Company Interview / Down-and-out small caps making a comeback

Key points:

Significant comebacks in tech and finance sectors, notably Zip (ASX: ZIP) and Nuix (ASX: NXL)Beamtree (ASX: BMT) shows strong growth; cautious optimism for Appen (ASX: APX) despite AIConcerns for Audinate (ASX: AD8) and Johns Lynn Group (ASX: JLG) regarding future earnings growth

Dean Fergie from Cyan Investment Management sees a resurgence in previously struggling tech and finance businesses. Small caps show a mix of performances this reporting season, with some surprising investors positively. Dean mentions firms like Zip (ASX: ZIP) and Nuix (ASX: NXL) making significant comebacks due to cost-cutting and improved profit margins.

Dean highlights significant growth for companies like Beamtree (ASX: BMT) in the medical software sector, with impressive share price upticks. He sees cautious optimism for long-term sustainability for businesses like Appen (ASX: APX) despite AI competition.

Dean also discusses a surprising downturn for Audinate (ASX: AD8), an audiovisual tech firm, and raises concerns about the future earnings growth for Johns Lynn Group (ASX: JLG), traditionally seen as stable.

Full unedited transcript below:

0:11

Let's, uh, get a little more on what we've heard from reporting season. Our next guest saying there has been a significant resurgence in previously down and out tech and finance businesses to get a little more of what we've seen. Dean Fergie joining us from Scion Investment Management. Dean good to catch up with you again. Thanks for joining us. With us biz. All right. Let's first get the the outlook overall then of what you've seen I guess particularly with the focus on small caps.

0:36

Yeah it's been I mean I guess always the reporting says it can be pretty volatile. I think the All Ords was pretty much flat for August, but we saw a huge disparity of of reports. I think there are no businesses that did incredibly well and saw some really, really big uplifts in share prices and some others that disappointed. But I think broadly, you know, investors probably went into the reporting season pretty nervous and I think by and large probably came out feeling somewhat reassured about the future. Companies seemed to be fiscally responsible at the moment. So overall, I think it was a pretty a pretty decent reporting season. All right. Well, let's get a little more specific then. I was just mentioning there in terms of particularly tech and and and finance tech finance if you like, what have you seen in that space.

1:24

Yeah. What's been really interesting is, is the sort of strong performance of a number of the, the financial lenders, the sort of, you know, obviously buy now, pay later was, was was a big thing a few years ago and kind of went off the people's radars for a while. What we've seen in the background is these businesses in terms of consumer lending, I look at businesses like before, Pay Harm and zip have been really, really aggressively cutting costs and they've still seen pretty strong, um, consumer demand for their products. And interestingly, I think in a in a kind of a volatile interest rate market. They've been able to kind of increase their margins as well. And what's that meant? What that has meant with these businesses are doing really, really big throughput in terms of lending is that there's been a lot of, um, profitability dropping through to the bottom line. I think, um, you know, zip they do something like, um, $900 million in revenue. They saw $100 million turnaround in their

2:24

EBITDA. So these businesses were particularly, you know, previously high cost, um, bad debts and, and really marginally profitable have turned into what, look, you know, for the moment being, um, pretty profitable businesses. And we've seen some really big upticks in their share prices in the, in the past month or so.

2:44

What about some of the other smaller tech companies we've seen with the likes of Newegg, which has made something of a comeback, of course, given the the troubles that it's had.

2:54

Yeah, I mean, that was the case. You saw, um, a number of these businesses like Newark and Appen, apon, which were, you know, many, many years ago were were marquee tech stocks have had terrible performances. They're kind of dragging themselves off the floor at the moment. And again, with investor expectations that are really, really low in terms of these businesses, um, management that are pretty focused in turning the ship around, being, you know, strong and cost cutting, seeing some small up creases in, in revenue means that you're seeing some pretty strong stock price performances. I think investors tend to like just completely dismiss these stocks for a while. Um, and it's only when reporting season comes that investors kind of look at the numbers go, you know what? They're actually doing a little bit better than we thought. Um, I've pretty low valuations. So we've seen some really strong performances. One other one we really like is the little medical software business called Bean Tree. Again, this is a business that, you know, was, you know,

3:54

people were quite supportive of a few years ago. Got in the doldrums are performing at the bottom line really, really well. Strong forecast uplift. So that was another business. We saw it sort of uptick, you know, 40 or 50% in the last month. So it's there's a fair bit of good news out there

4:10

when you just in terms of open Jane. Um, longer term though, you're confident it still has a viable business model given what we're seeing the developments with I.

4:22

Yeah. Look, I mean, I think given it seems to be probably not one of the smartest of the businesses out there, given the advances we've seen through through marquee businesses like ChatGPT. Um, I think there is some question over its long term sustainability, but this is still a business that's doing almost a quarter of a million bucks in revenue. Um, is close to profitable at the moment. You know, do I think this is going to go back to being a $40 stock again, nowhere near it. But we're seeing a business that, you know, went from sort of $40 to, I think it was about 50 or $0.60 and has come back and is trading sort of like $1.50 or so. It's um, it's probably one that's worthwhile. Have you look at just from a completely down and out sort of business with, with what? They've still got a pretty commercial business, I think. Now, speaking of market darlings that have come back down to earth ordinates, what do you see what's going on there at the moment?

5:22

Yeah, that's been, um, an interesting one. I mean, this was sort of an audio visual technology company, and it's been a market darling on very, very extended multiples for a long period of time, which hasn't necessarily stopped it going up. I think these businesses, when they have momentum, it doesn't really matter what the valuation is. If they're continuing to perform, they'll do well. They had what you definitely consider as a shock announcement in early August, where they basically said next year because there's a move from hardware to software in terms of, you know, I've technology. They're not going to be doing the revenues growth. They thought EBITDA might even be a little bit down. So this was a business that was priced for growth is not over offering the short term any growth at all. And so we saw it pull back I think it went from kind of maybe a recent high of 22 bucks back to about 9 or 10. So it's it's more than halved. Um, again, this is a business still on a pretty stretched multiple. It's owned

6:22

kind of 40 times enterprise value for EBITDA. So I think there's a little bit of risk there unless FY 25 as they're suggesting, it's just a bit of a blip and they head back to growth. But that's one I'd be probably cast in my own pretty carefully in portfolio because I think there's some risk there. Similarly, John's Lynn group and that's um, there is some concern about its earnings growth going forward.

6:48

Yeah. That's right. I mean, that was another business that again, was was what seemed like it'd be very, very secure Defensive business. They're involved in, um, a lot of insurance repair work, and they've been seeing sort of, I think, annualised growth of 23 to 24% for the last 4 or 5 years. So that's one of those businesses. You just go, look, that's I can I can set and forget and I just worry about it. And this year, for a number of reasons, they've kind of done flat revenue and profitability in terms of their business as usual business. So I think, you know, we have businesses going from growth to maybe kind of just cash cow kind of businesses. They don't demand the same multiple in the market, and people tend to be quite quick to sell them. So that was one that's, you know, again I mean look at the graph there. It's up 100% over sort of 5 or 6 years. But it's off 50% last 6 to 12 months. So it's another one that I

7:48

think really investors will have to carefully assess their medium term growth prospects, because at the moment they're just not showing that.