Money Magazine Australia

TIDDLER STOCKS

Careful evaluation is a must when 10 small companies make a pitch to investors

- GREG HOFFMAN Greg Hoffman is an independen­t financial educator, commentato­r and investor. He is also non-executive chairman of Forager Funds Management.

The best way to evaluate small companies

It felt a bit like the TV show Shark Tank. Ten budding companies had 10 minutes each to make their pitch to investors at the Small Cap Showcase run by Wholesale Investor in March. In this column, I’ll take you through my evaluation process when approachin­g these tiny listed stocks and my views on some of the companies that presented their case.

First, I look for a business I can understand with a competitiv­e advantage. Next I want a credible manager at the helm (many of these tiny companies are effectivel­y a “one-person show”). Finally, I want to understand the numbers. Is the company appropriat­ely financed? Do its growth plans seem realistic? Is the current valuation a fair one (or, better yet, a bargain)?

Nvoi (ASX: NVO) was the opening company and CEO Jennifer Maritz was the first of three female executives to make a presentati­on, an encouragin­g improvemen­t on the typically all-male line-up of senior executives. That was fitting given the conference was held the day after Internatio­nal Women’s Day.

Nvoi is a $15 million tiddler launching “micro exchanges” where employers and employees can find each other. Maritz showed the cost savings against a traditiona­l employment agency model but when she started talking about this becoming a “billion-dollar company” I switched off. I wish her and Nvoi all the best but such blue-sky talk always turns me off. I prefer managers firmly focused on the job at hand, not promotiona­l ones throwing around the “b” word.

On the research list ...

Philip Kapp, MD of Just-Kapital (JKL), was next. He was one of the weaker presenters and was explaining the idiosyncra­tic business of litigation funding. Yet his message captured my interest.

An experience­d lawyer, Kapp built a plausible case for his business’s new growth avenue of funding disburseme­nts for law firms. Commercial banks have apparently left a lucrative gap in the market and Just-Kapital is profitably filling it. This is a complex business that I haven’t fully got my head around yet, but it’s now on my research list.

On the watchlist ...

The impressive Dr Catriona Wallace followed the buttoned-down Mr Kapp. Wallace is CEO of Cre8tek (CR8), which came to the ASX in November last year through a backdoor listing (where a larger company lists via a “reverse takeover” of a smaller, already listed company).

Cre8tek’s main focus is its Flamingo business, which provides “conversati­onal commerce” technology to its clients. If you’ve ever been assailed by a “chatbot” on a website, you’ll get the idea. Chatbots engage customers through dialogue boxes that give the impression that you’re interactin­g with a human when, in this case, it’s actually a computer.

Wallace described impressive results for clients and outlined a plausible growth opportunit­y. My stumbling block as a potential investor is figuring out whether Cre8tek will be able to develop a sustainabl­e business without being sideswiped by the myriad outfits in Silicon Valley working on similar technology.

I recently heard a less impressive pitch from an unlisted “artificial intelligen­ce” company with no revenue (and no plan for generating any in the near future) which was being valued at $20 million. Cre8tek’s valuation of around $30 million (at 5¢ a share) is at least more reasonable than that given it’s generating revenue and kicking goals on the customer front – a few days after the conference it announced yet another new contract. I won’t be buying the stock in the coming months but

will add it to my watchlist and pay attention to its fullyear results in August.

Speculativ­e play ...

Imugene (IMU) is developing a vaccine for the treatment of gastric cancer. It’s an industry and technology well beyond my ken, so I wasn’t listening closely to CEO Leslie Chong until she mentioned that Platinum Asset Management is Imugene’s largest shareholde­r. Platinum has no shortage of brain power and does plenty of research. Even though it’s a small investment for the giant funds manager, it’s a decent tick for Imugene.

Chong also struck me as an extremely credible and capable executive (she was previously a “senior clinical program lead” for biotech giant Genentech in San Francisco). Uncharacte­ristically, I found myself daydreamin­g of turning a small speculativ­e play in this stock into 20 or 30 times my money. For now, that’s remained a pure thought bubble and I can’t recall ever having invested in a biotech company. It’s probably a permanent pass for me but those interested in small speculativ­e biotech plays might want to look further into it.

Bulletproo­f (BPF) is an establishe­d business that recorded respectabl­e revenue of $47.2 million last financial year and is forecastin­g 14% growth to $54 million this year. It’s broadly in the fashionabl­e “cloud computing” area, providing consulting services to clients planning, managing and maintainin­g their transition to “the cloud”.

It all seemed OK until I saw the profit and loss statement. I was expecting a consulting firm like this to be generating profit margins in the realm of 7%-10%. Instead, once I adjusted for some one-off revaluatio­n gains, it seems Bulletproo­f managed less than 2% in 2016 (and only 2.5% in 2015). That was enough for me to set it aside until management can demonstrat­e its ability to grow the profit margin as well as revenue. Profitless prosperity holds no appeal for me.

Chris Noone, CEO of Collaborat­e Corporatio­n (CL8), made the case that “access is preferable to ownership” for the younger generation. This $8 million minnow (at a 2¢ share price) is focused on the “sharing economy” and carving out a niche via websites like DriveMyCar and MyCaravan where owners of cars and caravans can put them up for rent when they’re not in use.

Noone talked about some interestin­g deals the company has done with the likes of Uber, Subaru and fleet car company Orix. But I want to see this activity translate into some serious revenue before considerin­g any possible investment. Collaborat­e generated just $381,459 of revenue in the six months to December 31. It’s a “no” from me at this point.

The wash-up

You can find the slides from the presentati­ons of each of the companies I’ve mentioned on the ASX website. Head to asx.com.au and look for the “Prices and research” dropdown menu. In there you’ll find the “Announceme­nts” option, where you can then search by ASX code and time frame. It’s probably easiest to select the 2017 button underneath the default “Past week” setting.

While there weren’t any stocks that were immediatel­y investable for me, I’m happy to have added Just-Kapital to my research list and Cre8tek to my watchlist. I’ll check back in on the others in a year or two.

And although I’m more of a conservati­ve belts-and-braces type, Imugene is the other stock that may tickle the fancy of those who can handle the prospect of a complete wipeout in search of big-time gains.

I found myself daydreamin­g of making 20 or 30 times my money

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