One of my good friends used to have a sign up behind his desk: “He who turns over the most rocks wins”. It was his way of motivating himself to keep looking at all the companies reporting their results regularly. And so in that spirit, I thought I’d review 6 companies that recently reported their quarterly results. Of these companies, I’ve chosen 5 of them that I think are interesting for one reason or another, and I’ve included one that is an example of the kind of stock I would avoid.
Without further ado:
Ansarada (ASX: AND)
What it does: Ansarada principally sells deal room software designed for M&A teams but also has solutions for ESG requirements, board meetings, governance, risk management, and compliance.
How Was The Quarterly?
The most recent quarterly result from Ansarada was particularly strong. As you can see below, quarterly receipts from customers and operating cashflow hit record levels at $16.2m and $5.7m respectively.
In hindsight, we missed a trick with our coverage of Ansarada’s Q1 results, given the ~30% increase in the share price since then. Arguably, the results this quarter – finally eclipsing the bumper quarter in December 2021 – show evidence that the M&A cycle is once again on an upswing.
The company boasts net cash of over $24.5 million, quarterly “adjusted EBITDA” of ~$3m, and strong growth (263%) in its freemium users. While future success is not guaranteed, you could definitely argue that this quarter indicates that the strategy of winning customers through freemium digital channels is working. Genuine free cash flow (even after lease repayments) was over $2.8m for the quarter.
My thoughts:
If Ansarada experiences a confluence of a cyclical uptick in demand and a successful new (freemium) go-to-market strategy, it will likely continue to experience improving results and share price strength. However, it does seem from the chart above that typically the December quarter is stronger than others, so there is some risk the next quarter will disappoint.
Given this is a cash flow positive software company trading around 3.5 times FY 2023 revenue – with the likelihood of growth – I think there is at least some prospect of a takeover offer.
Aroa Biosurgery (ASX: ARX)
What it does: Aroa makes and markets extracellular matrix products designed to improve the rate and quality of soft tissue wound repair. For example, their products are used to heal surgical wounds more quickly.
How Was The Quarterly?
Aroa reports in New Zealand dollars so the following figures are in NZD.
As you can see below, Aroa’s December quarter was the strongest in the last year, but the company isn’t really showing much growth either, since this quarter was in line with the prior corresponding quarter. The company has over $30m in cash so it doesn’t need to raise capital any time soon.
However, this quarter also included a downgrade to guidance from $72m – $75m of product revenue to $66m – $69m of product revenue. It also dropped normalised EBITDA guidance from $1m – $2m to a loss of $1m – $3m.
My thoughts: I read two fund manager reports confessing to losing money on Aroa, but I don’t think that is necessarily the fault of the managers they lost money, because Aroa was obviously hyping up the market to believe there would be more growth than it has produced. The nature of management comes through when they talk about “updated” guidance instead of the more informative “downgraded” guidance. This kind of messaging usually does more to erode trust than it does to impress.
Right now, the Aroa share price is down around 50% from its peak, but its market capitalisation is still about $200m AUD. This puts it at around 3 times the top end of forecast revenue. Given the generally high margins available for medical devices, it is quite likely the company could make at least 15% profit margins once it spends less on growth and launching new products.
I don’t think the stock has to drop much further for the risk versus reward to really stack up, but the big green flag I’d be looking for is positive operating cashflow arising from revenue growth.
SKS Technologies (ASX: SKS)
What it does: SKS Technologies designs and installs AV/IT, electrical and communication networking solutions.
How Was The Quarterly?
SKS Technologies reported a record quarter, with receipts from customers of $32.5m and cashflow from operations of $2.94 million. Genuine free cash flow was around $2.5m.
Based on receipts from customers, SKS Technologies has basically doubled in size over the last couple of years, showing good organic growth, which is in keeping with the company’s strategy from two years ago. The company has ~$900k cash and a debt facility for up to $5m.
My thoughts:
SKS is run-rating around $120m per year in revenue while showing good organic growth. In FY 2023 the net profit before tax margin was only 0.75%, but as the business gains scale, it is reasonable to expect improved margins.
If the company once again doubles revenue over the next couple of years, it would have around $240m in revenue. And at that stage, I’d expect NPBT margins closer to 3.5%. That would imply $8.4m. Adjusting for a normal tax rate, we’d have NPAT of about $5.9 million. Its current market capitalisation is only $30m, so shareholders don’t need anywhere near that level of success to make money. Therefore I think the risk versus reward equation is favourable for shareholders.
Top Shelf International (ASX: TSI)
What it does: Top Shelf makes and markets a range of “craft spirits” including NED Whisky, Grainshaker Vodka and Australian Agave.
How Was The Quarterly?
In the most recent quarterly, Top Shelf announced it had “completed the build and commissioning of its agave distillery at the Eden Lassie agave farm during FY24 1H marking the end of the Company’s intensive capital expenditure program.” Investing cash outflows were about $1.8m compared to about $2.4m in the prior quarter.
In comparison, receipts from customers were about $11m for the quarter, up on $6.5m in the prior quarter. However, despite this improvement, operating cash outflows were about $4m, showing that the company spends, much much more than it earns.
Another way to conceptualise the futility of the business is the $3.4m quarterly EBITDA loss. The company currently has $25m in debt, which expires in December 2024. It is exploring a sale and lease-back of its agave assets to help refinancing.
My Thoughts: Businesses like Top Shelf rely on the market being willing to pay up for the value of inventory on the balance sheet (supposedly worth around $11m on June 30 last year). Given the business makes no profits, groans under debt, and has fairly unheard-of brands compared to the competition, it is fair to say I have no interest in the stock. I’d strongly avoid it due to the often-toxic combination of losses and debt.
Advance Braking Technology (ASX: ABV)
What it does: ABV designs, makes and markets failsafe brakes that get added to vehicles used for special purposes such as in mining.
How Was The Quarterly?
The quarter to December 2023 was a slightly weaker quarter for ABV, with revenue down 15% versus the (very strong) December 2022 quarter.
That said, the results were still solid with net profit after tax of $663,000, operating cash flow of about $1m and free cash flow not much less than that, thanks in large part to an R&D grant worth around $600k. This saw a strong improvement in total cash to $1.9m (with $500,000 of bank debt funding available when needed).
My Thoughts: With a market capitalisation of around $20m, ABV won’t need much growth to justify its current share price, and then some. On the balance of probabilities, I still think it is probably undervalued, but results will be volatile while the business remains so small.
Disclosure: the author of this article does not own shares in the companies mentioned. This article is not intended to form the basis of an investment decision and is not an official recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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