Company overview - Contango MicroCap Limited is an investment company. The principal activity of the Company is investing in microcap companies listed on the Australian Securities Exchange (ASX). The Company focuses on achieving a long-term return over and above the benchmark ASX All Ordinaries Accumulation Index and also to pay regular and franked dividends. To achieve its objective, it invests in a diversified portfolio of ASX listed micro-cap stocks. The Company's subsidiaries include Bellwether Partners Limited and Contango Capital Partners Pty Ltd. The Company's portfolio is managed by Contango Asset Management Limited.

CTN Details
Highlights on Net Tangible Assets: Contango Microcap Ltd.’s (ASX: CTN) Net Tangible Assets (NTA) of investments before tax reached $1.115 (ex-div) as of February 2017 as compared to $1.196 as at January 2017. NTA after tax reached $1.029 (ex-div) in February 2017 as compared to $1.094 in January 2017. The group holds Net Assets after Tax of $172.46 million during February 2017 as compared to $183.35 million in January 2017. The group’s overall assets were $224.216 million as of December 2016 as compared to $226.203 million in June 2016. But the group’s net assets had improved to $180.739 million as of December 2016 as compared to $178.464 million as of June 2016. 

Net Tangible Assets (Source: Company Reports)
 
First half of 2017 Performance highlights: CTN reported a revenue decline to $6.179 million in the half year ended at December 2016 against the revenue of $15.756 million in the prior corresponding period. Accordingly, the group’s Profit before income tax reached $2.355 million during the period from $12.092 million in half year ended at December 2015. Total comprehensive income attributable to Members of Contango MicroCap Limited reached $2.213 million as of half year ended at December 2016 as compared to $9.055 million in December 2015. As a result, the basic earnings per share amounted to 1.3 cents per share for the half-year as compared to 5.6 cents in 2015. The group also reported for cash and cash equivalents to $39.98 million as of December 2016, up from $9.436 million as of June 2016. 

First half of 2017 Financial Performance (Source: Company Reports)
 
Restructuring Program: 2016 has been the year in which the company’s restructuring program had started with it disposing of its investment manager, and, also its 38% stake in another listed investment company, CIE, coming to an end. Further, it is expected that these initiatives will set Contango Microcap aside as a leader in the LIC space, where shareholders’ interests are pursued first and foremost through growth in Net Tangible Asset (NTA) value and not compromised by the growth aspirations of its investment managers. Contango Microcap has appointed a second investment manager (OC Funds Management) and will be the recipient of the proceeds of the company’s recent sale of shares. Contango Microcap believes that the current manager has delivered solid performance in recent years. However, the capacity constraints on microcap managers provides an unacceptable concentration risk that would now be diversified. Moreover, it is seen that the low stock liquidity in the sector and the size of stock positions in the portfolios can make it difficult for microcap managers to consistently add value. As a result, having multiple managers and restricting the size of their allocations would offer more opportunity for each manager to maximize the returns to shareholders inside the portfolios. This would also offer an opportunity to review the management fee arrangements payable by the company to its managers. Additionally, the restructuring has reduced the complexity of the company, and as such the directors have agreed to an annual reduction of directors’ fees in the order of 30% pa, effective immediately. Contango Microcap is also considering a change of name to remove the confusion in the market place related with the “Contango” brand and provide the Company with a profile independent of its investment managers. In addition, LIC’s have become the investment vehicle of choice for many investors and brokers & financial planners on behalf of their clients. With this greater acceptance comes a requirement by shareholders that LIC Boards have to be more cautious with their capital management initiatives, ensuring that capital raisings are undertaken always aiming towards NTA accretion. The group believes that these refinements would benefit all shareholders and hence lead to higher returns and greater transparency of the Company for shareholders.
 
Sell Down of CIE Shares: Contango Microcap has completed the sell down of its stake in Contango Income Generator Limited and offered its remaining shares in CIE (approximately 3m shares) to both CTN and CIE shareholders through an application offer. The offer got heavily oversubscribed as the demand for the CIE shares exceeded the number of shares available by a significant amount, which is nearly three times. The board had decided that CTN shareholders who applied will get the priority to the offer. Moreover, each CTN shareholder would get the initial minimum application amount of 1000 shares and thereafter any remaining balance will be pro-rated across the unfilled balance of the CTN applicants. Therefore, the CTN shareholders will get 1000 shares plus about 46% of the remaining balance they applied for. Overall, the net proceeds of the sale, which is around $27 million would be added to the company’s core activity of investing in microcap companies.
 
Dividend in the first half of 2017: During the half-year ended December 31, 2016, CTN has paid the final dividend for the year-ended June 2016. This was a dividend of 3.7 cents per share and was 50% franked. The record date for this dividend was September 30, 2016 and the total dividend paid out on October 14, 2016 was $6,002,153. Moreover, the interim dividend for the year ended June 30, 2017 was declared on in February 2017, which is a dividend of 2.7 cents per share (50% franked). The record date for this dividend was February 17, 2017 and the total dividend is to be paid on March 24, 2017 will be $4,526,712. As of February 28, 2017, CTN has a Dividend Reserve of $3.4 million and has sufficient funds to pay dividends proposed during FY17. Overall dividends paid or declared to shareholders since inception have now exceeded $116 million.
 
Stock Performance: CTN stock fell over 9.78% in the last six months (as of March 10, 2017). This weakness is mainly on the back of subdued performance of CTN investment portfolio. CTN investment portfolio returns fell over 4.4% in the last one month (as of 28 February 2017, while the investment portfolio contained 84 securities) as compared to ASX/S&P Small Ordinaries Accum Index to the rise of 1.3% and ASX All Ordinaries Accumulation Index returns of 2.1% during the period. CTN investment portfolio fell 4.3% in the last three months against ASX/S&P Small Ordinaries Accum Index returns of 2.4% and ASX All Ordinaries Accumulation Index returns of 5.5%. CTN investment portfolio generated 0.6% in this fiscal year to date as compared to 4.6% returns of ASX/S&P Small Ordinaries Accum Index and 11.4% returns of ASX All Ordinaries Accumulation Index. On the other hand, CTN investment portfolio delivered decent returns of 16.7% in the last twelve months while ASX/S&P Small Ordinaries Accum Index delivered returns of 16.8% and ASX All Ordinaries Accumulation Index delivered returns of 21.3%. Moreover, the Microcap sector has continued to outperform the broader equity market and the exposure to emerging companies has been beneficial to investors to some extent. CTN has continued to pursue core thematic investment themes. These include the ageing population and health, quality food, IT/social media, outdoor advertising, tourism and leisure, cyber security, SMSF sector and lithium. The investment team has been resourcing above industry peers and increased investment on the additional portfolio attribution and risk systems. Meanwhile, the correction in the stock placed the same at lower levels. We give a “Buy” recommendation at the current price of – $ 0.98

 
CTN Daily Chart (Source: Thomson Reuters)

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