Who says boring can't be beautiful? While much of the attention in ASX small caps has centred around Buy Now, Profit Later and e-commerce stocks, a handful of quality businesses are on a tear.

In this episode, Gary Rollo of Montgomery and Chris Stott of 1851 Capital discuss high-calibre companies with a proven track record of profitability and shrewd management teams making the most of opportunities presented by COVID-19.

They include: 1) ARB Corporation - A 4WD accessories manufacturer and distributor whose share price is being driven higher by a record order book; 2) Ingenia Communities - Poised to benefit as domestic tourism opens up; and 3) Macquarie Telecom - A cloud boom winner investing heavily to cope with higher demand.

Chris also reveals the "best micro cap opportunity in the market" right now while Gary brings a stock whose savvy management team is capitalising on a beaten-down market.

Notes: Watch, read or listen to the discussion below. This episode was filmed on 9 September 2020.


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Edited Transcript

Matthew Kidman: Welcome to Buy Hold Sell brought to you by Livewire Markets. My name's Matthew Kidman, and today we're going to get boring, but at the same time, we're going to get rich. Small companies that are doing very well but don't sound interesting. Talk about that, Chris Stott from 1851 Capital and Gary Rollo from Montgomery Investment Management. Gary, it's been around forever. Been a super stock ARB. Buy, hold, or sell?

ARB (ASX:ARB)

Gary Rollo (Sell): ARB is a sell for us. Look, it's super high quality. Whenever you mention quality in small caps, ARB jumps into mind, so it's a premier league type stock. The problem is opportunity. At 19 times EBITDA and a business model that's capable of delivering mid-single digits type growth, you're paying a lot for that quality. So, Liverpool type quality, but Tranmere Rovers' type of opportunity, so pass that one on.

Matthew Kidman: Chris, while we're in lockdown in COVID, nothing better than ripping off the old bumper bar and putting on a new one, a few floodlights. ARB. Buy, hold, or sell?

Chris Stott (Buy): Buy, Matthew. So, one of the strongest results we saw at reporting season, they called out a record order book in the company's history. They're actually struggling to keep up with demand at the moment out of their Thailand facility and also Kilsyth and Melbourne. So, a really strong balance sheet, great management team, really leveraged to that interstate travel thematic over the next six to 12 months. So buy.

Ingenia Communities (ASX:INA)

Matthew Kidman: Okay, when you travel, you've got somewhere to stay. Ingenia, accommodation, buy, hold, or sell?

Chris Stott (Hold): Hold for us. So, again, very strong management team in that lifestyle space, which is a really good thematic over the medium term, but we think the stock's had a really strong performance in more recent times so I'll hold for now.

Matthew Kidman: We all need a bit of value accommodation. It's a big market. Ingenia. Buy, hold, or sell?

Gary Rollo (Buy): Ingenia's a buy for us. As Chris identified, that stock has got significant tourism assets, so it's a play on domestic tourism, hard to find. There's lots of operational leverage when those parks get filled up, as you might imagine. It's all fixed cost. That stock had upgrades of about 12% as a result of those good results that Chris mentioned. The stock hasn't really performed as a result. We think that the stock should do well once the domestic holiday season becomes apparent as a driver for earnings and this is a great way to play that. So, Ingenia's a buy.

Macquarie Telecon (ASX:MAQ)

Matthew Kidman: Now, Macquarie Telecom used to be really boring, just sell your voice products. Now, they build data centres. Buy, hold, or sell?

Gary Rollo (Buy): Macquarie Telecom's a buy. This one has got everything for us. The top line over the course of the next four or five years is going to be driven by the data centre earnings power, and that's a great theme. You know, cloud is driving that market. The business can self-fund the data centre development, so there's no need for extra capital. The stock's on 12 times EBITDA. You've got a management team that's delivered since it's been listed for about 12 or 13 years. It's a buy.

Matthew Kidman: Okay. You sound like you're falling in love, not picking a stock. Chris, Macquarie Telecom. It's really changed itself over time. It might've been boring, but it's really got investor interest. Buy, hold, or sell?

Chris Stott (Hold): Hold, Matthew. So, FY21 for Macquarie Telecom's an investment year, so they're deploying over $140 million of CapEx into a couple of new data centres at Macquarie Park and down in Canberra. So, again, David Tudehope, major shareholder, has done a terrific job with this business well over a decade and continues to do so. But for now, it's an investment year, which will suppress their earnings in the second half of this financial year, so we'd look to review it around that stage, but for now, it's a hold.

Generation Developement Group (ASX:GDG)

Matthew Kidman: Okay. Wake us up from our boredom. What's one stock that looks a bit boring, but it's actually a ripper?

Chris Stott (Buy): Generation Development Group, Matthew. GDG is the ticker. It's the best micro-cap opportunity in the market for us right now. So, they're in the investment bond space, which is really good from a tax-effective standpoint, particularly for people rolling out of super. Their funds under management sits at $1.4 billion at the moment and is growing dramatically; very, very quickly. They grew substantially through that pandemic period. Led by Grant Hackett, we think that it's certainly carved out a really good niche and got a really strong balance sheet with $12 million net cash. So, a high propensity to grow. So, that's a buy for us.

Alliance Aviation Services (ASX:AQZ)

Matthew Kidman: Gary, got something that can swim as fast as that?

Gary Rollo (Buy): Well, we're going to fly faster. My pick is Alliance Airlines. Alliance Airlines has one of the best management teams in small caps. This is a business model that acquires aviation assets on the cheap, puts them to work in markets where having low-cost assets really counts, and they have got lots of growth opportunity in what is a chaotic aviation market at the moment. They've recently acquired 14 Embraer aircraft, which they'll put to work inside the business over the course of the next two or three years, and that should grow their earnings 40, 50, 60% over that period of time. So, that stock, good value, great balance sheet, great management, and the great opportunity in the aviation market ahead.

Matthew Kidman: These two guys might look boring but they're really excited about what they see out there.

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