When systems integration becomes a compelling party topic

THE NEW CRITERION

K2Fly (K2F) 32c

 

Is that the time?

Partygoers suddenly remember the babysitter or an early morning appointment when the conversation turns to consulting systems integration for infrastructure and asset-heavy industries.

But for K2fly investors sitting on a 300 per cent-plusgain over the last two months, this party topic is more riveting than house prices and whether Bernard Tomic is simply a twat or a lost soul deserving of sympathy.

With its dominant client base of miners, K2fly can be seen as an exposure to the recovering resources sector, yet one not dependent on the commodities cycle. A bullish December update, which sent the stock (K2) flying, vindicates the board’s decision to buy the private Infoscope in July last year.

The purchase price –$625,000 and $275,000 of K2fly scrip – represented a stingy ebit multiple of 1.56 times.

Infoscope’s software enables miners to manage land issues such as tenement tracking, cultural heritage and ground disturbance seamlessly. Clients include Fortescue Metals, iron-ore mine operator API Management, Metals X, Westgold Resources and The National Trust (via The Keeping Place, funded by Fortescue, BHP Billiton and Fortescue).

But what’s spiked the punch bowl is Infoscope’s recent tie-up with the German based enterprise software provider SAP, which globally has 770 mining clients (including most of the majors).

This raises the prospect of K2fly receiving monthly licensing fees from SAP off a much wider customer base, as SAP moves its clients to ‘cloud’ computing..

K2Fly exec chairman Brian Miller says that with a market cap of $10m, K2fly would not normally be big enough to get a seat at the SAP table.

Proving the adage that it’s not what you know but who you know, Miller leveraged his previous history as an SAP executive.

“SAP is especially important in relation to moving customers from on-premises software to the cloud,” he says.

“Because we have leveraged our previous relationship with SAP we have been able to be the first cab off the rank.”

The Infoscope platform is currently being “ported to the SAP cloud and its s4 Hana environment”. This is geek speak for saying that when someone plugs in the right cable, Infoscope and SAP will run seamless together.

When this happens by the end of the current quarter, SAP’s salespeople will be able to sell K2fly products to its own client base, generating recurring monthly licensing revenue for K2fly.

“SAP has very aggressive targets in terms of how they will move their client base. In the mining sector we should play very well in the space,” says Miller, who believes that most clients would be good for annual fees of at least $500,000.

 

 

 

 

 

 

 

Otherwise, K2fly has reseller deals with other IT industry leaders including OBI Partners and Kony of the US, Sweden’s ABB and Capita PLC of the UK.

K2fly re-sells Capita’s Fieldreach, a mobile based management tool for blue-collar workers on physical assets. In November K2fly struck a deal to supply Fieldreach to Arc Infrastructure, which operates WA’s 5500 kilometre freight network.

K2fly also consults to the water, electricity, rail and power sectors.

 

K2Fly doesn’t exactly have the field to itself. In the tenement management sector it competes with the private C2 Land and Land Assist, or miners who build their own system using Indian programmers.

But there’s no doubting the revenue momentum.

In December K2Fly said it expected to generate revenue of $630-640,000 in the December quarter, well up on the previous December’s $144,000 and double the September quarter run rate.

 

 

 

 

 

 

On Feb 5 K2Fly announced a contract with a “tier one utility company” that would be material to 2017-18 revenue.

The company then went on trading halt, after which the company clarified that it would be a WA-based electricity company and involve revenue of $250,000-300,000.

Spark up the party!

Lowell Resources Fund (LRT) not yet listed

To Nirvana, it smelt like teen spirit. To us, it reeks of another commodities boom trying to erupt, albeit with the share and equity market jitters trying to cloud the outlook.

For those who have already ridden the battery metals good luck. For those positioning for base metal and gas booms, ditto.

In reality, the bases are loaded against the small investors who heed the advice of   a shirt tugger, cab driver or (worse still) broker. They’re either too late, or being flogged opportunistic rubbish.

It’s this thus an ideal time for Lowell Resources Fund to seek an ASX listing and thus become a listed investment trust. The trust structure means that all earnings (typically from realising capital gains on investments) must be distributed to investors.

Lowell already has $21m and is seeking to raise a $10m, not so much out of necessity but to give existing investors a source of liquidity.

The management entity isn’t short of management prowess: it’s headed by Steve Mitchell, who developed oil and gas producer Molopo Energy into a $300m company.

As it happens Mitchell was turfed off the Molopo board – his usurpers later were as well – and these days Molopo is a cash box subject to an unsavoury takeover battle.

Lowell Group was formed out of a handful of assets from the old National Mutual resources fund set up in the 1980s. In that time the fund has grown from $3m to $21m, solely through capital growth rather than new funds and despite some redemptions along the way.

The fund was early into runaway graphite play Syrah Resources (ASX:SYR) and has also done well out of Gold Road (GOR) and lithium runaway Kidman Resources (KDR). It’s also waiting for the listing of Chilean zinc and precious metals producer Laguna Gold, in which it has invested $4m.

Not that the fund has got it right every time, one notable miss being the unlisted explorer Thai Goldfields. “You can’t take 30 stocks and make everyone a winner,” Mitchell says.

Still with annual total shareholder return of 10.4 per cent since inception – compared with a 1.3 per cent decline for the resources index – Lowell has picked more winners than losers.

Lowell plans to list in the second week of March, with the offer closing on Feb 28.

Despite the preponderance of listed investment vehicles, not too many are resources focussed. The closest that comes to mind is the gold oriented Lion Selection (LSX), which has assets of about $40m.

Lion, by the way, puts its famed Lion Clock – which represents the mining cycle – at 8pm. The boom started at 4 pm and all goes pear-shaped at midnight, but make of that what you will.

 

Tim Boreham edits The New Criterion

Tim.boreham@independentresearch.com.au