The Olympic tailwind driving our top 10 holdings

Queensland’s economy is good and getting better: the state posted growth of 1.7% in FY24, 2.2% in FY25, and the state Treasury projects 2.8% for FY26 and 2.5% in FY27. This is supported in part by a surge in infrastructure spending for the 2032 Olympics, which is expected to create 130,000 direct jobs and an economic benefit of $7.4 billion. 

In the lead up to the 2000 Olympics, Sydney property gained 60%, and it looks like Brisbanites are well on track for a big windfall too. In 12 months, Brisbane property has gained 17.3% and regional Queensland is up 13.9%. However, the bigger opportunity may lie beyond property, and within Queensland’s forgotten small caps.

With the state set to enjoy long-term economic tailwinds, investors could benefit from running the ruler over the many high-quality, Queensland-based, small cap companies being overlooked, for now. Backing our view, four of our top 10 holdings are exactly these kinds of companies.

3 reasons to be 'Overweight QLD’

Our reasons for being overweight Queensland are simple: 

1. The companies stand to benefit from favourable and durable economic tailwinds.
2. Many Queensland small caps receive even less market attention than small cap peers headquartered in Sydney or Melbourne, leading to valuation opportunities.
3. A local presence means our research process is strengthened by regular contact with management teams, operations, and industry networks, helping us move ahead of the market.

While larger Queensland-headquartered companies such as Suncorp (ASX:SUN), ALS (ASX:ALQ) and NEXTDC (ASX:NXT) are well known to investors, much of the broader listed cohort sits outside the ASX100 and gets much less attention.

That group includes fund holdings with multi-billion-dollar market caps such as New Hope Corporation (ASX:NHC), Superloop (ASX:SLC) and Data#3 (ASX:DTL), as well as smaller companies including Michael Hill (ASX:MHJ), Jumbo Interactive (ASX:JIN), and Mitchell Services (ASX:MSV).

An overlooked QLD small cap on the rise

Mitchell Services (ASX:MSV) is a useful example. While not well known, it passed our stock selection process to score highly in our analysis, and since then has seen a strong share price gain, and improved its earnings and balance sheet significantly, supporting recommenced dividend payments.

The company is headquartered in Brisbane, and operates 88 drill rigs for surface and underground drilling services. Approximately 40% of its revenue is generated in Queensland, where mining remains a major contributor to economic activity.

When we started researching Mitchell Services, the company was moving through a more difficult period and market sentiment was weak, so we returned to first principles, asking:

1. Is the core franchise intact?
2. Can it generate acceptable returns through the cycle?
3. Is the balance sheet resilient?
4. Are we being paid appropriately for the risk?

Our conclusion was that the core franchise remained sound. At the time, we believed we were effectively acquiring the business at around 1.5x through-the-cycle EBITDA. The balance sheet was solid, net debt was modest, and management remained focused on pricing discipline and capital preservation. With a market capitalisation of roughly $60 million at that stage, the valuation struck us as undemanding, relative to the company’s historical free cash flow generation.

The reward for sticking to your process

Market cycles will always test conviction, but in our experience, the answer is not to react to short-term sentiment, but to stay anchored in fundamental research sound process, and to exercise patience.

In Mitchell’s case, the company’s underlying earnings power has since begun to reassert itself. The company reported first-half EBITDA of approximately $20 million, implying annualised earnings of around $40 million, which is consistent with levels the business has achieved previously. Cash conversion has also been strong, and the balance sheet has improved to a net cash position.

The company’s fully franked interim dividend of 4.0 cents per share is a further indication that capital management has strengthened and that the board is prepared to return capital to shareholders while remaining disciplined on future growth opportunities.

Small Caps of the Sunshine State

Investors stand to benefit from looking beyond the market’s traditional centres and casting their eyes further north. In the sunshine state, they will find many quality businesses on attractive valuations with positive outlooks, the kind of opportunities that align well with FiveRock’s research-driven investment process. 

Mitchell Services is just one example of a small cap Queensland company we like that’s been missed by the market, despite having strong fundamentals and enjoying the tailwinds of a robust state economy. 

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