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Overlooked Small Cap Champions

Weekly Reports | Sep 14 2020

This story features COG FINANCIAL SERVICES LIMITED, and other companies. For more info SHARE ANALYSIS: COG

By Tim Boreham, Editor, The New Criterion

The overlooked small cap champions defying the coronavirus gloom.

As the now-concluded earnings reporting season shows, the pandemic has created a distinct market of winners and losers – interspersed with a few plodders just getting by.

The trouble with the obvious Covid-19 beneficiaries such as e-commerce stocks is that they're trading on fancy valuations. But delve deeper into the often murky small cap pond and it's possible to pluck overlooked industrial plays that are doing surprisingly well.

The stocks mentioned here are robustly profitable and generally are dividend-paying. Having said that, sizing up earnings has become problematic at a time when ebitdac' earnings before interest, tax, depreciation, amortisation and Covid has become an accepted way to state profits.

An issue with sizing up stocks is that most of the results pertain to the full year to June, rather than the Covid-afflicted half year to June.

Investors should thus focus on the half year or June quarter trends and management prognosis on performance in July and August

A key variable is how Victoria's second lockdown will affect companies exposed to the tumbleweed state and it's too early to glean the full impact.

Consolidated Operations Group ((COG)) wins an honorable mention for declaring a maiden dividend of 0.152 cents per share, despite reporting a virus-affected bottom line loss of -$10 million.

Readers might ask: Consolidated who? The company is the country's biggest asset finance group, via a network of independent and company-owned brokers.

The company also runs a self-funded commercial equipment financing book.

Consolidated generated earnings before interest tax and depreciation (ebitda) of $31.2 million, up 4%, on revenue of $222m (up 2%).

While we're on it, listed quasi rival CML Group ((CGR)) maintained flat underlying earnings amid resurging demand for invoice financing (factoring).

Earlier in the year Consolidated vied with Scottish Pacific to take over CML Group, before ceding to its Caledonian rival. But the takeover fell through anyway.

Speaking of lending intermediaries, Mortgage Choice ((MOC)) defied the slowdown in housing activity by posting a less severe earnings decline than expected (down -16% to $11.7 million).

But the most notable aspect of the numbers is that settlements increased by 7% for the year to $10 billion, with June quarter settlements up 18% to $2.6bn.

One reason is that the "incredibly competitive" mortgage market is prompting more switching from borrowers, with the heightened activity flowing into July and August.

The buoyant conditions prompted the board to increase the full year dividend to 3.5 cents per share, fully franked, from 3c previously.

Assuming a 7c a share total payout this year, this often underrated dividend cash cow trades on a yield of around 8%, fully franked

As a lender to used vehicle buyers, Money 3 ((MNY)) should be in the eye of a storm in terms of mounting delinquencies. But in keeping with the trend of cautious consumers elsewhere, borrowers repaid at record levels in the June quarter.

The reformed payday lender reports a record month in July, reflecting commuter preferences for hygienic private vehicles over germy public transport.

The upshot of the better than expected dynamics was a 14% rise in underlying earnings to $32.3m, despite bad debts almost doubling to $23.6m.

The reported profit declined by a similar degree to $24.1m, mainly because of a $10.1m "economic outlook provision" for anticipated further bad debt problems.

Despite customers' propensity to repay, Money 3's loan book increased 16% to $433m for the full year.

The company describes 79% of its loan book as "strong or good", with 19 % on watch list, 3% sub-standard and 1% impaired.

The quality of the book is actually better than in the previous year, but given conditions could sour the economic provision seem prudent.

In the meantime, broker EL & C Baillieu forecasts a current year dividend of 10.5 cents per share, up from 8c in 2019-20 and implying a circa 5% yield.

Turning to health, diagnostic imaging house Capitol Health ((CAJ)) should have been a Covid casualty, given patients have shied away from consulting their GP about other ailments.

About 80% of Capitol's business derives from bulk billing, with Medicare data showing a sharp dip in visitations in April of up to -40% (before rebounding in June).

Capitol therefore did well to boost full-year operating ebitda (including JobKeeper) by 22% to $27.8m, with revenue edging up 3% to $153m.

Following a $40m equity raising in April, Capitol has minimum debt, which bodes well for acquisitions as asset prices ease.

The board bestowed a half a cent divided, taking the total full year payout to 1c a share (a yield of 4%).

Capitol's 63 clinics are biased to Victoria, so one outstanding question is how the lockdown 2.0 will affect performance.

"We know that eventually you will get that dodgy knee or back looked at and you should also take a look at Capitol Health,' says broker Shaw and Partners.

Changing tack altogether, scaffolding and formwork rank as about one out of ten on the excitement scale and we're only ascribing a score for the construction buffs out there.

What's not so boring for investors is the ability of Acrow Formwork and Construction Services ((ACF)) to thrive in the troubled times. This is partly the result of a timely switch from the residential sector to engineered formwork for mega infrastructure projects.

Acrow reported a 22% net sales surge to $87m for the full year, with ebitda climbing 30% to $15m.

Notably, June half ebitda doubled to $9.5m, while revenue surged 39% to $49m.

This is because client projects such as the Sydney and Melbourne metro projects, Snowy Hydro 2 and Brisbane's Queen's Wharf forged ahead with minimal disruption.

With a record pipeline of new jobs, management is "comfortable" with broker forecasts of ebitda of $17-17.5m for the current year.

The munificent board upped final dividend to 1.05c a share from 1c previously, taking the full year payout to 1.75c (a yield of around 5%).

Border restrictions aside, the stock with arguably the best ASX code shows that the big-ticket WA mining projects continue to tick over with minimum disruption.

Mader Group ((MAD)) provides specialist contract labour to maintain mobile equipment such as trucks and excavators. Customers include three iron ore majors and the company is also exposed to the booming gold sector and eastern seaboard coal.

Mader posted full year earnings of $17.5m, up 17%, with revenue increasing 20% to $274m. Notably, the June half was stronger than the first half.

As could be expected, the WA bubble has created some labour supply issues. But given revenue from this core geography rose 24% to $181m, the problems are being overcome.

While Mader is vulnerable to the usual commodity cycles, longer term supportive factors are Australia's ageing mining fleet and increased strip ratios which requires more overburden to be removed with the life-sized Tonka Toys.

Bell Potter forecasts earnings of $19.3m this year, putting the stock on an earnings multiple of less than nine times and a yield of around 4%.

In the communications sector, satellite phone minnow Beam Communications ((BCC)) is ringing up the profits with a 43% ebitda boost to $3 million, even though revenue declined -16% from previous record levels to $14.9m.

The reported loss of $1.6m resulted a $2m charge for capitalised development costs, but bouquets to the board for recognising these imposts now, rather than in the never-never.

Beam owns the SatPhone Shop chain, while telco clients include Iridium, Inmarsat and our' Telstra.

Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR's core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Content included in this article is not by association the view of FNArena (see our disclaimer).

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