Research as a Service Playbook

Great companies are built in tough times

Executive summary

COVID-19 has taken Australia officially into recession but the real impact is still being masked by the economic stimulus being pumped into industry by the Federal and state governments. We had a taste of the volatility that can be created by uncertainty. March 2020 delivered the most volatile month of trading for micro- to mid-cap companies since the 2008 Global Financial Crisis, with the S&P/ASX Emerging Companies Index down 31.5%,its greatest ever monthly decline. In the 70 days since, the S&P/ASX Emerging Companies Index has substantially outperforming the broader market lifting 40.04% this quarter to date.

The market rout together with the economic stand-still brought about by COVID-19 have put Australian companies and investors in uncharted waters. Past experience shows that investors fly to the top end of the market, access to capital becomes scarcer for smaller growth stock, research teams reduce head counts and as a result broker research coverage of small and microcap stocks diminishes along with stock liquidity (which can cause “value voids”).

We entered this current environment with fewer than 530 of the 2,050 companies on the ASX with research coverage despite the ASX’s annual investment in its smaller company equity research scheme. With the effects of the COVID-19 pandemic likely to lend more volatility to the financial markets and broader economy, we expect further diminution of smaller company sell side research, creating an even bigger void of information for retail and wholesale investors in a key part of the market. If we are correct in our expectation that broker research coverage will continue to diminish for smaller stocks, companies will need to find other ways to get their investment case heard. Investor briefings by investor relations and/or third parties is one avenue, but without earnings estimates, it does not allow for discovery. Independent equities research has a role to play in that discovery process.

Earnings estimates combined with consistent, relevant and timely research to dimension valuation and outlook for a company presents a powerful combination for investors looking for new opportunities. In this paper we examine RaaS’s methodology for choosing the companies we seek to engage with for independent investment research, the team’s experiences and learnings through past cycles and revisit the companies currently under coverage by RaaS and the specific features that we find compelling. Despite diversity of industry and sector, there are some overarching similarities between the companies we cover and, for the most part, they should continue to demonstrate operational resilience in the current challenging environment.

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