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What’s next? Bonds and BTH

The only thing that makes investing possible is permanent, intolerable uncertainty, and not knowing what comes next.

And momentary shivers ran up our spines reading forecasts for the Australian economy; GDP growth to fall under 2%, unemployment drifts up towards 6% and the RBA applies electro shock therapy with two interest cuts, one in July and again in September, by a combined 0.5%.

It gets worse. Peak to trough housing prices fall further to 15%, even with the interest rate cuts. Sydney and Melbourne declines are closer to 20%. Housing loans edge closer to a credit crunch falling between 30-40% as tighter credit plays out. They have fallen 24.7% from the August 2017 peak. The lingering feeling of a 5-10% share market correction becomes more of a certainty. Because one of two things has to happen – either earnings have to increase or share prices correct. And currently the market’s P/E tracking at close to 20 is above its 15 long term average. A change Federal Government and economic policy adds further economic uncertainty.

So where to hide? Certainly, an overarching principle should be the SLR of investments: safety, liquidity and return. Cash is the safest. But with term deposit rates crunched with a lower prime rate the only safer havens are government and corporate bonds. Or finding stocks with annuity type income streams like Service as Software, with global facing businesses.

Corporate bonds offer a happy compromise – the market in Australia has more than $1 trillion on issuance and is about 70% of the size of the listed equity market. So it is liquid. Average gross yields are running at slightly above 6%. But as an asset class, represents only 11% of total holdings for investors with direct equity holdings. Historically, corporate bonds have been issued by large rated companies in Australia and owned by overseas or institutional investors. Yield chasers like SMSF’s slowly are increasing their exposure to this asset class.

Unless you are a skilled credit risk analyst a portfolio approach to corporate bonds is probably the best way to spread risk and maximise return. Corporate bonds can be purchased in parcels as small as $10,000. Large bond issues tend to be rated by investment agencies and usually carry a minimum investment grade rating of BBB. Coupon (interest) rates on unrated bonds are higher – a caveat of higher yield than 10% infers much greater risk. Generally, the term on corporate bonds is short 3-5 years and aftermarket bond pricing is very much influenced by what is occurring to issuer’s underlying equity share price. So, this is not a set and forgets asset class and a possible franking credit change looming makes it a go to asset for higher yields.

Government bonds, on the other hand, can be regarded as a sleep well at night under any circumstances. Their credit rating, either state or federal is guaranteed and that is reflected in the lower coupons paid than corporate bonds. In uncertain interest rate times like the moment, a possibility exists, bond prices may raise if official interest rates are cut. Two rate cuts this year could see bond’s shorter duration securities jump 10% in price. The possibility of capital gain plus a locked in coupon rate makes this an attractive investment. A measure of a bond’s attractiveness is examining the bond’s yield to maturity. State governments usually trade at a slight premium to Federal paper, for a perceived incremental risk increase. Those with long memories may remember NSW Premier Jack Lang in the 1930’s depression threatening to repudiate state debt held by UK bond holders. Bond yields to maturity (YTM) at the shorter end are around 1.6%. Longer term maturities like 2033 trade on 2.1%YTM.

Recurring income streams, like SaaS, give investors with more risk appetite the option of capital growth and annuity style income when the business model matures.

Examples we have highlighted include Nearmaps (NEA), which has risen 185% in price over the past 12 months as it’s SaaS business in the USA built traction. Others like Dragontail are in their nascent stages.

Another to come to the table, where there is a very high conversion of sales, 75-85%, into the bottom line is Big Tin Can (BTH). BTH is a leading provider of cloud-based sales enablement software to large enterprises with global and mobile sales forces.  It has over 400 enterprise customers with 150,000 licensed users across 50 countries and in 17 languages.

The SaaS platform aims to improve mobile worker productivity by automating and streamlining long-cycle Business to business (B2B) and Business to consumer (B2C) sales processes. It streamlines on-boarding and training to preparation, engagement and customer follow up. Put simply the platform allows sales reps to more effectively engage and sell more to their customers and allows senior management to monitor that process in real time.

Our interest in BTH is the organic revenue growth, up 38% percent in the first half 2019 FY. This follows a similar half growth pattern since 2016. BTH reiterated it is on track to deliver 35-40% revenue growth in FY2019. And what’s more expects the retention of new customers to be stable. Which implies revenue of around $20 million?

BTH’s share price has jumped to high 40 cents from a recent low of 25 cents. But it still trades at a 65% discount to more mature US/AUS listed software peers.

Organisations which use BTH report a +350% increase in content usage, +275% boost in sales conversions, and +65% more revenue generated by new sales representatives.

As BTH build revenue the market will attribute higher valuation to revenue. And this stock could easily double in the next 18 months.

Trust me I am a broker.

By Kim Slater 

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