Microequities Rising Stars Conference

Like fishermen, most value investors will tell you about the 10-bagger that got away. For me it was Flight Centre, which I sold after it had increased 150% on its way from below $4 in March 2009 to $40.

In the quest to find the next 10-bagger, along with several colleagues I recently attended the Microequities Rising Stars Conference where we heard presentations from seven companies. You’ll find our initial thoughts below, but if you want an in-depth discussion then tune in to the recent podcast edition of Doddsville.

BigAir Group (BGL) – Presenter: CEO Jason Ashton

BigAir is a $100m internet services company. It has attached satellite dishes to around 140 communications towers and large buildings, much like the Sky satellite dishes that provide racing at your local TAB or pub.

About 70% of its customers are businesses in large office buildings, with the remainder made up by buildings housing students. Yes, this is a service even students can afford, if they club together. Installation costs between $1,500 to $5,000 and satellite dish prices are falling rapidly.

That’s far cheaper than fibre, a market dominated by Telstra, where 1km costs $8,000 to lay. It’s all about density. That’s why companies like BigAir have had success in lower population areas and why fibre dominates in CBDs. As long as BigAir’s dishes have a line of sight, they can deliver the high speed internet with guaranteed performance. That suits heavy users like students and businesses unable to rely on mobile services.

The company is highly acquisitive, but Ashton appeared to know his business well. BigAir could become a takeover target itself, but we can see a time when BigAir’s fixed internet service faces obsolescence as fibre services expand and mobile services improve.

There’s another threat, too. Data price falls are being offset by higher usage, of videos for example, but the trend in data pricing is clearly down. It’s hard to imagine that won’t affect BigAir’s fortunes eventually.

We’re currently researching the mid-cap telco sector in companies where product life spans are more predictable. Expect that research over the next few weeks but don’t expect any more from us on BigAir. NO VIEW.

Blue Sky Alternative Investments (BLA) – Presenter: CEO Mark Sowerby

Yes, the name. Bit of a turn off isn’t it? Let’s try and put it aside for the moment. Blue Sky is a fund manager aiming to capitalise on the increasing popularity of alternative assets like water rights, in addition to the more typical activities of private equity and hedge funds.

The company was formed in 2006 and its funds have returned 15.6% a year since. Given the impact of the GFC, that’s an impressive number. Blue Sky has $250m of assets under management and is aiming to double that over the next 12 months. Within four years it wants $2bn under management.

On management’s $20m estimate of net profit, in four year’s time that would equate to a share price above $10 (a potential nine-bagger from the current price of $1.14). But that’s easy to write, and say, than it is to do. Too many funds perform well when they’re very small but trail off with larger amounts of money.

Clearly, the company is ambitious, hoping to tread the well-worn path of other giant alternative asset managers like the US-listed companies The Blackstone Group, KKR and The Carlyle Group. Sowerby actually compared Blue Sky to these organisations in the early nineties.

Blue Sky trades on a 5.3% dividend yield and you might want to do your own homework if you’re looking for the next Magellan Financial Group. But with a market cap of just $37m and very low liquidity, it’s too small for us to touch. NO VIEW.

Runge Pincock Minarco (RUL) – Presenter: Executive GM Kieran Wallis

This tongue twister reflects the company’s origins, dating back to 1968; Runge produces mining software; Pincock Allen & Holt provides mining advisory services in the Americas; and Minarco-MineConsult is an independent advisor for investment banks and other mining investors in the Asia-Pacific region.

The company has produced over 11,000 mining studies, has been involved with over 75% of mining IPOs in Hong Kong and 90% of Australia’s coal production relies on the company’s software. These are big numbers for a $60m company.

While the software maintenance contracts provide steady revenue at very high margins, the company is currently unprofitable due to the lack of new mining investments. Meagre profitability should be achieved next year after numerous layoffs.

There could be more pain to come as the company is leveraged to mining activity, but it’s one of for the watchlist as its software is vital to large mining operations around the country. NO VIEW.

Cash Converters International (CCV) – Presenter: CEO Peter Cumins

At over $400m, Cash Converters was the largest company to present, despite its share price falling over 30% since the update on 21 Mar 13 – (Avoid ­ $1.30).

Cumins’ sometimes-humorous presentation included the fact that the average store produces a profit of $500,000 before tax, and said France and Spain had been bright spots. Is Cash Converters the ultimate hedge against apocalypse I wonder?

While new government legislation in Australia recently entrenched the small loans industry, compliance can now involve analysing three months worth of customer bank statements for a $200 loan. The fall in short duration loans triggered the recent share price fall, but there’s an upside. Many customers are now accepting longer-term loans because the paperwork is virtually the same.

Cumins also explained the company had led with its chin in the UK, initially suffering large default rates due to the antiquated UK banking system and monthly pay cycle. Weekly pay cycles in Australia give customers more opportunities to repay their loans before their financial position deteriorates further.

A smart new product ‘carboodle’ was also discussed. This allows customers to purchase a car and make one monthly payment that includes all the on-road and servicing costs. The cars are also fitted with chips so they can be recovered easily in the event of theft or default.

The price-to-earnings ratio of around 12 doesn’t seem demanding given the company’s growth prospects, but we’re prepared to wait for a larger margin of safety given the risks of lending to less creditworthy borrowers and higher unemployment. AVOID.

Prime Financial (PFG) – Presenter: CEO Simon Madder

Prime Financial provides financial advice for over 4,000 clients, generally aged over 40 years with investable assets of $500,000 to $1m. The company’s tiny market value of $16m is dwarfed by $1bn of assets under advice.

With stakes in nine accounting firms and partnerships with more than 20 others, the accountants focus on mundane tax issues while Prime provides higher margin financial advice. Madder believes the company can increase margins, as it’s currently pricing its services too low.

Prime only buys 50% of accounting firms and demands a $200,000 upfront payment to ensure incentives are aligned. Such arrangements offer significant operating leverage because new advisors aren’t required each time a new client walks through the door.

Still, joint ventures can end badly when key people depart and the agreement no longer serves the interests of both parties. If one firm was supplying Prime with many clients, a large portion of revenue could potentially disappear overnight.

Madder is clearly focused on getting the incentives right and Prime could capitalise on the number of firms currently dealing with succession issues. It’s a tiny business that could benefit from scale and industry tailwinds. To those prepared to do their own homework, there may be something in it. NO VIEW.

Clover Corporation (CLV) – Presenter: CFO Darren Callahan

According to the company’s chief bean counter, Clover Corporation (28.6% owned by Washington H Soul Pattinson) is a $100m ‘nutraceutical and medical products’ company. To the layman, it recycles tuna oil from manufacturing canning operations for use in infant formula. The company turns a small profit but is aiming to expand by selling specialist products to help with premature births, where infants can suffer from a raft of developmental problems.

There’s a sense of the lotto ticket about this stock, reliant on it discovering a medical breakthrough. And there are other risks. Blackmores has been a stellar performer since Pan Pharmaceuticals went out of business due to quality and safety concerns in 2004, although Callahan firmly denied that there could be any health and reputational issues with the company’s production facilities that are inspected and audited monthly.

Clover Corporation is too risky for us but it may have a place in a well-diversified portfolio of speculative stocks. NO VIEW.

Vocus Communications (VOC) – Presenter: CEO James Spenceley

With a share price up 23% since No call on Vocus from 17 Sep 12 (No View – $1.70), Spenceley was keen to highlight that revenue and profit of this voice and data networks provider has been growing quickly. What he failed to mention was that earnings per share has been stagnant due to capital raisings needed to invest in expensive data centres.

He also showed a chart of rival companies boasting superior performing share prices and suggested Vocus would catch up. As a 10% shareholder, we’d suggest Spenceley is preparing Vocus to be acquired as part of a consolidation of the sector.

Still, there is potential here. Remarkably, the first customer of each new fibre roll out effectively pays for the entire investment. Each additional customer is all cream. That helps offset the capital intensity of the data centres and means free cashflow should improve over the next year or two as new data centres are completed in New Zealand and Melbourne.

Operationally, the company is performing well, but we’re put off by management’s promotional style. For now we’re prepared to wait for a cheaper share price and won’t commence official coverage until we’re ready to pull the trigger. NO VIEW.

Please note, if you’d like to see the financials of these companies, visit the company home page on our website and click on the ‘financial data’ tab. Announcements and dividend information is also available in the same place.