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Smaller companies going global: Part 2

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In the second installment of this two-part series, Adrian Ezquerro of Clime Asset Management highlights two ASX-listed smaller companies with attractive long-term prospects for international growth.

As Adrian wrote last week, the Australian enthusiasm for travel is also reflected in some of the country’s brightest emerging companies.

This in turn means that Aussie investors have the chance to achieve exposure to offshore markets and their associated growth thematics without needing to invest through offshore exchanges. For investors, this means they can boost their portfolio’s diversity while also providing access to markets that can be significantly larger.

However, Adrian also warned that offshore growth strategies can come with their share of risks, and Australian corporate history will attest to this.


With this in mind, Adrian’s second post delves into another two ASX listed smaller companies that Clime Asset Management believes are well positioned to continue executing on their global growth strategies.

Navigator Global Investments (ASX: NGI) – formerly HFA Holdings (ASX: HFA)

NGI is a company that we have highlighted over the past 12 to 18 months given its value appeal and improving operational momentum. To recap, NGI is the parent company of Lighthouse Investment Partners, a US-based global absolute return hedge fund manager. Lighthouse manages US$10 billion across commingled funds and customised accounts for endowments, foundations, institutions, pension funds and large individual investors.

NGI is somewhat unique in that all revenue is generated offshore in its core US market, with its ASX listing effectively a legacy borne out of corporate activity several years ago. In 2007, at the peak of the market, the then Australian focused HFA business bought Lighthouse for just shy of $750 million in cash and scrip. Since that time, Lighthouse’s business has continued to steadily grow while the Australian operations have been wound down.

Along the way, following significant impairments, NGI has generated substantial carried forward tax losses in both the US and Australia, meaning the company won’t pay any (cash) tax for years to come. However, the Australian component of the tax losses remains landlocked until such time as the company has a domestic revenue generating presence.

After a long road to recovery, the company has emerged as a genuine growth story. With resurgent growth in assets under management, up 19 per cent to US$10 billion over the past 15 months, coupled with a strong cashed-up balance sheet and consistency in cash flow, we believe the company is well placed to invest for future growth.

Given the clean slate and refreshed operational momentum, we believe the time is right for management to incrementally build out the scope of its operations. In line with this view, NGI recently renamed from HFA Holdings as part of the company’s gradual shift away from its historical exclusive core of fund of hedge funds operations. The business is still likely to retain its heritage in hedge funds; however, we expect that it will grow to become a broader asset management business in three to five years time.

Figure 4: NGI’s new name and branding
Source: HFA AGM Presentation

According to the company, "The change of name is sought now that the company has completed a number of strategic milestones, including repayment of bank debt, rationalisation of the capital structure and balance sheet. It also signals the commencement of a broader business strategy which seeks to grow and diversify the group’s key operations, in particular further leveraging the strengths of Lighthouse’s proprietary managed account platform."

Now trading slightly beyond $3 per share (~$500 million market capitalisation), and having paid a healthy dividend along the way, NGI has been a strong performer over the past 12 months. After a solid run, the question of course is whether it’s time to assess our portfolio weighting. In our view, although NGI is no longer extremely cheap, it is certainly not expensive. Given the company still trades on an attractive and growing free cash flow yield of around 8 per cent (9.2 per cent on a forecast ex-cash basis), which supports a 7 per cent plus dividend yield, we remain positive on the company’s near-term outlook.

Perhaps more importantly, we also remain positive on the company’s longer-term prospects. Based on discussions with management, NGI looks to have a strong pipeline for more customised mandate wins in new distribution markets in the Middle East, Japan and Europe. NGI is a US dollar reporter and therefore enjoys a translational benefit as the Australian dollar depreciates against the US dollar.

Hansen Technologies (ASX: HSN)

HSN is a company that has long had a presence in various offshore markets, a presence that is only likely to grow further over the coming decade. Established in 1971 by Ken Hansen, and later listed on the ASX in 2000, HSN is today a leader in mission critical billing software on a global basis. HSN’s billing software is crucial to the operations of its customers, primarily those operating in the energy, water, telecommunications and pay TV sectors. As a result, customer churn is extremely low while the degree of recurring revenue is high.

HSN’s growing global footprint is impressive and encompasses a large, diversified client base of nearly 600, spread across 80-plus countries and serviced by 20 offices in various geographical locations.

Figure 5: HSN’s global footprint
Source: HSN FY2017 results presentation

HSN recently acquired Enoro, the leading billing software provider in the Nordic region, in what was the company’s largest transaction to date. HSN has a sound track record of integrating acquisitions, extracting synergies and thereby building the margin of the acquired business. We expect HSN will again follow this template with the Enoro purchase, which will effectively become a core driver of growth for the company over the coming 12 to 24 months.

As illustrated below, HSN has a diversified exposure to various currencies. While the somewhat stronger Australian dollar in FY17 was a mild headwind for the company in that financial year, should recent Australian dollar weakness continue, this trend will likely benefit reported results for FY18.

Figure 6: HSN’s currency exposure
Source: HSN FY2017 results presentation

Looking ahead, we believe the company is well placed to deliver double-digit growth in per share earnings and cash flow over the next two to three years. If achieved, this will build on the strong record of growth, largely self-funded, delivered over the past decade.

Figure 7: HSN’s per share earnings, dividends and operating cash flow, FY2006 – FY2020E.

While there may well be some significant bumps along the way, offshore markets represent a potentially deep pool of opportunity for those Australian companies that are good at what they do. Although each of the companies highlighted today face their own specific set of risks, we believe all are well positioned to deliver on the longer-term growth opportunities apparent in a range of markets – both here and abroad.

Adrian Ezquerro is smaller companies fund portfolio manager at Clime Asset Management. Clime Asset Management owns shares in HSN, HFA, CKF and BVS on or behalf of various mandates for which it acts as investment manager.

Smaller companies going global: Part 2
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