Building value: 4 small caps delivering through the noise

If all you did was follow the largest companies listed on the Australian and US markets, you’d be forgiven for thinking all is going swimmingly for the entire listed universe. Given the highly concentrated nature of these markets, where the top 10 companies comprise about 40% of each respective index, this couldn’t be further from the truth.

The reality is that, outside of resources, the past 12 months have been full of macroeconomic headwinds for small and mid cap companies. In the 12 months to 30 September, about 90% of Small Ordinaries constituents generated negative returns, while the S&P Small Industrials Accumulation Index returned -14.4%.

The important distinction, however, is that this only applies to the pricing of this cohort of companies. In many cases, earnings are marching higher year on year, and value continues to build (in our view). It’s been a classic case of earnings up, multiples down. But more on this specific point in a later note.

In our recent letter to investors, we highlighted four companies that have continued to execute strongly and grow intrinsic value, despite the macro headwinds. All operate away from the day to day headlines and have been added to the Elvest portfolio through the course of 2026. 

They differ in what they do, but the common thread is that they are growing at significantly above-market rates, have strong balance sheets, and have been added to the Fund at substantial discounts to our estimates of intrinsic value.

The Following is an excerpt from Elvest’s recent long-form letter to investors. All references to prices and forecasts are as at 30 September 2026.

Cogstate (CGS)

Cogstate is a neuroscience technology company that develops and commercialises digital cognitive assessment solutions used to measure brain health in clinical trials and healthcare settings globally. The company operates an asset-light, multi-channel business model divided into two revenue segments, being Clinical Trials and Healthcare.

CGS measures whether experimental drugs are actually working on the brain. When a pharmaceutical company runs a trial for Alzheimer's, depression or a rare neurological condition, the cognitive tests that determine success are notoriously easy to get wrong, and CGS supplies both the testing technology and the scientific oversight that keeps the results credible in the eyes of the regulator.

FY26 results were sound, with revenue rising 15% to US$60.9m at a 30% EBITDA margin, while group net cash stands at US$34.8m. Underlying profit grew at a similarly attractive rate, rising 17.3% to US$11.9m.

CGS has US$118.5m of contracted revenue still to deliver, up 32%, of which at least US$48.3m will fall into FY27, up 54% on the pcp. Any contracts won during FY27 will only augment this figure. Executed sales contracts during FY26 more than doubled to US$89m. The company has also broken its earlier dependence on Alzheimer's, with sales contracts from other conditions now making up 77% of the total, and about 40% of new contracts now arrive through partner platforms rather than its own sales team, to no detriment of CGS margins.

Switching costs are high and CGS is one of only three global providers. Once a trial begins using Cogstate's tests, changing providers midway would break the comparability of the data and put years of work at risk, so the contract effectively runs to the end of the study, and repeat business from well-funded global pharmaceutical companies is high.

At $3.41 CGS is valued at $580m and trades on about 25x Elvest’s FY27 earnings estimates, with earnings forecast to grow at 30% compound over the next two years. 

We are comfortable paying a higher multiple for CGS for a few reasons. It is part of a small global oligopoly, has revenue contracted years ahead, margins of 30% (which are forecast to keep expanding), and a long global growth runway.

The Koala Company (KOA)

Koala is a fast-growing furniture brand that designs and sells its own branded modular furniture and mattresses, primarily operating via a digitally native, direct-to-consumer (DTC) e-commerce business model. By cutting out traditional retail showrooms and middleman markups, KOA passes cost savings directly to consumers while offering fast shipping, tool-free assembly, and risk-free trial periods.

While only a recent listing, KOA is a small cap that ticks many of the boxes we are looking for. Founder-led, with emerging niche leadership and a strong net cash balance sheet, KOA is a capital-light cash generator growing into large domestic and offshore market opportunities.

The FY26 result was sound, and yet we feel the best is to come. Revenue was up 20.1% to $332.3m (+24.4% in constant currency), while underlying EBITDA more than doubled to $27.9m. Gross margins expanded 290bps to 65.3%, driven by product innovation, premiumisation, and disciplined commercial execution. 

The swing came from selling higher-priced modular sofas alongside the original mattress range, which lifted the average order from about $1,038 toward $1,269 and now makes up more than half of sales. The United States grew revenue 59% (68% in constant currency) to $74.9m and represents well under 1% of a market worth about $50bn. KOA’s Japanese business continues to grow at healthy rates as well, with revenue up 13% (24% in constant currency) to $89.4m, with gross margins expanding 410bps to 68%. The company finished the year debt-free with its $71.2m of net cash accounting for nearly 20% of the company’s market capitalisation.

Current offshore growth appears high quality, given gross margin held above 65%, and the range scaling fastest is the higher-priced furniture rather than the entry-level mattress, suggesting customers are trading up.

We hold no illusions about the category. Selling furniture online is competitive, and barriers to entry are relatively low. What separates KOA is that it designs and iterates its own branded product, owns the customer relationship, and now has enough scale in sofas to command ever-improving buying power.

At $4.68 the shares are trading on about 16x Elvest’s forecast FY27 earnings (~13x on an ex cash basis). KOA is compounding revenue at over 20% and earnings at over 35%, with operating leverage only really now starting to emerge. Backed by a dynamic owner-manager, substantial cash reserves and growing operational momentum in deep international markets, we are optimistic about KOA’s prospects.

Service Stream (SSM)

Service Stream is an Australian industrial services company that designs, builds, operates, and maintains critical national infrastructure across the Defence, telecommunications, utilities, and transport sectors. The company uses a low-asset-intensity, contract-based business model centered on long-term operations and maintenance (O&M) framework agreements with blue-chip infrastructure owners like Telstra, NBN Co, regional water and power utilities, and the Department of Defence.

We are attracted to SSM as its structured recurring revenue model minimises capital expenditure while ensuring predictable cash flows driven by regulatory and essential-service spending rather than broader macroeconomic cycles. 

In essence, SSM maintains critical infrastructure that cannot be allowed to stop. It maintains telecommunications networks, services defence estates and keeps utility assets running, largely under multi-year framework agreements won by tender and historically renewed 93% of the time.

While FY26 revenue was broadly flat at $2.5bn, adjusted profit rose 18% to $81.1m as margins improved, particularly in utilities, and the dividend also rose 18% to 6.5 cents per share. We look ahead to FY27 with optimism, with two key contracts likely to layer growth on top of the numbers achieved in FY26. A Department of Defence agreement covering 113 sites across South Australia and the Northern Territory contributed $88m in its first partial year and scales toward a $240m annual run rate. We see considerable upside to this annual run rate as the Defence asset base both grows and ages in the coming years.

A new nine-year Yarra Valley Water contract worth $405m begins in October. This recent award exemplifies SSM’s growing national presence in the maintenance of Australia’s ageing water networks.

Little of SSM's growth depends on the economic cycle. Water, networks and defence estates need maintaining regardless of the economic environment. Growth comes from winning the next panel and running existing work better, which is what the utilities margin improvement represents.

At $2.39 SSM trades on about 15x Elvest’s FY27 earnings estimates, which are forecast to grow in the high teens (%). With a strong net cash balance sheet, we see potential for further upside via accretive M&A. SSM offers a sound mix of growth and income in an uncertain market, backed by revenue contracted years ahead (work in hand exceeds $8.2bn), government and utility counterparties, and a strong industry position.

Wagners (WGN)

Wagners is a diversified construction materials, infrastructure services, and advanced building technology provider operating across Australia and the US, with a core focus on the South-East Queensland market. WGN imports and grinds cement at its own Brisbane terminal, quarries its own aggregate, and batches concrete through a network it keeps expanding, so each new plant pulls more volume through assets it already owns.

FY26 was a breakout year for the group, occurring before any of the Brisbane Olympics pipeline of work begins materially contributing. 

Revenue rose 17% to $503.9m and operating profit rose 61% to $67.2m, with margins reaching 13.3%. Concrete volumes rose 55% as the network expanded into a construction market expanding on surging infrastructure build activity.

WGN’s core construction materials (CM) division continues to execute well into a growing opportunity set. CM revenue increased by 28% to $328.2m, with volumes and selling prices both improving year on year. CM EBIT increased 41% to $56.0m, as increased volumes delivered operating leverage.

WGN’s newer business unit, Composite Fibre Technologies (CFT), offers a point of difference for a construction materials focused company, and provides substantial long-term growth optionality.

CFT makes utility poles and crossarms from composite material rather than timber or steel, and volumes rose 206% as electricity networks in Australia and the United States invest in their grids to better protect these networks against the elements. While timber poles rot and burn, and steel poles corrode, a composite pole does neither, weighs a fraction as much and can be carried into places a truck cannot reach. Utilities replacing ageing networks after a decade of fire and storm damage are the natural buyer, and Wagners is one of few producers at scale.

The CFT division grew revenue 36% to $93.4m, and EBIT by 85% to $18.1m in FY26. A new production line in Texas coming on stream later this financial year could lift US growth materially.

At $4.54 WGN is valued at $900m and trades on about 17x Elvest’s forecast earnings, which we view as attractive when compared with our two-year compound earnings forecast of about 19%.

Closing

This has been a volatile quarter and a challenging year for small and mid cap industrial companies. Changing global trade policies, geopolitics, war, energy prices and inflation have combined to reset risk-free rates at higher levels, which has meant generally sound investee company execution and growth in intrinsic value has not always been reflected in share price appreciation. However, in our view, therein lies the opportunity.

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Adrian Ezquerro and Jonathan Wilson are Principals of Elvest Co Pty Limited (ABN 65 657 018 614, AFSL No. 547 262) and Portfolio Managers of The Elvest Fund.

Disclosure: Adrian and Jonathan are exclusively invested in The Elvest Fund. Elvest may hold shares in any/all stocks mentioned above.

*This report contains some forward-looking statements which reflect the expectations of Elvest Co Pty Limited about the future prospects of companies held within the portfolios managed by Elvest. While considering its expectations to be based on reasonable grounds, there is no guarantee that those expectations will be met. These statements should therefore not be relied upon as an accurate representation or prediction as to any future matters.