Buy Hold Sell: 5 growing small caps for FY24

Some of the biggest stocks on the ASX started out as minnows.

Take BHP Group (ASX: BHP) and CSL (ASX: CSL) for example, today two of the biggest stocks in the country. Once upon a time, these stocks were known as Broken Hill Proprietary Company and Commonwealth Serum Laboratories and very few people knew of them. It took years - decades even - of toiling away in relative anonymity before these companies cracked the big time.

Imagine if you knew then what you know now.

I'm sure I'm not alone in my daydreams of borrowing Doc Brown's time machine and whizzing back to invest $1000 in the shares of BHP and CSL when they first listed - for those who are curious that was 10 August 1885 for BHP and 30 May 1994 for CSL (although, CSL was founded in 1916).

Alas, we cannot. But the next best thing we can do is try to identify current small caps that could ultimately grow into tomorrow's large caps, or at least, grow over the year ahead.

So in this episode, Bell Direct's Grady Wulff was joined by Tim Johnston from Tyndall Asset Management and Tobias Yao from Wilson Asset Management for their analysis of three stocks that could outperform over the next 12 months. Plus, they each name a stock pick of their own.

Note: This episode was recorded Wednesday 9 August 2023. You can watch the show, listen to the podcast, or read an edited transcript below.

Edited Transcript

Grady Wulff: Hello and welcome to Livewire's Buy Hold Sell. I'm Grady Wulff and today we're taking a deep dive into the small-cap sector to find a selection of stocks that have a high growth runway heading into FY24. To do that, I'm joined by our experts, Tim Johnston from Tyndall Asset Management and Tobias Yao from Wilson Asset Management. Gentlemen, first up we have MMA Offshore, which provides marine services to the offshore oil and gas industry. Tim, we'll start with you. Is it a buy, hold, or sell?

MMA Offshore (ASX: MRM)

Tim Johnston (BUY): For us, it's buy. It has had a good run, but it is lagging its international competitors. The reason we like it is the fact that the supply/demand environment has changed enormously for MMA. It's a supplier of offshore vessels that support the oil and gas industry, but also now a new source of demand in offshore wind farms. Demand has rapidly outstripped supply. Prices are increasing enormously. And importantly, the supply response to bring on new ships is a multi-year story. So we see no supply response for a number of years.

Grady Wulff: Tobias, its share price has run 124% over the last year. Buy, hold, or sell for MMA offshore?

Tobias Yao (BUY): I agree with Tim. It's a buy for us. I think the big debate in the market is, to Tim's point, where the supply comes on to meet demand in this cycle. We've visited quite a few industry players and that’s suggesting to us that if you're going to order a vessel now, it's going to take you probably more than two years to receive the vessel. And idle vessels cannot be reactivated in the current market. So it's a buy for us. We believe rates will continue to go up, which will benefit their top line and their bottom line.

SkyCity Entertainment Group (ASX: SKC)

Grady Wulff: Staying with you, Tobias, we have casino and leisure business, SkyCity Entertainment Group. Buy, hold or sell?

Tobias Yao (HOLD): SkyCity is a hold for us. We really like the New Zealand asset and the opportunity in the online space in New Zealand, but the regulatory uncertainty is keeping us on the sidelines. So it's a hold for us for now.

Grady Wulff: Tim, its share prices has fallen 16% over the past year. Buy, hold, or sell on SkyCity Entertainment Group?

Tim Johnston (BUY): It's a buy for us, for pretty much the reason that Tobias doesn't like it. We think the regulatory risk is actually overstated in the current share price. The reason for that is the New Zealand Ministry of Justice did a review into anti-money laundering last year and have basically found no material issues for the casino group. So for that reason, we think the de-rating that's occurred is overdone. I think there's 30% upside just from the valuation multiple alone, and they're also at the end of quite a large capital reinvestment program, which is going to drive earnings growth from here also.

Viva Energy Group (ASX: VEA)

Grady Wulff: Next up we have Viva Energy Group, Australia's licensee of Shell’s fuels and lubricants. It runs around 700 Coles Express stores and recently acquired On The Run (OTR) group for $1.15 billion. Tim, buy, hold or sell?

Tim Johnston (HOLD): For us, it's a hold. We really like the business. We really like the management team. It's a high quality management team. They've executed flawlessly over the last five years and strategically they're very, very capable. And we do like the On The Run acquisition. The problem for us at this point in time is that the conversion of 700 stores to a new format will take a number of years. And whilst we do see that long runway of growth coming, I think it's a bit too early to pay for it. So it's a hold for us.

Grady Wulff: Tobias, its share price has lifted nearly 18% over the last 12 months. Buy, hold, or sell for Viva Energy Group?

Tobias Yao (BUY): Viva is a buy for us. To Tim's point, the On The Run acquisition, in our view, is very strategic. It's very high quality and we like the management team, and we're backing them to execute. Over the next 10 years, we believe they could convert 700 of their Coles Express formats to On The Run. Now, On The Run generates two times the revenue per store as Coles Express. So that should underpin the growth for both top line, bottom line over the next decade. Now, over time, convenience retailing as a percentage of total business should go up, and that should lead to a valuation re-rate, given the refining exposure reduces and the earnings volatility reduces. So Viva is a buy for us.

Grady Wulff: Now, we asked our guests to bring along a stock with high growth runway to buy. So I'll stay with you. What have you bought for us today?

Megaport (ASX: MP1)

Tobias Yao (BUY): My stock today is Megaport. We've done really well out of it over the last few months because the chairman, Bevan Slattery, has stepped into the business and introduced financial discipline and steadied the ship. The reason why it is still a buy for us is because we believe the new CEO, Michael, is of very high pedigree. He's had an amazing track record in the US and he's very experienced in sales. So we believe he could rejuvenate the sales culture and the sales cadence of the business. The product itself is very good. The net retention revenue is still very healthy, even with the operational challenges. So we are backing the management team to continue to execute on this turnaround. So Megaport is a buy for us.

Grady Wulff: Tim, which stock have you brought for us that has a high growth runway?

Strandline Resources (ASX: STA)

Tim Johnston (BUY): I'm suggesting Strandline Resources. Now this is a much higher risk proposition than the other stocks we've talked about today, but it does also offer the prospect of outsized returns. Strandline is a new producer of mineral sands. The reason I like the stock is, first and foremost, the commodity outlook for mineral sands is very good. The market is forecast to be in deficit within the next three to four years as a consequence of existing mines coming to the end of their life or seeing declining grades. So the outlook for the commodity price is very strong as a result, and that'll generate very good cash flows for Strandline.

In addition to that, it's a 37-year asset life. It's a very large resource. The management team is looking into expanding the size of the plant and bringing forward a lot of that cashflow by increasing production. So another leg of growth. And then thirdly, they've got other mineral sand deposits around the world. We know there are other parties interested in joining them and progressing those potential projects, and we think Strandline can do that on a very capital-light basis, sharing the economics of the project without having to put capital into it. So a third leg of growth.

At the moment, you're getting an opportunity to buy it primarily because it's having a few commissioning issues and ramping up its first project. Importantly, none of the issues that are occurring are uncommon in mineral sands, and none of them are insurmountable. So the share price has underperformed quite dramatically in the last month, but this is an opportunity to buy what looks to be a very promising project with a long growth runway at a very attractive price.

Grady Wulff: Well you heard it here first from our experts. That's all we have time for today. I hope you enjoyed that episode of Livewire's Buy Hold Sell. If you did, why not give it a like. Remember to subscribe to our YouTube channel, we're adding so much great content every single week.