Overlooked and Under-loved

3 Beneficiaries of Earnings Season

Disclosure: SGI is very illiquid, and I own shares in all 3 companies

After a rough 18 months in small caps, you are starting to see both the recovery in investor sentiments and consequently share prices. 6 months ago good news was no news, with many companies reporting great results but no reaction from the market unless it was bad news.

In small caps across any 12 months period, the biggest winners tend to be boring industrials with low PE bases like Mader, Duratec, Vysarn, XRF, IPD group or sexy fast-growing companies that go from expensive to very expensive like Dropsuite, Promedicus, Weebit Nano. The best long-term compounders on the ASX always tend to be the sexy fast-growing companies like REA, PME, ALU, and TNE, due to the capital-light nature of the business and ability to scale. However, the best short-term opportunities tend to rise in the more boring companies which tend to have more structural difficulties like cyclicality, low margins or are capital intensive. As a result, the market tends to try and get ahead of the sexy companies bidding their prices up as a near FOMO, while when investors look at more boring companies due to their more structural issues they will give the company a lower multiple, and wait to they execute until they bid up the share price off a low base. Mader, Duratec, Vysarn, XRF, IPD are all companies with PEG below 1, but still have great 12-month returns, and the best part about these companies investors’ returns aren’t too dependent on just the multiple someone will pay in the future but the earnings of the business unlike many companies these days.

The 3 companies I’m going to talk about today are Stealth Global Holdings (SGI), LaserBond (LBL) and Ava Risk Group (AVA) all fit the bill of cheap boring companies that have been executing but I believe has been overlooked by the market. All 3 have been trading within their own 20% range for the last 12 months with no real volatility, while the companies have all continued to grow at very strong rates. With funds beginning to flow back in small caps and investor sentiment rising, I expected to see some great full-year results and potentially see some rallying in the share prices.

Ava Risk Group

As previously discussed here Ava is a world leader in risk management technologies for critical assets and infrastructure. The group is made up of 3 companies: FFT, BQT and GJD. They provide their solutions to most security-conscious commercial, industrial, military and government clients in the world.

With 46% organic revenue growth through the first 3 quarters, management suggests full-year revenue to be between $28 and $30 million, with would be around 55% growth on the previous year. I believe Ava is at an “inflection point” and in the last 12 months has been beginning to scale very effectively with management targeting growing revenue to $70-$100m with 25%+ EBITDA margins in the coming 3 years. While a think the target is over bullish they don’t need to hit those targets for this to be a great investment.

With a current market cap of $49m, if Ava just grows revenue to half of their $100m target to $50m and gets an EBITDA margin of 15% that would be an $7.5m EBITDA, just 6.5x its current share price.

I expect the market is wanting to see some more consistent scale and some profit numbers, while they are about breakeven right now I expected once sales kick in to see some nice operating leverage.

Stealth Global Holdings

Start off by saying SGI has only a $12m market cap and is very illiquid, while their market cap may be small it has $100m in sales up from $24m when it IPO’d.

SGI is an industrial distribution company that operates and franchises around 70 stores Australia-wide. They have a strategy of growth by acquisition along with organic growth. Their roll-up strategy I believe is very prudent given the capital-intensive nature of these businesses, their ability to realise synergies through sales and cost-cutting, and the ability to buy companies very very cheaply and grow them. SGI has organic sales growth of around 10-12% which is very impressive given its valuation. SGI has targeted growing sales substantially in the coming years. I expect full-year sales to be $110m up 10% on the previous year with an NPAT of at least $1m, trading at 12x earnings. I believe the market is waiting to see a substantial profit from the company, as historically it has been borderline break even. Mr Market is probably also spooked off by the $10m of debt, given the low share price and low-interest rates SGI has funded its acquisition through debt. It is noted the $7.5m of debt is for working capital and the remaining $2.5m is to be paid off in the coming 12 months.

With the rolling off in debt and strong organic growth and the ability to realise synergies with acquisitions I expect profit to substantially grow in the coming years to a margin of around 2%+, and they could see a nice bounce from their full-year results if they can produce a nice NPAT.

Planning on doing a write-up on SGI in the coming weeks

Link to investor presentation for SGI

LaserBond

After seeing a really strong performance in their share price from 2016-2019 LaserBond share price has been flat despite the strong growth of the business.

LasberBond is a surface engineering company that improves the wear-life of products for customers, which are typically miners which decreases downtime of mining machinery. LaserBond has 3 division services: where they improve the wear-life of different products produced by OEMs, Products: where they create their own products for different machinery, and technology: where they licence their technology to different industrial services companies.

You can see from the chart above the strong long-term growth LaserBond has seen (from their H1 FY23 presentation). Typically H2 profit is significantly stronger, and given the integration of an acquisition and their technology sales I wouldn't be surprised to see an NPAT of $5m+ and if LasberBond holes its multiple of ~21x earnings you could definitely see a nice share price boost of ~15%

Link to Rask LaserBond interview

With low multiples and strong growth outlooks, I think all 3 are great long-term positions. Given the boost in investor sentiment in the last month or so and the strong business performances from the first 3 quarters of FY23, I wouldn’t be surprised if all 3 companies see a nice boost in their share price. I’m planning on topping up my positions in all 3 companies in the coming week.