Phil King, the founder of Regal Funds Management, started the month of March with a swim at Manly beach in Sydney in the knowledge that February was one of the best months ever for several of his equity funds.
The funds performed well because they were positioned to take advantage of two of the positive themes to emerge from the 2018 reporting season – technology growth stocks and cash rich resources stocks.
“Technology and resources are the two sectors going really well,” he says. “I think it is good for shareholders and the broader market that resources companies are giving lots of capital distribution.”
In the tech sector, Regal’s funds benefited from the surge in the share price of language technology company Appen. King says Regal has sold out of another high flying tech stock, Altium, which develops software for the design of electronic products.
King says Regal has sold most of its holding in buy now, pay later technology company Afterpay Touch. “We think they are a great business but the valuation is a little stretched,” he says. “We will probably look to buy back in later in the year.”
Investors in tech stocks need strong nerves because of the high level of volatility. One measure of volatility is the 50 day moving average, which is 55 for Appen and 54 for Afterpay.
Compare that to Telstra and Commonwealth Bank of Australia which have 50-day moving averages of 27 and 19, respectively.
Despite the volatility in tech, King says emerging companies offer good organic growth opportunities that cannot be found elsewhere.
Here are seven tech stocks currently favoured by Regal and the reasons why the fund manager likes them.
Bigtincan Holdings. It sells a software product that enables sales and service organisations to engage with customers.
Regal likes it because of consistent 35 to 40 per cent organic revenue growth from both new client wins and expanded contracts with existing customers. “It generates software as service revenue, with low churn and high lifetime customer value,” Regal says.
“Recently achieved cashflow break even on a normalised basis. We believe it is undervalued, trading at only three times current recurring revenue base of $21 million.”
Credible Labs. Operates a consumer finance marketplace to help customers make better financial decisions.
Regal likes it because of strong loan origination momentum and record volumes in the second half of 2018 of more than $US700 million, up 80 per cent on the previous corresponding. It now has more than 1.3 million user accounts.
“Recently launched mortgage origination platform across 34 US States, expanding addressable market to the $US1.6 trillion US mortgage market, which is 80 times larger than it’s core student loan market that it currently plays in,” Regal says.
Livetiles. It sells subscription software licenses to IT providers delivering cloud computing services.
Regal likes it because it recently completed an acquisition of a highly complementary, fast growing software business – Wizdom, for an attractive price (3.5 times recurring revenue). This was substantially funded by scrip via the issuance of Livetiles shares.
“It has pro-forma recurring revenue of more than $30 million across more than 800 customers, with line of sight to cashflow breakeven,” Regal says.
“Livetiles alone achieved more than 230 per cent growth year on year in annualised recurring revenue to $23 million at December 2018.”
iSignthis. It is a deposit taking financial institution or neo bank providing transactional banking services in Australia and the European Union.
Regal believes iSignthis is at an inflection point for volumes and margin. It has obtained an ECB banking license in Europe, which now means the business is no longer reliant on third party operators to process transactions.
“Within this €1 trillion market, ISX has a leading anti-money laundering tool and a full range of banking products, which should see its customer base expand significantly,” Regal says.
“iSingthis anticipates being granted a banking license by APRA in the second quarter of 2019, which would enable it to provide transactional banking services in Australia, and make it the first wholesale/B2B neobank to receive APRA approval since PayPal.”
King says Regal has also invested in three unlisted tech companies which have the potential to join the ASX through initial public offerings. These are: Life360, Whispir and Damstra.
Life360 is a US-based company that has developed a location sharing and driver safety smartphone app that seeks to protect and connect families. Ranks in the top 5 most downloaded social media apps in the US.
Whispir has developed software that assists businesses in managing their communications workflows between people, devices and systems. It operates in Australia, New Zealand, Asia and the US.
Damstra has developed an integrated, software as a service, cloud based software and hardware workforce management solution to facilitate safer workplaces and increased business efficiency.