Nanocap 5 Update & Option to Top-Up or Redeem

Prophecy International Ltd (ASX:PRO) (“Prophecy”), the remaining business owned by your Nanocap 5 investment trust, reported 1H20 results in February and recently provided a trading update with regards to Covid-19.

Overall, the company has made good progress over the past 12 months with a significant uptick in revenues across its major operating divisions, client wins, improved quality of earnings and strengthened balance sheet. The business has also expanded its salesforce footprint across its major client markets. The improvement in fundamentals saw Prophecy experience strong share price gains up until March 2020. That strong share price recovery was significantly reduced by the Covid-19 outbreak and the consequent market correction. Though the current share price (post-Covid-19) is still materially higher than 12 months ago, it very much remains a depressed one and represents a buying opportunity.

1H20 Key financial highlights

1. Revenue of $7.3m was 20% higher than the prior comparable period (1H19: $6.1m).

2. Both main divisions (eMite and Snare) reported material YoY growth in sales.

3. EBITDA increased to $0.7m (1H19: $0.1m).

4. Balance sheet strengthened with cash balance rising to $4.1m (1H19: $2.3m), and no financial debt.

5. Positive traction in the sales pipeline and increased salesforce footprint.

 

Performance by division

eMite

eMite revenue of $1.7m was up from 1H19 revenue of $1.6m. Whilst the increase may seem modest, eMite’s revenues are predominately Software as a Service (SaaS), and as such the increase in sales takes time to be reflected in recorded revenue. Total contracted value (TCV) is therefore a more meaningful metric to gauge the momentum in the business. TCV increased materially from $1.7m in 1H19 to $2.8m in 1H20. Average first year contract value (1CV) increased to $41k versus $15k. The significant increase in 1CV is a result of the eMite offering being added to the Amazon Connect platform which has larger, enterprise scale clients. Despite Covid-19, eMite has a positive outlook for FY20 and the business continues to gain momentum in its SaaS offering.

Snare

Snare revenue of $5.0m was 28% higher than 1H19 revenue of $3.9m. Average sales value rose to $13k, up 54.6%. Prophecy has expanded its European sales force presence. The company is working on several major distribution agreements under a SaaS model. These deals are material in nature and would enhance the quality of earnings, as well as further lifting sales in FY20 and more sustainably into FY21.

Investment opinion

Prophecy has made robust progress over the past 12 months and has reported a solid 1H20. SaaS and other recurring revenue continues to increase and enhance the quality of earnings of the business. We do not expect Covid-19 to significantly impact the business and the company continues to be well positioned for a strong FY20 result. We also note that the eMite pipeline remains strong. Prior to Covid-19, Prophecy’s share price had recovered strongly and rose as high as $0.90 per share. At the current price of $0.42 per share and given the relatively benign impact of Covid-19 on the business, we believe Prophecy is an attractive buying opportunity. We note $0.42 per share is still materially higher than the price 12 months ago, however, the current market valuation is severely depressed with a market capitalisation of just $26.9m and no financial debt. Trading at just a 1.9x revenue multiple, Prophecy remains one of the cheapest software companies in our Australian investment universe. We recommend investors stay in the vehicle as we look to extract an even better price outcome. However, we are cognisant of the need to provide a liquidity pathway for those investors who require it. For this reason, we will be opening Nanocap 5 for redemptions (on a best endeavours basis and following the redemption process set out below) for those investors who wish to exit the investment. We note that given the existing lack of liquidity in the shares of Prophecy, the large spread between the bid and ask prices and the low market price, redemption proceeds may be materially below the fair value of the business. For those investors that wish to stay in the vehicle no action is required for the next 12 months.

The Microequities investment management team will remain fully invested in the Nanocap 5 investment vehicle and may decide to increase their investment during the next 12 months, as long as the Nanocap 5 remains open for investment. If fellow investors wish to increase their investment, they will be provided an equal opportunity to do so. Additionally, other investment vehicles managed by Microequities Asset Management Group may also invest or increase their investment in Prophecy.

Top-up Process

1. Unitholders seeking to Top-up their units in this fund should complete, sign and send the Top-up form to invest@microequities.com.au

2. Unitholders will be issued with new units in Nanocap 5 based on the closing end of business day Net Asset Value of the Nanocap 5 Trust on the day cleared funds are received.

Redemption Process

In view of the limited liquidity in the shares held by Nanocap Trust No 5 (‘Shares’), the redemption process will operate on a best endeavours basis and follow the procedure below in order to be equitable to all unitholders:

1. Unitholders seeking to redeem their units in this fund should complete, sign and send this form to invest@microequities.com.au

2. The total of all units to be redeemed as set out in the signed and completed redemption forms received by Microequities on or before 30 April 2020 will be included in the Redemption Pool.

3. Microequities will use its best endeavours to sell as many of the Shares as possible without materially impacting the share price in order to fulfil the redemption requests for the total number of units in the Redemption Pool. As such, the redemption of units in the Redemption Pool may occur over multiple months.

4. On the last business day of each calendar month, the unit price for Nanocap Trust No 5 units will be calculated based on the net asset value of the fund.

5. The number of units from the Redemption Pool to be redeemed in each month will be based on the number of Shares that have been sold during that month.

6. Each redemption request included in the Redemption Pool for that month will be satisfied pro-rata based on the number of units in that redemption request divided by the total number of units in the Redemption Pool. By way of example, if you send a redemption request for 700,000 units and there are 1 million units in the Redemption Pool for that month, 70% of your units will be redeemed at the beginning of the following month and 300,000 will carry over to the Redemption Pool for month after.

7. Those redemption requests that are being satisfied each month will be paid within the first 5 business days of the month based on the unit price calculated at the end of the prior month.

8. Any units in the Redemption Pool which are not satisfied in the next month will carry forward to the Redemption Pool for the following month.

To request a redemption please click below. Nanocap 5 investors that wish to redeem must send us an executed redemption form by close of business 30 April 2020. Investors that wish to stay invested in Nanocap 5 do not need to take any action.

If you have further questions regarding your Nanocap 5 investment or any other Microequities investment matter, please call us on 02 9009 2900.

Yours sincerely,

Microequities