Contango Microcap Ltd (ASX: CTN) has a diversified portfolio of 60 to 90 firms that are listed on the Australian stock exchange, each with a market cap in the range of $10 million to $3350 million at the time of acquisition. CTN chooses small cap to mid-cap firms that has the potential to become large cap. The fund also has the option to hold cash up to 50% of the size in the portfolio. On the other hand, CTN avoids biotech or early stage firms, mining companies at exploration stage, pseudo-private equity type and companies with no definable earnings. The portfolio size of the fund as of May 31^st, 2015 was $183 million.

Contango is among the best performing portfolios in Australia, and delivered 0.6% returns during May, and consequently generated a total twelve month portfolio returns of 10.8%. Mobile Embrace, Catapult, Mineral Deposits and Corporate travel were among the best performing stocks in the month of May, which rose by 28.6%, 18.2%, 16.7% and 14.4% respectively. The fund entered into QMS media, an outdoor media company at P/E of 10x; Shirriro, a kitchen appliance and consumer products marketing firm at P/E under 10X and Garda property trust, which has a dividend yield of 9%. Meanwhile, CTN has improved its cash position by 5% to 6% in the month, enabling the fund to evaluate new opportunities and participate in new raisings. On the other hand, CTN estimates the global growth to be slow and ongoing commodity process pressure and reaffirmed underweight in the resource sector in May. 


CTN Microcap portfolio (Source: Company reports)

With regards to the March quarter highlights, the fund posted a returns of 12.5%, as compared to the small ordinaries index return of 7.3%, Emerging companies index return of 4.3% and all ordinaries index return of 10.2%. The shares of CTN has increased by over 3.4% to $1.08 from $1.045 during the first three months of the year. The firm paid a dividend of 4 cents per share to shareholders in February, resulting into a total return of 7.3% during the quarter.

CTN has strived to drive value to the shareholders by launching new products, investing in best practices and developing the investment team. As a result the group launched a Contango Income Generator Limited (CIE). The objective to launch CIE is to address the investors looking for yield stocks in the equity market, retirees, high net worth investors as well as investors who are over exposed to large cap stocks. Accordingly, CIE offers investors with a diversifiied exposure to ex-30 income securities. The fund also intends to pay a minimum annual dividends of 6.5% of the firm’s net tangible  company’s objective. Some of the picks by the fund manager include Bank of Queensland Limited, Bendigo and Adelaide Bank Ltd, IOOF Holdings Limited, McMillan Shakespeare Limited and Tatts Group Limited. 


CIG VS ASX 300 (Source: Company reports)
                                                 
CTN has been delivering better returns as compared to the S&P/ASX small ordinaries accumulation index and S&P/AX emerging company’s accumulation index. The fund delivered 14.4% returns per annum over the last five years, as compared to the 8.1%, 3.5% and 2.9% respectively from S&P/ASX All ordinaries accumulation index, S&P/ASX small ordinaries accumulation index and S&P/ASX emerging company’s accumulation index. Moreover, the fund has been a good dividend player, wherein it declared a total dividends of 83.6 cents per share to shareholders since December 2004, resulting to the total payout of around $95.9 million. On April 2015, CTN proposed a guidance of 3.7 cents per share for the fiscal year of 2015, in line with its dividend policy.


Performance over the years (Source: Company Reports)

Although CTN faces considerable amount of risk while investing in the mid cap stocks, investors should not forget the capability of these stocks which has the potential to deliver huge upside and generate solid earnings with good dividend yields. The fund has successfully delivered a long term gross performance of 16.4% per annum since its inception in March 2004. Given the attractive valuations offered by CTN portfolio (P/E of 11.5x) as compared to the small ordinaries accumulation index (P/E of 12.8x), we believe that CTN is well positioned to generate decent performance for the fiscal year 2016. 
 

CTN Investment portfolio fundamentals (Source: Company Reports)


Based on the foregoing, we give a “BUY” recommendation to the stock at the current levels of  $1.05

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