LUKE WINCHESTER | from Merewether Capital

· Podcast Episodes
Surfing with the grommets at the smaller end of the ASX - Luke Winchester from Merewether Capital
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How small is the small end of the Australian share market? Who shows the love for this end of
the market? That would be Luke Winchester, MD and CIO of Merewether Capital, a specialist, small and micro-cap boutique funds management firm based in Newcastle, New South Wales. The firm focuses on absolute performance, deep, fundamental research and understanding of the businesses invested in. Luke is also one of the largest investors in the fund for a fully aligned, skin in the game experience.

This episode was inspired by Luke's recent appearance on Ausbiz Luke's two resilient nano cap stocks with potential on ausbiz.

It featured a table that came from DMX Capital linked here: June 2023 Monthly Report - DMXAM

I first came across Altium back in 2010, 2011. And back then I was first introduced to the stock by a retail investor on a Facebook group. The market cap for the business was, I think, around $50 million. Thinking about this now, it's a great example to circle back to the conversation we just had because back then Altium was actually going through its own strategic shift to build a platform for their product, and a cloud-based platform at that, which required some short-term investment and some muddy numbers and questions from the market about whether this was the right decision and could they compete with these established peers already in that space. And, of course, we fast forward just over a decade and Altium is now a multi-billion-dollar business sitting in the index. It's gone from being on a microcap retail investor Facebook page to covered by probably a dozen broking houses and analysts and owned by numbers of large fund managers


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0:00:01 - Chloe

Shares for beginners. Phil Muscatello and Finpods are authorized reps of Money Sherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

0:00:12 - Luke

You can rattle off a list of names. They were all micro-caps, small caps, when they began their journeys and the key theme to all of them and this is why I always warn people against just looking back in hindsight, because it's easy, really easy to look back in hindsight, but if you go back and you read some of the old reports from these businesses, they weren't super obvious. You know, even back then they weren't super obvious. They had their issues, they had their warts. They never looked perfect. But you know, like we said before, management grind away, they execute, they pull the right levers when they have to, on strategic shifts, acquisitions, and then, over time, good things happen and compounding takes effect and you end up with large, beautiful businesses that are the examples of what we want to find as small and micro-cap investors.

0:00:58 - Phil

G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. How small is the small end of the Australian share market? Who shows the love for this end of the market? Well, that would be Luke Winchester, MD and CIO of Merewether Capital. G'day Luke, G'day Phil. Thanks for having me back on. Merewether Capital is a specialist, small and micro-cap boutique funds management firm based in Newcastle, New South Wales. The firm focuses on absolute performance, deep, fundamental research and understanding of the businesses invested in. And, Luke, you're also one of the largest investors in the fund, so interests are fully aligned and you have skin in the game as well.

0:01:38 - Luke

Yeah, skin in the game. Single largest investor in the fund, my family's money. Yeah, and it's also the single, you know, largest investment. We have no other investments outside of the fund. So fully aligned with my investors, and I think that's how it should be. As you said, skin in the game, you want managers who are putting their money where their mouth is. So that's certainly what I try and do.

0:01:57 - Phil

It was great to catch up with you in person. I think the first time I actually met in person was at Coffee Micro Caps, at Mark Tobin's Coffee Micro Caps in Sydney, which was I mean, it's just great to go to those events and just see all of the innovation that's happening that just flies under the radar of the usual analysis of the Australian share market.

0:02:16 - Luke

Yeah, yeah, and I mean we'll obviously dig deeper into this topic. But you're completely right. You know, when you look at the Aussie market, there's, top of my head, 3,000-odd stocks on the market and you know the vast majority of them are small and micro caps. But all the attention from brokers, media and even, I guess, most retail investors is focused at the larger end. You know they're well researched, well covered and it leaves a real dearth of information for the micro caps. And you know guys like Mark and myself and others, you know we do what we can to help these companies get their stories out, because they often have really good stories to tell and a lot of them are just genuinely good little businesses, you know, on their path to becoming a lot bigger and, as investors, that's exciting and that's what we want to be a part of.

0:03:00 - Phil

So this interview we're basing on a recent appearance on Ausbiz and we're going to focus on a table or a snippet from a spreadsheet that you were looking at in the in this episode. Before we do that, I just wanted to also just by way of warning. It's very exciting into the market, but why should new investors avoid the small end of the market?

0:03:21 - Luke

Well, look, it is more risky. We are talking about smaller businesses and by definition they have smaller operations, smaller balance sheets, smaller cash balances. They're more exposed, I suppose, to certainly macroeconomic factors. If we see some sort of cyclical weakness in the Australian economy, which a lot of people are predicting, larger businesses are just better positioned to weather those storms and come out the other side. Smaller businesses, you know, especially those that are still reliant on external capital, you know from investors or from debt markets, and they can find themselves in a bit of trouble when times like that come around. And you know that will obviously colour the conversation we're about to have, because you've seen that play out in the microcaps. You've seen that sort of reaction to smaller companies over the last 12 to 18 months as that macroeconomic background has deteriorated a little bit.

So, yeah, so inherently more risky. But you know, all things equal, that risk equals reward. That's what we're looking for as investors and microcaps. We can touch on a few examples later on. You know the rewards available to investors when you can find these companies, when they're small, but on that growing path to becoming much larger you can have companies that make an investing career. You know, with some of these businesses If you find them early and then have the stomach to hold them through the volatility.

0:04:42 - Phil

And that's interesting, that word volatility isn't it? Because that's just basically the measure of how much a share price moves up and down, and volatility is much greater at this end of the market. Is that the case?

0:04:55 - Luke

100%. So the smaller end of the market is definitely more volatile. Where I push back on conventional thinking is that a lot of people associate volatility with risk and to me they're not the same thing. Volatility means, as you said, the share price is whipsawing around. You see large moves up and down, but inherently to me, risk is the fundamental analysis of the business.

What is the risk? That I could permanently lose my capital, that you know this business could go under, or the operations of the business you know are impacted in a way that is a permanent hit to the earnings capacity of that business moving forward. And from that point of view, you know, as I said, that they're slightly more risky just because we are talking about smaller businesses and smaller balance sheets, but not to the same extent that the volatility would imply. And that creates the opportunity where you've got businesses with volatile share prices that have been hit quite hard but the operations can still be quite solid, quite fundamentally strong, and come out the other side. And yeah, that's the opportunity we look for as small and microcap investors.

0:05:58 - Phil

So that's something that I've been going on about for quite a while now the difference between what normal people think risk is as opposed to what the finance industry defines as risk. And there's so many definitions of risk in the finance industry, but really for ordinary investors it's just the idea we just don't want to do all our dosh.

0:06:17 - Luke

That's right. That's right. And so to go back to your question before about should people avoid the smaller end of the market, to me the key is being able to build the conviction to, as you said, ride out that volatility and focus on the underlying definition of risk. Is there a chance of a permanent loss of capital in this business You'll see people sometimes talk about? Unless you can dedicate large amounts of time, hours a week, then you shouldn't delve into the micro and small cap end of the market.

I push back on that. I mean not sure whether we spoke about last time I was on the podcast, but my entry into the investment career. I was doing this while I was working a full-time career in another field and investing on the side in smaller micro cap stocks. A few hours of research a week, maybe even less than that, it can still be enough to understand, without doing super deep dives into these companies. What do they do, how do they make money? And, as you said, the key question is what's the risk? That I could permanently do my money here, and there's some small things you can do to really minimise that risk. I mean simply focusing on businesses that are profitable and pay a dividend, you will drastically reduce the risk of that happening. And there's dozens or hundreds of smaller micro cap companies that fit that definition, and they're the ones I encourage people to go out and find.

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0:07:36 - Phil

Okay, so let's have a look at this table that we've been referring to Basically. There seems to be some columns there. We've got sub 20 million, 20 million to 100 million, 100 million to a billion and a billion plus. Now I'm assuming that's to do with the market capitalisation of these particular companies in these sectors. Tell us about this.

0:07:55 - Luke

Yeah, so look, this is a table. I will give credit to fellow micro cap investors, DMX Capital Hopefully we can link to their monthly report in the show notes and as you said. So it's a table that breaks up the market into four buckets by market capitalisation sub 20 mil, 20 mil to 100, 100 to a billion and a billion plus. And then also by sector. But to me, the main thing I take out of this table is that market cap breakdown and it's for financial year 2023 returns and you see very quickly that the overall market did okay in FY23, entirely driven by the large caps which, of course, are higher weighted. So when you see that overall index return, it's very much driven by those large stocks at the top of the index. So for companies in every sector, over a billion dollars the overall return was 8%. But as you come down that scale 100 million to a billion negative 2.9,. 20 million to 100 million negative 16.7.

And then what I would do nano caps we marry with a capital we have. We have one or two holdings in this bucket sub 20 mil market cap negative 37.5. So you can see just the linear progression of the smaller these businesses are, the less the market wanted to do with them over FY23, and simply just exited that end of the market to focus on larger, larger businesses which, again, as I said before, there's some rationality to that. They are bigger businesses, bigger balance sheets, and there's a reason why you would expect them to be safer if you expected some macroeconomic sort of uncertainty. But that sort of number to me screams almost panic selling and capitulation in certain pockets and, as a micro cap investor, gets me a little bit excited about what the future could bring, because of course you know that sets the platform for future returns.

0:09:43 - Phil

Is that what you refer to as the safety of liquidity? That's a term that you mentioned in the interview and I was really interested just to dig a little bit deeper into that. What's liquidity look like across this table?

0:09:55 - Luke

So liquidity in general just means the amount of turnover that you have in a stock. You know, usually on a day is how it's measured. And so when I say people seeking out the safety of liquidity, what that's really referring to is that when people are uncertain on the outlook for the market, for the economy, they want to be in stocks that they can quickly exit if that decision is made. So if their outlook turns quite sharply be it on a piece of news or just coming to the view that they want to reduce exposure to the market, you are able to exit those large liquid stocks much more easily. When you come down into the pockets of the market where I play, that's more difficult.

Not a lot of dollar value actually changes hands in some of these stocks.

It might only be a few thousand $10,000 a day. But then the other issue is there's often a large spread between the people who want to buy the stock and sell the stock, and that creates issues in and of itself. So you may want to sell a position, but if the next buyer on the screen may be there at a 10% lower share price, that obviously creates issues that you can't actually exit the stock at the price that it's currently displaying. So that's what I mean about safety and liquidity, and that's a genuine phenomenon. Like that makes sense to me, it's rational to me, but again, it creates the opportunities for investors and the key to this obviously is patience, because again, you're talking about playing in a space where some of these businesses, if you were to enter them, you may not be able to get out any time soon. So, having the patience, having the long-term thinking and perspective, I think there's some fantastic opportunities for investors who have that and have the stomach to hold on to some of these positions to the medium, longer term.

0:11:38 - Phil

Is it worthwhile looking at the average daily trade of certain of these listed companies just to see how much buying or selling would actually affect the price of the stock?

0:11:50 - Luke

It's not something I have top of my list again because I like to focus on that long-term thinking and if I like the fundamentals of a stock, then to me liquidity becomes a secondary sort of consideration. But you have to be comfortable with your investing style and your capacity to be able to handle volatility. So for investors who may not be as seasoned as I am with microcaps and small caps definitely a consideration. You want to be able to find things where, if I'm wrong, I can actually exit this stock quite easily. But for me I like to focus more on the what if I'm right.

And there's fantastic opportunities where some of these subsectors in the table were just discussing consumer discretionary stocks down 50%. Healthcare down 44%. Information technology the poster child of the sell-off down 40%. So I'm not rushing yet to buy these stocks just because they've been sold off Some of them deservedly so. But babies always get thrown out with the bathwater when you see those sorts of large swathes of selling. So that's where I'm sort of fishing around at the minute for those opportunities, but again with the knowledge that some of these I'll have to stomach some more volatility and some of them I could just be wrong on. You have to accept that as investor you don't get every analysis correct. But again, from a microcap point of view, it doesn't take too many to go right to really overwhelm that risk reward on the other side.

0:13:16 - Phil

So I've got this question and I think it's we need to change it slightly and that's has the hype left. The small and microcap end of the market. But you kind of referred that this is based on rational decisions. But when money does start flowing back into the market, does it require a little bit of hype for people to become interested in this end again?

0:13:37 - Luke

not necessarily hype. It requires confidence. So it requires confidence in the market and the outlook and people, the confidence to be able to stomach less liquidity, more volatility and, as I said before, businesses and balance sheets that aren't as safe and defensive as the larger caps. To answer your question as it was originally posed, though, the hype has definitely come out of the market, but I've been on the record saying a few times that is a fantastic thing. Hype is not good. Hype creates bubbles. Bubbles burst and leads to the situations that we're in today.

So the poster child for me was buying now pay later, through that sort of 2021 period led by some actual fundamentals made sense. Afterpay was doing quite well, but then you saw the hype around. All of these minnows try to follow them, and I've said a few times that a market sell off like what we've seen, it's like a forest fire. You need it every few years to remove that speculation and that hype and businesses who don't have sustainable business models, who were basically never going to make it without the good grace of the market, giving them capital. That's capitalism that the capital flows to the pockets of the market, where it should go for the best return. So when I'm looking at the, at the beaten down small and micro caps. What I would say to people is don't look at where share prices have been 2021. It was hype, it was mania, and certain pockets of the market and certain businesses. They'll never get back to where they were.

That was a unique time. What you really need to be focused on again is coming back to the fundamentals of the business. For those businesses that can continue to grow, generate earnings, pay dividends, have good outlooks, particularly structural outlooks. I do agree on being a bit more wary on the cyclical Australian economy. I'm not rushing to buy retailers or construction stocks or things like that. Businesses that can offer some more structural growth, though, I think look really interesting where they are. So to me, that's the key. It's not looking where they've been, it's finding the businesses that have. As I said before, babies are thrown out of the bathwater, but they're good businesses and they're going the right way. When that confidence does return, they're the ones that will see that recovery coming out the other side.

0:16:00 - Phil

What are a couple of the metrics that you focus on when you are valuing a business?

0:16:04 - Luke

Traditional metrics, of course, when they fit the purpose. So if you have businesses that are growing their earnings, I can't go past just a classic price to earnings ratio, discounted cash flow. They are the ways you should value a business ARR metrics and price to gross profit. A few things snuck in over the last couple of years, but coming back to those old school metrics to me always makes sense when I think you need to be. I don't want to use the word creative because there's a negative connotation with that when we talk about accounting.

0:16:36 - Phil

A bit more qualitative, exactly.

0:16:39 - Luke

We're talking about businesses that are just earlier on in their life cycles, and particularly their earnings life cycles. You often come across businesses where operationally they're doing really well, but management are making the very rational and often correct decision to reinvest back into their businesses and that can create, in the right circumstances, incredible rates of return into the future, but at the sacrifice of short-term profits. So if they wanted to appease the market, there's some stocks that could probably come out and report good earnings and trade on low PE multiples. But I actually have a lot of respect for management teams who are making what they believe are the right long-term decisions for their business and continue to invest. So you need to be a bit more willing to accept.

Okay, the multiple looks high optically looks high, but what's happening behind that? Is there a level of investment or is there a segment of the business that's currently loss making but has some promise? That's sort of how I tend to think about valuation, not so much what's the multiple here and now today but I've used this word a few times when I've done some media stuff I like to think of the earnings engine being built. So what could earnings look like in one, two, three years if things execute the way I hope they could and you start to see some scale emerge over the cost base. So it's more difficult. It's a lot easier when you have businesses that are already mature, established, well-defined earnings, but again it's the opportunities that can be created because you're doing that little bit of extra work that a normal price to earning screen doesn't really show you. The risk comes out, obviously, where your analysis then has to be correct and management have to execute, that's smaller, micro cap businesses. You're relying a lot on the execution of management of the business.

0:18:35 - Chloe

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0:18:54 - Phil

And it's by the very nature of these kind of businesses that they've got to make pivots very quickly, don't they Like they might suddenly identify another means of making revenue that they didn't even think of in the first instance, because opportunities present themselves. These are not mature businesses. These are kind of businesses that are looking for where the revenue is going to come for, isn't?

0:19:14 - Luke

it, yeah for sure. And again, that creates a lot of opportunities for investors because we're in a market. It's very skittish and I agree with you. I'm quite lenient with the management companies not only that I invest in, but broadly across the micro cap, small cap space To your point.

Yes, you want these businesses to grow and experiment and tinker with their business models and their go-to markets and their product bases and customers and pricing models and find the right product market fit. And then when you do, obviously drive hard into that and I think we're in a market that's really not rewarding that at the minute. So businesses that may be trying to do a strategic shift or investing into a new product or new geography, you're not seeing much reward for that at all. The market very much focused on what are the metrics being reported today and not really looking at, well, what's this business investing for into the future. And again, it creates really good opportunities.

We can talk about a couple that I touched on in that AusBiz interview. I think both fit into that bucket where the metrics today they're not jumping off the page at you, but when you scratch below the surface and look at what these management teams are doing and the opportunities they're building and the optionality that they're providing within their businesses can actually be quite exciting. So I agree with your point and I think you need to have that leniency that I was talking about. You need to be able to let management experiment and tinker and give them the time to try and make the strategic changes or shifts that will drive long term value.

0:20:51 - Phil

It is the dream of any investor to have a company get in at the small end and watch it grow and suddenly become a large company and, of course, when it gets into the indices there's more attention, there's more funds that have to invest in it and it can be a virtuous cycle. Can you run us through an example of the company that has grown big enough to make it into the ASX 300 and what the effects were on the company and how it's covered and what it meant for investors in that business?

0:21:18 - Luke

I can think of plenty of examples, but the one I'll pick for the conversation is Altium Limited. I first came across Altium back in 2010, 2011. And back then I was first introduced to the stock by a retail investor on a Facebook group. The market cap for the business was, I think, around $50 million. It's actually thinking about this now. It's a great example to circle back to the conversation we just had because back then Altium was actually going through its own strategic shift to build a platform for their product, and a cloud-based platform at that, which required some short-term investment and some muddy numbers and questions from the market about whether this was the right decision and could they compete with these established peers already in that space. And, of course, we fast forward just over a decade and Altium is now a multi-billion-dollar business sitting in the index. It's gone from being on a microcap retail investor Facebook page to covered by probably a dozen broking houses and analysts and owned by numbers of large fund managers, and to me that's again it's a little bit of a cherry picked example.

Obviously, not every of these stocks turn into Altium, but there's plenty of them Dicker Data, Objective Corp, Pro medicus you can rattle off a list of names. They were all microcap, small caps, when they began their journeys and the key theme to all of them and this is why I always warn people against just looking back in hindsight because it's easy, really easy, to look back in hindsight, but if you go back and you read some of the old reports from these businesses, they weren't super obvious. Even back then they weren't super obvious. They had their issues, they had their warts. They never look perfect, but, like we said before, management grind away, they execute, they pull the right levers when they have to on strategic shifts, acquisitions, and then, over time, good things happen and compounding takes effect and you end up with large, beautiful businesses that they're the examples of what we want to find as small and microcap investors.

0:23:19 - Phil

Okay, well, let's have a look at the possibility of a couple of businesses keeping an eye on at the moment, without the benefit of foresight, of course. This is not a recommendation to buy anyone. This is just by way of an example and a way of looking at companies in this space. So tell us about Prophecy International.

0:23:37 - Luke

Yeah, prophecy International, it's a software business, two main pieces of software in sort of separate fields, but they share a commonality. So the first piece of software is called EMITE, it's analytics software for call centers, and the second piece of software is called SNARE, which is a cyber security monitoring software. So, despite targeting very different end markets, as you can imagine, the key commonality is both of those pieces of software. Their core reason for being is to ingest copious amounts of data, streamline that, filter that and provide it in presentable and actionable ways to management. So you can imagine if you're in a call center you've got thousands, if not millions, of pieces of data being created every hour, every day, and being able to track that, monitor that, improve efficiency and performance. And cyber security is exactly the same, the heightened awareness around cyber security. Now products like SNARE are really coming to the forefront as a tool to monitor when you do have those sorts of incursions, like we saw with Optus and Medibank. Something like a SNARE monitors everything, and so the way Prophecy markets the product is it answers three key questions Did someone get in, how did they get in? And if they did, what did they see, take or change? And it's that sort of monitoring software. So again you're taking a copious amount of data from all sorts of endpoints trying to determine those things. To come to the business and the financials.

The reason why I think it's interesting and I'll play a comparison to that Altium example just before the business has been through a large transition over the last few years. The first part of that was like a lot of software businesses making that transition to cloud-based software as a service. They used to be on-premise legacy integrations with complex legacy infrastructure. Now it's all cloud, deployed in minutes into cloud-based infrastructure. It's such a better business model, it's such a fantastic business model. There's a reason why the market has realized that the beauty of the software as a service business model, the recurring revenue that comes alongside it. They've been doing that over the last few years. They've finished it with E-Mite. They're halfway through or maybe a bit earlier with snare. That creates, I think, the opportunity you're seeing in the market. It's about a 40-mil market cap at the minute, 40, 45, but 13-mil cash in the bank cash flow break even. So to me, when we go back to what we were talking about before, sorry, look, was that 13 or 30 mil cash in the bank 13, 13.

0:26:19 - Phil

Still not bad for that sort of capitalization, though, is it?

0:26:23 - Luke

No. So it's a rock-solid balance sheet and cash flow break even. So they're not eating into that cash balance either. It's sort of a nice buffer for them.

To go back to what I was sort of saying before about my investing style, and I think the right style to have for smaller microcaps is to focus on that downside first. Am I protected by a good balance sheet, good operations, good cash flow? Prophecy ticks all those boxes for me and so the way I look at it as a business 22 mil annualized recurring revenue it's through that sort of break even, profitability, inflection point, Good software businesses like I think Prophecy is you really start to see these businesses scale once you get to that sort of 20, 25, 30 mil recurring revenue. And so, as I said before, I think about the earnings engine being built and I think Prophecy's got a very nice earnings engine where, if they can just grow modestly over the next few years maybe 15 to 20% a year, which is reasonable for a software business in some nice structurally growing, addressable markets you would see good chunks of that incremental revenue fall down to the profit line.

And I've sort of got Prophecy maybe FY24, FY25, 2 to 3 mil net profits around that sort of 45 mil market cap, so 15 times-ish earnings, without some aggressive assumptions looking forward a year or two. And that's a good example of how I like to think about valuation for these small businesses, Because there's no PE multiple you can point to right now and say Prophecy trades on X PE. You need to sort of have that view of okay, what do things look like in a year or two? And don't be too aggressive. Obviously Don't assume the world takes over takes over the world, but some conservative assumptions and I think you get to some very reasonable valuations quite quickly and that the certainty of the cash balance and the cash flow break even is the other part of it as well.

0:28:15 - Phil

What's the ticker code for it as well?

0:28:17 - Luke


0:28:17 - Phil

Yeah, so Prophecy International,

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Okay, then Global Health. That's the next company here you wanted to talk about.

0:29:22 - Luke

Yeah, global Health. So Proposy International to go back to that table we were talking about sits in that $2200 mil which had been hit hard and Proposy had as well. The share prices is down quite substantially from its 2021 peak, but Global Health is in that sub-20 mil market cap, so that nano cap range where, as I said, on average, these stocks are down 37%. Global Health is one of those down quite substantially. It's about a 7 mil market cap. So what these guys do it's patient administration software and electronic medical record software for allied health, private hospitals and some ad hoc sort of specialists as well, but a very established revenue base. Again, where I sort of get excited about this business looking forward is the reported numbers sort of mask the underlying growth of the business over the last few years. So they earn revenue in two ways. One is the recurring revenue they get from their software and the other is they charge companies implementation fees for installing their software, maintaining and upgrading it, things like that. Now, global Health is a little bit different to Prophecy in that in the medical space where they play, you still deal with on-premise legacy softwares. Medicine is an area that it has not kept up with the rest of the world and the pivot to the cloud and always being in the cloud hosted infrastructure. So they generate quite healthy sort of professional services fees for going on site, helping their customers integrate, upgrade and maintain. But that actually fell off through COVID. As you can imagine, hospitals and allied health and specialists had a lot of other things to focus on and deployment of software fell down the list. And so when you looked at the numbers for global health, their headline revenue and profit numbers looked quite ugly through that period. But the underlying software business has grown quite steadily about 15 to 20% a year for the last three or four years and that's where I start to get a bit of optimism about the future. They've won some good contracts so you get some visibility of what that could look like in the future and I think you see that sort of same steady compound growth on the software level and the return of the professional implementation. They've called out that they've seen a recovery this year. They're able to get on site again, sit down with their customers and start to implement some of these contracts they've won over the last couple of years and of course implementation then leads to that recurring software. So it's a very good leading indicator. So they're at a seven mil market cap and they've got about seven mil in recurring revenue, so about one times ARR.

Where the market I think is is pessimistic on the business and rightfully so to a degree is they are still going through what they call the replatforming of their software, which is basically taking their on-premise software into the cloud for certain customers who are ready for that, and that's expensive. We're talking about prophecy before. Prophecy went through that same process earlier back in 2018, 2019, they started the process, but it is expensive to upgrade your software from on-premise to cloud, but a necessary one. They have to do it. And again it circles the conversation back nicely to what we were talking about having some leniency for these management teams who are strategically making the right decision.

I have no doubt that long term, taking their core Mastercare product from on-premise to the cloud is the right decision for global health.

But you are not being rewarded by the market right now because it's costing them roughly $300,000 to $400,000 a quarter in development costs.

So I think that should wind off, though They've sort of flagged that over the next six months the bulk of that will finish.

I think you have the professional service revenues and the ongoing compound of the software revenues To me provides a very interesting position for the businesses right now. It's undoubtedly cheap on again not the biggest fan of ARR metrics, but one time's recurring revenue is undoubtedly cheap on that metric and it's the optionality you have for if the business can execute. One of the other things I like about this business and I like to see in smaller microcaps is they often punch above their weight and so in an unheralded announcement a few weeks ago, global Health announced that their software was selected by a subsidiary of Woolworths called A Healthy Life to provide the backbone to their telehealth services that they wanted to pivot into. It's always interesting to me. Obviously for Global Health, that's great as a shareholder in the business. But there's a lot of smaller microcaps around and you find them and they're doing some really interesting things and, as I said, punching above their weights and beating out some large appease.

0:34:12 - Phil

Look, winchester, it's been great chatting with you again today. Thanks very much for coming on the podcast.

0:34:18 - Luke

Thanks, phil, thanks for having me.

0:34:19 - Chloe

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