Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Forager Funds Management senior analyst Gaston Amoros tells why now is the time to buy up small-cap ASX shares.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Gaston Amros: My name is Gaston Amoros; I'm a senior analyst at Forager Funds Management. Forager Funds Management is a value-oriented funds manager. It's been around since 2009.
Our historical return, or at least the number that I have in my head, is 16% compounded per annum over the last 10 years. And I think that's around 500 points, so 5% of alpha versus our benchmark. Our benchmark is the All Ordinaries Index (ASX: XAO) and the fund is a listed investment trust in the ASX under the ticker Forager Australian Shares Fund (ASX: FOR).
In terms of investment philosophy, we typically invest in stocks that are unloved and undervalued. On any given year, the market will present you opportunities, and for some time the opportunities have been typically what people describe as value stocks. These are stocks that have actually rewarded us with the performance that we've been harvesting for the past 18 months or last couple of years, I would say.
We typically go wherever the opportunity is and wherever we see value emerging. That value has worked very well over the last couple of years. We think that now we are starting to see an opening up of opportunities in small-cap growth in particular.
The other sector that could be interesting is, what people normally describe as COVID beneficiaries that are being thrown out with the proverbial wash water. But I think the one that is more interesting, and that probably I'm hoping that the one that would actually build our returns in the second, over the next couple of years, will be small-cap growth that is now suffering the same fate as some value stocks a few years ago.
Biggest convictions
MF: What are your two biggest holdings?
GA: Given that we're talking about that [small-cap] bucket and given that I think it's where the opportunity is for your readers and where we see the opportunity emerging these days, I think Whispir Ltd (ASX: WSP) would be one of them.
Whispir is a service platform that helps automate communications workflows with customers or employees via SMS, email, social media posts, etc. They have around 1,000 customers. And they count names that people will be familiar with — like Telstra Corporation Ltd (ASX: TLS), Foxtel, Chemist Warehouse, Australia Post, Qantas Airways Limited (ASX: QAN) and a bunch of others.
So someone like Chemist Warehouse, if I remember correctly, they started in 2016 with one use case — particularly it was they were using the Whispir platform for click and collect notifications. I think today there are around 6 use cases, which include COVID vaccinations, e-prescriptions, click and collect, and a few other things.
Another customer, for example, [is] the City of Christchurch Council in New Zealand. They use the Whispir platform to coordinate emergency response in the case of earthquakes or in the case of tsunamis.
This is time-sensitive, mission-critical communications, either among an employee base, or customers.
MF: The share price is down more than 40% over the past 12 months, but your team still has plenty of faith in the future?
GA: We have plenty of faith in the future. It's one of our largest positions in this sleeve of high-growth companies. We started buying Whispir, I think it was around the middle of the year… entry price was around $2.50. So I think we're slightly underwater at the moment, but we have a 3-5 year investment horizon, and we're very confident that we will make more than our fair share over that period of time.
Whispir has grown 20%, 30% per annum, historically. They upgraded their FY22 guidance at the time of their AGM. They just reported fiscal Q2. So this is December and they were growing 27% year-on-year. And they added a record number of customers.
Also, very importantly, in December they announced that transformational deal. They signed Singapore Telecommunications, or Singtel, as a partner in the Asia-Pacific region. So Telstra does the same job for the Whispir here in Australia and New Zealand.
Telstra gave them 80% of the revenue that they have in Australia and New Zealand. So if Singtel does anything remotely similar to what Telstra has done for Whispir in Australia, this deal is very transformational. And there isn't much in people's numbers for this deal. This is a deal that will start contributing in size from FY23. So what it actually does is de-risks the growth profile.
Last but not least, Whispir is traded at around 3 times EV [enterprise value] to revenue. This compares to Xero Limited (ASX: XRO), WiseTech Global Ltd (ASX: WTC), and Altium Limited (ASX: ALU) that are trading between 15 and 20 times EV revenue for a similar growth profile. That gives you an idea of the potential risk-reward here.
MF: And your other big holding?
GA: The other one that's worth mentioning, which is big for us, is Bigtincan Holdings Ltd (ASX: BTH).
Bigtincan is a leader in sales enablement software. What sales enablement means is essentially a software platform that you deploy either in mobiles or in tablets or in laptops to your salesforce. It does basically 4 things: sales content management, sales training and coaching, document automation, and internal communications. So it's a bundle. And it integrates to your salesforce.com or to like your SAP or to whatever other ERP or CRM solution people are using.
But the important thing to understand is, not all software is created equally. There are software products that insert themselves at the front-end where the revenue is generated for the company, where you get the incremental dollars. And you get software solutions that go in the backend, which are nice to have and they fulfil an important role, but they're not mission-critical. It's hard to measure the utility of the backend products, whereas the front end, it's very clear. Either they're helping to make more revenue, or they're not.
Bigtincan is one of those that is at the point of friction where the salesforce is actually generating the revenue. You get all that for $7 a pop — basically $7 per user per month. So it's actually a small investment across a large workforce and the customers are pretty happy.
The proof of that is in the fact that it's been growing ARR [annual recurring revenue] at more than 30% organically over the last few years. The total number is 50% compounded because they've been buying and rolling up companies — but their organic growth is north of 30% over the last few years. It's 97% recurrent revenue. It has pretty interesting unit economics.
We are very excited — but again, we are a 3-5 year investor. We are very excited about what the future looks like.
