capital allocation here. We feel that the remaining business is too small to be ASX listed, and that shareholders should be telling the board to return what is left of their cash.
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