the call: Friday 22 May

[MUSIC] The call is brought to you by Centuria, an ASX-listed property fund manager with $21 billion in assets under management. Want to diversify beyond equities? Explore the Centuria Sydney CBD Prime Office fund at centuria.com.au. [MUSIC] Good day and welcome to the call. Ten stocks, pink by you, two experts. It is Friday, the 22nd of May. I'm Andrew Gagan. Thanks for joining us again here on the show. Also joining us today, Claude Walker from Rich Life and Luke Winchester from Maryworth Capital. That may give you a clue as to what we're actually going to do today. Of course, it is a focus on small caps, gentlemen. Welcome to you both. Great to see you in the studio. That's a bonus as well. And Luke, the mark of the moment is something to hold. Isn't that given that volatility? The extreme lose is seen from one day to the next. How is this playing out for small caps at the moment? Look as a combination of things. Obviously, the sentiment around geopolitical issues that we all know about, I think Australia is specific, although you've seen a divergence, particularly from the US with that real tech AI focus over there. Those indexes continually hitting all time highs. It feels like every night. We're struggling over here for a couple of reasons. We don't have that genuine tech AI exposure, or obviously, driven by banks and miners. And two, I think the Aussie economy is a bit of a different spot to where the US is right now. Our inflation is a bit stickier. The RBA with those interest rate rises. And I was only commenting to someone this morning, it just feels like that last interest rate rise was that that final straw that sort of broke the consumers back. You've had almost every retailer who's updated the market since that time say the same thing, which is January and February were pretty good on budget. March, we started to see some wobbles and then April was pretty ugly. And now, of course, we just had the budget. And you look at the implications of that. We've had the budget in terms of holding those assets. Yeah. And Claude's got a good article on a rich life discussing those changes and particularly the impact to small caps. You know, we'll bring it back to the program today. But, you know, risk assets now being punished more than your safe defensive and income generating assets. So, throw all that in. It's that time of year with tax loss selling as well. So, the general sentiment around small caps is pretty tough at the minute. But there's still good opportunities out there. So we'll talk about a few things. Of course. That's why you guys are here. And I'm a huge regards to what the park is doing. Claude, look, just mentioning obviously you got that article you've written in response to what we're seeing. Why the CGT change is terrible for growth stocks. And why? Well, the simple answer is that the mechanics of the change, which are unfortunately kind of complicated, mean that if you have a low risk asset, like say a lower risk asset, like an index fund that grows at slightly more than inflation, then the CGT increase is like fairly modest, maybe a 30% increase in tax. And that's the kind of example that they've used in the budget paper when, you know, the people at Treasury and the politicians have envisaged this increase. They've imagined how it impacts a person who is investing in an asset that they don't have any big losses and they don't have any big wins. So they just have one steady asset that is a little bit above inflation. And they will be paying a modest increase in tax. However, for the small growth investor, which is what I've done, spent my career doing, RIP, there is basically you might have a number of stocks that lose out completely, but just one stock that accounts for the vast majority of returns. That might be a 10-bagger. And you'll only get the cost-based indexing on the cost-base of that stock, not of the ones that lost. As a result, the actual increase in tax you pay will be very extreme because you'll end up paying like the full, probably marginal rate, if you've got a big year where you've made a big win, you'll end up paying the top marginal rate on your winning stock that made 200K, but you won't get to index the cost-base of the other stocks that lost money. And as a result, you can have a person who's invested and made a $100,000 profit over 10 years in an ETF, and they'll pay after the changes, maybe $30,000 or something in tax. And you'll have a growth stock investor who's made exactly the same total profit, $100,000 over the exact same time frame, 10 years. And they'll pay something like $45,000 or $46,000 in total tax. And that will encourage people not to be growth investors and instead to just invest safely in indexes or ironically even houses. And as a result of that, it will, should all else being equal, really reduce the valuations of growth stocks across the board because now that the before tax gain you need to make on those growth stocks, just to match an investment in the ETF index fund, is even higher than before. So I'm expecting this change will be a big headwind for all growth investing, not just small cap growth investing. Yeah, well, I mean, certainly there's been a lot of commentary since these changes are announced. They still got to be legislated of course, but the point was made perhaps that. Sorry, it's just absurd because all the growth investing creates the jobs. Well, I want to encourage that. Well, to that point, there was perhaps this should have purely applied to physical property. I really wanted to address the issues in the property market. Exactly. And that would be so effective because that would actually get capital out of the property market into shares and other assets, which would be great forehousing affordability. But they're punishing people like me and Luca invest in, well, especially me because he has more of value orientation with his investments. But honestly, I couldn't design a change that was more specifically detrimental to my style of investing. Yeah, well, I think you're not alone. You're punishing us all. We're all in it. That's why we're talking on this show today. So, well, is camera listening? We shall find out. Yeah, that's the big end. Like, oh, we'll find out soon, guys. Anyway, it's a first world problem. Let's remember that. That's true. In context. All right. So, let's kick it off without stock of the day. Not so small, but it is good as minute go, as it's pulling out of the US market. That was the big news that dropped this morning. It was seized trading in Chicago immediately. But it has a number of stores that will recognize a one-off impact of 30 to 40 million US dollars. The first for a chance saying the financial performance in the US business has not been acceptable. It was not being targeted hurdles. GYG saying Australia remains its core focus and the Australian business is in a sole position with strong growth of firm expecting to make underlying EBITDA or an Australia of $85 million for the F/26 up 29% on the year. Now, here's Chief Executive Steven Marx talking to us in February when we asked him of any plans to exit the US. We have a real point of difference in the market. We tweaked our narrative in marketing and touch. I've built, it's been 20 years in Australia. We've got restaurants in Singapore and Japan. The signs I'm seeing here show that the US will pick up quicker than it was obviously to build in Australia. We're very optimistic for the future in GYG. With it comes obviously financial discipline. We've got border proof for 15 restaurants. We've got eight. We've got two more opening up this year. One will continue to build obviously revenue. Our cost of goods is getting stronger with our supply chain and we're optimistic for the future here. Now, that was Steven Marx as I said in February. I know you guys can actually hear what he was saying then, but you said he was committed to the US. They saw the growth potential there. That was only a couple of months ago. Look. What has changed? Does this turn it around? We've seen the response on the market today. A big bounce. Yeah, which might shock a few people, given inherently looks like bad news and part of the valuation of Guzman and Gomez was predicated on the potential of the US being such a large market. So why would shares be up today? It was a very heavily shorted stock and I think a lot of people were there because of the struggles in the US. With that thesis largely played out for the people who were short, it looks like a bit of a short cover rally to me today. Look, there's a lot of commentary around this decision. There's a lot of people, a bit of a told you so because they were trying to sell Mexican food in probably the most competitive market in the world. I think a lot of people were calling the strategic follies of that for a long time. So there's some gloating and some backpading going on by people, but I have to admit this is the right call for management. I mean, you go back and look at the results. They were barely growing in the US. Stalls were stalling out. They were throwing good cash after bad because the Aussie operations are pretty, is a pretty good business as a standalone segment. So they made the right call to exit that and I sort of, in one hand, applaud management the board, not chasing, not trying to follow through a bad decision just because you've committed to something as you were talking about there, Andrew, at the start. The problem now, though, for investors is this is now just the Australian business. You've lost that blue sky potential of the US. I know they were talking about trying to play forward with other jurisdictions, but they when year is big. The problem is if this is just now an Australian story, this valuation has to come down significantly and the problem is that we have a pretty good peer on the ASX in Collins Foods. You know, has a dominant fast food franchise here in Australia. Trains about half the valuation of what the Aussie business does for Guzman. So I know we've had a bounce today. I think longer term, short medium term. We now see this start to pull back and start to reflect that this is only just the Aussie operations now. That valuation has to come back. So I'll say a sell Andrew. I think if you're there today is giving you a pretty good opportunity on some short covering to exit the stock. It's not one, you know, I don't mind the business. I like the food and I don't mind the business. Like a lot of people, I thought the US was a very bad endeavor. It's good there out of there. Probably needs to share probably need to be down 40, 50% before it looks interesting though. 40, 50% that's given most fall and so already interesting. All right. Thanks. Look, that's a sell. I would also sell the stock. It's hard to add too much more to what Luke said, but I will just give a little background for retail investors who might be thinking of taking an ill advice point on this one. This is just a absolute, you know, the valuation of this company has been a joke from IPO until now. It's incredible that it got to where it did. That shows you the cynicism and power of this like index inclusion play because what they did, their company got big enough to IPO and then all a lot of, you know, pretty smart institutions supported the IPO knowing that they could support the IPO. They just needed to hold the price up for a little bit. They just need to have a little bit of good news flow in order to create enough liquidity and size for this stock to get added to like the passive funds. And then the smart, I don't know, I should have checked the exact date, but the smart installs who had participated in the IPO sold out around the time or shortly after all of that passive money pushed the share price up. So as the passive, you know, done money buys in, the share price goes up. You see that in 2024. That's when the smart installs who are like kind of in on it, like not saying there's anything illegal about it, but like they're in on the plan, which is that, you know, float this thing, get it bought by the passive funds and sell to the passive funds at a ridiculous valuation, like mission accomplished, which is then of course, there's maybe the same installs or their makes, the other installs who didn't, maybe they didn't get given the IPO stock that they could flip, but they're like, well, I see you ready to make money out of this, shorting it because it's so obvious what's happened. And so that's why you've had it 15% short or something like that. And so anything that's heavily short, we'll have these big covering days like we've had today. But ultimately, you know, of course, the US Joe, the US plan was always a joke to anybody, like of course we're not going to spend like sell, angle sized Mexican slop into America. But like, you know, the question is, it does Australia have the appetite for that kind of gunk food. And maybe it does, maybe it doesn't call on food as a decent business that's been going around for a long time. So I think it could survive long term, but as Luke says, it's got a long way to go before it's trading in the ballpark of reasonable multiple. I have it on 25, 24, 25 times underlying a bit of the Australians and business. Underlying a bit there is a very gamy number. You don't pay 25 times that for it for a matureish business. Yeah. Colors about 10. Yeah. So more than double the like nearest comparable. All right. Well, that's pretty plain to see then it is a double sell for Guzman and Gomez. I don't know that Luke would be happy if you've criticized his dietary habits. Yeah. Calling it gunk food. Perfect. Okay. All right. Let's have stock of the day. Guzman and Gomez. Let's get into the ones as chosen by you. The first five we're going to take a look at. Now we're going to do a contrast compared to begin with the WT financial and centipotal alliance courtesy of the viewer question. I'm also going to take a look at three people learning sports and it's haven and Maxi parts which is out with an update today as well. All right. Let's get into it then with as I said, we're going to compare these WT financial. It's business model has two major parts business business licensing and direct consumer advice as well. Now Alex asked in the question saying, I currently hold both. These are my portfolio would love the two companies to be reviewed by the experts feel the current valuations are being missed by the market while not immediately seen as sexy and the sum of it abouring these financial services stocks have insider ownership traded a Ford P ratio around 10 reported double due earnings growth and a cheek based on free cash flows and due to low liquidity on yet to see these stocks re-rate similarly to listen to your count with these experts. Well, what's the view? Claude, what do we do with this way? We'll start with you and you can do the first and then the second and then we're going to look. Sure. Okay. So we've got WT financial and center point alliance that we're sort of discussing together. And both of these make sense to discuss in some ways together because they are essentially both roll-ups or conglomerations of financial advisors and their core business. So you're probably a lot of our viewers are semi aware but you know the regulations and stuff to give financial advice is quite onerous and there's like you either need to have a license yourself or authorize yourself under another license. That's what both these businesses do that kind of thing. Now they have slightly different approaches to it. I'll start with WT financial. Look, this is the smaller of the two and I think you know the you know question or thinks that they're both good and it owns them both and I can understand what it does. Essentially he says look they're cheap based on free cash flows. I wouldn't think so much about free cash flow although that's very important as dividends because one of the things that you see sometimes with cheap businesses is that they accumulate the free cash flow and then they use it to buy something else and you never actually see that as a shareholder. So look at the dividends. Both of them still do have good dividends. I have WT financial onerous 6% trailing 12 months dividend yield which is pretty reasonable given that it you know has the potential to be roughly steady. However I would definitely not say it's cheap or not so cheap for the segment. The cheaper one in my viewers center point alliance which has a higher dividend yield. I have like 8% or 8.5% but perhaps because it's a bit larger it has a little bit more risk in terms of losing revenue and advisor numbers and both of these companies face the same kind of risks that we've now seen play out again with the other comparable which is Sikoa which is completely blown up because they were the one of the people that were most responsible for shoving those fraudulent first guardian first sent here whatever they're called those master shield whatever they're called those those funds that are in the news that have the silly names. Straving those people down the throats of like the the gormless investors and so Sikoa is in big trouble now and they should be in big trouble. That's why these stocks are cheap because if there's something that's gone wrong in the whole network if there's one problem where there's a whole network that could take down the whole network or causing massive rises. So finishing that that's the risk you've got to be aware of and so if you wanted to invest in this cheap segment which does have a good dividend yield I think the probably the approach is actually correct put a little in both because you never know where the landmines hidden and the reason I don't own these stocks but the reason I actually do think these are probably going to have a decent year or so ahead is because I think that they'll end up getting more business because of the Sikoa blow up. So in terms of our questioner do I like your ideas that you have read in I do like them I think they are a sensible small cap investment right now I think that as long as you acknowledge there is real blow-up risk with these businesses and your size your position appropriately I'd probably if I wanted to invest in them I'd probably prefer spread it out between the two rather than go all in on one. All right we're calling it buyers then. Modest? I'll call them you guys you guys know that I'm always like cautious of these kind of blow up risk businesses but yes you know forced as long as you take into account that with your position size I would call them buyers I think the returns here will be decent just from dividends if they don't blow up. Yeah okay all right look how do you compare? You know look I agree with a lot of that Alex who wrote it in he was talking about the valuations being cheap and they are cheap relative to you know other businesses and the index but this is a sector it's a tough industry clawed highlight of the risks around it and so the listed players in this industry really sort of see their multiples expand more than sort of 10 to 12 times earnings. These guys are both a little bit cheaper than that moving forward which sort of sums up where we are in the market with small caps yields are strong. Claude picked up on the exact thing I was going to say though so this is a this is an industry where there's actually quite a bit of transparency about how many advisors each of these businesses have under license like it's actually updated weekly there's various websites which track the the advisor numbers of all these groups and so you can get a pretty good feel as to which groups are bringing more advisors under their licensing umbrella and which ones are losing them and the trend now for the last six, nine months since all of that Sequoia drama is these two have been the main beneficiaries of Sequoia shedding advisors. Cloth right though, something similar could happen here, where if you get those negative headlines, the advisors don't want to be associated with a certain licensee group, it's not hard for them to shift across to someone else. I will be positive on both. If you made me pick one, Andrew, I'd pick Santa Point over Wealth today or WTL, but I'm fine with heart, holding both. Maybe for the program, just 'cause I'm not as positive on some other stocks coming up, we'll say bye for Santa Point. - Bye for Santa Point. - And a whole for WTL. Okay. There we go. All right, so that was a bit of an interesting way of doing it, wasn't it? Sorry. - I wouldn't just add, I prefer Santa Point over the two of them as well, but I think diversifying your risk across the two of them makes more sense. That's why I'm giving them bye both. - Yep, okay, so buy and set a point. Maybe call it a whole then. - Yeah, you've got to do that whole. - Yep. - So that Koshy here, did you know becoming an Osby's contributor gets your stocks straight to the front of the queue at the call and to the expert of your choice if a big if you become an Osby's contributor. It's our small way of saying thanks for your support. The link to become a contributor is in the show notes and we'd love it if you could leave us a review as well. Thanks for listening. - Okay, let's move on to the third stock and we're gonna take a look at 3P learning. Now Nick asked me about this dust build and distributed digital education programs. Schools, teachers, parents, delivered in as a soft, as a SAS subscription model, essentially. Luke, this is pretty much in your wheelhouse, isn't it? So is this one that you have looked at before? - Look, one I've looked at, one I've never owned. So it's core products are reading eggs and mathematics. So anyone with young children might be familiar with the products. It's been a very tough business now for many, many years and it's gotten to the point now where given the last few years, I think the only conclusion you can come to as an investor is that this is a business in structural decline. Whether it's competition, AI, I probably haven't delved too much to really understand the competitive drivers but they are just consistently losing, a load of mid single digit percent of revenue every year and I know Claude loves his term. I love it too, the melting ice cube where as investors, you know, can you rely on a management team to cut costs and stay ahead of declining revenue, you can sometimes do okay for short periods but it is just, it's not the sort of investment that I like to find as a small cap investor. I think we were talking at the start of the program about all the headwinds facing us as small cap investors. Why then go and put another headwind in front of yourself in the sense of declining business and structural decline. So for me, this is a pretty easy avoid. It looks cheap nine, 10 times earnings but they always do on the way down because the market's ahead of the earnings decline which is I think they are here. So pretty, pretty easy avoid and I'd even go one step further and you drive yourself if you're there. Claude. Yeah, I think it's definitely a self for me as well. I acknowledge that there's been some director buying recently and I acknowledge that the P ratio could end up looking cheap, you know, if they have, if they've cut and cost extra hard and as a result of, you know, a little bit of luck in that they have not too much revenue loss say in the next half or the next year and they cut costs aggressively, you could see their profit go up and you could see this and it would be possible for the share price to go up but I would argue that would be brief because let's take a look at this. The long term story of this business is not that difference from something like Nix or what I would argue would like, it's definitely worse than something like Guzman and Gomez even but it's just like this super over hyped IPO which by the way was like 10, 15 years ago now. Oh yeah, yeah. But when that IPO happened in my opinion the company was already pretty much X-growth and it like it had a couple more half decent years just long enough for the shares that were escrowed to like get out of escrow then there was heaps of selling and it never and it just basically has been going downhill ever since. It is remarkable how resilient their revenue has been especially in what they call B2B which is really B2S schools, particularly in Australia. The amount of money the education departments are spending on mathematics in this country is should be a scandal. It should be a scandal when you've got some kids coming to school hungry, you've got kids with behavioral issues that can't be excluded from school and like then pose a threat to other children or slow down their learning. You know, we could help public education in this country by having extra teachers, we could help public education in this country by making children a Fed. Instead we pay money for this not impressive at all maths program that was cutting age 15 years ago and has from what I've seen by my children barely changed in any meaningful way. Offers almost no advantage over just a classic maths worksheet and you know, quite frankly could be replaced by three or three programs essentially. You could write a simple maths program on, you know, using Claude AI and it would be almost as good and you could do it and you could make it free and the heap's already online free. So I won't read out the names of their free competitors but I'll just say I think it's a massive disgrace that the Australian government pays for this product and you know, it's only declining it like a few percent per year on the revenue level. So if they had the mindset where they were going to just milk it for every dollar so it was worth, then you could probably expect to get a decent return on the $70 million market cap it has today if they really milked it because they still got tens of millions of revenue for selling this software, right? But the last few years they've spent it, you know, trying to invest in making their software better, they magically think they're going to get growth. It's not possible to get growth when you're overcharging so massively for the product and the main reason you get to do that is because either you have a direct to consumer acquisition channel which is of course then expensive to acquire the users or you're just relying on the fact that the public purse is paying and nobody cares that they're overpaying for the product in my view anyway. And I think if you ask any parent or teacher out there should we spend more or less on mathematics? Would you prefer another teacher or a mathematics subscription? You know, well you can do the research itself but from my sample which is anecdotal nobody thinks mathematics is a good buy. There you go, that is why it is a double cell. Let's do something completely different now. We don't have sports entertainment. It is the stock, SEG, the code. It produces and it's due with sports content across radio to the digital print, live events, two live sports teams. And Claude let's start with you and just tell you look at the share price over the past five years really got nowhere. - Yeah, so I mean this is a business that is I guess fundamentally in the business of advertising. So that means that it's always, I think of it as a pro cyclical company and it's done investments in this and the other. So it rarely has had a clean set of results. If you look at its long term, historical earnings, et cetera, it's up and down all over the place which is consistent with just generally advertising businesses that are investing in assets, selling them, divesting them, some are losing money, some are making money. It's like a real mess, it's a real tough business basically. Hard to make money, hard to build enduring value. So I would just avoid it, like quite frankly, Luke might have a different view. Perhaps he thinks it's cheap, but for me, and I see them buying back shares, et cetera. So there's the argument, there's always the argument with these stocks like oh, that it's priced in, but for me, no, I don't think it's favorable at all. - I do have a bit of a different view. So this is one where I probably had that same view of media and advertising very cyclical for the smaller players, it's also hard. I chucked this on my watch list at the Half Year Report when they had some pretty good numbers and then they had a conference call that I jumped on. And to be honest, I find it pretty interesting now. Like they are in a niche, they're in this sports niche, really dominant down in Victoria, starting to expand in a new South Wales and Queensland a little bit as well. But what sort of caught my eyes, I was talking about, this is a business where you need to build out your platform and your content first and then scale your advertisement, your revenue on top. So because they were fleshing out their new South Wales and their Queensland and they were bringing on sports personalities and people like that, you're incurring some cost upfront and then building afterwards. So yeah, about 12 to 13 times earnings, I think that's a fairish price today, but you look ahead and if they can continue growing the way they are, those profits, it will scale and profits will grow faster than revenues. I think I'll say a whole dough Andrew, just because I do share Claude's view of like it's a cyclical business, advertising is inherently cyclical. I do like the niche that they're in though. They like because of that sports focus, they're going to attract advertisers, certain advertisers who may focus them given the reach they'll have, particularly into certain demographics. So this was one, yeah, I think Claude's right, I did, I did. I did share a different view just because when I stumbled across at the half year, I'd sort of chuck on the watch list and thought this one looks pretty interesting. I haven't done too much more work on it yet, but certainly one I'll say a hold for. Right, I have a different opinion there, but it is an avoid from Claude and look would hold it. Let's now turn to Maxi parts. Ash, when I was talking about this truck and trailer parts distributor, that key being in Maxi parts and also for Shesterradia, now it has, out of the trading update today, in fact, reaffirming guidance despite revenue weakness there, particularly I guess taking into account the headwinds from the Middle East, conflict and how that's affecting the transport sector in general. Look, what do you think? Yeah, look, in general, it's not a business or a sector that I love. And I think it's one that you can lump into this idea of the market loves to look at a well-executing peer, and then say that's too expensive or I've missed that one, where else can I go? And so you look at something like a supply networks, which has been a fantastic business on the ASX now for 10, 20 years in this auto parts distribution sector. A lot of people look at supply networks on 20, 25 times, or things whatever it might be. It's had a big run, it's expensive, where else can I go? And you naturally try to look to a Maxi parts or an RPM automotive, or some of these smaller players that are in the same space, but just don't have the same quality of business, quality of management. So it's not a bad business, though. Today's update, very timely, obviously, with the program today, sort of coming out and saying what a lot of businesses are saying, which is things really started to weaken around that March period. Obviously, the Iran geopolitical stuff, the interest rate rises, diesel stuff like that. But even before that, it wasn't had a look at the half-year report. It wasn't like this was a business that was absolutely flying, and now coming into these macro issues, revenue was up 2% at the half-year, and profits were down a couple of percent as well. So it was already struggling for some growth anyway. Looking at the update today, it's guidance sort of in line with where they were. I think the point of the update today, though, was more to say, things don't look good for the future. So revenue slightly weakened, and what they'd said, profits roughly in line. But FY27, if this persists, things could potentially get a bit ugly. So I wouldn't want to be there, Andrew. I'm tempted to say a hold, because maybe the bad news is priced in. But I just think there's better opportunities. So let's say a sell and come up with a couple in the second half. We don't worry about it then, do you? So sell it. Good. Yeah, look, I mean, I wish we'd got to it. I prepared this last night, and I was going to say sell, and it's down 5% today, but I still think it's a sell. And the reason is, look, I own supply networks, and have done for many years. And I have, I downgraded it. It was a recommendation that I made, you know, quite a long time ago now for the website. And it has more, more than doubled in price since then. And I've long since downgraded it to hold. And in fact, we've, this is supply network, we've taken some profits. But I still hold the rest of that. And the part of the reason I hold onto my some supply network shares, and in fact, it might even upgrade it to buy if it keeps coming down, is that Maxi parts is such a great competitive to have. Like, you should be blessed to have a competitor like Maxi parts. Because they are constantly, oh gosh, there's so much I could go into it. So they, for example, they are on a different plane of existence, where they're always talking about underlying profit, excluding, you know, discontinued operations and or excluding significant items, etc. And there's always, you know, there's always significant items for something. That's what I thought was significant about the update today is right now. They said, oh yeah, we're in line with, you know, our profit before significant items is in line with estimates and stuff like, yeah, but what's the actual profit going to be? What are the significant items that you're going to surprise us with this year? And that's, it does so often over the years I've been watching it. It's constant, you know, and the other big differences that, so Maxi parts been much more acquisitive. Now that has not worked out for shareholders. They don't have a track record of acquiring well, put it that way. And so it hasn't really managed to grow. And what's more, its network has grown out in this sort of like, hodgepodge way, depending on where the acquired businesses had their, you know, geographical locations, whereas supply networks has slowly and deliberately chosen the exact locations where it makes sense for it to build its new distributed sensors or to build its new locations where it, where it, like the, the spokes where it serves a customer base. So supply network has this like very deliberately crafted for the long time, low key attitude where they're just telling you their profit each year, they don't do glossy, like they don't make a big song and dance about it. And they're very deliberately building their network out. And this gives them, in my view, a very sustainable advantage over Maxi parts. And now, as inflation puts the cost up of everything, the cost to start a new version of either one of these businesses just goes up and up and up. So the, because you need to build up tens of millions of dollars of inventory. So Maxi parts is going to be the weaker competitor in my view. Supply network is going to be the stronger competitor in my view. It's been that way for at least five years. I don't see that changing. So I would not own the weaker competitor in a distribution network. Because generally speaking, distribution networks is thin, competition in margins, right? So only the best ones really going to do well, because they're always going to push prices down to, to cause pain on the weaker ones. And they say, even in their most recent results, webcast, they had a comment, or we've seen some aggressive competitor activity in certain areas. Of course, the bigger, stronger ones are going to always cause them pain with aggressive activity where they can. And the best distribution for truck parts that I know of in Australia has got to be multisperse, which is supply network. Right, I then double-sell. Let's sum up the first half of the show. Pretty negative overall. We did begin with our stock of the day, Guzman and Gomez, which on that news that is exing the US market. But both sort of saying that's obviously reducing its growth opportunities there. So it's a double-sell. And then we had that comparison there between WT Financial and Centre Point Alliance. Now pointing out that WT is the smaller of the two, Centre Point Alliance, the cheaper of the two. Both would prefer Centre Point over WT Financial. 3P Learning. Once again, pretty negative. Luke would avoid it. WT is the point where it's sell it. In fact, seeing that sector's instructional decline and we're clawed, probably work well listening back to what he had to say about that. Very critical of what they have to offer if it also sell it. Sports entertainment isn't a void from Cloud. Whereas Luke is a little more positive on it. But both pointing out it's a cyclical business, so be aware of that. And finally there are Maxi Parts, it is a double-sell. All right, let's so catch up with our own high conviction fund. Picked by the Investment Committee, latest episodes, life at ozbiz.com.au. You head to the drop down menu and you can have a listen to that. And the reason is just why that made their changes in the portfolio. And so far the fund is up close to 31.5% on a kind of return base. And since it began in March 2022, so you know the deal. Keep those requests coming in. You've worked hard for your money, all your life. Now your money needs to work hard for you. Whether you're building, transferring or drawing down, the right information makes all the difference. At ozbiz Retire you'll find the latest news and insight from trusted experts all in one place. ozbiz Retire is powered by RAM. Retirement income done differently. So the second half of the show, we are going to take a look at energy one. Wagner's GWA Group. I don't know if we're doing Kibbegrar. Maybe I'm out of order here. I thought we were doing yep. Okay, I've got the wrong list. I have a money. I'll correct that. All right, so let's begin with energy one. And getting to because that start, it is a lot of energy software and service company that essentially building those tools for wholesale energy trading, carbon trading, operations and risk management as well. Checking in, in fact, it did. Should have price fell about 10% after announcing that it's annual recurring revenue growth of around 30% that was below expectations. Luke, let's start with you. Well, I think let's start with Claude. I mean, EOLs. Claude's baby. Fair enough. Go to it. This is a very long-term holding for me. I think the first board shares went around $1. If you zoom out, essentially, this company's last results was record revenue, record profit is looking healthy in terms of its actual results. However, what has weighed on the share price more recently was, first of all, I feel like software stocks in general have been on the nose. Then most recently, I think it was just yesterday, they announced a market update which disclosed that they would receive 13% ARR growth in FY26. Now, this was definitely below. I think that they sort of implied that their target for AR growth was around 15 to 20% and they never gave any kind of specific guidance about it because they essentially can't control exactly what their AR growth is because the end result can be swung around by a couple of customers signing by a certain date or not. Now the funny thing about this situation is if you actually look at the detail they said that AR AR may finish slightly below our projections at around 15% growth constant currency primarily due to timing of project commencement which will fall into FY2027 instead the timing impact is largely explained by two large multinational industrial customers increasing the scope of their projects which has extended the scoping phase and pushed the project start date. So you know the and these projects have combined AR value of approximately one million which will be coming next year. So to me you know this is bad news in that I guess that they'll they'll be a little bit less growth in FY2026 but on the upside FY2027 should have some new you know new contracts at the beginning of it and on top of that the reason that this has been delayed is apparently because they're increasing the scope of their projects which is a good like it's a positive sign about the company's products and the desire of its customers to work with it. So yes okay in the short term it's a slight negative but in the longer term it's like yes more neutral or you could even argue say negative plus positive so it doesn't change the long term investment thesis. Now I think EOL will struggle as will many growth small caps under the new potential tax regime however it is you know over the long term growing its profits and it does tend to pay a dividend I'll be at a small one. So over time I think you know will be it will be okay this is a particularly well-position company to grow and that was what the new CEO who has you know just taken over after a transition period that's what he really emphasized in the majority of that announcement which was like sort of read like his first like let it to share holders from his from his own in his own voice I guess and you know he said basically that the pipeline continues to expand customer engagement remains strong and our products and AI initiatives are closely aligned with long-term market trends. So the long-term investment thesis does is not change to me short-term I totally understand why this is impacting on sentiment but if you're a long-term investor there because you believe that this company will be meaningfully bigger in five or ten years this announcement is probably more of an opportunity to buy shares and I haven't bought shares myself since this announcement because I wrote about it and then now I'm talking about it so I have to wait a couple of days but I'll most likely use the share price weakness that we're seeing at the moment to top up slightly. Yep okay well I'm weakness in which is happening but I consider it a buy right now like I will shock if I wasn't a commentator I'd just buy it but instead I'm talking about it and then I'll wait some time and I'll buy it. I think Claude Luke. I think it's a buy as well. Look this is one of the best small-cap businesses on the ASX. The software is a service metrics for me oh well are up there with not only again some of the best on the ASX like your Ystecs not quite prime editors but sort of Ystec Tech 1 but but even globally the the SAS metrics they put out are unbelievable. Claude's right the long-term thematic as well around the energy transition the sophistication and the complication of the grid as more and more power is required only benefits these guys and that that medium long-term hasn't changed at all. So you know you're getting an opportunity as an investor to purchase on these short-term hiccups which I mean take a step back I know the environment we're in for software for growth for small caps all of the the nervousness around sentiment right now but this is a business who said we're targeting to do 15 to 20% ARR growth we're going to do 13 like it's this these are the sorts of opportunities that long-term investors should be bouncing on because it doesn't change that medium long-term thesis at all and even even yesterday you know I think it was down 10 11% at one point and started rally through the day I think as that sort of thinking crept back in 40 times earnings look you could argue that's you know a touch high but it's still in that scaling this isn't a mature software business they're still growing at those at those high levels and importantly profits are going to grow faster than revenue even around that sort of high-teens rate so that comes down very very quickly this is a buy from the Andrew but again it's it's it's not just the business and where we are it's more I think as investors like I said these are the things we should be training ourselves to do is to take these find these short-term issues ask the question is there a long-term change and if not you know looking to jump on those opportunities all right that has been the pick thus far it is energy one double buy right I better lift the pace let's get into it with the wagnas and this is construction materials infrastructure company concrete cement aggregates and the life based into one but I think it was behind actually building the Tournament International Airport at least the air strip there look what are you seeing and I guess once again we took the railroads headwinds potentially with the economy yeah we've got we've got wagnas and we've got GWA together which again we had that comparison with the first two stocks and now these two you can sort of contrast them as well because there is a big divergence on the ASX right now between construction companies exposed to infrastructure which is a huge tailwind and companies exposed to residential which you know the market is just not a fan of whatsoever you know there are genuine headwinds there so wagnas is definitely that first bucket these guys are exposed to the infrastructure spend in particular we're in a market right now you know we've discussed all the uncertainty you know from all these different places and so what the market is really doing is looking around and going well what the magic can I see where I can just guarantee a tailwind for the next you know one two three years data centers is obviously one any data center related play we're seeing share charts like that and the other one is Queensland Olympics Brisbane Olympics the market is looking at the the infrastructure that's budgeted to go into Brisbane and southeast Queensland over the next few years and has jumped onto anything that has exposed to that just because you know you can be certain that these businesses have a tailwind for at least a year or two and all the uncertainty in all these other places I don't love chasing businesses like that and on thematics like that if you were there for the last couple of years congratulations you timed a really good cyclical bottom and now you've ridden it to the cyclical top 25 times earnings the underlying business isn't doing that well they're forecasting the second half to be weaker than the first and again I think that Brisbane Olympics the magic is doing a lot of heavy lifting in the share price so I wouldn't necessarily exit the whole position Andrew but we just saw that share price chart I think that's one where you're definitely taking profits and looking to find some beaten down names at a better opportunities right now call it a trim then court yeah I'd call it a hold for now but then look to sell because I think Luke nailed it with his focus then you wouldn't usually see a business like this which is capital intensive so you know growth generally requires like cash to fund and also you know basically usually these kind of construction businesses can be like quite up and down cyclical like that could be a good year and a bad year they've had a couple of good years and the expectations as Luke outlined are for more good years these guys have timed their IPO well so that they've got a little bit of operating history and now that they can like really have a good few years but for reference you know analysts estimates roughly have earnings per share doubling from FY 25 to FY 2027 now that's like quite unusual in this sort of capital intensive businesses and it's because of that strong demand and then they see further 20% growth after that the year afterwards so this is very high doubling in two years then another 20% growth that's very high expectations of a capital intensive company that you know for reference they see most of that a lot of that gain coming from margins the actual revenue growth is expected is more in line with 25% over over the next couple of years versus you know doubling of profits so record unusual margins are expected that's driving that share price you know you're buying if you're buying now you're chasing the momentum and right now if I was in it yeah I'd be over mine to start selling but look at the momentum look at the narrative like you never know when it's going to peak out but yeah definitely now's the time to start thinking of trimming and I wouldn't just rush out of it right now because that these narratives can run a long way but I'd start trimming to it's not a bad business yeah it's like these like these construction materials are not many left on the ASX you know they've all been bought just because they are strategic assets in a lot of ways yeah they shouldn't try it at 25 times yeah you wouldn't expect usually this kind of multiple to be maintained and it's because that expectations of gross is so it's so high all right so look to trim Wagner's now let's continue with w8 group to Luke's point now this is actually got the exposure to the housing industry in terms of its supplier bathroom and kitchen fixtures and the like and so given that's Claude what do you think yeah like so this is a not a particularly high quality business, but unlike Wagner's, it trades at a multiple that reflects that. And I think we've actually had it on before and I've been sort of, you know, not very enthused about it. And I remain not very enthused about this business. It wouldn't really be a business that I'd look for long-term because yeah, high capital intensity, no real demand tailwinds for growth. However, right now, if we look at it, the multiple's quite low. And the budget changes really does seem like very geared towards like new housing construction. So I wouldn't be surprised if conditions over the next few years did ease for these guys given that like residential housing construction and like, you know, therefore the bathroom fittings that they sell, that they, you know, specialise in and those kind of products. They should be in pretty good demand for the next couple of years. Like it's a big focus of the government to kick that kind of stuff off. Having said that, you know, again, they're not high quality businesses. Inflation impacts these guys, you know, like suddenly if things getting more expensive, they have to put up more capital to buy the stuff before they sell the stuff. So inflation environment is not very, you know, enticing for these ones. And in terms of the outlook, you know, they're always very sensitive to the demand outlook. So with the government's trying to make as much new housing as possible. If there's a recession, then it'll hit these guys hard anyway. So yeah, like it's okay. I'll call it a hold. - Mm. - 'Cause if you're in there, it's come down a bit now and visit is pretty low price. I think that maybe you'd be okay from here, but it's not one that excites me. - Look. - I agree with all that. I think it's a hold. It, yeah, uninspiring is I think a great term. And particularly like, you know, being, being small cap focused investors, like we can, we can just find growth and, you know, structural tailwinds across our end of the market. And GWAs, that little bit larger, $500 million, you know, and a much more stable mature business. The government policies, obviously they're trying to spark, you know, new housing developments, but probably, you know, didn't go as hard enough as what maybe some people thought they would. It's more about reducing the incentives on other assets than sort of direct incentives for new supply. And the business, you know, just, yeah, sort of reflects that 2% revenue growth at the half year, trying to get some margins, but that's always hard to do when you're growing less than inflation. So I'll say a hold just on the value of, actually in about 11 times, but doesn't inspire me either. - Calling that an uninspiring hold for both then. All right, let's turn to keep a great education centers. This is what it provides that tailored, particularly English and maths tutoring, primary and secondary students here in Australia. And more recently, it's half year financial results, was, well, regarded by the brokers, it's fairly solid. What do you think, Luke? 'Cause I know you have been watching this for a long time, haven't you? - Well, we've owned this for a long time. It's been a rough ride in many ways, but pretty positive on the business now. And I will say bye for the program, Andrew. I think it's pretty good value here. It's trading somewhere around like maybe nine to 10 times earnings could come in a little bit stronger than that. Wait and see, and particularly on a cash flow basis, I think this is a business where their cash will generally outperform their reported profits. What sort of made it hard for the market to get excited, though, is over the last couple of years they've been consolidating their center numbers globally. So closing a lot of underperforming and sort of centers that aren't quite at scale and focusing more on their centers that are and driving that sort of revenue per center that way. I think for the market to really sort of, that valuation to increase from the levels where it is now, center numbers do need to grow. And they've got a new CEO in place. I think she's very well credentialed and she's sort of outlined the strategies to do that. But while I like it here, Claude was talking about 3P learning before, which is a little bit comparable to keeping a guy in that same sort of early education space. Talking about, you know, it would be better if they were sort of milking the business and returning it to shareholders. And I think you're getting a shareholder yield. I'll use that term as dividends plus buybacks of well over 10% here with Kip McGraw. I think you're getting about a five, six percent dividend yield and they've already bought back about 6% of their shares so far this year. So I like that sort of capital strategy. And I think that's where you're going to get most of your returns as a shareholder. Some multiple expansion from here would be icing on the cake, but I don't think you need that to do well from these levels. So I'll say bye. Bye. Claude. Yes, so I was more negative on this for a long time, but I've recently converted to Luke's view on Kip McGraw and bought shares myself at around current prices. And the reason is because for a long time, these guys had a different CEO who had a real pawn shop for buying businesses that then subsequently lose a lot of money for the shareholders of Kip McGraw. And instead, what needs to be done is the-- someone needs to focus on nurturing and making as healthy as possible the franchise network, which I believe is a fundamentally good thing in society. So what Kip McGraw offers in a day, in an age where it might have you like children are like endlessly shoved on to devices or ignored as their parents or on devices, these guys like offer an adult to like stand over someone's shoulder and make them do the exercises they need to do to catch up. They also offer a learning environment groups that's like up to four people where these might not be the smartest kids in the class, but they're there because they want to learn. And the transformation in potential, when you have children in a group of other children who all want to learn versus children in a group of children, half of whom have no interest in learning and are just causing a riot, is enormous. The social proof of where all trying to get better is massive. There's huge potential for people improving their ability to do maths in English. I'm from Kip McGraw's methodology, and there's so many testimonials of parents who have taken their kids who were struggling to these tutoring franchises and had a caring teacher get their child up to speed. This is a great business that's been around for 50 years that's been mismanaged for 15. And it's now just got a new CEO and it's just started paying dividends again. I reckon we're going to get the returns we need to see from dividends. So it made almost five cents in, you know, the Australian franchise business made almost five cents in earnings per share. The statutory results were like messy because they had to like write off one of these old purchases that the old CEO made. So it's not expensive right now, but I believe that as the new CEO brings a focus to improving the actual franchise business rather than constantly having other schemes, I think we can see even more earnings growth and higher dividend. So maybe I think that over the next three or four years, the dividend could double from here easily. - So we'll call that a buy for you as well then. - Yeah, yeah. - I definitely like it as a dividend stock, you know, thank God, we've just talked about how it's the growth stocks that are going to get hit. - Yep. Right now, double buy for Kip McGraw. Let's round it out, we look at Peppa Money, Josh asking out this one. And it's taking a look at its latest results. And I, in fact, this was out of February, it's for your results, there are record originations, record assets, and the management end-pad up some 7% there. Has that changed though, Claude? What's the outlook as you see for Peppa Money? - Also, in terms of the expectation for earnings, analysts have earnings growing, like growing modestly. And you mostly get your return from this kind of business from the dividend because the earnings are really a bit of a, they're like, you know, their paper profits because this is a non-bank lender, right? So they're, you know, lending money for all manner of things for people that can't get the same loan from a bank, and they're doing it at high interest rates to make a profit. They have to make accounting decisions about, you know, what their expected losses are, et cetera. And that means that their actual profits are just this sort of paper fiction. What really matters is how much can they pay you in dividends. Now, analysts have dividends actually reducing in 2027 from 2026, but based on the 2026 yield, you know, it's reasonably priced, like it's got a huge dividend yield, even if we, even if we only see, like sort of 17, 15 cents dividends, you've still got this huge dividend yield. You are being compensated for the risk you're taking with this kind of lender. So what is it, like a 9% dividend yield or something like that? Like, I'm not going to sit there and say sell because it's quite cheap right now relative to how it often trades. But having said that, as with those financial advice stocks, we started at the beginning of the, of the, say of the show, you need to know that this kind of business has blop risk. So yeah, I think it's cheap. But just remember, you buy 10 of these, you'll probably get eight that are fine and actually do quite well from dividends and two that blow up. So you, so you don't want to go too heavily into these ones. All right, so you are, I'll give it a hold. Yep, I'll give it a hold. Wait, I'll say a hold as well. I think what's, what's scary is that when these sorts of businesses blow up, it's the environments we could potentially be about to enter, which is interest rates going up, the consumer getting squeezed. And we find out all of those loans they've written the last couple of years weren't the most strict lending standards. So I think it's worth being wary about non-bank lenders in this environment. That share price there, you see that big spike back in January and then the subsequent fall back down in February. That was because Challenger actually bid for the business and then came back and they originally had a $2.60 non-indicative bid and then submitted a $2.25 best and final. The market probably doesn't like that when someone gets under the hood of a business, has a look at the operations, has a look at what's going on and says it'll actually want to pay less than what we originally wanted to. So that's why it's trading where it is. I think it's a hold because of that and yeah, if you do see that price recover back to where it was, that's where you might look to take some of the table, given the risks of the industry. Right, I'll let's sum it up then. Second half of the show. Beginning with energy one, the most convincing buy that we saw on the show today. In fact, the only, the only, no, second, we had two double wise, a stand corrected. Now, claw it, long term hold of the stock. So as a definite buy for him, a look to the point was saying, one of the best small caps on the ASX. So yeah, it is a double buy. Wagner's both would seek to trim it essentially. Whereas a GLAW group, that is a hold for both, but call it uninspiring. Some inflation risk concerns there as well for that stock. But GLAW, it is also a double buy. There are a look, long term holding for him, clawed having recently us bought in and loves the prospect there for dividends. And finally, there's paper money. It is a double hold. That is our small caps special for this Friday. Thank you to our guest, Claude. Thanks for joining us for a rich life. Thanks for having me. Likewise, Luke. Thanks for joining us on Merri with the Capitol. Thank you. Good to be in here. And thanks to you for watching. The call is brought to you by Centuria, an ASX listed property fund manager with $21 billion in assets under management. Explore the Centuria Sydney CBD Prime Office Fund at centuria.com.au.