Profitable Micro-caps (Revenue greater than $10m)

[steve fleming]

I take it you mean HDX?

A bit of a dump on HDX today, does someone know something in advance...

well the result turned out to be ahead of guidance and consensus estimates.

Strong EBITDA margin expansion (from 37% to 42%)
Huge market share expansion (from 40% to 47%)
Strong cash flow generation ($5.4m prior to P&E funding (growth))

Capital management plan (After a period of funding the immediate growth opportunities, then surplus cash to repay debt then to fund dividends (presumably when it starts paying tax again))makes sense.

With references to a ”a conservative balance sheet” and their explicitly stated capital management plans suggest that there will not be any imminent capital raising, which I suspect some may have been expecting.

Assume a little H2 growth, HDX should easily do $12m NPAT for FY13, so trading on a forward PE of about 4.

[steve fleming]

Yep, you are probably right, the recent share price behaviour certainly suggests there is some maneuvering for a cap raise.

They should be able to make their $750k monthly repayments from operating cash (the $5.3m you noted was for 6 months, and with $12m estimated 2H EBITDA, 2H cash flows should be higher), however where the market takes a view (often without fully understanding the intricacies of the business) that a balance sheet is over leveraged, it is often best to bite the bullet and de-gear the balance sheet.

Personally, with debt ($28m) less than 1.5x EBITDA ($22m) and with an ICR of over 8x (EBITDA $10.1m / interest of $1.2m) i would not consider HDX to be highly geared, quite the opposite in fact, but if that's the view of the market, I am not going to argue against it.

Its a classic growth funding quandary - do you debt fund growth and avoid dilution and maximise returns to equity holders? or do you equity fund growth with a more conservative balance sheet to appease the market, but which provides equity holders with a lower return?

Anyway, with announced revenue growth of 62%, EBITDA growth of 83% and NPAT growth of 162%, and a number of brokers clambering over HDX for a piece of the action, a cap raising shouldn't be too difficult to get away at a reasonable price!

[percy]

Yep, you are probably right, the recent share price behaviour certainly suggests there is some maneuvering for a cap raise.

They should be able to make their $750k monthly repayments from operating cash (the $5.3m you noted was for 6 months, and with $12m estimated 2H EBITDA, 2H cash flows should be higher), however where the market takes a view (often without fully understanding the intricacies of the business) that a balance sheet is over leveraged, it is often best to bite the bullet and de-gear the balance sheet.

Personally, with debt ($28m) less than 1.5x EBITDA ($22m) and with an ICR of over 8x (EBITDA $10.1m / interest of $1.2m) i would not consider HDX to be highly geared, quite the opposite in fact, but if that's the view of the market, I am not going to argue against it.

Its a classic growth funding quandary - do you debt fund growth and avoid dilution and maximise returns to equity holders? or do you equity fund growth with a more conservative balance sheet to appease the market, but which provides equity holders with a lower return?

Anyway, with announced revenue growth of 62%, EBITDA growth of 83% and NPAT growth of 162%, and a number of brokers clambering over HDX for a piece of the action, a cap raising shouldn't be too difficult to get away at a reasonable price!

Bit off the subject, but what why were you up in the middle of the night?

[steve fleming]

Bit off the subject, but what why were you up in the middle of the night?

Very observant of you Percy!

I'd like to say i'd just got home from a big Monday night out, but in reality, the baby woke up and refused to go back to sleep, so I was just staying awake with her!

[mark100]

On another note - MNY had a good earnings report too, with substantial growth. Another cap raising to expand further, in addition to the debt funding recently secured. Subscription price of $5.20. Any thoughts?

Think you mean SIV raising at $5.20? On SIV - good result and looks like a potential upgrade is possible later in the FY. Near $6 I view is as being a little pricy after such a strong run and with more shares to be issued at $5.20

On MNY - ROE is dismal, less than 10% I think. NPAT is growing due to an expanding equity base. The funding facility might be a game changer. I don't hold but it's worth watching

[mark100]

I bought in the little sell off a few weeks back but sold when it got into the $5.90's. So no share purchase plan for me which is a bumma

[OneUp]

EPD looks interesting - trading on a prospective PER of 6.5x post the recent acquisition, even assuming no improvement in the core business. That is, $17m market cap / $2.6m NPAT in FY13 (i.e. $1.3m NPAT from core business + ~$1.3m NPAT from Conducive based on stated $2m EBIT less 30% tax and assuming 6% interest on the first $3.2m tranche). If you assume some improvement in the core business (they delivered 500% NPAT growth in FY12 over FY11, albeit off a low base) then it could be on ~5x PER.

EPD delivered 1H13 NPAT of $1.2m (adjusted for one off acquisition costs) and off to a "strong start" so far in 2H13 and with expectations of "stronger second half earnings", so all looks on track. Part of this stronger outlook no doubt will come from the Conducive acquisition which is "running ahead of expectations", but only delivered EBIT of $0.5m in 1H13 compared to full year forecast of $2.0m at time of acquisition (note 1H13 only included 4 months trading from Conducive). They also talked up the likelihood of acquisitions to "accelerate growth" (perhaps accompanies by a capital raising?). Operating cashflows also improved significantly on prior periods.

FY13 prospective P/E ratio more like 10-13x now given EPD's doubled since initial post but still easy to see significant further upside.

[Lizard]

EPD delivered 1H13 NPAT of $1.2m (adjusted for one off acquisition costs) and off to a "strong start" so far in 2H13 and with expectations of "stronger second half earnings", so all looks on track. Part of this stronger outlook no doubt will come from the Conducive acquisition which is "running ahead of expectations", but only delivered EBIT of $0.5m in 1H13 compared to full year forecast of $2.0m at time of acquisition (note 1H13 only included 4 months trading from Conducive). They also talked up the likelihood of acquisitions to "accelerate growth" (perhaps accompanies by a capital raising?). Operating cashflows also improved significantly on prior periods.

FY13 prospective P/E ratio more like 10-13x now given EPD's doubled since initial post but still easy to see significant further upside.

Thanks OneUp and well picked! Think my only holding in this is via Pie Funds (and my choice for the "one from our newsletter" in their share picking comp). Keep meaning to take a closer look though.

[percy]

EPD delivered 1H13 NPAT of $1.2m (adjusted for one off acquisition costs) and off to a "strong start" so far in 2H13 and with expectations of "stronger second half earnings", so all looks on track. Part of this stronger outlook no doubt will come from the Conducive acquisition which is "running ahead of expectations", but only delivered EBIT of $0.5m in 1H13 compared to full year forecast of $2.0m at time of acquisition (note 1H13 only included 4 months trading from Conducive). They also talked up the likelihood of acquisitions to "accelerate growth" (perhaps accompanies by a capital raising?). Operating cashflows also improved significantly on prior periods.

FY13 prospective P/E ratio more like 10-13x now given EPD's doubled since initial post but still easy to see significant further upside.

Pleased I brought a few.Great result and very positive out look.Modest prospective PE.

[Lizard]

Good result out from AZV. Half year NPAT of $566k from continuing operations on market cap of $8.3m at current sp of 4.4cps. Appears to be a growth forecast and good growth apparent in the North American segment, with more to come after recent contract with Honeywell, Canada.