Why Forager Australian Shares Fund just bought shares of this small cap

I’m fascinated by the investment choices of managers who go for the contrarian picks and somehow make it work, at least to the point of soundly outperforming the market.

Forager Australian Shares Fund (ASX: FOR) has an excellent track record, over the last five years it has returned an average 19.25% per annum net of expenses and fees. There aren’t many managers out there with a better return after fees in Australia.

Therefore, it caught my interest when I saw that Forager announced it had become a major shareholder of CSG Limited (ASX: CSV) by buying 19.3 million shares, which equates to 6% of the voting power.

CSG describes itself as a subscription provider in the Australia and New Zealand region, supported by an in-house equipment financing business. It’s the largest non-manufacturer of print and business technology solutions in Australia and has national footprints in both countries.

It has a range of customers from small-to-medium enterprises, up to large corporations and government organisations. It works with a number of major business partners like Canon, Konica Minolta, HP, Samsung and Microsoft to deliver a brand agnostic product and service offering.

A unique selling point is that CSG customers can source all their IT needs from one supplier with one monthly bill, hence the subscription description of the business. The business has around 710 staff in 27 locations across Australia and New Zealand.

In FY17 its revenue dropped by around 1% and its earning per share (EPS) dropped from 5.7 cents to a loss of 13.7 cents.

Forager must see a value play after its share price dropped from $0.435 to $0.285 in one day.

The fall came about from a trading update. The previous guidance for the first half of FY18 was that revenue would be around $269 million and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) would be $30 million. The new guidance was that revenue would be between $253 million and $260 million and the underlying EBITDA would be $18.5 million to $21 million.

The revenue decrease was disappointing but the EBITDA dropping by around a third is a big decline.

Management attributed the decline to lower than expected print equipment sales. To me, that’s not a surprise as more businesses are looking to go paperless to save on printing and paper costs.

CSG CEO, Julie-Ann Kerin, said “While we are disappointed with our print sales execution, we are pleased with the strong growth in technology with high value subscription seats closing at 19,184 as at 31 December 2017, representing organic growth of 44% relative to the prior corresponding period.

“The technology business will represent approximately 25% of group revenue at the end of FY18. We remain confident in our growth strategy and the long-term opportunity for the business”.

Foolish takeaway

Perhaps it is the technology growth that Forager thinks is worth investing in CSG for. If it is, it could a good long-term investment whilst the share price is depressed. However, the CSG share price fell by just over 5% today, so perhaps the pain isn’t quite over yet for CSG shareholders.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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