Revenue Rises 1.5% to $12.7m as Profit Drops 20% at Microequities

Profit Squeezed by Market Valuation Slump

Microequities Asset Management Group Limited (ASX:MAM) reported a 20.1% drop in profit after tax attributable to owners, down to $5.7 million for the year ended 30 June 2026. This decline contrasts with a modest 1.5% increase in revenue to $12.7 million, underscoring how market valuation pressures weighed heavily on earnings.

The chief culprit was a sharp fall in market valuations across the small and microcap industrial asset class, particularly within technology-weighted portfolios. A negative narrative around artificial intelligence (AI) disrupting software business models took hold among investors, triggering significant devaluations. Despite these headwinds, Microequities maintained profitability and a robust balance sheet, with net assets exceeding $23 million.

Funds Under Management and Revenue Impact

Funds under management (FUM) fell 15% to $517.1 million, reflecting the valuation-driven market downturn. This drop in FUM translated to a 5% decline in recurring revenue to $10.2 million and a 9% fall in operating profit from recurring revenue to $6.1 million. Performance fee income, which is sensitive to fund returns, plummeted 37% to $2.3 million, reflecting weaker second-half fund performance.

Operating expenses were well managed, rising only 3% year-on-year, keeping the ongoing operating expense ratio to recurring revenue at 40.02%, up from 37.17% the prior year. Interest revenue and other income halved, while distribution income and unrealised losses on investments swung dramatically to a $2.1 million loss from a prior $575,000 gain.

AI Narrative Tested Against Investment Evidence

CEO Carlos Gil emphasised that Microequities is not swayed by market narratives alone but bases investment decisions on data and evidence. The company has closely scrutinised the alleged threat AI poses to its software holdings and found no evidence of detrimental effects so far. In fact, AI is proving to boost demand in their cybersecurity software investments, with the Global Value Fund’s cyber security holdings benefiting from AI-driven threat evolution and expanding digital infrastructure.

This cautious stance aligns with the recent partial recovery of the Global Value Microcap Fund, which rose 23.6% since April, hinting at a possible trough in valuations for Microequities' domestic growth funds. The small and microcap industrial asset class remains significantly oversold, offering potential long-term opportunities if fundamentals reassert themselves.

Dividend and Capital Management

Reflecting the profit decline and a desire to preserve capital for new product development, the board declared a fully franked final dividend of 1.0 cent per share, payable 4 September 2026. This brings the total fully franked dividend for FY26 to 3.3 cents per share, down from 4.3 cents the prior year.

The company also continued its on-market share buy-back program, repurchasing 1.3 million shares during the year as part of a maximum 13.27 million share buy-back announced in late 2025. This reflects an active approach to capital management amid market volatility.

Strategic Investment in New Funds

Microequities is preparing to launch a new domestic fund targeting industrial and resources companies, supported by the recent recruitment of a geologist to the investment team. Additionally, the company sees potential to scale its private credit strategy following the successful launch of a private credit special purpose vehicle (SPV) in FY26, aiming to deliver further value to clients.

These initiatives signal a diversification beyond the traditional microcap equity focus, seeking to capture opportunities in alternative assets and sectors less affected by the recent tech-driven valuation swings.

Executive Remuneration Aligned with Fund Performance

Executive pay includes performance rights linked to fund returns and business performance, with vesting contingent on achieving a 5% compound annual return above benchmarks. Notably, 25% of performance rights vested in February 2026 were settled in cash, reflecting fund performance in the first half of FY26. The remuneration report reveals a negative share-based payment expense for the year, due to forfeiture of some unvested rights amid the challenging market environment.

Non-executive directors’ fees remain fixed, with the chairman paid $60,000 annually. The company did not engage remuneration consultants during the year.

Audit and Governance

The FY26 financial statements were audited by BDO Audit Pty Ltd, who issued an unmodified opinion. The audit highlighted valuation of unlisted investments as a key matter, given the complexity and subjectivity in valuing Level 3 assets including private securities and funds where Microequities acts as trustee or manager.

Microequities continues to comply with regulatory requirements, including upcoming climate-related financial disclosure standards expected to apply from FY28. The company maintains a strong governance framework overseen by a board comprising experienced directors with backgrounds in law, finance, and investment management.

What to Watch Next

Investors will be watching the recovery trajectory of Microequities’ funds, particularly the domestic growth and cybersecurity portfolios, for signs that the AI-driven market narrative reverses and valuations re-rate. The launch and performance of new industrial, resources, and private credit funds will also be key to assessing the company’s strategic diversification and growth prospects. Dividend sustainability and capital management decisions amid ongoing market volatility will remain under scrutiny.