February Small Cap Winners & Losers

This story features BRAVURA SOLUTIONS LIMITED, and other companies. For more info SHARE ANALYSIS: BVS

By Tim Boreham, Editor, The New Criterion

Profit season brings out the best and worst in small caps – and sometimes both at once

While inconsistent, the just-concluded profit reporting season has provided succour to investors in the small-cap minnows who believe the sector has been unjustly marked down.

It’s always hard to be definitive about such a sprawling milieu of thousands of stocks, but in the main the small ‘uns look to be benefiting from tapering inflation and wage pressures and resilient consumer sentiment.

According to broker Wilsons, the ASX small-ordinaries index has returned 5.4% over the last five years, compared with 9.7% for the ASX 200 index. Globally, the small caps discount relative to larger stocks is at a record high.

 “Small caps generally underperform large caps in the lead-up to an economic slowdown and this cycle has been no exception, with both global and Australian small caps underperforming significantly since 2021,” the broker says.

As for the reporting season, the small caps winners’ list was a case of revenge of the tech stocks, with Bravura Solutions ((BVS)), and Audinate Group ((AD8)) enjoying the best share reactions.

Clubhouse champ Bravura provides management software for the wealth management sector. The company reported a -$1.7m interim loss, but upgraded full-year guidance to earnings before interest tax depreciation and amortisation (ebitda) of $18-22m compared with the previous forecast of $10-15m.

The company’s “re-set and re-energise” strategy, including -$65m of cost cutting, also buoyed investors who pushed the shares up 30% post results.

Shares in online retailer Kogan Group ((KGN)) climbed 24% after the online retailer reported a turnaround from a -$23.8m loss to an $8.7m profit, whilst declaring its first dividend since 2021 (7.5c per share).

Audinate provides AV software and hardware that enables customers to dispose of cumbersome equipment. Audinate shares soared 20% after the company turned a previous -$400,000 loss into a $4.7m net profit and sent out strong positive vibes about the rest of the year.

Fourth placegetter Imdex Limited ((IMD)) enables drilling contractors and resource companies to find, define and mine orebodies with precision and at speed.

The company reported ebitda of $71m, up 13% albeit with reported net profit slipping -26% to $16.8m. But that was enough for the shares to spurt 17%.

Elsewhere, the reporting jamboree revealed plenty of other gems but in many cases they took some digging to find.

A recession bellwether, trucker Lindsay Australia ((LAU)) reported “resilient” demand for its refrigerated haulage .

Lindsay reported a 7.5% profit boost to a record $18.07m, on revenue of $418m. Softness in rural haulage aside, management expects full-year ebitda to increase 13% from last year’s record, to $102-108m.

Specialising in marine propulsion and stabilisation systems, the Perth based Veem ((VEE)) propelled itself to a decent result: a 92% net profit surge to $$3.5m, with revenue lifting 37% to $37.5m.

Veem services the global yacht sector, which is not being troubled by the cost of living crisis.

That’s not the case with chicken processor Inghams Group ((ING)), which is both  a winner and a loser from stretched household budgets. Chooks are a cheaper source of protein than red meat, but out-of-home consumption is suffering as folk consume their birds at home.

Inghams’ net profit was up a none-too-paltry 268% to $63m, on revenue of $1624m (up 9%). Still, the company couldn’t ‘pullet’ off investor wise and the stock tumbled 17%.

Sentiment in the biotech sector has been crook for some time and contract drug manufacturer IDT Australia ((IDT)) has struggled.

IDT has a history dating back to the1960s and has reinvited itself more times than the late David Bowie in his androgynous era.

IDT has deployed its approved facility to prepare medical cannabis products, while it is also tapping demand for psychedelic drugs for research purposes.

On the road to redemption, IDT disclosed half year revenue of $5.8m, 137% higher and narrowed its loss by one third, to -$3.86m.

IDT’s circa $30m market cap is backed by the $18m plus valuation of its freehold property, plant and equipment in eastern Melbourne.

The reporting season also revealed the cracks in the office property market – and as a rule we will join the working-from-homers by staying away.

But we’ll make an exception for the well-established services office provider Servcorp ((SRV)), which has 151,000 square metres of space across 40 cities in 20 countries.

Servcorp reported an underlying pre-tax profit of $28.3m, 25% higher and is sticking to a full-year number of $50-55m.

After shrinking its space during the pandemic, Servcorp is expanding, having invested -$60m over the last year to add 15 more floors.

Allowing for Servcorp’s ample cash reserves of $108m, the company trades on a skinny earnings multiple of 6.7 times and yields around 7%.

While discretionary consumer stocks generally did better than expected, the small cap retailers were all over the shop – literally. 

Beacon Lighting ((BLX)) shone, as did the similarly housing-exposed furniture maker Nick Scali ((NCK)). Sofa, so good.

Shaver Shop Group ((SSG)) benefited from consumers looking for DIY options to shave their hairdressing bills.

Baby Bunting Group ((BBN)) proved  a cot case while plus-sized clothier City Chic Collective ((CCX)) is shrinking in all the wrong places, such as the bottom line.

A vendor of smelly candles, diffusers and mood rings, Dusk Group ((DSK)) posted a -38% profit decline and said trading was likely to remain challenging for the rest of the year.

The shares were snuffed out by -14%.

The ‘biggest losers’ list consisted of heroes turned villains – if only temporarily. Exemplars were Corporate Travel Management ((CTD)), down -19% and medical imaging dazzler Pro Medicus ((PME)), down -14%.

Kettle and coffee machine maker Breville Group ((BRG)) was punished for weak sales and the stock went off the boil by -12%.  

Traffic camera operator Acusensus ((ACE)) had a ‘zero to hero’ month, with its shares soaring 15% after the company emerged as preferred bidder for a  Washington State speed camera tender.

But this week was not so ACE: the company missed out on a Western Europe contract and the stock slunk -30%. Still, allowing for a five-for-one share split last year – not bad given the poor sentiment towards small caps.

A quiet achiever, engineer Duratec ((DUR)) provides services aimed at prolonging the life of assets, across defence (its biggest client sector), aged care, mining, energy and utilities.

Interim earnings came in at $12.2m, 56% higher on revenue of $293m, 28% higher. This effort was ‘rewarded’ with a -16% sell-off, which goes to show the devil often is in the entrails of a result.

On a cautionary note, small caps are a square peg that can’t be corralled into a round hole.

They can’t be viewed as an amorphous blob, but given they are less scrutinised there are greater rewards for diligent investors than plonking more in yawn-inducing Telstra or Commonwealth Bank.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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

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