Buy Hold Sell: 5 Aussie small caps to weather the storm

Buy Hold Sell

Livewire Markets

Bittersweet. Civil war. Virtual reality. And the famous Mark Twain quote “It usually takes more than three weeks to prepare a good impromptu speech.” What do all these have in common? Why, they’re oxymorons of course!

That brings us to the topic of today’s episode of Buy Hold Sell: Resilient small caps. While these ideas are not complete opposites, the small end of town is certainly where you’ll be more susceptible to stock price capitulation, particularly as the market starts to crunch.

And boy, it is crunching alright. The S&P/ASX Small Ordinaries is down nearly 16% year to date, while its big brother the ASX200 has printed a more modest -3.6%. Some former small-cap darlings have led the descent, the following among those caught in the selloff:

  • Buy now pay later company Z1P (ASX: Z1P) fell -78.75% 
  • Digital payments firm Tyro (ASX: TYR) down -62.94%
  • Online sports betting company Pointsbet Holdings (ASX: PBH) dipped by -62.84% 
  • Data centre business Megaport (ASX: MP1) declined -59.54% 

If you're in need of capital protection but can't let go of your Growth infatuation just yet, this episode is for you. We hosted small-cap specialists Josh Clark from QVG Capital and Gary Rollo from Montgomery Investment Management, quizzing them on the small caps they believe offer exciting upside after the sell-off while remaining resilient through market cycles. 

The stocks covered are:

  • Travel company Webjet (ASX: WEB),
  • Billing software firm Hansen Technologies (ASX: HSN), and 
  • Data and software company Objective Corporation (ASX: OCL)

Our guests will also each share a small-cap stock they believe shows resilience against the odds. 

Read, watch or listen below:

Note: This episode of Buy Hold Sell was shot on Wednesday 25th May 2022. You can watch the video, read an edited transcript or listen to the podcast below. All data sourced from Mathan Somasundaram, DeepData Analytics


Edited transcript

James Marlay: Hello, and welcome to Buy Hold Sell brought to you by Livewire markets. My name's James Marlay, and today we're talking about small caps. It's been a tough start to the year, the small odds down 14% (on date of filming, now past 17%), some of the other sectors, technology, healthcare, the consumer discretionary space, even worse. So today we're going to look at resilient parts of the market in the small-cap space. I'm joined by Gary Rollo from Montgomery Investment Management and Josh Clark from QVG Capital. Now let's start with you, Josh. Webjet couldn't have had a worse time over the past few years, (but are now) up 12% year to date, 18% over the past 12 months after surviving Armageddon. Buy, hold or sell on Webjet?

Webjet (ASX:WEB)

Josh Clark (SELL):Webjet's a sell for me. I agree, it couldn't have had a worse time in terms of the operating conditions, but I think it's had a pretty good time in terms of the share price. So if you look at the pre-pandemic maximum enterprise value that this company had, you're talking about $2 billion is the maximum evaluation it got to pre-COVID and it's well north of that now. And that's despite the fact that the business has recently posted a loss. It's still early in terms of its earnings recovery trajectory, albeit that is happening. But I think given that you've got well over a fully recovered enterprise value, you're not really getting paid for all of the unknowns. So things like the market share that they're likely to have, what the ultimate cost profile margin profile will be, the commissions that they're likely to receive from their suppliers, the total level of travel, how quickly that comes back, I think there's a lot of unknowns and I just don't think you're getting paid for that in the share price here. So it'll be a sell for me.

James Marlay: Okay. Gary Webjet, buy hold or sell?

Gary Rollo (BUY):It's a buy. I'm going to go the opposite way of Josh here. Look, travel's recovering Webjet's well positioned. If we think the travel market's going to recast itself the same way it was pre-COVID, we have to think again, the businesses that have survived are positioned to thrive. They're going to be the market share takers. There's been significant cost out specifically at Webjet. We think that they'll have a much higher market share and doesn't need to get back to the full kind of run rate of the travel sector to show the same revenue profile. And the cost profile suggests they'll make a lot more money when they do. So, we think that when we get to the point where travels say 75, 80% recovered, Webjets economics will be pretty much fully recovered, but people will recognise that it's a market share taker from there. So what our view is of the kind of 11 times EBITDA, the kind of EBITDA pull that we think that they can get out of this market, that's a decent price to pay for the optionality of that market share and gainer and the growth that they can get from there. So for us, it's a buy.

James Marlay: Okay. Switching industries from travel, we're going to Hansen Technologies. Pretty boring on the revenue side. Pretty stable. But that might be sexy in this market, buy, hold or sell?

Hansen Technologies (ASX:HSN)

Gary Rollo (BUY): Mate, I've said to you in an earlier video that we're aiming small and missing small, and this is what Hansen is in this market. It's the tech stock for today. Look, it's not a high growth type business, it's got stable industry fundamentals in the sector that it plays in. It's basically giving you market level growth, but in a business model that's a bit better than the market. You've got a founder-led management team where they've given some punchy targets for years, two, three, four, and five in terms of what they think they can get to M&A's got to be part of that story. They're one of the bigger players in their sector. So we think they should be able to repeat recent M&A and get there. So aim small, miss small, decent valuation, 10 times EBITDA, good cash flow. Yeah. That's on our portfolio.

James Marlay: Okay. Josh. Hansen. It's got a little bit of a dividends go along with it. Very grinding, slower growth, buy hold or sell?

Josh Clark (BUY): I think those things are correct. It's a buy for me. So probably at risk of repeating some of Gary's comments, but I think one of the really interesting things about Hansen is it is low growth. It does low single digit type organic revenue growth. But then if you go back over the last decade, it's compounded shareholder returns of over 20%. And if you go back further than that, the growth rate per annuum is even higher. So it's an interesting case study. How have they done that with such low revenue growth? And I think the answer is some of the things that Gary's already said, but great cash flow, founder-led business, high returns on capital is one of the important points there. And probably the most important point is the founder-owner management and the discipline capital allocation. So they've been able to go and purchase businesses with sticky revenues, retain those revenues, but then improve that margin profile of those businesses over time. And that's where a lot of the values come from. So if you're in an environment where share prices are falling, that's not necessarily bad for Hansen. They potentially pick up a few bargains, so that's a buy for me.

James Marlay: We're going to stay in the tech sector. Offering tech solutions for public sector organisations is Objective Corporation. It's actually 25% ahead of the tech index on a 12 month view, but it's taken a punishing in the past month or so. Buy, hold or a sell?

Objective Corporation (ASX:OCL)

Josh Clark (HOLD): It's a hold for me. You know, we've just talked about Hansen. There's a lot of similar characteristics. So founder-owner management, great cash flows, high return on capital, really clean accounting, some really disciplined acquisitions and a track record of executing on those acquisitions. The thing that it has that Hansen doesn't is the additional revenue growth in the teens potentially. But the other thing that it has that Hansen doesn't is the multiple. And it's pretty expensive here, despite the fact that it's come back a long way. You can't forget that the market's demanding a higher return on stocks now. So Objective Corp looks too expensive for me to be compelling enough to buy. So it's a hold for me.

James Marlay: Too expensive for Josh. Is it a buy, hold or a sell for you, Gary?

Gary Rollo (SELL): It's a flat out sell. I mean, we look at technology with a sort of three-eyed lens. In the beginning, we look for technology that is future proof. We look for markets that offer optionality for growth and we also look at organic growth track record and given the multiple, and that multiple is pretty steep, we can't see how the risk returns skews well for that investment, so our view, it's a sell and we just move on. We wouldn't look at it at these valuations. I mean, it's the anti-Hansen, it's aim big miss big, and the downside pain could be large. So not for today.

James Marlay: Okay. Now I've asked each of our guests to bring along a resilient stock that's been sold off in the recent route. So Gary, I'm going to start with you. What's the resilient stock that you thinks maybe copped an unfair punishing of late.

Macquarie Telecom (ASX:MAQ)

Gary Rollo (BUY): There's a few. So, we've got a long list to pick from, but I'm going to stick with that aim small, miss small theme. Macquarie Telecom, it's a data centre player. And it's got major clients like the cloud hyper-scalers as clients, which as I've mentioned earlier, growing their business pretty strongly and also the Aussie government. They're basically digitalizing more rapidly than the market probably expects. Look, that business is on 14 times EBITDA. It's got a founder-led management, it's got a good balance sheet and it's got growth optionality ahead. So for us industry fundamentals are good. It had a great set of numbers at the first half. Not that anyone cared, but the share price is down 20% this month alone, for example. So Macquarie Telecom, you're not going to go wrong and it's got lots of value left on the table. We think it's worth somewhere between $80 and a hundred bucks, even in a higher interest rate environment. So, that's a pretty decent return from the modest $55 to $60 that it's trading out today. Yep.

James Marlay: Thank you, Josh. You've got something resilient that's been knocked down and you think is worth a look.

Trajan Group (ASX:TRJ)

Josh Clark (BUY): Certainly the share price doesn't make it look resilient. If you look at something like Trajan, I think it's worth talking about. Very much at the smaller end of the market cap spectrum, but that share price has gone from maybe $4.50 to $2.50 or thereabout. So pretty big fall. And that's just ignoring the fact that they're going to hit their guidance still, earnings are very resilient. So the markets that they're selling into, laboratories and original equipment manufacturers of an analytical instrumentation for labs, I say that 10 times quickly. So very defensive market, their customers are still growing. Their customers are listed so you can see the growth. Definitely you'll get high single digit, maybe low double digit growth out of that. And you've still got optionality in terms of some of their more leading edge technologies around micro sampling. And then on top of that, safe pair of hands. So founder-owner led, good returns on capital and so far, really good capital allocation, I think with the acquisitions that they've made. So that one would be a buy for me.

James Marlay: Okay. Well, the selloff sounds like it's been indiscriminate across the smaller sector, but I've heard a couple of ideas today where I'm seeing managers identifying good businesses, resilient businesses, and they're excited about the valuations. I hope you enjoyed that episode of Buy Hold Sell. Remember to subscribe, check in on YouTube, we're adding new content every week.

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