ComOps Limited ("COM") - Profitable Micro-cap

[steve fleming]

http://www.comops.com.au/site/index.cfm?display=15390

Seller of business software and services.

Market cap= $4.5mil

NPAT profitable the last 7 years.

Revenue of $16m - includes a rolls royce client base (Coke, Toshiba, Toll, Dulux, Freedom, Sealord....)

Sales (and EBIT) dropped in FY10 (from $17m to $16m) but growth expected to resume in FY11.

No debt.

Had a market cap of $35 million pre GFC, so at $4.5mil you are getting pretty good value for money.

What is interesting is last night one of the larger shareholders, MOAT Investments, has called for 3 of the 4 COM directors to resign.

MOAT Investments is the investment vehicle of Cyril Jinks, a senior Bell Potter stockbroker. MOAT subscribed to 7mil COM shares @ 20 cents a couple of years ago, so at 3.9 cents currently is sitting on a pretty healthy loss, and understandably wants something done.

There is no question that board rejunivication is needed, and this may provide an opportunity for a board restructure which may then be followed by some other value adding corporate initiatives.

Given its recurring income stream ($7m pa), the quality of its client base, its company owned software and it industry credibility, $4.5m IMO represents very good value for money.

Will be interesting to see the outcomes of the board manoueverings....

[JBmurc]

yeah sounds good do they pay a dividend...or just keep growing their cash balance or high overheads etc

[Lizard]

Thanks Steve, one to watch. Though, a quick glance through the accounts gave me the impression it was a bargepole job. But as you say, maybe some shareholder manoueverings might make a difference. Though the cases I've seen where this has happened have taken a bit of time to clear the decks before progress can be made.

Have to say, if there's one thing that really irritates me in a directors report it is when they say something like this one: "The increase in earnings was a direct result of management's continuing efforts to lower overheads and also...." when the actual fact is that operating profit fell 50% and it's only the tax adjustments mentioned in the "and also" part of the sentence that produced the earnings increase!

Btw, on quick look, I couldn't figure why the 2009 balance sheet had been restated? The differences were more than superficial.

[steve fleming]

yeah sounds good do they pay a dividend...or just keep growing their cash balance or high overheads etc

Hi JB,

Last couple of years the surplus cash has been used to fund acquisitions and repay bankdebt (which is now all paid off).

No dividends yet...and probably unlikely for a while IMO

[steve fleming]

Thanks Steve, one to watch. Though, a quick glance through the accounts gave me the impression it was a bargepole job. But as you say, maybe some shareholder manoueverings might make a difference. Though the cases I've seen where this has happened have taken a bit of time to clear the decks before progress can be made.

Have to say, if there's one thing that really irritates me in a directors report it is when they say something like this one: "The increase in earnings was a direct result of management's continuing efforts to lower overheads and also...." when the actual fact is that operating profit fell 50% and it's only the tax adjustments mentioned in the "and also" part of the sentence that produced the earnings increase!

Btw, on quick look, I couldn't figure why the 2009 balance sheet had been restated? The differences were more than superficial.

Hi Liz,

Agree, re the tax comment, it assumes shareholders are mugs and can't read accounts.

Balance sheet restatment arose because of some errors around treatment of leases....the previous auditor was subsequently replaced!

I do think for $4.5 mil you are getting a heck of a lot of bang for your buck here.

[Jaa]

Hey Steve this company's operations cover parts of my day job, though I have never heard of them. Anyway a few comments.

The width of their product range is ridiculous for their small size. They should consolidate around their workforce management suite of products and drop their ERP offerings.

Their sales force automation offerings look badly out of date requiring PDAs! So I wouldn't count on the recurring income from these products continuing. Could all be replaced by iPads.

The founder is due to retire in July 2012 which isn't a good sign. Small IT companies and comops seems no exception are very founder focussed.

They say their future is in cloud based products which is the right strategy for them. I doubt they have the right people and money to achieve it.

Technology One provides a useful counterpoint as they are also investing heavily in their new cloud based platform. They are spending $25m/yr to comops $1m on R&D. Also compare Comops broad-spectrum cloud approach to Xero's more focussed approach.

Also can't believe they paid $300k to a bunch of Kiwis for nothing more than a strategy that said to grow, Comops should acquire other small Australian software companies :eek2:

[steve fleming]

Hey Steve this company's operations cover parts of my day job, though I have never heard of them. Anyway a few comments.

The width of their product range is ridiculous for their small size. They should consolidate around their workforce management suite of products and drop their ERP offerings.

Their sales force automation offerings look badly out of date requiring PDAs! So I wouldn't count on the recurring income from these products continuing. Could all be replaced by iPads.

The founder is due to retire in July 2012 which isn't a good sign. Small IT companies and comops seems no exception are very founder focussed.

They say their future is in cloud based products which is the right strategy for them. I doubt they have the right people and money to achieve it.

Technology One provides a useful counterpoint as they are also investing heavily in their new cloud based platform. They are spending $25m/yr to comops $1m on R&D. Also compare Comops broad-spectrum cloud approach to Xero's more focussed approach.

Also can't believe they paid $300k to a bunch of Kiwis for nothing more than a strategy that said to grow, Comops should acquire other small Australian software companies :eek2:

Hi Jaa,
Thanks for those comments - good to get some industry insight.

I agree, Workforce Management would appear to offer the business the most upside. It contributes the majority of COM’s rev and profit...also i see that the last 3 acquisitions have all been in the workforce management space.

I do think that for it to be profitable for so long, and to win the customers that it has, means that it must have some competitive advantages.

Where and how it is going to grow is another story though..........!

[steve fleming]

I think COM is interesting because of a couple of things:

1 - Bang for your buck

Basically, for the price of a Shell ($4.5 m/c) , you are getting a profitable established business .
No doubt the business does have issues (as Jaa alluded to), however to maintain its profitability over the years and to secure such a range of high profile customers suggests that COM is doing something right.
For a market cap of $4.5m, while there is a possibility of further short term downside, logic suggests that when you compare COM to what else you get for $4.5m on the ASX, you are getting lots of bang for your buck here.

2 - Corporate Manoeuvrings

The current directors are probably lacking the drive/experience to really maximise the potential here.
The nominated directors appear to be more “corporate savvy” and experienced in transactions.
The founding shareholder has 35% and is looking to exit...if he is removed as Director, his shareholding is potentially in play.
MOAT is sitting on a large loss and is probably keen for a generous rights issue to average down his holding.
So lot of interesting ways this may play out.

I allocate up to 20% of my portfolio to what I call “Special Situation Plays”....such as back-door plays, and other interesting opportunities (that would not ordinarily meet my normal investment criteria/requirements) but that have multi-bag upside if they come off....this fits in nicely to that part of my portfolio.

[percy]

Suspenend.
failure to lodge their full year a/cs on time. They may need to look for up to date business software and services supplier so as they can get their a/cs out on time.they may need to look at XRO.in NZ.

[steve fleming]

Thanks Steve, one to watch. Though, a quick glance through the accounts gave me the impression it was a bargepole job. But as you say, maybe some shareholder manoueverings might make a difference. Though the cases I've seen where this has happened have taken a bit of time to clear the decks before progress can be made.

Have to say, if there's one thing that really irritates me in a directors report it is when they say something like this one: "The increase in earnings was a direct result of management's continuing efforts to lower overheads and also...." when the actual fact is that operating profit fell 50% and it's only the tax adjustments mentioned in the "and also" part of the sentence that produced the earnings increase!

Btw, on quick look, I couldn't figure why the 2009 balance sheet had been restated? The differences were more than superficial.

Bump......(for Liz!)

[Lizard]

Thanks Steve - I didn't even remember that I'd looked at it in March last year.... forum posts a handy substitute for memory sometimes!

[steve fleming]

4c out today, and essentially all the cash from the cap raising have been applied towards the repayment of legacy ATO debts...and the balance sheet will still look terrible

another cap raising will be required by the looks of it with operating cash still negative

credit to the directors for keeping the company out of administration, but in hindsight that may have actually been the best course of action to get the balance sheet in order

[Lizard]

Somewhat surprised to see Pie Funds have become substantial holders. Guess their trade is looking good on paper though, since their average entry seems to be 3cps and last trade was at 4.6cps

[percy]

Chart looked fantastic.
Fundamentals look terrible?