5 Interesting Microcaps & Nanocaps for 2017

Mark Tobin

As anyone who has read some of my previous articles they will note I don’t attach a buy, hold or sell recommendation to stocks. I let readers of my pieces determine that for themselves. The pieces merely state a stock looks interesting to me at least at the present moment. This can be due to a confluence of factors related to the stock. Factors can include apparent attractive valuation, new management teams or boards, outcomes of strategic reviews other assorted near term catalysts. Given the above I have picked 5 stocks with market capitalisations all under AUD$100m that look interesting currently. Click below for an overview of the thesis for these five stocks.

SDI Limited (SDI)

Mkt Cap $88m

Share Price $0.74

FY17 P/E EST 12

Fully Franked Yield 3%

SDI is a global leader in the development, manufacture and supply of dental products. Think tooth whitening products, amalgams, aesthetics and composites etc. used by dentists. This is a company which has been growing its revenue purely organically and consistently for a number years. All of their growth is funded through internal operating cash flows. It pays a small, but regular fully franked dividend. The company is also prudently on programme of reducing current debt levels. SDI will bring 4 new products on stream over the course of calendar 2017. Management has been able to increase gross margins every year for the last 3 years, which is coupled with an efficiency and productivity drive that is seeking to improve operational costs and margins even further. A recent sharp pullback in the share price due primarily, to some short-term unfavourable FX and tax impacts makes SDI look interesting.

Hitech Group Australia (HIT)

Mkt Cap $16.1m

Share Price $0.52

FY17 P/E EST 7

Fully Franked Yield 3.5%

Est. Cash $4.0mil

No Debt

Hitech is a recruitment company providing contract and permanent candidates for the ICT industry. They have a long list of both government and corporate clients and have operated for 20+ years. Recruitment is a very cyclical industry but management is of the view that after two solid years the cycle has turned in their favor. The ICT sector of the economy is experiencing strong growth which should help Hitech as their clients recruit more employees. Indeed management reconfirmed guidance at the AGM of 10% - 20% growth in operating profit for FY17. Management’s previous misstep of putting excess cash to work in listed investments has masked the turnaround in the operating business. Management has stated their share trading days are behind them and not to be repeated. Hitech has got a strong balance sheet, low P/E, no debt, over 20% of its market cap in cash and operating in a vibrant sector of the economy it’s interesting.

ICS Global Limited (ICS)

Mkt Cap $15.7m

Share Price $1.49

FY17 P/E EST 14.0

Yield 4.2%

Est. Cash $1.3mil

No Debt

Just over 2 years ago I profiled ICS and since then it has rewarded shareholders with a solid total return. ICS primarily provides a medical billing service to doctors, specialists, clinics etc. to ensure various medical insurers in the UK pay them. ICS in essence provides a software-based accounts receivable/debtors control function in return for a small percentage based fee based on the value of claims processed. The business continues to go from strength to strength and while they are the biggest player in the UK market they estimate that 90% of the market still does not use a medical billing company but rather do it in-house. The business has been growing purely organically at 20% plus over the last few years. Obviously Brexit and subsequent collapse in the pound versus the Aussie dollar will impact on their FY17 earnings and this has lead to a sharp pull back in the share price. However I think the pull back provides a noteworthy opportunity to revisit the story, as ICS will be cycling the impact of this lower exchange rate in FY18. The underlying business remains on a very strong growth trajectory. Should the GBP appreciate again versus the AUD at some point, once some certainty about Brexit is established this will provide a significant tailwind to earnings as opposed to the current earnings headwind. The stock is trading at just above 52 week lows and successful microcap investors PIE funds hold just over 15% of the company. As per my previous article on finding microcap and nanocap gems on the ASX these indicators make ICS look interesting.

Stargroup Limited (STL)

Mkt Cap $19.6m

Share Price $0.033

FY17 P/E EST N/A

Yield N/A

STL is a provider of ATM’s and EFTPOS terminals in Australia. The company through a number of acquisitions is seeking to create a vertically integrated supply chain in the provision of ATM and EFTPOS terminals. Uniquely it owns just over 11% of its ATM supplier and said ATM supplier owns just over 5% of STL It has acquired a profitable ATM processing and switching company so it can process all its own transactions and also provide these services to other independent ATM providers. A newly received debt facility will allow it to fund further growth initiatives. There is also the possibility of consolidating the independent ATM providers outside of the Big 4 banks. It has delivered 12 consecutive quarters of record revenue growth and will most likely achieve profitability at an EBITDA level at least in FY17. Its rapidly increasing size has allowed it to renegotiate the processing costs and charges from the banks which will cut its costs of good sold by over 50% through FY17. With a balance sheet well funded for future growth, a significant track record of improving quarterly results, near term profitability at a group level and the boards’ intention to pay a maiden fully franked dividend in June 2017 it looks interesting.

USCOM Limited (UCM)

Mkt Cap $30.3mil

Share Price $0.27

FY17 P/E EST N/A

Yield N/A

Est. Cash $2.0mil No Debt

USCOM manufactures a range of digital spirometers (measures lung function), hemodynamic monitors (measures heart function) and blood pressure monitors. UCM has been growing revenues steadily over the last few years through its USCOM 1A hemodynamic monitor. The device has FDA, CE, CFDA and TGA approval with sales growing at CAGR of 40%+ over the last 3 years. UCM currently has 55 distribution agreements in place for sales of the device. Sales of the device look to continue growing in 2017. UCM’s new spirometers and associated auxiliary products were just granted CE mark approval. FDA and other regulatory approvals for this suite of products are expected in 2017. UCM’s 2 blood pressure devices are also in the final phases of regulatory approval and should be granted in the course of 2017. UCM has a solid track record of bringing a medical device through the regulatory framework and generating sales from the approved device. This experience coupled with multiple new devices coming online over the next 12 months, which they can then sell, into an existing distribution network suggests that economies of scale benefits and near term profitability is achievable. At this juncture it looks interesting.


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James Marlay

Thanks Mark, re STL - is the move to a cashless society not a big structural headwind for this company?

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Mark Tobin

Hi James Yes and no. ATM's of the future will be like mini banks where you can also deposit cash for example (STL planning on rolling this breed of ATM out in AUS) along with more expanded service compared to today. They are also moving into EFTPOS and all the backend processing of transactions which still needs to be done for Visa Paywave/Mastercard Paypass or standard ATM transactions. Cash will also be with us for a fair while yet in my view.

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John Peters

Gee Mark, I hope you get paid for your analysis, as you are not making any money on your tips. ;) I can tell you Starpharma is a huge risk. CEO Todd Zani has sold a lot of his stock and the company has a mountain of debt in what is a declining business. http://www.illawarramercury.com.au/story/4527377/atm-use-hits-15-year-low-as-cashless-society-gathers-momentum/?cs=7 None of which you seem to mention in your so called "independent" research here http://www.starpaymentsystems.com.au/images/pdf/media/201706121Techconference_Marktobin.pdf

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