Value stocks just had their best month in nearly three years. After a very long slide downward, the Dow Jones Thematic Market Neutral Value Index abruptly jumped by nearly 8% in September. The corresponding growth index is conversely down by nearly 8%. Is it finally value's time to shine?
If so, it could be great timing then that halfway through their recent roadshow, NAOS Asset Management, which focuses on smallcap and microcap value companies ran through a dozen or so stock ideas, most of which have also recently turned back up after a tough FY19.
I've summarised these for you here along with some of the thematic ideas discussed, but watch the edited video below to hear the views in full from NAOS Chief Investment Officer Sebastian Evans, and Portfolio Manager Robert Miller.
BTC health (ASX:BTC): Market Cap: $30.6 million
BTC Health is a nanocap medical supplies and distribution business, that reunited the same team that took Acrux (ASX: ACR) from a $70mil IPO to a $700mil company at its peak, paying $250 mil in dividends on its way. And like Acrux, BTC Health is a Pooled Development Fund (PDF).
While the stock had a rough FY19, falling 57.5% as it bedded in an acquisition, the trend has turned back up since July (up >40%), and NAOS said the company has a long pipeline of growth opportunities in Australia.
The stock also fits within one of the key thematics Sebastian flagged earlier in the presentation, ageing population and healthcare.
He cited drivers of the theme as being: the end of the Royal Commission and potential funding changes; the NDIS ramp up; the opportunity in devices and drugs; and lastly a number of private unlisted businesses that provide an opportunity for growth through acquisition.
This last driver, the private businesses, presumably contributes to the pipeline of opportunities available for BTC. However, it is the opportunity in devices and drugs that Sebastian said NAOS is looking to leverage through their holding, and referred to the $700 million private equity takeover of Device Technology in late 2018, as illustrative of the opportunities in the space.
Motorcycle Holdings (ASX:MTO); Market Cap $133 mil, FY19 EBITDA: $18.0mil
Motorcycle Holdings also had a rough FY19, falling 63.5% despite reporting $18mil of EBITDA for the year. The national data for new motorcycle sales had been negative for 2 years, however, this July and August saw the first increases in the stats. Since then, the stock price has not just bottomed but nearly doubled.
This position fits within the thematic of Cyclical businesses highlighted by Sebastian. He made the point that the market went into FY19 too bearish on consumer sentiment and that there is some mean reversion happening now, which cyclical businesses like Motorcycle Holdings may stand to benefit from.
MNF Group (ASX:MNF): Market Cap $376 mil, FY19 EBITDA $27.2 mil
MNF Group has customers that include Microsoft, Google and Amazon, and Rob describes it as ‘selling picks and shovels for the telco sector’. Its share price has followed the same script as the previous two stocks, falling last financial year (down 25.5%), but jumping since then (up by >45% this FY).
He said the market was confused by the company's non-core areas that clouded and hurt the stability of its earnings profile. So, last year NAOS took more of an activist role, to help the company to simplify the story for the market, with the benefits of this flowing through now.
BSA (ASX:BSA); Market Cap $180 mil, FY19 EBITDA $24.6 mil
Sebastian made the case that it is in the ongoing maintenance spend on infrastructure that the opportunity lies, not in the actual build itself, and cited this as another key thematic.
One stock leveraging this is BSA, a technical services contracting company that is a key beneficiary of the NBN maintenance. It is also involved in tunneling projects, so is directly exposed to the pipeline of infrastructure build rolling out nationally.
Enero Group (ASX:EGG); Market Cap $172 mil, FY19 EBITDA $20.7mil
Enero is a group of businesses involved in PR, marketing and communications and has been a key holding for NAOS for a number of years.
It had a good FY19 (up 38.7 %) supported by strong growth in the US market, where profit in some key assets tripled. The growth in the US has continued, and with an under-geared balance sheet, Rob thinks it has room to run further.
CML Group (ASX:CGR); Market Cap $95 mil, FY19 EBITDA $20.4 mil
Cashflow solutions company, CML Group, fell 17.1% last year primarily as it was held by several other microcap funds that closed their doors and had to sell positions.
Rob said NAOS is more than happy to be in the stock today, saying that it now has a ‘single-digit PE, excellent yield, and an EPS growth profile that is very strong’. Further, it has recently acquired a business, Classic Finance, that has accelerated the company's strategy by two years.
Over The Wire (ASX:OTW); Market Cap $249 mil, FY19 EBITDA $20.1 million
Over the wire describes itself as ‘a dynamic, high growth provider of telecommunications, cloud and IT solutions to mid to large enterprises in Australia and New Zealand’.
The stock has been a key holding of NAOS, and Rob said it is a rare exposure on the ASX to the cybersecurity theme. The stock had a strong FY19 but slipped in recent months because of the timing of an earn-out from an acquisition but is positive of the outlook.
AP Eagers (ASX:APE); Market Cap $3.5 bil, FY19 EBITDA $167.6
Following a merger with AHG, AP Eagers will have 11% market share. Rob argues that this consolidation should deliver major synergies. He expects that in time, 15% of the company’s market cap could be available to investors as cash through capital management. He summarised by describing this stock as being 'above market quality, but below market price'.
People Infrastructure (ASX:PPE); Market Cap $233 mil, FY19 EBITDA $17.8 mil
Workforce management solutions company, People infrastructure, listed 2 years ago and has been rising ever since. It gained 118% in FY18, making two accretive acquisitions in that time. Rob likes the cost and revenue synergies on this one as well, as well as the ‘Low gearing, a capable management team, and being in a great tailwind area'. He also says the stock is another beneficiary of the NDIS driver that Sebastian included in the aged care thematic.
Experience Co (ASX:EXP); Market Cap $147 mil
Rob finished by looking at Experience Co (ASX:EXP), which used to be called Skydive The Beach and was focused exclusively on sky diving across Australia and NZ. But in late 2017, it started rolling up a number of other adrenaline sport type businesses.
Following this, the share price did its own skydive from 90c to 20c. I hadn't heard much about the company since then until Rob mentioned that the stock has had a management change with the new team looking at rationalising the company back to its core sky-diving assets to leave a more profitable business.
The 'next generation'...
And finally, Rob put up this slide, referring to ‘the next generation of businesses’, providing a few more stock ideas to keep a watch on.
Watch the presentation highlights here
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