Strong investment portfolio underpins healthy profit for WAM Microcap

WAM Microcap ASX WMI invesmtent portfolio profit DTL CCX SZL VVA
WAM Microcap has achieved a $27.3 million operating profit (before tax) for 1H 2020 – driven by its investment portfolio.

Listed investment company WAM Microcap (ASX: WMI) has posted a $27.3 million operating profit before tax for the first half of the 2020 financial year, citing strong investment portfolio performance and growth in assets over the period.

The profit increase represents a 311.9% jump on the previous corresponding period, and accompanies an operating profit after tax of $19.7 million, also up 333.1%.

Core holdings which contributed to the positive results included information technology business Data#3 (ASX: DTL) which increased 75% during the period; fashion retailer City Chic Collective (ASX: CCX) which was up 44.6%; buy-now-pay-later provider Sezzle Inc (ASX: SZL), up 71.3%; and health club network Viva Leisure (ASX: VVA), up 205.6%.

Detractors for the period were 5G Networks (ASX: 5GN), Prospa Group (ASX: PGL) and Cardno (ASX: CDD).

Microcap’s investment portfolio increased 18.5%, beating the ASX Small Ordinaries Accumulation Index by 14.6% with an average cash level of 20.1%.

The company attributed the result to “diligent research and an intensive schedule of meetings with company management teams”.

Market outlook

Lead portfolio manager Oscar Oberg said Microcap would continue to be rigorous in its pursuit of companies within the high risk, high reward small and micro-cap segment of the equity market which demonstrate earnings growth.

“Despite sectors exposed to the Australian economy performing well over the period, key data such as retail sales, consumer sentiment and economic growth disappointed market expectations,” he said.

“Given this weakness, we reduced our positions in companies exposed to the Australian economy over the past few months.”

He remained optimistic that the Australian housing market had bottomed and said there was value in the mining services sector in light of improving commodity prices and requirements by mining companies for infrastructure investment to maintain production levels.

“Small and micro-cap companies have historically demonstrated outperformance during the later stages of market cycles and underperformance in the early stages,” he said.

“We remain highly-selective when investing in this potentially volatile segment of the market.”

Half-yearly dividend

Microcap directors have announced a fully-franked dividend of $0.03 per share, reflecting a 33.3% increase on the previous period and representing an annualised fully-franked dividend yield of 4.2%.

The dividend has been achieved through strong performance of the investment portfolio since the company’s inception in June 2017 and the profits reserve available.

It is believed to be consistent with the company’s investment objective of delivering a stream of fully-franked dividends to shareholders.

“Our board is committed to paying an increasing stream of dividends, provided [we have] sufficient profit reserves and franking credits and it is within prudent business practices,” the company said.

“[Our] ability to generate franking credits is dependent upon the receipt of franked dividends from investments and the payment of tax.”

The dividend will be paid on 21 April.

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