Understanding the 18% dividend yield of this profitable ASX microcap

Navigating the microcap space can be a turbulent one – The stocks here are often illiquid, susceptible to pump-and-dump schemes and love to raise capital. Even if you uncover a hidden gem, the stock can remain undervalued for far longer than what your sanity can endure.

On the off occasion, a microcap company posts some numbers that are too strong to ignore. And that was the case for Cue Energy (ASX: CUE). In this education piece, we'll be breaking down some of its latest numbers and outlook plus some broader food for thought for microcaps.

Cue Energy at a Glance

Cue Energy operates oil and gas projects in Indonesia, New Zealand and Australia, with a focus on both exploration and production. The company's key projects include:

• Australia: Interest in three production assets located in the Amadeus Basin in NT. These assets were acquired from Central Petroleum in July 2020 with the following interests: Mereenie (7.5%), Palm Valley (15%) and Dingo Fields (15%).

• New Zealand: Cue holds a 5% interest in Petroleum Mining Permit 38150 which contains the Maari and Manaia producing oilfields located 80 km offshore. The current production from the fields is approximately 5,300 barrels of oil per day.

• Indonesia: Cue holds a 12.5% interest in the Mahato PSC located in Central Sumatra, Indonesia. Field production was 6,400 barrels of oil per day as of June 30, 2023.

The Half-Year Result

Cue shares have been trading sideways around the 7 cent level since early 2021. Here are some of the key numbers you should note before we move onto the half-year FY24 result.

• Market cap: Approximately $45 million

• Net cash: $23.2 million and no debt as at 31 December 2023

• Average volume across the 20-days prior to the result: 98,600 shares (approximately $6,000)

The half-year FY24 result was pretty extraordinary from an earnings and payout perspective.

• Revenue rose 22% to $29.3 million

• Net profit after tax rose 34% to $9.1 million

• Declared a 2 cents per share special dividend

In the lead up to the result, the company had an enterprise value of just $21.8 million (market cap minus net cash). The net profit figure equates to almost half its enterprise value ... from just six months of earnings.

The stock opened the session 29.9% higher at 8.7 cents and finished 49.3% higher at 10 cents. Approximately 17.4 million shares traded hands.

The special dividend seeks to return $14 million to shareholders – representing the entirety of its first-half net profit plus $4.9 million in cash reserves.

At a current share price of 11 cents, the 2 cents per share special dividend represents a yield of 18.2%. The record date of the dividend is 22 March 2024 and payable on 5 April 2024.

Looking Ahead

Cue said it has activities planned for all its assets over the next 12 months to increase production from existing fields.

The half-year result noted that "Strong oil prices are benefitting Mahato and Maari oil sales, which are based on Brent benchmark pricing. Recently announced Australian gas contracts have been signed at prices reflecting current market conditions."

Food for thought

Cue has been dishing out some solid numbers for the past two financial years (FY22-23) but the market just didn't seem to care.

• FY21 result (18 August 2021): Revenue of $22.4 million and gross profit of $11.6 million. Cue suffered a $12.7 million after tax loss due to capex, foreign currency losses and volatile energy prices. The stock finished the results session up 1.5% to 6.6 cents.

• FY22 result (25 Aug 2022): Revenue up 98% to $44.4 million – The highest annual revenue generated by Cue in more than 5 years thanks to higher production across the portfolio. Net profit jumped 226% to $16.1 million. The stock rallied 20% (from near five-year lows) to 7.2 cents.

• FY23 result (25 August 2023): Revenue up 16% to $51.6 million and net profit after tax of $15.2 million. The stock finished the result session up 8.0% to 6.7 cents.

Cue Energy 5-year price chart (Source: Market Index)

The unexpected special dividend might have been the key catalyst behind the recent re-rate.

Cue shares surpassed the 10 cent level for the first time since December 2020. However, trading above 10 cents brings its own set of challenges. Previously, the stock moved in 0.1 cent increments (i.e. from 9.8 cents to 9.9 cents) but now it shifts to 0.5 cent increments (i.e. 10.0 cents to 10.5 cents), representing a 4-5 percentage change with each tick.

This adjustments leads to a stacked order book. For example, you'll see millions of shares up for sale at 11 cents and numerous eager buyers at 10.5 cents.

The other question is what happens once the stock trades ex-dividend? While Cue aims to boost production in the coming year, there's no guarantee of another special dividend.