Buy Hold Sell: 5 undiscovered micro-cap gems
They used to say "Great things come to those who wait." But it took Abraham Lincoln to realise "Great things may come to those who wait, but only the things left behind by those who hustle."
And (segue alert) it seems that Australia's micro caps have been doing just that: hustling.
The MSCI Australia Micro Cap Index returned 36.34% over the past 12 months (to Feb 26). An undeniably impressive gain, compared to the S&P/ASX200's 3.6% return over the same period.
In this episode of Buy Hold Sell, Livewire's Ally Selby, as well as micro-cap experts James Dougherty from Lennox Capital Partners and Nick Guidera from Eley Griffiths Group, put five undiscovered micro-cap gems to the test.
And believe us, there's a few in there to put on your watchlist.
Note: You can watch, read or listen to the discussion below. This episode was filmed on 17 March 2021.
Ally Selby: Hello and welcome to Livewire's Buy Hold Sell, I'm Ally Selby. And today we are talking the spicy end of the market. That's right, we're talking micro caps. They're cheap, they're cheerful, but how do you distinguish the darlings from the duds? Well, to do that, I'm joined by James Dougherty from Lennox Capital Partners and Nick Guidera from Eley Griffiths Group.
First up, we have ELMO Software, it's the furthest thing from Sesame Street possible. It's a SaaS company and it's got a market cap just shy of $500 million. James, I might start on you. Is it a buy, hold or sell?
Elmo Software (ASX:ELO)
James Dougherty (SELL): It's a sell. Look, it competes in a very competitive part of the market, revenue has been growing organically but so has the capitalization rates of its R&D and the useful life of its intangible assets. If you look at the cashflow, losses have been growing steadily every year.
Ally Selby: Nick, it's about to drop off the S&P Small Ords index when the S&P rebalances at the end of the month. Is it a buy, hold or sell?
Nick Guidera (HOLD): I think it's a hold for me. I agree with James, it's certainly had its challenges, particularly through COVID-19. Organic growth slowed, churn rose, operating leverage really hasn't been demonstrated in the last three or four years. But I think there's a possibility that it could well be a vaccine beneficiary as businesses start to reinvest in processes, but I'd like to see a better risk-reward.
Autosports Group (ASX:ASG)
Ally Selby: Next up, we have Autosports Group and we'll stay on you, Nick. Everyone seems to be jumping in their car and going on holidays or buying new cars, everyone but me. Is it a buy, hold or sell?
Nick Guidera (HOLD): I think it's a hold. I think you've seen a very strong recovery in both the share price and the auto market. Although those numbers have just started to slow a little bit in February, that's not to say they can't continue. They've benefited from a really strong used car market and high margins in that business and there's a decent lack of inventory in the market. I think our concern is just the concentration of brands in the high end and it's largely been an acquisition-driven story rather than organic so, for us, it's a hold.
Ally Selby: James, it's currently trading quite close to its all-time high. For you, is it a buy, hold or sell?
James Dougherty (HOLD): It's a hold for us and largely because of the share price appreciation. Look, the business is in a good space at the moment because new car sales have come back. But we are cautious that the expanded margins that they have managed to achieve, largely due to a lack of inventory of new cars, will revert over the medium term.
Capitol Health (ASX:CAJ)
Ally Selby: Next up, we have Capitol Health, they run 63 diagnostic imaging clinics across the country. Is it a buy, hold or sell?
James Dougherty (BUY): It's a buy for us. This is a business that has a history of a lot of acquisitions, not doing a great job of integrating them, and then having a pretty chequered operational past. We think that's all changed with the new management team. They've integrated a lot of the legacy acquisitions, they've spent a lot of time focusing on managing people and retaining people, which is really important for a business like this. And you're seeing the results in the first half result we had in February.
Ally Selby: Nick, it listed in June 2006 and hasn't done that well for shareholders since. Is it going to explode from here on in? Is it a buy, hold or sell?
Nick Guidera (HOLD): I think for us, it's a hold. It certainly had a very strong half. It has had a chequered history and a variety of management teams. They're clearly benefiting from improved margins and I think they manage to still grow volumes in a tough Victorian operating environment in the second half. That still looks pretty positive, I think, for this half. I think, for us though, we prefer Integral Diagnostics (ASX:IDX), which has got higher margins, it's another diagnostic imaging play in the space. Just because they focus on higher modalities and we like their management track record.
Aussie Broadband (ASX:ABB)
Ally Selby: We'll stay with you. Next up we have Aussie Broadband, which provides NBN services to residential homes and businesses. Is it a buy, hold or sell?
Nick Guidera (BUY): It's a buy for us. This is one of those emerging telcos that have come onto the market in the back half of last calendar year. They're taking a significant amount of share from the majors.
Ally Selby: It's still quite small though, isn't it like 3.5%?
Nick Guidera: Yeah, 3.5%. but I think they're taking north of 10% of all subscribers to NBN and they're largely doing that on the back of really strong customer service and a really strong internet service experience as well. And I think customers are demanding that significantly. These guys are also spending a lot on their network, which will ultimately drive the operating leverage in their business and we like what management are about.
Ally Selby: James, over to you. Its share price is up around 50% since it listed in October, is it a buy, hold or sell?
James Dougherty (BUY): It's a buy for us as well, largely because of the points that Nick made. We really like the management team, importantly the management team didn't sell a share in the IPO, they've dripped a little bit out since, but they're still large shareholders in the business. If you take that number that Nick quoted you - around 10% of NBN churn - if they do nothing else but just maintain that share and let the natural operating leverage that exists in this business playout, this business will be making in excess of $50 million dollars EBITDA in the next couple of years.
Ally Selby: I'll definitely be taking note of that. Next up, we have Pentanet, it listed earlier this year, is it a buy, hold or sell?
James Dougherty (BUY): It's a buy as well. It's a very similar business to Aussie Broadband, it's an ISP. There are only so many ways you can really differentiate yourself as an ISP. It's latency and customer service. They've got a fixed wireless network, their own infrastructure, which means they get great speed, and they've got local call centres, which means you get great service and they continue to take share. The management team, the Cornish brothers, actually sold their house to start this business and haven't sold a share into IPO.
Ally Selby: How about for you, Nick? Is it a buy, hold or sell?
Nick Guidera (BUY): Yeah, it's a buy for us. It reminds us a lot of iiNet in the early days, another Perth ISP. The former CEO is chairmen, they share similar colours and they've got a significant focus on customer service. As James touched on, the fixed wireless model that they're pioneering with technology out of Facebook, I think is a pretty interesting space and one the majors are probably watching pretty closely to see if they can improve the quality of NBN speeds through fixed wireless technology.
They've also got a decent opportunity in the gaming space through their partnership with Nvidia, which is pretty amazing given Nvidia's a NASDAQ-listed company. This is an emerging micro cap that ultimately has been able to negotiate a partnership for 12 months to see them utilise that gaming technology over time. I think it's a buy for us and one that we're watching pretty closely, albeit in its early stages.
Ally Selby: Well, that's all we have time for today. We hope you enjoyed this episode of Buy Hold Sell. If you did, why not give it a like? Remember to subscribe to our YouTube channel so you never miss an update.
What micro-cap stock do you think is a buy?
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.