Australian Equities

We provide this monthly report to you following conclusion of the month of August 2024.

The TAMIM Small Cap Fund was down -0.64% (net of fees) during the month, versus the Small Ords down -2.02%.

Over the last 12 months the fund is up +17.35% net of fees versus the Small Ords up +8.51%.

The month of August was an uphill battle for the Fund. The month began with global markets selling off aggressively on the back of a partial unwinding of the yen carry trade. Global markets sold off between -5% and up to -20% in Japan in just a matter of 2-3 days. The Fund is not immune from general market volatility and so we spent the rest of the month peddling hard to regain those early month losses.

Market sentiment eventually recovered and the focus was back to fundamentals and the August reporting period. Share price directions were now driven by each company’s individual results performance and the corresponding market reaction to it.

Overall the majority of our holdings performed to expectations or exceeded them. Those that disappointed and where the original investment thesis was broken, we exited. There were some cases where our thesis was not broken but the market aggressively sold the stocks down due to certain aspects of the results or the outlook disappointing the market. In those cases, we took time to reassess our position and in some cases reduced our exposure. Unfortunately a combination of market volatility in early August and some late month disappointing results, ended up with the fund being down for the month, although this was after a very strong CYTD performance so far.

The good news is that as we go to print in mid September, the Fund is performing strongly. We will have to see whether that continues until the end of the month, but rest assured we continue to actively manage the portfolio.

We have uncovered some exciting growth companies to add to the portfolio that tick most of the boxes we look for such as founder led, strong profitable growth, cashed up balance sheets and industry leading positions.

Some of these companies are utilising AI applications to drive strong sales growth and disrupt competitors.

We discuss some of these in our portfolio update section and also some of the laggards that we still believe present good upside in the next 3-6 months.

As we look forward into the near term, we are still of the view that rate cuts in the US will drive strong investor sentiment towards small/mid caps. In addition, once the uncertainty of the US presidential elections is resolved in early November, we believe the market will rally into the year end and into 2025 and beyond.

We provide a brief commentary on portfolio updates during the month in the portfolio section of the report. We look forward to providing further updates in our next monthly report in October.

 

Sincerely yours,
Ron Shamgar and the TAMIM Team.

Comms Group (ASX: CCG) is a leading provider of innovative cloud communications solutions, secure modern workplace services, global unified communications, and wholesale telecommunications services. The company operates primarily in Australia and the Asia Pacific region, where it serves a diverse range of corporate clients, particularly in the mid-market segment.

Comms Group’s cloud communications services are designed to enable businesses to operate more efficiently and securely, offering solutions that include voice, data, and video communication capabilities integrated into a single, unified platform. This approach not only reduces costs but also enhances collaboration and productivity for its clients.

In addition to its core cloud communications offerings, Comms Group provides secure modern workplace solutions that cater to the growing demand for remote and flexible work environments. These solutions are particularly relevant in today’s business climate, where companies are increasingly adopting digital transformation strategies to stay competitive. By offering secure, scalable, and flexible workplace solutions, Comms Group helps businesses adapt to the evolving needs of the modern workforce.

The company’s wholesale services division offers telecommunications services to other carriers and service providers, generating additional revenue streams and enhancing its overall market position. This diverse range of offerings enables Comms Group to capture multiple market segments and provides a strong foundation for sustainable growth.

Comms Group’s FY24 results were exceptional, surpassing market expectations and setting the stage for a promising future. The company reported a record revenue of $55.5 million and an underlying EBITDA of $6.6 million, both exceeding guidance. A particularly notable aspect of Comms Group’s financial performance is that over 90% of its revenue is recurring, driven entirely by organic growth.

Additionally, Comms Group has shown significant improvements in its cash flow, with operating cash flow up by 150% and free cash flow increasing by 200%. These improvements highlight the company’s ability to generate substantial cash, which is crucial for funding future growth and potential acquisitions. The declaration of an inaugural dividend of 0.25 cents per share, potentially yielding 4-9% in FY25, further underscores Comms Group’s commitment to delivering shareholder value.

Looking ahead, Comms Group has provided an optimistic outlook for FY25, targeting 5-10% organic revenue growth and over $7 million in underlying EBITDA. The company is focused on becoming a leading provider of cloud communications and secure modern workplace solutions across the Asia Pacific region. A key element of this strategy involves cross-selling secure modern workplace solutions to its existing telecommunications customers.

Furthermore, Comms Group is exploring strategic growth opportunities through selective acquisitions, aiming to expand its footprint and enhance its service offerings. Importantly, Comms Group is targeting a net debt-neutral position by June 2025, reflecting its prudent financial management and commitment to maintaining a strong balance sheet.

One of the standout features of Comms Group is the alignment between the board, management, and shareholders. At a recent Extraordinary General Meeting (EGM) in June 2024, the board was awarded 7 million shares that vest between 12.5 cents and 20 cents, compared to the current share price of 7 cents. The board collectively holds 23% of the company, with the Managing Director being the second-largest shareholder. This substantial insider ownership ensures that management’s interests are closely aligned with those of shareholders, a trait we value highly in potential investment opportunities.

The telecommunications industry is inherently a consolidating one, where new challengers consistently emerge to take market share from larger incumbents. Over time, these challengers often become the consolidators, acquiring smaller players to expand their market presence. A decade ago, we witnessed this trend with M2 Telecom (ASX: MTU) and Vocus (ASX: VOC), who merged after acquiring several smaller listed players.

In recent years, Aussie Broadband (ASX: ABB) and Superloop (ASX: SLC) have emerged as successful challengers in the industry and are now in the consolidation phase, acquiring smaller peers to strengthen their market positions. We have benefited significantly from owning shares in Symbio (ASX: SYM), which was acquired by Aussie Broadband last year, and have also seen strong returns from our investment in Superloop.

Given the current market dynamics, we believe that Comms Group is a highly attractive target for both Aussie Broadband and Superloop. At a valuation of FY25 EV/EBITDA of just 3.5x, Comms Group presents a compelling opportunity that is too good to pass up. We anticipate a potential takeover within the next 6-12 months at a 6-8x multiple, representing a substantial upside of +71% to +128% from current levels.