2 listed microcap names to consider
Morningstar's Lex Hall talks micro-cap stock picks with Carlos Gil, chief investment officer at Microequities Asset Management.
Lex Hall: Where are the opportunities in micro-cap equities, today. I'm joined by Carlos Gil he oversees the Deep Value Fund at Microequities. And we're going to talk about three stocks that he's got his eye on.
Carlos, welcome back to Morningstar.
Carlos Gil: Great to be here Lex.
Hall: Now the first name on the list is and lot of these -- well, these three names, I should say probably aren't household names, it's fair to say. But the first one is Smartpay Holdings. It's an IT service management company.
Gil: Yeah, it plays in the payment space, which at the moment, there's huge investment appetite for. Historically Smartpay had about 35% of the market share in New Zealand and they had a very simple operating lease model where they essentially leased EFTPOS terminals to SMEs, signed them on a three to five-year contract and collected a monthly rent from them. That's a mature market with not a lot of growth. But in Australia, about two years ago, they started to build a presence. And the model in Australia is slightly different in the sense that it's not a simple operating lease model, they actually generate a commission or a transaction fee of all the volume that goes through an EFTPOS terminal. Probably your listeners are much more familiar with one of Smartpay's larger competitors called Xero, which is a much bigger company. So think of Smartpay as a smaller version of Xero but growing at an organic growth rate that's faster than Xero.
Hall: Okay. Now, it's funny you should mention Xero because the second name on the list today Reckon Limited, which is an Australian software company that provides cloud based accounting, that made me think of Xero obviously.
Gil: Correct. So Xero would be a direct competitor around the accounting part of the business products that Reckon has. They do also have practice management software, which Xero currently doesn't play in. That's actually a very good solid business. But you're right, Xero in in one of their product divisions is a direct competitor of Reckon.
Hall: Okay. Is that something to be worried about, or?
Gil: Look, our investment thesis on Reckon isn't predicated on Reckon winning the SME market. We believe that Reckon has carved a niche for itself and will continue to grow, not at the rate that Xero is growing, but there is still a growth pathway for (Reckon) to continue to establish a foothold in the market, but it's never going to beat Xero, we can see that Xero is definitely going to win the market and has already taken the lion's market share.
Hall: Okay, all right. So that's Reckon Limited, (ASX: RKN) and Smartpay Holdings (ASX: SMP). The third name on the list isn't listed yet, which is very interesting. It's called Complexica. Tell us about that.
Gil: So Complexica produces artificial intelligence software for enterprises to help them optimise sales and promotions. But it also has a component of also assisting supply chain logistics. And we've invested very successfully in the past in enterprise software and we like B2B business models because they're very sticky and provide a very long term, reliable cash flow for a business. And we believe that artificial intelligence is really in the nascent stages of penetrating enterprises. So there's massive multi decade growth available for the likes of Complexica and other artificial intelligence software providers, and we're super excited by that investment. We've invested in Complexica via our new private equity fund and we believe Complexica is on the road to IPOing within the next two years.
Hall: Okay. Carlos Gil from Microequities. Thank you very much for your insights today.
Gil: Thanks for having me here, Lex.
Hall: I'm Lex Hall for Morningstar. Thanks for watching.