Here's my take on a couple of small-cap shares that I have been looking at recently:
Kina Securities Ltd (ASX: KSL) – A$156 million market capitalisation
Kina Securities is a Papua New Guinean ("PNG") bank and wealth manager who's banking business is phenomenally profitable. It is the fourth biggest bank in PNG, the largest wealth manager, one of only two licensed stockbrokers, and has a significant foreign exchange business.
The semi-monopoly that Kina operates should remain reliably profitable for the long term, and has some modest tailwinds including (slowly) growing superannuation balances and the increase in availability of banking services (e.g. mobile banking) to the under-banked country.
However, despite an apparently strong competitive position, Kina's profitability has decreased recently and Net Interest Margins have been in decline over the past two years. The real question is, in my opinion, 'Is Kina cheap enough to justify a further decline in its business and allow for other risks, while providing for sufficient upside if conditions do not decline?' I don't think the answer to that question is 'Yes' just yet, and you can read more of my thoughts on Kina Securities here.
Eureka Group Holdings Ltd (ASX: EGH) – A$94 million market capitalisation
Eureka Group provides low-cost rental accommodation for pensioners, and receives its funding primarily, indirectly, via government subsidies. The company is on an acquisition spree and has been using debt aggressively to acquire new units and sites. Also, unlike Japara Healthcare Ltd (ASX: JHC) or Estia Health Ltd (ASX: EHE), Eureka is not reliant on the Aged Care Funding Instrument (ACFI), which reduces the near-term possibility of regulatory changes.
Cheap on the face of it, a significant chunk of Eureka Group's profits recently have come from revaluation of its properties, not from rental yields. In my opinion this means that the company's low Price to Earnings (P/E) ratio is somewhat illusory as not all of the profits are 'available', e.g., to pay debt. You also can't count on property revaluations occurring every year, especially since increases in the rental yield are effectively capped by the tenants' financial position.
I liked a lot of what I saw in Eureka's reports, and would be open to owning shares at another time. However for the moment, it looks like a $94 million company with $42 million in debt, that is growing aggressively in a capital-hungry business with a low return on invested capital, and I'm not super keen on that.
