Coffee Microcaps Weekly 22.06.20 Issue 1
BSA Limited Company Review
Hello
Welcome to the first issue of my Coffee Microcaps Weekly Newsletter. This new subscription newsletter ($20 monthly/$220 annually) will be published every Monday morning. Each week, I will be delivering ASX microcap market news and stock analysis direct to your inbox. The newsletter will generally highlight one interesting ASX microcap story each week. I will also be sharing additional investment articles, videos, podcasts, insights and news to ensure you stay ahead of the curve when it comes to ASX microcap investing. I’d love to hear your feedback and suggestions for future newsletters by emailing mark@coffeemicrocaps.com. I hope you enjoy Coffee Microcaps Weekly.
Stock Review of the Week
BSA Limited (ASX: BSA) is a very traditional business providing fire protection, telecoms network services and repairs & maintenance services to large scale commercial buildings and infrastructure assets. BSA has fallen significantly from around $0.40c in late Feb 2020, and since then BSA has been stuck in a trading range around the $0.25c mark. BSA has not experienced any material bounce back in its share price, which is distinct from the broader equity market rebound we have seen since the COVID19 inspired fall during March 2020.
BSA has three main divisions
BSA Connect
BSA Maintain
BSA Fire & Build
BSA Connect
This division accounts for about 58% of BSA's total revenue. This division primarily services the NBN rollout and ongoing upgrade and maintenance services on behalf of the NBN. Its current contract with the NBN was recently renewed until December 2021. BSA Connect also provides similar telecoms services for wireless and satellite communications infrastructure to other telecoms companies in Australia. BSA has recently moved into smart metering and commercial grade solar markets as a growth area for the Connect division. This should hopefully reduce the customer concentration risk around contract renewals with the NBN and create a more diverse customer base for the division. This division has seen EBITDA margins improve from around 5% to circa 8% over the last few years, which is pleasing and shows improved management and cost discipline by management. This is critical in this division and for BSA more broadly as all three of BSA's divisions operate in traditionally low margin industries.
BSA Maintain
This division accounts for about 23% of BSA total revenue. This division provides maintenance services primarily to large scale commercial buildings such as office blocks, shopping centres, universities etc. Services include fire protection, HVAC, general repair and maintenance of plumbing and electrical infrastructure, energy and lighting audits and design, tenant fit-outs and building automation systems. EBITDA margins have been falling in recent years, but new senior management has been appointed recently to lead a turnaround of this division. This division had a minuscule EBITDA margin of 1.5% in 1H20. In the recent trading update, BSA alluded that of its three divisions the Maintain division had seen a degree of softness due to COVID19 as customers conserved capital and held off on all but critical maintenance.
BSA Fire & Build
This division accounts for about 19% of BSA total revenue. This division provides fire suppression systems, fire equipment, fire systems design and engineering services and the associated ongoing maintenance of such fire systems. Customers for the divisions again are sizeable commercial building and infrastructure projects and assets such as Wesconnex for example. This division has seen EBITDA margins as high as 10% in the recent past. EBITDA margins for this division have generally averaged around 8% over recent results.
BSA Company Outlook
All divisions can cross-sell products and services to each other's customers. BSA's increasing national footprint is also proving attractive to its customers who operate nationally, such as recent customer win Aldi supermarkets. BSA is also looking to expand into the energy sector through smart metering and commercial solar projects. BSA has also stated it is looking at acquisitions to further growth in the business.
BSA recently exited its HVAC major build business unit. Some legacy costs and adjustments arising from this divestment are still coming through the accounts, but these will mostly be a thing of the past from FY21.
A new CEO and CFO have also been promoted from within BSA and should bring some fresh impetus to the growth prospects outlined in the recent trading update. Given the internal nature of both appointments, they are familiar with BSA's business from day one and it signifies a depth of management capability and sound succession planning internally within BSA.
BSA, unlike many other stocks, avoided the need to raise additional capital during the recent market rout. BSA maintains a healthy net cash balance sheet with significant financing facilities at its disposal if required for internal growth initiatives or potential acquisitions. The majority of these finance facilities were renewed in May 2020 for the next three years and on improved terms for BSA.
BSA's recently announced a trading update for FY20 where it has guided the market that both revenue and EBITDA are going to be a scintilla above BSA’s FY19 reported figures. This revenue guidance is down about 8% compared to the revenue number BSA had guided to previously. However, given the context of what has transpired in recent months, a year of flat revenue and profits is not the worst outcome in the world for shareholders of BSA.
BSA also announced it would pay its first interim dividend of 0.5c fully franked in July 2020. This was after BSA had previously suspended the payment but not cancellation the interim dividend. This represents the first interim dividend paid by BSA since 2013. BSA has already paid a final annual dividend of 0.5c fully franked for FY19, 18 and 17 after previously having a complete dividend hiatus of some four years from 2013 to 2017. If BSA were to declare a full-year final dividend of 0.5c fully franked with its full-year results in August, this would put BSA on circa a 3.3% fully franked yield. Ok, not the highest yield in the market but in microcap land, I generally welcome yield as it is traditionally hard to come by. BSA has informed the market that its future dividend payout policy is 40% - 60% of earnings per share, which balances the need to reward shareholders and fund growth initiatives. BSA has also announced that it currently has $13.9m in franking credits on its balance sheet. BSA is presently undertaking a strategic review of capital management initiatives to try and release these franking credits back to its shareholders. I expect an update or perhaps even the results of the strategic review when BSA announces its full-year results in August.
BSA Catalysts
The outcome of the strategic review into distributing its large franking balance is the most obvious.
Any acquisitions over the next 12 months, which will add to both the revenue and profits base of BSA.
Internal growth areas are starting to flow through to revenue and EBITDA as BSA builds out these products and services.
Conclusion
BSA is currently trading on a circa PE of 13 times with a net cash balance sheet and a roughly 3.0% fully franked yield. BSA appears to have some upcoming catalysts that could cause the market to change its view on the current valuation it is ascribing to BSA. The recent trading update states that its "long-term financial goal is to maximise growth in shareholder value". This statement may seem like an obvious one to make, but I have found in the past companies who explicitly state this goal generally achieve their goal.
Overall, BSA looks interesting.
Upcoming Microcap IPO's
I will highlight any new non-resource/non-biotechnology microcap IPO's that are due come to market. Some weeks there will be an IPO or two; other weeks there will be nothing.
This week we have Advent Health which is scheduled to list July 8, 2020.
Please contact the relevant broker or lead manager to get a copy of the prospectus concerning any IPO mentioned.
Other Good Stuff
Each week I will try and bring other pieces of content (generally microcap related) I have found, which I think will benefit the readers of this newsletter. I firmly believe the process of microcap investing to be a lifelong incremental improvement exercise.
This week I wanted to share with readers this presentation from Brian Bares of Bares Capital Management in Austin, Texas, which he delivered to the Southern Luthern University Business School. Brian talks about running a concentrated microcap investment fund, his firms process and philosophy and experiences of running such a strategy over many years. Although, it is a long video I would encourage you to watch right to the end Q&A, as some of the student questions are really preceptive and well thought out, which I found to be an extra value add to the overall presentation.
Wrapping Up
Thank you for reading this week’s edition and I will speak to you next week. Any and all feedback welcome to mark@coffeemicrocaps.com
Disclaimer
This newsletter does contain financial advice in any way, shape or form and readers should note the content is general financial information and does not constitute financial advice. The author wrote this newsletter expressing their own opinions. In preparing this newsletter, no account was taken of the investment objectives, financial situation or particular needs of any specific reader. All readers should contact an appropriately ASIC licensed financial professional before making any financial decision concerning the contents of this newsletter. Nothing in this newsletter is to be considered a buy, hold or sell recommendation with regards to any company nor is it a recommendation to buy any financial product or service mentioned in the newsletter. No company or financial services provider mentioned in this newsletter has paid any fees, commissions, or other benefits to be mentioned in the newsletter. All research is conducted on an entirely independent basis. The author or any associated entity of the author does not hold any direct ownership in any of the companies mentioned in the newsletter. Subscriptions fees payable by premium subscribers are intended to cover the research, production and publication costs both directly and indirectly in terms of research time and effort associated with the creation of this newsletter. The author gives no representation or warranty concerning the newsletter and its contents. To the extent permitted by law, the author excludes all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information contained in the newsletter whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, the author hereby limits their liability, to the extent permitted by law. Although the information contained in this publication has been obtained from sources considered and believed to be both reliable and accurate, no responsibility is accepted for any opinion expressed or for any error or omission in that information. The use of any content from this newsletter is solely at the reader's own risk: all care, no responsibility.