Buy Hold Sell: 5 undiscovered small caps
It’s not often that you find a company that’s been listed for 30 years, pays a 6% dividend yield and trades on a single digit earnings multiple. That’s exactly what we uncover in this episode of Buy Hold Sell where we go looking for ‘undiscovered gems’ in the small cap end of the market.
Tune in as these two value investors provide detailed insight into 5 undiscovered small caps.
James: Welcome to Buy, Hold, Sell. My name's James Marlay and today, we're talking about undiscovered small caps, stocks that are flying under radar. I'm joined by Steve Johnson from Forager Funds and Marc Whittaker from Investors Mutual.
Gazal Corporation (ASX: GZL)
James: Marc, never heard of this stock before, Gazal. Buy, hold or sell?
Marc: Gazal is a buy for us. It's a hidden gem in the retail space on the ASX. It's been listed for 30 years. It's a very long duration business. Look, the key strengths of the business are it's in a joint venture with PVH brand so it basically controls and regulates the Calvin Klein and Tommy Hilfiger brands in Australia so if you're buying a Calvin Klein garment today, it's come through this JV, which Gazal owns. Look, cheap stock. If you take out the property that's on the balance sheet so it's got a great deal of property, I think the earnings of the JV are trading around 5 or 6 times. You're getting a really good discounted stock here in a good space. The brands are growing about 30%, good retail management and a good yield of 6%. There's not a lot to not like about this stock.
James: Steve, you're a Calvin Klein kind of guy. Buy, hold or sell on Gazal?
Steve: More a Bond sort of guy, James. I would say hold and I say that because I don't know the business well enough. I won't even make any uninformed comments about this one. I hadn't heard a lot about it until you put it on the agenda today so I went and had a quick look. Some interesting little brands in there.
Marc: Worth doing some work.
Steve: Exactly. That's the point of segments.
MMA Offshore (ASX: MRM)
James: Moving along. MMA Offshore. Buy, hold, or sell?
Steve: Another core holding for us. It's a buy. Just got back from the Middle East actually, on the weekend. I was in Abu Dhabi. We've got a number of investments in our international fund that are headquartered there. Market’s really turned, there's a lot of people now in the industry more confident that this higher oil price is here to stay, perhaps more importantly that the world is going to need more supply from somewhere over the next few years, or we could be in for potential shortages. We're already seeing that in the Middle East, interesting comments about Saudi Arabia and the UAE, can they actually produce that much more that Donald Trump wants them to produce there? Their tap seem to be pretty full-on.
So some of our services providers they're bidding like crazy for new work, a lot of expansion going on. MMA is late cycle. So you're not going to see an improvement for this business for a number of years until project start getting approved, and there's lots of work offshore, but we think at today's discount to its assets backing, you're getting paid reasonably well to wait.
James: Marc, MMA Offshore. Oil. A bit cyclical. A lot of assets. Buy, hold, or sell?
Marc: A lot of gearing as well. Look, it's a nice discount to NTA. But I question whether the NTA is really the NTA at this point in time in the cycle, there's a lot of excess capacity out there. It takes a while to get that back on stream and obviously these guys have the supply there to provide to the market. For us it's more of a hold. I'm inclined to say a sell, but I think as Steve attested to it there is a bit of a waiting period on this one and we're happy to sit back and watch it for a little while and just get comfortable that it's actually heading the right direction
Southern Cross Media Group (ASX: SXL)
James: Southern Cross media. Old school radio, not really a popular stock with the retail crowd. Buy, hold, or sell?
Marc: Look at a six percent yield in an eleven times PE, radio is sexy again. This is a core holding for us actually, we like it. Radio is actually a very resilient medium in the media space, it's continuing to grow. It's one of the few old world media forms, where the audience and the ratings have actually grown over the last ten years. So, it's in a good space, it's in the regional media space, in particular regional radio, regional TV. Regional TV is in decline, but it's being managed really well. Regional radio business is a great business. It's going from strength to strength and Grant and Nick there have done a really good job. Metro radio business is going well as well. It's more competitive, but in the end the operator of two metro licences in each market around the country. So they got a good strategic position there as well. As I said, good balanced shaped, they deleveraged out over the last little while. Six percent yield, fully frank, again we like it. Buy.
James: Steve, radio, Southern Cross media. Buy, hold, or sell?
Steve: I wouldn't argue with much of that, to be honest with you James. And I think the whole strategic picture in the industry is really positive as well. You are going to see more M&A here. And the logic is compelling about shared costs across different forms of media. You got a big personality on radio, get them on the TV as well, get them in the newspaper, plug your TV shows on the radio and in the newspaper. Half of what you read in the newspaper now is Stan. They're plugging their own programmes and content, and I think that combination is going to work quite well and be quite powerful together, and now that some of those barriers to putting these businesses together is gone. You are going to see more M&A in that space. We don't own the stock, so probably shouldn't be running around saying buy. I think it's a really interesting opportunity and I will say buy.
James: All right, well this is a chance to give us one, an undiscovered small cap, that you think ticks the Forager of our criteria for today.
MSL Solutions (ASX: MPW)
Steve: I'm going to go with a tiddler here. I'll go back to MRM. I think that's probably one of the more prospective and overlooked stocks in our portfolio, at the moment. But I'll run with a little stock called, MSL solutions, this is a bit of a dud float from a few years ago. We participated in the float. They hit their prospectus forecast with a bit of funny business.
They own a bunch of software for golf clubs, mostly and they do the handicapping system in Australia. It's a pretty good little business and the revenue line is growing nicely. Both organically and with some acquisitions. They've promised the world a bunch of earnings, that they struggled to deliver and I'm not really, I really wish they'd come to the market and said "We're not too worried about our earnings for the next five years. We want to grow the top line and then we're going to have a really nice business here." They've created some expectations, that'll put pressure on the share price, but I think they are delivering at a top line level and there's a nice opportunity standing in front of them. It's one of those reoccurring annuity IT businesses, that in a different world, you can see trading at a very different model point.
James: Okay, great. Marc something under the radar, something you want to tell the folks about today.
McPherson’s (ASX: MCP)
Marc: McPherson’s, MCP.ASX, this is a brand owner in the personal care, beauty care, and household space. So it owns brands such as A’kin, Dr.Lewinn’s, and in the household space, the Multix brand. So if you're shopping and you're looking for some compostable plastic bags, which are green friendly, the Multix garbage bags are for you. So very good space growing category, as we all know the personal and beauty space is also growing quite nicely. So they are doing well. It's giving you double digit EPS growth for this year and pretty good growth for the next year as well. It's only trading on ten times, again a six percent yield, fully franked.
Lori, the new CEO, relatively new CEO there, is doing a really good job, really focused on the export opportunity around the key brands in that health and beauty space. And doing a pretty good job, they're coming at it from very considered way, as well. Not just sort of going full on and not understanding what they're doing. They're actually taking time to understand the opportunity in front of them. Some people might say they're moving too slowly, but I think it's a very considered, well regarded approach. And given what we are seeing, with some of the other players in this space, I think it's been the right way to go. Good quality business and selling good product. We like it.
James: Yeah. Well, who said no opportunities on the ASX, just need to go looking a little bit. The gentleman today found a few undiscovered gems.
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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.