2 ASX Small Cap Companies to buy in FY24.

1. Viva Leisure Limited (ASX: VVA)

TEAM VEYE | 18-AUG-2023 ASX – VVA

On 11 August 2023, Viva Leisure Limited (ASX: VVA) announced its financial and operational results for the Full Year ended 30 June 2023 (“FY2023”).

The company’s revenue surged by 55.4%, reaching a substantial figure of $141.2 million. Notably, a significant portion of this remarkable revenue growth, accounting for 89%, was attributed to clubs that were opened prior to FY2023. This strategic expansion and focus on pre-existing club locations are evident in the company’s strong EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) growth, which skyrocketed by an impressive 429.2% to $29.2 million.

(Source: Company Reports)

Moreover, Viva Leisure managed to achieve a remarkable EBITDA margin of 20.7%, marking a notable improvement from the 6.1% margin recorded in the comparable previous period. This achievement aligns with the company’s steadfast commitment to maintaining customer satisfaction, evident in the utilization rate increase of 340 basis points to 72.7% in owned locations. As Viva Leisure expanded its network, adding 20 locations to reach a total of 171 owned locations and 12 locations to reach 346 in all locations, it not only enhanced its market coverage but also achieved a significant boost in its scale. These expansions seem to have contributed to the company’s positive financial trajectory, as indicated by the reported NPAT (Net Profit After Tax) improvements. The NPAT (pre-AASB16) showcased an impressive upswing of $14.3 million, reaching $8.8 million, signifying a substantial turnaround from the losses faced in FY2022. Additionally, the statutory NPAT reached $3.4 million, a considerable shift from the FY2022 loss of ($12.1) million. The company reported a noteworthy free cash flow of $12.3 million for the entire fiscal year. Between the first half of the fiscal year (H1-FY2023) and the second half (H2-FY2023), Viva Leisure managed to achieve a remarkable 28% increase in its free cash flow before tax. This upward trend showcases the company’s ability to generate and manage its cash flow efficiently as the year progressed. With a strong balance sheet that included a cash balance of $6.8 million at the end of June 2023, Viva Leisure stands as a robust player in the market, poised for continued success.

Outlook:

(Source: Company Reports) Projects Being Delivered in FY2024

VVA is gearing up for a tech-driven shift, launching Viva Hub, Viva Pay, and digital signage to enhance user experiences and efficiency, potentially adding $4 million annually. Bolstering growth with a $17.8 million investment in upgrades, acquisitions, and tech advancements, Viva aims for a robust 70-75% ROI within a year of site upgrades. FY2024’s expanded upgrade program builds on FY2023’s success across 27 locations, propelled by 11 secured greenfield sites and 12 negotiations, with a focus on the Club Lime brand. Further profitability is targeted through non-membership revenue, aiming at $20 million annually.

Valuations Bias:

VVA is expected to experience robust growth, with forecasted ROIC rising from 12.2% (FY24) to 18% (FY26). The Price-to-Sales ratio is projected to improve to 0.54x by FY26, indicating increased market confidence in revenue generation. Additionally, the PEG ratio is anticipated to improve to 0.17, signaling attractive value relative to earnings growth potential. These projections reflect Viva Leisure’s potential for enhanced profitability and market position in the coming years.

Risk Analysis:

Market volatility, competition, regulatory changes, economic downturns, execution challenges, interest rate fluctuations, emergence of a situation like COVID-19, liquidity concerns, geopolitical uncertainties, and market perception risks should be considered while investing in VVA.

Technical Analysis:

The stock has shown technical strength, consistently holding above the middle Bollinger band and the 14-day Exponential Moving Average (EMA) since March 2023. This resilience indicates a rejection of further downside. The Relative Strength Index (RSI) at 60 adds to the bullish outlook, suggesting potential for further upside in the stock’s performance.

Veye’s Take:

Over the past four years, Viva Leisure’s portfolio has not only expanded but also strengthened, with a strategic emphasis on highly profitable and sustainable recurring revenue streams. The company has achieved impressive financial growth, evident in its 51% Compound Annual Growth Rate (CAGR) for revenue and 69% CAGR for EBITDA over this period. These results underscore the economies and advantages derived from the company’s increased scale. Viva Leisure has achieved remarkable milestones, boasting record levels of memberships, revenue, and locations. The company’s guidance, as issued in October 2022, has been successfully met. The Group’s EBITDA margin has remained consistent and is expected to further increase as sites mature and utilization rates rise for locations opened in the second half of FY2023. The conversion of EBITDA to Free Cash Flow (FCF) has improved significantly, reaching 42.1% in H1-FY2023, up from 38.7%. The company aims for a target conversion rate of 35% or higher moving forward. As margins continue to improve, FCF is expected to see further enhancement. Notably, Viva Leisure’s Net Debt to EBITDA ratio is currently at approximately 1.05x, providing substantial financial headroom if needed. Cash flows from operations have witnessed an impressive 90% improvement, supported by substantial investments in acquisitions, refurbishments, greenfield sites, and technological advancements. Furthermore, the company has effectively managed its debt, leading to a reduction in total debt. Viva Leisure’s strategic growth trajectory, financial achievements, and prudent financial management position it for continued success and innovation in the market. Veye maintains a “Buy” on “Viva Leisure Limited” at the closing price of $1.435 (As of 18 August 2023).

*All Data has been sourced from Company announcements and Refinitiv, Thomson Reuters.

2. AUSTRALIAN STRATEGIC MATERIALS LIMITED

TEAM VEYE | 18-AUG-2023 ASX – ASM

Australian Strategic Materials Limited is a company focused on producing critical metals for advanced and clean technologies. They are involved in the extraction, refining, and manufacturing of high-purity metals, alloys, and powders. Their products are supplied directly to global manufacturers in industries such as clean energy, electric vehicles, aerospace, electronics, and communications. The company operates through three segments: Korea, Dubbo, and Corporate. The Korea segment includes the construction and commissioning of the Korean Metals Plant, while the Dubbo segment involves the evaluation and feasibility of the Dubbo Project. The Dubbo Project is situated near Toongi, 25 kilometers south of Dubbo in central-western New South Wales, Australia. On the other hand, the Korean Metals Plant is situated in the Ochang Foreign Investment Zone, approximately 115 kilometers south of Seoul, Korea. The products offered by Australian Strategic Materials include neodymium, praseodymium, terbium, dysprosium, zirconium, niobium, and hafnium, which are crucial components in various advanced and clean technologies.

Stock Performance Profile:

(Source: Trading View) Three-Month Performance of ASM compared with ASX-All Ordinaries Index (XAO) and Basic Materials Index (XMJ)

Synopsis:

Australian Strategic Materials Limited (ASX: ASM) is building a global rare earths and critical minerals business.

Its Dubbo project is construction ready and delivers strong financials.

20-year life of mine and further 50 years of resource.

Grant support received from Federal Government

From the Company Reports:

On 3 August 2023, Australian Strategic Materials Limited (ASX: ASM) (ASM or the Company) announced that its wholly owned subsidiary, ASM Korea Co., Ltd, had signed a five-year binding agreement with USA Rare Earth, LLC. The sales and tolling framework agreement is for the supply of neodymium iron boron, NdFeB alloy, which is expected to commence in 2024. The tolling clause provides USA Rare Earth the option to have an agreed percentage of the total indicative quantity to be supplied as tolled product using USA Rare Earth supplied feedstock.

The Framework Agreement builds up ASM’s growing customer portfolio and reinforces the Company’s strategic supply relationships with the US magnet production industry, through its Korean Metals Plant (KMP).

USARE’s production ramp-up of high-performance rare earth magnets will be boosted by NdFeB alloy supplied from KMP.

Australian Strategic Materials Limited on 26 July 2023 announced entering into a non-binding Memorandum of Understanding with ASX-listed nickel producer Blackstone Minerals Limited (ASX: BSX), and rare earth element refiners, Vietnam Rare Earth Company.

The agreement between three companies having identified synergies and shared objectives, provides a framework to collaborate in several areas.

This could be handy in identifying, assessing, and securing REE mining opportunities in Vietnam, which can be used as feed stock for VTRE’s REE refinery, strengthen the parties’ capability to obtain REE mining concessions and in securing long-term offtake of REE oxides.

On 24 July 2023, Australian Strategic Materials, provided its Quarterly Activities Report, to 30 June 2023.

The company began a strategic partnership with US-based rare earth magnet manufacturer Noveon Magnetics Inc., by sale of an initial 100 tonnes of NdFeB alloy from ASM’s Korean Metals Plant. It also secured the supply of rare earth oxides with a binding agreement with Vietnam Rare Earth Company, to ensure the continued ramp-up of production at the KMP;

Competitive Advantage:

Australian Strategic Materials gets a perfect customer and partner in USA Rare Earth, with its magnet manufacturing capability and approach to market. ASM continues to increase its metal production output from its Korean Metals Plant, while this longterm supply agreement demonstrates the growing demand and positive trajectory of the US rare earth magnet market. Both ASM and USARE are currently focused on scaling up their respective operations and developing an alternative rare earths and critical minerals supply chain to support forecast growth in these and other sectors. Because of the Framework Agreement, USARE will secure the majority of its metal and alloy requirements for magnet production and depend upon ASM til it begins using materials from its Round Top reserve in Sierra Blanca, Texas.

Business Catalyst:

It is anticipated that the global demand for NdFeB magnets will increase at a compound annual growth rate (CAGR) of 7.5% from 2023 through 2040. The growth in the electric vehicle and wind power sectors will translate to a comparable demand growth for the critical rare earth elements (e.g., neodymium, dysprosium, and terbium) which these magnets contain. ASM sourcing the required oxides from Vietnam, simultaneously building its relationship with VTRE, is also ensuring greater oversight of its supply chain. Thus supporting its sustainability and governance commitments its our customers as well as shareholders.

Outlook:

ASM had entered into a binding agreement with VTRE in April 2023 to buy rare earth oxides from Vietnam, to be used as feedstock at ASM’s Korean Metals Plant. It had been intending to progress this to a further long-term supply agreement. This three-party MOU with VTRE and Blackstone is an extension of ASM’s current relationship with VTRE. It validates the commitment of both companies to continue to explore long-term supply agreements and manufacturing opportunities. It also has the potential to drive a more collaborative approach within the rare earth elements and critical minerals sector and deliver positive outcomes for all parties involved.

Technical Analysis:

The monthly chart shows a solid base formation at $1.090 and subsequent stock recovery, indicating a strong presence of bullish investors with potential for continued upward trajectory. On the weekly chart, the stock exhibits “Higher Highs,” trades above the 14-day EMA, and is positioned at the upper Bollinger Band with RSI indicating further upside momentum. This convergence of bullish indicators in both time frames suggests a strong bullish trend for the stock.

Veye’s Take:

ASM had already established a strong relationship with the VTRE and it was encouraging to witness the progress they were making to increase their oxide production capacity. The three way partnership they are looking to build with Blackstone has the potential to benefit ASM’s existing supply of rare earth oxides for processing at the KMP. It could become a great opportunity to develop the full value chain for rare earths in Vietnam. It is rare to find a potential partnership in which the strategic advantages and core competencies of each party are so complementary. Blackstone’s potential move into Rare Earths in Vietnam aligns with ASM’s Technology Mineral strategy and is synergistic to its Ta Khoa Project and its existing relationships in the EV industry. ASM, can seize upon this opportunity to extend its relationship with VTRE and to progress their vision of full vertical integration in critical minerals. This agreement leverages Australia’s world-leading regulatory frameworks for mining and resources, and Vietnam’s abundant labour supply and strong manufacturing base. ASM, along with MOU partners will now progress discussions with a view of potentially establishing a world leading fully integrated rare earths business. Veye recommends a “Buy” on “Australian Strategic Materials Limited” at the closing price of $1.450 (As of 18 August 2023).

*All Data has been sourced from Company announcements and Refinitiv, Thomson Reuters.

 

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