The 5 companies talked about in today’s investor’s podcast are:
1.
10:01 – XRF Scientific Ltd (ASX: XRF) – a lab testing business with a market-leading position.
2.
21:04 – Catapult Group International Ltd (ASX: CAT) – a sports technology business combining video and wearable tech for predictive performance enhancements.
3.
25:36 – Kip McGrath Education Centres Ltd (ASX: KME) – a multi-decade family-run education provider growing around the world.
4.
37:19 – National Tyre & Wheel Ltd (ASX: NTD) – an independent tyre distribution business with a growing range of services and footprints.
5.
45:07 – Earlypay Ltd (ASX: EPY) – an invoice financing business that’s growing out of covid
Important warning: some of these companies are illiquid and may be highly volatile. While Luke & Owen do their best to identify some of the risks involved with these companies, we highly recommend that you seek the advice of licensed and trusted financial adviser before investing.
Luke Winchester is the portfolio manager and founder of Merewether Capital, having previously spent time at Oracle Investment Management.
The Merewether Capital Inception Fund invests in small and microcap ASX-listed companies.
Merewether is long-only and takes a high conviction approach (10-25 positions) to the ASX’s smallest types of companies. Luke targets profitable companies with talented management teams and avoids more speculative companies like those involved in biotechnology or resources exploration and mining.
Resources & free stuff:
• Luke Winchester’s first interview with Owen Rask (http://www.rask.com.au/2021/02/15/interview-luke-winchester-small-cap-investing)
• Merewether Capital website (https://www.merewethercapital.com.au/?utm_source=RASK)
•
Download (https://bit.ly/rask-analyst-books) Owen’s free analyst pack (Word & PDF)
•
Join Rask Rockets (https://bit.ly/raskrockets22) – SAVE $500
~~ A note for transparency: we receive nothing ~~
Rask, the publisher of the podcast series, is a privately owned company. It’s majority-owned and run by Owen. Unless explicitly stated otherwise, you can assume that Owen and Rask Group receive nothing for mentioning companies, products or services in our podcasts.
“The best part was the disclaimer” – said no-one ever
This information warning is actually important (that’s why we write it in the same size font… unlike our competitors). This podcast contains general financial advice only, issued by The Rask Group Pty Ltd. This information does not take into account your needs, goals, or objectives. So please consult a licensed and trusted financial adviser before acting on the information. Investing is risky and can result in capital loss. Nothing in this podcast should be considered as a forecast or guarantee of future returns.
Please read Rask Australia’s Financial Services Guide (FSG) available on our website to learn more about us, what we offer and our podcasts.
Date of recording: 16 March, 2022.
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Don’t act on the information until you’ve spoken with your financial adviser you’ll find out full disclosure disclaimer and link to our financial services guide in the show notes Luke welcome back to the show mate thanks Al thanks for having me back on it’s always a pleasure mate it’s always
A pleasure because we get to talk small companies we get to talk micro caps some really interesting businesses but many of our listeners will be aware you’ve you know you’ve switched roles you’ve gone out your own and you’ve started your own fund since we spoke last time
I’ll include a link in the show notes for anyone that didn’t listen to the previous episode with Luke maybe you can give us an introduction to Merryweather tell us a little bit about how you found it it’s early days Market’s been volatile you know how have you found
Things running your own money yeah yeah when we did the podcast last time uh back then I was still at Oracle Investment Management um and even in that podcast a big part of our conversation was um my my professional work at Oracle versus I’ve always had a
A passion individually for for micro cap and small cap stocks and that was my online Persona Winnie which we were discussing um and so yeah Merryweather I’ve had the opportunity the the the fortune to be able to follow that you know more individual passion and launch
Marwe the capital um right now it’s just the Inception fund um which is a pure micro Cap Fund so a real extension of of what I was doing personally um and had some good success with um yeah fund launched back in early December um so
I’ve sort of half joked to a few people I can hopefully look back in a few years and be the guy who launched his fund a few months before World War II so we’ll we’ll see how it all plays out but it’s been good um you know going into it I I
Sort of uh was told by some people and and understood the importance of making sure I had a good investor base who who understood me in my process and you know the the volatility that you would have um of course the overall Market but but with micro caps in particular so um I’ve
Been pleasantly surprised with with my investor base and how they’ve reacted to to the volatility um and yeah actually look I I I I see it more as an opportunity right now than a massive risk to the downside I I you know have put a lot of cash to work since since
Launching Mayweather so um we’ll talk about a few today um and some of them I’ve I’ve actually bought recently too which is nice but um yeah overall it’s been no no short of interest um interesting but um also also some good lessons and and I think I’ve accelerated
My my learning you know sort of would hope to to to do a lot of these lessons over the next three four five years I’ve squeeze them into three months but um it’s it’s all been very good well if you you can survive this and I you seem to
Be acting in a way your temperament seems very cool and collected um I think you can you can survive the next few years too just quickly it’s um is wholesale only in $50,000 minimums to invest it is it is yeah just given the restrictions around that that retail
Versus wholesale the cost of a retale fund we are we are wholesale only but um don’t give anyone’s wholesale investor um sophisticated status um Reach Out investors mwea capital.com to you I can I can run you through sort of what we do and who I am yeah great um and there are
Updates and there are a couple of um company writeups on the site too there I’ve tried to populate the the website with some stuff so Marther capital com.au you can sign up for monthly notes and every now and then i’ I’ve probably haven’t kept up as much as
I would like but I’m I’m trying to put out sort of blog posts on individual companies and and yeah we’ve got XF and kit mcra which we’ll talk about in a second on the website um and hopefully do a few more of them so gives investors
You know a bit of insight into uh the stocks I’m looking at and also how I maybe approach investing as well yeah great so before we get to the the three to five companies you’ve brought three to the table I’ve brought two slightly larger companies to the table um maybe
Just to just to get your thoughts on reporting season you alluded to it being very volatile there um we were going to record this a week or two ago but you’re away on holiday I was a away on holiday um so now we’re doing it and these
Companies um stood out to you for you know some good reasons I assume but maybe just generally speaking how have you found reporting season this year as opposed to Years Gone by yeah so I guess to clarify first the three companies I’ll talk about I I own the M marwe the
Capital and they was sort of the three standout reports um which is why I wanted to bring them to to people’s attention um reporting season overall I thought it was I thought it was really interesting on the whole I thought it was quite positive I thought it really
Showed the resilience of of a lot of businesses um in the face of a lot of moving a lot of moving aspects um you know they’ve been rehashed you know a million times not only by business themselves but but also Talking Heads um around inflation interest rates Supply chains commodity pressures wage
Pressures just this Confluence of factors that that could have impacted businesses and some were heavily so don’t get me wrong but but I was pleasantly surprised with how many were able to to Buffet a lot of those challenges um and put some resilient results out to the market and um
Commentary on the whole was I think pretty positive um obviously wait and see and there’s always reasons to be negative um and and you know sometimes they do come out of left field something like a CO that’s what that’s what can really shock the market but but I think
On a whole the the ASX and particularly where I play in that micro cap small cap space um I think a lot of businesses have really come out of Co quite strongly and and and are poised to do well over the next few years um the the
Caveat to that and I’m sure you guys at rasque noticed this as well was um you still had to do a lot of work under the surface with these results though um so you rewinded 12 months ago the main thing we were doing was sort of trying
To strip out the benefits of Co subsidies and impacts and things like that and now it’s the opposite where you’re having some pretty clean results for the last 6 months but their prior corresponding periods may have been boosted by jobkeeper or anything else so
It’s it’s still a lot of work to try and come up with those clean comparisons and see how underlying businesses are really moving but that’s that’s you know that’s the the fun part of the job and I think that’s the opportunity for investors who are able to do that then you know what
Doesn’t look like an opportunity on the surface you do that little bit of digging that little bit of scratching and you see well you know there might be some some sort of mitigating factors to some of these numbers and and you know what I like to term that underlying
Earnings engine of the business is actually improved even if the headline numbers haven’t so I thought it was a really interesting reporting season from that point of view as well um and and and like I said I I as as a micro cap investor I love those sorts of reporting
Seasons because that’s my opportunity I know that a large part of my of of of the market in the micro caps will purely move based on whatever those reported numbers are the opportunities I can say well hold on that reported number is a little bit weak but you know I can sort
Of adjust for this or or you know um remove that and I think that that’s where I always get my best ideas from how about in terms of just one final question on this how about in terms of like Outlook statements um I think some people’s fears are that a lot of you
Know the inflation impacts are not yet truly felt by some of these businesses how how did you find companies dealing with that from like a you know second half or um you know full year results um perspective yeah look I I think that’s a fair statement that that the numbers that
We’re seeing in the pipeline haven’t flown through to the businesses yet haven’t flowed through sorry um I actually thought Outlook statements on the whole were pretty positive and and maybe that’s me setting my expectations from a coid world the last two years of most businesses actually just outright
Not providing any sort of guidance or commentary because of uncertainties um but but you know like I said in in my sort of will admit it can sometimes be a smallish in that small micro cap space um I thought most companies were pretty positive on the
Whole um and I I think the main reason for that is even though you do have some of these uncertainties in the future and inflation is the is is the big one coming through um the the recovery out of coid for a lot of businesses probably has a potential to overwhelm those
Inflation pressures and and so the overall business can still ride that Co recovery even even through um any sort of um bumps that may come um but look it’s it’s worth you know it’s it’s always worth keeping half an eye on the macro I I’m not a macro investor
Myself so I certainly don’t position the Merryweather Capital portfolio from a top down perspective I don’t take a view on where I think the macroeconomics is going or commodity prices or interest rates but certainly being aware of the environment I guess more importantly being aware of how individual businesses
In your portfolio a position for the macroeconomic environment and we can touch on one we’ll talk about one actually with xrf scientific um being exposed to commodi Cycles um they actually they were one of the few companies that called out Potential headwinds from from commodity prices so
Um yes I I certainly you keep that stuff in mind but but no on the whole I like I said I I actually thought this reporting season um was was pretty strong and and that’s I think creating a lot of opportunities because of course the broader Market’s been volatile and
Downside volatility in particular but those fundamental reports I think have been pretty strong so you you’ve had the opportunity to I think buy businesses that are doing well have just reported well um you know with share prices that have have sometimes actually gone backwards why don’t we start with that
We were going to start with but why don’t we start with xrf so um it’s a fascinating little business I think um people maybe don’t necessarily understand the business too well because it it kind of gets like into the weeds of testing laboratory equipment consumables um x-ray thos scopy um
People get a bit like tongue twisted with that one uh can you just maybe highlight what the business does um and then we’ll just we’ll just roll from there yeah look you look at their their presentations and you’re right like your first thought is this is incredibly
Complex business and it is in that sort of um laboratory products segment um it’s actually incredibly simple business so um they are they’re exposed to to to commodity producers primarily so these guys um if I’m if I’m a minor and I’m exploring or or um you know digging
Stuff out of the ground and know the grade or the or whatever of it um I do an assay test which is just a you know tube of of straight Rock mineral um that goes off to the lab it gets crushed into a fine powder um some chemicals are then
Mixed in with that powder and heat it up to some incredibly hot temperatures to create effectively a glass disc and that that goes in into an x-ray spectrometer so where xrf comes into that process is historically they’ve just been those machines that heat up to an incredibly hot temperature um they’ve expanded a
Little bit vertically into that chain and bought one of those crushing machines now business orus mining it’s called but the best way to think about xrf is they make lab machines that that heat things to incredible temperatures and and um you know then use to in that
Sort of assay testing um so they’re exposed to mining there’s no doubt about that the more testing and things like that benefits xrf but the business is probably not as cyclical as what people believe because I think when people think about Mining and commodity cyclicality they usually refer to um the
Capex of exploring so you think think about your traditional mining Services businesses are quite cyclical they need new explorers raising Capital coming to Market going out and Drilling and creating new projects that’s not so much xrf most of their business is is ongoing mining so you know BHP Rio forcu these
Big guys they’re continually um you know testing their their uh their minds and their product and that ongoing just mining is is is xrf so they do have some cyclicality at the front end so you know last couple of years they’ve done well as as that sort of jun your mining
Sector has done okay but the core business like Australia will continue to dig things up out of the ground for a long time and and that’s been very steady even through the mining bust um the other aspect of the business I really like that I think gets overlooked
Is the um um consumable side of the business so I I mentioned before they put some chemicals that that go into um the the assay that needs to be tested um and they they sell these chemicals to clients over and over and over so um they’ll sell a machine up front um but
Then the ongoing chemicals and it’s a very high margin segment like you know mid 30% profit before tax margins um it’s it’s it’s a it’s a beautiful sort of razor razor blade model so it’s one of the things I’ve always liked about xrf and it’s sort of a a hidden Jewel in
That business because they actually they’ve got a very dominant global market share like upwards of 50% in that sort of um chemical space which I I think is sort of lost on on the market a little bit but um that’s the business in a nutshell like I said it probably looks
More complicated than what it is um but um yeah look jumping into the report I suppose um come through reporting season Revenue was up 24% um this is one of those businesses I said before you know the headline npat was only up 177% that net profit number but there was
Some coid benefits in that prior result so I was saying before about adjusting last year’s result to try and get a clean sort of comparison between the two um you know real profits if you want to call them that were up 56% so some good leverage over that Revenue growth
Um the business the other thing I really like about this business which again I think sort of gets lost on the market is the quality of their balance sheet um so you look at their balance sheet there’s about 50 mil in total assets even if you strip out some of their liabilities it’s
About 20 million just real tangible solid quality assets a lot of that is um is platinum which goes into the the manufacturer of their Machinery um they have some chemicals on their balance sheet so lithium is a big input to their chemical that they use so they’ve got
Some lithium on the balance sheet they own their property down in Victoria um and and um they have a bunch of plant equipment as well so I think it’s a very strong balance sheet and the liquidation value I think is quite high they could they could sell particularly that
Platinum and lithium back into some very liquid markets um so yeah that’s never been an aspect of the business that’s worried me same with with cash cash has always been brilliant they convert their profits to cash fantastically um like I said the only this was a business that that was one
You look at that output Outlook statement on the whole it was quite positive the thing they did call out though is that lithium is a key input for them and and that big EV demand of lithium um so they’ve called out they expect costs to rise by a double digit
Percentage um now what I like about this business they’ve also said they think they can um increase their revenue by that sort of amount as well so it’s a basically pass on that cost increase to their customers um I give them the benefit of the doubt that they can
Because I followed this business for a while owned it for a while um and they haven’t put a price increase through to their customers for I think two or three years um certainly preco so I think they’ve got some sort of latent demand there the ability to pass on some price
Increases particularly in this environment where I think customers are probably more receptive to it because we’re all aware of the headlines around inflation and particularly commodity inflation so going to your customers and say look price of lithium is up 10 15% for us we’re passing that on I think
They have the ability to do that a little bit so worth keeping an eye on though um particularly because you know that lithium price hasn’t really slowed down a great deal I think maybe they were hoping for it too it hasn’t so be aware they are exposed to that and and
This is in that key consumable segment where those strong margins of 30 35% there’s a lot of fat that could be eaten away if if these um these lithium prices continue to Boom like they are so that’s probably the key risk to the business um but overall the outlook’s quite positive
Um they they have expanded quite well um and they were Savvy enough to do it during the mining bust which I think um talk about K mcgar in a second did a similar thing a business who can time their capex Cycles I think is a really attractive thing as an investor so your
Traditional business and Mining is a great example of this when we had the mining boom when times are good the natural inclination of a management team is to spend that money you know that the money’s coming in the door let’s go and acquire let’s go and expand let’s let’s
Go into that and of course everyone has that same idea so your Returns on investment are often very very poor um and the mining boom is a great example of that so businesses who can be counter cyclical with their capex cycles and so xrf when the mining bust happened that
Was when they began an expansion into Europe with with their products um targeting more of the uh the heavy industry segment like cement and glass and things like that I find that very appealing and so they’re now coming out of that so as that commodity cycle has
Turned for them their capex cycle also finished out so you’re seeing a real strength in in in the margins and and you see that that they call it their precious metal segment that’s that’s been the segment where margins have really expanded strongly over the last year and a half and they’re calling that
To continue so um it’s probably g a little bit in the weeds for people but I think that’s something you know keep an eye out on that on on how management allocates Capital but more importantly when um the last thing you want to see is management getting exuberant when
When times are good you rather s do that when when times are poor um but yeah look I think um you know they’re calling out a couple of new products to be released um you know sort of in that core laboratory range but I think I going to ask you about that they
Mentioned much um do you have any insights into that I don’t they’re very tight they’re very very tight even even when I’ve spoken to them and they’ve done some meetings um probably some some competitive stuff around that so uh the most I’ve gotten out of them is that a
Couple of new products one will be in that core um sort of um flux space of the of the you know labatory stuff but the other one they sort of said it’s similar technology but in a different segment so that’s you know I attribute no real value to that but it’s it’s
Certainly some blue sky upside if they can um you know expand their addressable Market into other segments it’s it’s um you know something worth keeping an eye on but but overall I thought it was a really really strong result um just pivoting again bring it always back to
Valuation because you can talk about how good the business is you got to pay the right price um they did um about two I’ve got it here in front of me they did 2.8 mil net profit after tax in the first half growing strongly so maybe
That comes out sort of high 5 6 mil um trading on a um 80 mil market cap so you know about 13 times earnings I think is pretty reasonable for this business um given all those characteristics we spoke about and importantly I think the growth I think you’ll see that multiple
Probably go from 13 to sort of maybe 1011 next year as as it continues to to grow strongly so yeah I think pays a modest dividend too pays a modest dividend so it ticks a lot of boxers for me um and you know very um not not only
A competent management team but but very conservative I think you see that in the way they run their balance sheet um I I have actually sort of quizzed them in the past of whether it’s maybe a bit too lazy they could you know leverage up
With a bit more debt for sure um but the you know the reply back to me is always a good one and you know um I I’ll butcher the quote from the CEO but it was something along the lines of that’s how a you know textbook MBA would want
To run this business of of you know stripp the equity out Lev with debt um but a but a business operator you know when you’re thinking 5 10 years and and and the security of your business um you know you run it conservatively and of course you know credit to him I was
Probably telling him that before Co when when you know Supply chains were hit very strongly and this is a business that keeps I think 9 12 months worth of inventory on hand so um very conservative has a nice dividend um reasonable valuation but I think you
Know the growth is there too which I think is always important to have in any business not just a micro cap yeah it’s a great rundown mate xrf trades on the ASX under the ticket code xrf pretty straightforward um 80 mil market cap as you said or there about so it does tend
To be a liquid for some investors um obviously you’re very familiar with that you’re running a small/ micro Cap Fund um but for investors out there and listeners just keep that in mind and you might want to monitor the liquidity position but um it’s a business which probably doesn’t get enough attention I
Would say because it’s actually very high quality it’s um one that we’ve recommended in the past as well I could never figure out what these new two new devices were um and I I was waiting and waiting and waiting um and so maybe we just we just have to keep waiting until
We find out you know what it is that they launch but um really interesting business um you did mention that many investors concerns are more cyclical in nature given its resources but um there is a lot of staying power there too maybe we’ll switch gears then we’ll jump
Across to another company um maybe I’ll I’ll talk about this one which is a catapult Group which is a business that many retail investors would be familiar with if they just watch the the AFL or the rugby or um some European soccer um originally catapult started as a GPS
Wearables business so for sports athletes and performance athletes and and their and their um staff could monitor Fitness monitor activity on on the ground or on the court um and get insights from that they then expanded into video analytics which basically says you know this here’s the camera
Let’s look down on the the ground um think of like teler tracker if you watch the AFL something like that then they made this move probably which was a poor use of capital they moved into um the pro division which is where basically they tried to take their Advanced
Analytics from professional sports and apply that to Semi-Pro athletes or athletes that maybe aspirational in nature that didn’t work and the business has since kind of been HIIT um we’ve got a new CEO at the hel come from audible uh which is basically focused on driving subscriptions one acquisition that they
Made recently was a company called SBG Sports in London and what this business does is it effectively takes its dominant position in F1 Sports and using adal to predict for example if you watch the the F1 when um say McLaren might pass Ferrari is there a 52% chance in McLaren
Passes Ferrari in the next three laps or something like that and so they’ve taken that technology and they’re now trying to apply it to different sports and under the CEO will Lopez they’re trying to basically bring together video and their other analytics engines and put it all in the cloud um and sell
Subscriptions into it so I think I’ve got some numbers here just from the the most recent period and U where are they here we go so from the most recent period this this software is a service sales growth um they measure it as annualized contract value which there
Are some criticisms of this metric but ACV growth was up 43% year onye um and that was driven by both divisions performance and health at wereable division up 40% tactics and coaching up 57% subscription revenue is growing fast at 29% I think the thing that investors
Will want to watch from here though is basically their cost base how do they they’re heavily recruiting if you go to the Catapult website and you go forcare I think it is you will see how heavily they’re investing in bringing um data together with Predictive Analytics so in
The past it’s more like we’ll capture the game we’ll look at the GPS afterwards and we’ll then get some insights from that then it became okay we can do realtime analytics and now the next step is how do we then be become more predictive with the analytics in
Real time to influence performance and coaching and tactics um and that’s where we’ll see a lot of benefit one of some of the big red flags I might also call that too for catapult is it’s kind of got a bit of a check in history in terms
Of its focus on profitability and its key competitor stat Sports has been winning some of the biggest deals around the world um you know many deals in the US for example I think there was a billion dollar plus contract that stat Sports won um and that would you know we
Would if if catapult had won that it we’ be probably in the ASX 200 um but it’s not so th this business is really impressive um it’s got really impressive technology I think it may have squandered its first leader advantage over the years but um I really really
Like the business for its sticky um Revenue I would say there are risks on the horizon being those costs um it has recently changed you talked about kind of like subsidies muddying the waters mate it actually changed its reporting season uh calendar and its window so we’re currently dealing with a mixture
Of nmon results half year results yearly results and we’re trying to reconcile that um but I think it’s for the right reasons that the change of the the year and the change of the reporting currency actually aligns better with the target audience which is in the US and um over
In Europe so that’s catapult group trades under the ASX ticket code cat there’s a lot to watch um I think it’s a impressive company the the acquisition of SBG will bolster growth um but keep an eye on that free cash flow and make sure you calculate it yourself that’s
That’s catapult um mate I think maybe we we’ve alluded to talking about Kit McGrath I know Claude Walker if he listens he probably is a regular listener he’d want us to talk about kit mcgr 2 trades under the ticker symbol kme um really interesting business profitable pays a dividend if I’m not
Mistaken um what does k mcgr do yeah it’s probably one that people are familiar with um so kit mcgr um you know you’d see their education centers around it’s a it’s a tutoring business um previously was a pure face-to-face um business um running I think lessons of of six students at a time
Um they were making a slow incursion into into online um but this the uptake was was very slow I think the um the perception from a lot of students and parents is that online learning the outcomes aren’t as strong as face to face so people um you know weren’t quite
Willing to to take it on straight away but of course Co hits and you’re essentially forced into into online learning not just in schools but with Shooters as well so luckily they already had their online platform in place and was able to take advantage of that and the overall business actually held up
Really well through Co um considering the type of business it is um so it was one I referenced before talking about um xrf where you you talk about um capex cycles and the Way businesses invest and I’ve I’ve sometimes said um when you have a larger business and even take catapult as an
Example before catapults a few hundred mil market cap and and you know a good chunk of Revenue um they have the capacity to put on four five six Mill of new employees and can sort of you know they have the the size to be able to do
That for a kit mcgar at 60 mil market cap um you know when you flesh out your executive team upgrade your you know backend platforms and go through this sort of capex investment cycle um even a $23 million investment completely wipes out all your reported profits and so to
Do that’s a big decision and when to do that’s an even bigger one and and they did that during Co where Co hits their Top Line actually held up okay but the growth stopped they were previously growing about 15 20% and and of course um when when Co hits it everyone sort of
Just paused um but the the decision to then embark on an investment cycle and they fleshed out with a chief technology officer a chief um product officer um they upgraded their backend um Center management software um implemented like sales forces of marketing software and um some um online booking software so
They’ve done that during Co so the reported numbers like I sort of was talk about before took a real hit in that period but now the benefits of that will play out that that scalable platform’s now put in place the co recovery fingers crossed we we’re on the way out and um
You know after two years of disrupted learning um students are able to to finally refocus back on to to where they need to be and so keeps well positioned I think to really see some fantastic operating leverage over the next few years so the two things that done and I
Think again it’s a pivoting business model which maybe makes it a little bit more difficult to analyze for people um but the first thing they’ve done is that pivot to online lessons Co accelerated that I think that’s now entrenched I think they’ve sort of said 20 to 30% of
Lessons will stay online it’s it’s actually persistently said up around 3540 so wait and see maybe it does make its way back down but I think that’s now entrenched and people have seen you’re able to do online lessons and maintain at least you know enough to make it
Comparable to going in face to face um it also has the benefit it opens up their addressable market so you think about what kit mcgr used to be if you had a center in Tamworth um you know it was very difficult to get anyone who
Wasn’t in maybe a a 25 50 km radius it’s a long way to travel for for you know an hour tutoring lesson with online lessons it just broadens that whole Basin of of where you can attract students from so that that’s the other the other big
Benefit they see um but the other key change to this business and it’s one that I always loved see a business do it it’s go from a franchisee model to a corporate model so previously the whole business was franchised every kit mcra Center you you walk pass would be owned
By a third party franchisee kit mcgrail would provide some backend support of obviously the brand um and they they’d collect you know 15 to 20% of the lesson fees for the services they provided but over time if you decide to do a corporate strategy you can pick and
Choose which centers you want to bring into your corporate business and so you know the centers that are doing well you know the centers that have the um you know that maybe aren’t optimized right that if you would have purchased that we can do some small things change some
Things and we can we know the strategies to to optimize um and so you’ve seen it with a lot of retailers who have been franchised and they slowly bring their best ones back in house and capture that whole profit margin for themselves and you leave the um subscale or or less
Optimized um in in the case of Kip usually your rural centers um to to be franchises in your service in the way always have so this pivot to the corporate centers um has meant they’ve had to bring in a a lot of those costs up front like I said before you got to
Bring in an executive team you got to bring in a whole platform to be able to service you know um they’ve currently got 22 centers around Australia in the UK um but a lot of that’s very scalable once you put those costs in place you know the Corporate Center Revenue can
Now scale over the top so you go from capturing like I said before about 20% of your of your total lesson fee to now capturing the whole hundred so Revenue growth’s really strong um and now I think is where you’ll see that profit growth really catch up with it because
You you you’ll scale over that you know relatively fixed cost base in the background um so yeah I think there’s a lot to like about Kip it’s it to me feels a little bit where xrf was maybe back in 2017 2018 you you you’ve had that investment period you’re now
Looking to leverage that and and come out of it the other side and see that that profit growth um and and look I I think the other one as well um is not only is it a good business Ste business has historically been profitable pays a dividend I’ve sort of alluded to it
You’ve had two years of disrupted learning and I think schools governments and even parents themselves I think everyone acknowledges that it will be difficult for the the current school system the way it is to just completely pick up that slack um and that in some form or fashion shooing will have to do
Some some some lifting um so governments New South Wales and Victoria have already um put plans in place and kit mcgr has access to to um school-based programs um but the real big one that they are eying off is they’ve just started a little tiny Beach head into
The US and that’s their expansion plan in the US is is through the school system so it’s a very lowrisk way of expanding they started with like three schools in Arizona that’s now up to I think nine um and they’re just expanding as the school contracts roll in so
They’ll they’ll win a contract with a school to provide some some tutoring services for students it means you scale up with Revenue um without having to do the you know like a lot of businesses you might have to spend three four5 million just establishing trying to
Build a brand trying to you know uh essentially put a business in place before it even exists so the ability to scale up like that with the schools I think is good and it’s under that kit mcra branding too so that’s that’s the big one is at some point I think when
The time’s right um they’ll they’ll pivot away from just the schools and and you know replicate their Australian business model but they’re able to do it in a very lowrisk way it’s interesting a lot of people don’t know that um before storm took over as CEO I believe it was
Kim mcgr shares traded for two cents um the business was in this real tough spot um because it was had these Legacy franchise contracts some of them were like $112,000 a year fixed fees going back to kit mcgar and obviously as the franchises did better and demanded more
Of K they were in a tough spot where they had to kind of unwind the franchise deals and they’re also repur like you said they’re repurchasing a lot of these territories like in the UK Scotland Etc um it’s it’s a really interesting I like
It I own shares by the way um because I see it it’s kind of like there’s three ways for them to grow they’ve got the the corporate centers they can re purpose the franchises um but then they’ve also got the um the US business as well and you know I think there’s a
Lot of criticism of them making that 4A into the the US with chly but if you think about it if you take a three view say the the acquisition makes a lot of sense because it’s positioned between tutor and student and like you said the the governments are focusing on schools
And getting students to learn more and using tutors to do that so it’s kind of opportune time for them to make that fora I thought it was really interesting um and yeah I think under Storm’s leadership the business’s execution has been pretty pretty um First Rate so rate
Yeah I I agree and um you know it’s always I was actually chatting to someone this morning about this um you see it with different companies where you have a Founder who who’s founded a business you know decades ago and when a family member or a son takes over it can
Sometimes be an interesting Dynamic and and and Kips Kip mcgr when when K ran it obviously K mcgar is is um you know the the name there um it was a much more conservative business and and I think over time you know without disparaging keep in any way things sort of were done
Because that’s the way they were done and so when Storm shows up and has some ideas about where this business not only um can go but some sort of where it has to go like he his background was in tech and I think he knew the future of
Tutoring would be online so luckily he began that pivot before Co um and understanding as well the relationship between the franchisees was important one but one where I think you’re right the power had shifted to the franchisees and they had to bring that back and I think going the Corporate Way has done
That shown franchises we can do this ourselves so come with us but you know we’re not going to allow ourselves to be to to be beholden to you so I agree I think he’s done a really fantastic job um the share price reflects that from where it’s been the last few years don’t
Get me wrong um but but on a shorter time frame of of call it maybe a couple of years postco it sort of languished I think and and I think a part of that is that that Dynamic I was speaking before about the reported numbers has has been
A little bit lumpy through this period as Storm’s gone through his investment phase but you know and I’m sure you agree with me as as a shareholder um you know it’s it’s the ability to be able to see through that and see again I’ll come back to it I call it that underlying
Earnings engine and so if I I think about where kit mcra was two years ago versus today the reported numbers it would look like it’s either gone backwards or gone nowhere but the potential of those earnings I think is dramatically increased and it’s just you know to bring agriculture um sort of
Analogy into it you’re sort of you’re planting your seeds and it’s it’s when you choose to harvest them is is the big question and um I think that timing is pretty soon I think you’ll see it in the corporate side maybe not the second half
22 but but maybe FY 23 um but it’s it’s it’s certainly one I love those I love those styles of investment where um you the numbers are a bit muddy but the underlying business has dramatically improved and the share price doesn’t reflect that that’s where I think PTI
Investors can just buy hold and just wait for the numbers they’ll come they’ll come eventually and when they do the share prices will respond yes stor mcgr recently bought some shares um further strengthening the alignment to shareholders um but again just a note here for for listeners um just be
Mindful of liquidity Kip can Kip MCG the company K is the ticket code can be a little bit IL liquid so just keep that in mind does pay a little handy dividend as well um the next company which I might jump on quickly um it’s a company called National Tire trades under the
Ticket code MTD um sometimes called National Tire and whe or mtw it’s a interesting business it’s probably not what you think when people think of tires they think of you know good year bow repairs and getting their car serviced this business is primarily a distributor of Tire tires so it Imports
And then on selles that to retailers it does have its own retail arm called Tire right um and it recently made an acquisition of another business called carers um so these are like bu business to Consumer B to C but typically it’s B2B um and the business has grown
Largely through acquisition over the years what’s really impressive about National Tire is it’s maintained its cash flow in that time it’s used some debt it’s used some Equity um but it’s it’s grown its business um you know these people want to stay around these people run these businesses
One of the hardest things when you make an an acquisition is the culture and the integration and they done a pretty good job of that under Peter ludman um the business has uh consistently reported incremental Revenue as a result of these Acquisitions um but it’s also over the
Past two years had some favorable um I guess extraneous variables so things like currency movements in the right direction good import export environment um but what we’re seeing now is probably a reversal some of those things so we’ve SE to make these Acquisitions into a pretty good market and it’s established
Itself as Australia’s largest independent Tire retail A Tire Distributor sorry um and also bring in that retail arm I initially thought when they acquired the tire right business I think it was part of tires for you I thought that they would actually um spin that off but what they decided to do is
Actually make that a franchise model because it’s not their core competency while they focus on integration and and building out this it backbone basically the business um went through this period where it was really dependent on Cooper’s ties that includes the Mickey Thompson brand so people were really
Concerned when that contract I think it was good year bought Coopers and they were really worried about that relationship how that might sour but basically what National Tire and Wheel has done is basically said okay well we’re just going to grow out of this we’re going to grow so big that um you
Know all of the the Tire suppliers and manufacturers have to work with us and we have to be able to push that through our Network um so by building itself up vertically then also having some distribution footprint to to consu the consumer side and also dominating things like mining forklifts agriculture it’s
Basically like entrenched itself in the in the ecosystem in Australia um there were a few things that stood out from the recent results um it is experiencing higher import prices because of the weaker Aussie dollar and the um rubber costs I believe are up too so there’s a
Material cost there um shipping costs we all know have gone up through supply chain bottlenecks and so on and so forth uh I would expect to see higher inflation in the second half hitting some of those wages um that that line item for wages that they have while they
Are riing out some cost due to synergies that we’ll probably see that go higher they increased in response to this has been pretty common across the industry actually um in response to supply chain issues in inventory they’ve dramatically invested in their working capital so their cash flow isn’t looking quite as
Crisp as it normally is um the shares fell about I think off the top ah head about 20% on reporting day so one of those big volatile ones that you’re talking about on the downside um some of the things that they can do however now that they’ve U made a number of these
Acquisitions of tires for you black rubber and Carters is they can use their own network to push their own volume through which they haven’t been able to necessarily do in the past so say if they have the retail arm they can fill shelf space with their own inventory and
They can start to push that through there rather than um be beholden to retails and just getting what the manufacturer sends so um there are some many organic levers that they can now I think some of the concerns might be around well hey in the past you said
You’re going to make all these Acquisitions and now all of a sudden you’ve shifted to We’re Not Making Acquisitions we’ve got debt on the balance sheet we’re going to you know go in a different direction and focus on the organic side I think it’s the right
Time to do that I think they should be doing that right now um I think the move to kind of diversify the the tire business and focus more on their their distribution is really interesting they made an acquisition of a company called black rubber which I’m not sure how much
You know about tires mate but um I didn’t know a lot before I got involved with national tie but one of the things that they can do is they can actually do deals like kilometers um so they can price tires and form um Enterprise kind of wide or companywide deals with Fleet
Companies and whatever to basically charge a fee on like a per kilometer basis um which is really interesting for tires electric vehicles by the way also use rubber tires so just in case people are wondering you know what’s electric vehicles going to do this but what they can do is through their retreading
Business they can now push all of their Network through the retreading businesses that they bought which lowers costs and allows them to share that that IP across the teams company pays a dividend um but obviously that’s dependent on cash flow being stable over the next 24 months I think it should be
Stable but um fully franked good dividend um I used to when I did valuation on this um I actually used a 15% discount rate which is probably Fair maybe you could go a little bit higher maybe a little bit lower depending on your view of the risks from the macro
And a 1% terminal growth rate and I think it’s still reasonably priced at these levels even if you get you know a decent dividend modest compounding um I think Peter ludman who has if I’m not mistaken Capital background really good Capital allocator um seems to be strongly aligned to the business and and
Lots of those Founders still entwined with the business too so National Tire it’s not without risk it’s a bit of a hairy one it’s one of those kind of acquisitive rollup really deep value plays you have to do your numbers carefully but um I think it’s an
Interesting one at least for the watch list um and as we see this this next six months play out just keep an eye on those wages and um basically how those costs expand we want to see those under control but NTD is the ticket code interesting business office yield um and
Modest growth um I think that that’s number four Luke so now we’ve got one more and this company that you’re about to bring up is it company I think I looked at and the irony is I think I looked at it when you and I may have
Been on osiz together for the call at lunchtime one day and I didn’t know anything about it and I did a little bit of cramming for the show and now I still know that little bit about it so I’m hoping you can fill us in on what early
Pay does epy the just just quickly on on National Tire um I I I like the business and I think it’s in the right space Distributors can be brilliant businesses um particularly in that nice little niche and and I think I agree with a lot of your comments there around the key to
A good distributor is is a very competent management team and I think these guys have been listed long enough and and being through Co to to demonstrate that and um more importantly I agree with your point on the balance sheet I I had a quick look I think it’s
Sort of at a level now that’s comfortable um it’s about one times net debt T at D you could probably you know if they found some aggressive lenders you could probably take that to two but I I think you’re right I think this is the right time to now squeeze what
You’ve what you’ve Acquired and get those organic synergies um and it’s one that yeah I I yeah pretty much agree with everything you said it’s it’s got some risks to it but for the right investor um you know I think you got a good man team at the helm to sort of
Steer that ship through them and do okay yeah it’s all about positioning position sizing rather something this size um so yeah it’s not without risk as I said but it’s a really interesting play for yield and maybe some modest growth as well just keep an eye on those extran factors
I guess but early pay tell us yeah so look early pay it’s by far the worst named company in my portfolio um this is the old CML group um that does invoice financing for um bu early pay of you haday come to the markets I think you know your first
Inclination when you see early pay is oh it’s another buy now pay later but it’s it’s not so these guys if if you’re a small business um and and you know you’ve sold some Goods to usually a larger business and and they may pay you on 60 90 sometimes even 100 day terms
Before you actually get your cash these are guys you can go to to sell them your invoice um and you know for a certain amount they they use some AI in the background to calculate exactly how much um um they’ll they’ll buy your invoice
Off you so you get cash up front in the door so it’s a very simple business factoring has been around for many many years um Millennia maybe um and they they do it well so this is a business like I said used to be CML group been
Listed for a long time um it was doing very well until Co so if you look at sort of their net profit up until Co it had just grown steadily year on Year from sort of 1 mil up to nearly 10 Co hits of course Co
In hindsight I think CO’s been such an interesting time because at a at a total societ of view I think we’ve sort of gotten through Co not too bad compared to what you maybe would have thought when when it sort of first hit but at a micro level and particularly small
Business in Australia you know there was some there were some big hits and looking back that’s probably the biggest Paradigm Shift we’ve had through Co I think a lot of a lot of power or split between small business and big business shifted to Big Business who were larger
Better access to Capital better access to survivability through Co and you’ve probably seen that impact a small business which fingers crossed can can come back strongly but nonetheless these guys exposed the small business so that profit really stagnated through fy20 fy21 and then I think we’re finally
Seeing that you know big pent up snap back from from from Co so this first half result um out of the the three I brought it and even probably my whole portfolio it was by far the the best result i’ um so these guys did just over 72 mil
Net profit which is basically they did 82 mil the whole of last year so a very very strong first half result um they upgraded their guidance and it was the third time they’ve done that so when they first came to Market at the end of their fy21 they said we think we’ll grow
About 40% um profit in in fy22 um at their AG they then Chang that to we we think we’ll do 50% profit um and then now they’ve come out and said we’ll do um you know 15 mil which is roughly about 70% profit so you’re seeing the the momentum of this business um
Increasing very strongly um and again it comes back to you’ll probably see this consistent theme across the three companies I’ve mentioned and and see across most of my portfolio but um you know conservative competent management team so you know despite doing over seven and a half mil in the first half
And second half is Gen generally seasonally stronger for them they’ve only guided to about 15 so it’s not to see they’ll probably end up beating that guidance again quite well and you know I’m sort of modeling out maybe somewhere between 15 a half to 16 million at the
End of the day um only currently trades on about 130 mil market cap so this is this is one for the the Deep value out there this is like sort of you know probably eight to nine times earnings um with with very strong growth again dividends cash flow um you’ll see that
Consistent theme across pretty much everything I talk about I suppose um so that business is where all the growth coming from that um that that invoice financing business um it it grew 24% had some good control over their expenses which only grew 21 as they get bigger
And you see this with a lot of finance companies like um if you were to look at maybe a money me a wiser you know some of those guys as you get bigger you can negotiate better terms with your with your lenders so their cost of interest
Is coming down it just it widens that operational leverage even more um the the reported numbers they had the benefit of of a lower tax rate which will normalize but um even taking like stripping out the tax effect you know still grew sort of 30 35% which is um
Which is really strong how about um how about sorry Luke how about things like um losses and their like kind of their risk management yeah it’s a very good point so again like it’s always important for a business like this um so this is a business where you’ve
Generally got a um a very strong asset backing the The Lending so you’ve got you know um an invoice that’s already been created like I said usually for a larger customer and so their their loss rates you know they they say there sort of less than 10 basis points um so it’s
Not a business that has to manage so when I compared it to a money me or a wiser before those guys are direct consumer FS that’s that’s a space where I’m a little bit weary on that space because I think you’ve been through two years where consumers have been quite
Subsidized by the government and consumer balance sheets are quite healthy so I sort of take their loss rates with a little bit of grain of salt but for these guys the quality of those those assets that are backing the um the the loans I think um yeah their loss
Rates have have never been a big issue for them um because keep in mind they’re not financing the small businesses directly they’re just financing the the um receivables that they have so um even even if those small businesses are struggling that’s still a legal claim they have to the receivables on another
Customer that they’ve issued that too so um yeah they do have one thing I will call out and again I talking about xrf before and sort of how you ascribe value as an investor they do have a direct equipment Finance book um so that’s one
Where if I may you know actually my wife used to run a cafe we have a cafe we have our coffee machine cost a few thousand you can get that financed and you know just um have have lease payments instead so that’s uh you that’s one of their segments that’s one that
I’m not as fussed about to be honest um it’s it’s an area that the history of the ASX is pretty checked you might remember silverchef a few years ago of course um access today popped up for about a year in that same space before you know they they blew up pretty
Spectacularly um because you’re exposing yourself much more to the underlying health of the small business that you’re servicing um you know they they need to be able to service these um these these equipment financing but it’s a very very small part of their business and by far
The engine the earnings engine is driven by that core receivables business which I think is doing really really well um so yeah look like I said I thought it was one of the the better results I saw it was just an explosion of organic growth a lot of that I think has just
Pent up Co demand but you know management have sort of said they’ve seen the start second half 22 continue um as they get bigger they’re able to you know the constraints of their growth sort of get removed because they um they have Warehouse facilities with their
Lenders that can you know only lend up to a certain amount they expand so they can now grow faster and actually announced that the other day I think yesterday that they’d increased their warehouse facility yeah um so yeah I think again it’s a very well-run business you need that anytime you play
In in the finance space you I think you got to have a really strong view on the management team and their their conservative nature um because lending lending is such a tough business um bear in mind again we’ll get into the weeds a little bit here I’ll try and keep it a
Little bit high level but when you lend um a small business or a consumer money The Profit you recognize up front is effectively what you want it to be so the accounting standards essentially let you take a predicted um loss on that and then across your whole book you know
Whatever’s left is your reported profit so always always keep that in mind that um you know you’ve got to have a strong view on how management approach their book how they’re lending um fast growth even though you know I’ve been talking about early pay growing fast um it’s
Incredibly easy to grow fast as a as a as a lender of money um all you have to do is give people a lower interest rate and you’ll generally grow faster than your peers but it means you’re taking on potentially more risk but again I’ve known this management team for a long
Time spoken with them and and you know followed them for a long time I’ve got a lot of comfort around their competency and how they grow their loan book and their business and you see that in the historical results as well so I thought it’s a fantastic result I think they’ll
Come out and actually beat that guidance that they put out to the market and and probably trade on maybe eight to nine times earnings with with some good growth um the big risk I suppose um and goes into what you were just talking about with national TI is um you know
The underlying exposure to small businesses in Australia if this is a double dip recession um you know we’ve already seen what Co did to their volume numbers and their profits um you know that similar thing could happen again so bear that in mind um again it goes back
To what I said I don’t invest because of macro but for a position like early pay you have to be aware you have to sort of have your finger on the pulse of where you think the economy is at any one time roughly um and you know maybe even more
More specifically the trajectory you know are things doing well are things maybe starting to turn what are the headwinds um and for these guys in particular for small business but um you putting them to the side I think the valuation you’re getting I think compensates you for for you know all
That risk and then some it’s a really interesting business when we looked at it when I quickly looked at it for for obos um I was surprised by how clean the financials were which you mentioned there it’s you don’t often see that so early when a company’s growing like that
You don’t see that um very often so that was refreshing actually and the name I guess the name is a bit that’s a bit uh scary in these times but um I think it’s a really interesting business so that’s early pay epy is the ticket code on the ASX M
You’ve brought some really interesting companies I know you you invest in a very deliberate way in these profitable not speculative companies you know avoid biotech avoid resources um which which I think that’s the way I invest too so I mean you’re you’re prey to the choir
Here just to just to recap we covered kit mcgr K is ticket code catapult cat early pay epy xrf scientific that was a great overview of that by the way xrf is the ticket code and National Tire NTD is ticket code mate we’ve got Maryweather capital.com how else can people get in
Touch with you let’s say if they want to ask a question about some of the companies that have come up today or even invest yeah reach on the email investors merwether capital.com I’m on Twitter luk winchester9 um I’m pretty prolific on there so you shoot me shoot
Me a Twitter message I’m sure I’ll see it um yeah they reach out in that that channel and more than happy to provide any more information on the fund um or just yeah chat about stocks if someone has a question about any of those three companies or or something else they may
Have seen um you know you’re familiar with me through through wbiz as well um I just I just love talking about companies and and what I’m seeing out there in the market so more than happy to always pick up the phone or shoot an email to someone great y I’ll put all
Those links in the show notes as well as a link to the original conversation that you and I had so Luke Winchester from weather Capital thanks for joining me today thank you mate really appreciate It thanks for listening to the Australian investors podcast which is proudly supported by JP Morgan Asset Management JP Morgan Asset Management provides opportunities to strengthen and diversify investment portfolios through alternative income strategies with the JP Morgan Equity premium income ETF or ASX jeppy jei currently the world’s largest active
ETF with assets under management of us $25.49 billion as at the 16th of May 2023 for more information you can visit the JP Morgan Asset Management site by visiting am. jpmorgan.com that’s am. jpmorgan.com