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What ASX small caps could surge towards Christmas?
For some investors, Santa Claus has come a little earlier this year.
Ron Shamgar
TAMIM Asset Management
In November, the S&P 500 concluded the month with an impressive rise, just under 9%, while the Nasdaq posted gains of nearly 11%. Closer to home, the All Ords in Australia showed a modest uptick of 1.3% – a positive stride, though not quite matching the strides seen in the U.S. This leaves investors pondering the possibility of a 'Santa rally' to further bolster the market's performance.
December brings with it the prospect of adding to this year's gains. Historically, barring years when the market was down, this month has been favourable for investors. The term 'Santa Claus rally' typically refers to the stock market’s tendency to rise in the last five trading days of the year and the first two of the new year.
This phenomenon was first documented by Yale Hirsch in 1972 in the "Stock Trader's Almanac." He noted that since 1950, the S&P 500 had averaged a gain of 1.5% during this seven-day stretch. This pattern has consistently held true, with an average increase of 1.3% in the index and the market recording gains in 34 of the past 45 years – over 75% of the time.
While tech giants have shown robust performance, aligning with the prevailing trends among most mega-cap stocks, they weren't the sole contributors to the market's uplift.
In our TAMIM portfolios, two key themes have emerged this year: robust business performance and enticing corporate takeover opportunities. Steering clear of the flashy themes such as AI, we have sought value in less explored areas. It is in these overlooked niches where we often find the most promising opportunities.
Why did the Adore Beauty share price rocket?
Investors have been scrambling to buy the online beauty retailer's shares this past week after it confirmed the receipt of a takeover offer.
According to the release, the company has received a non-binding, conditional, and indicative proposal from THG plc (LSE: THG) to acquire 100% of Adore Beauty's outstanding shares.
According to the release, the company has received a non-binding, conditional, and indicative proposal from THG plc (LSE: THG) to acquire 100% of Adore Beauty's outstanding shares.
London-listed THG, also known as The Hut Group, is a British e-commerce company that sells own-brand and third-party cosmetics, dietary supplements, and luxury goods online.
The release reveals that THG proposes to acquire Adore Beauty by way of a scheme of arrangement for $1.25 to $1.30 cash per share, subject to various conditions including due diligence.
This offer price represents a 33.7% to 39% premium to where the small-cap ASX share ended the prior week.
However, it hasn't been enough to get a deal over the line.
Rejection of the Takeover Proposal
The announcement further disclosed that Adore Beauty's board has declined the takeover offer, reasoning that it does not accurately reflect the company's value. The board's assessment was detailed as follows:
“Following a review of the terms of the Proposal with the assistance of its financial and legal advisers, the Board of Adore Beauty (Board) concluded that the Proposal undervalued the Company, was unable to be implemented, and was not in the best interests of shareholders. For these reasons, the Board rejected the Proposal.”
Additionally, the statement emphasised:
“The Board is focused on maximising value for all shareholders. The Company will keep shareholders informed in accordance with its continuous disclosure obligations.
Adore also remains on track to achieve an EBITDA margin of 2 per cent to 4 per cent this financial year and is targeting 8 per cent to 10 per cent EBITDA margins in 2027, and 10 per cent growth long-term, driven by private label product expansion and more returning customers shopping via its app.”
Remarkable Growth in Gentrack's Share Price
In the past year, Gentrack's (ASX: GTK) share price has rocketed an impressive 155%. The company, a provider of software solutions for utility companies and airports globally, boasts a diverse clientele including notable names like EnergyAustralia, Npower, Melbourne Airport, Sydney Airport, Gatwick, Schiphol, Orlando International Airport, and Auckland International Airport Limited (ASX: AIA).
Originating from New Zealand's power market deregulation 25 years ago, Gentrack has become a trusted name in software solutions for operational efficiency and customer engagement. Its platforms are instrumental for utilities and airports adapting to rapid global changes and seeking sustainable futures.
Now, Gentrack operates globally, with over 200 clients in 20 countries and offices in key locations including the UK, Australia, New Zealand, and the USA.
Breakout year
Gentrack has experienced a standout year, marked by significant growth in its FY23 full-year results. This achievement is attributed to the acquisition of new customers and a strong recovery from COVID-19, especially in the airport sector.
The company's FY23 revenue saw a substantial increase of 34.5% year-over-year, reaching $169.9 million. Its annual recurring revenue experienced a 51.2% boost to $105 million, and its operating earnings (EBITDA) skyrocketed by 185% to $23.2 million.
The growth in both the Utilities and Veovo sectors has enabled Gentrack to revise its FY24 revenue forecast upwards. Initially projected to be between $157 million and $160 million, the new guidance sets the revenue target to match or exceed FY23's figure of approximately $170 million. This upward revision comes despite losing one-off revenues of $27.6 million from insolvent UK customers. Correspondingly, the EBITDA forecast is now narrowed to be between $20.5 million and $25.5 million, as opposed to the earlier range of roughly $19 million to $27 million.
Gentrack's success in the Utilities segment is rooted in expanding relationships with both new and existing energy customers. A notable highlight was Genesis Energy selecting Gentrack's new g2.0 solution in November 2023, a testament to the confidence in Gentrack's product strategy. Similarly, EnergyAustralia launched its 'Solar Home Bundle' on Gentrack's platform, showcasing groundbreaking distributed energy management solutions.
Gentrack also plays a crucial role in supporting over 50% of UK businesses with water solutions. A significant achievement was the migration of Scottish Water Business Stream’s 200k+ business customers to Gentrack’s cloud-based platform. In Fiji, Gentrack is set to transform the Water Authority of Fiji's platform, further highlighting its impact in its core markets.
The company's FY23 revenue saw a substantial increase of 34.5% year-over-year, reaching $169.9 million. Its annual recurring revenue experienced a 51.2% boost to $105 million, and its operating earnings (EBITDA) skyrocketed by 185% to $23.2 million.
The growth in both the Utilities and Veovo sectors has enabled Gentrack to revise its FY24 revenue forecast upwards. Initially projected to be between $157 million and $160 million, the new guidance sets the revenue target to match or exceed FY23's figure of approximately $170 million. This upward revision comes despite losing one-off revenues of $27.6 million from insolvent UK customers. Correspondingly, the EBITDA forecast is now narrowed to be between $20.5 million and $25.5 million, as opposed to the earlier range of roughly $19 million to $27 million.
Gentrack's success in the Utilities segment is rooted in expanding relationships with both new and existing energy customers. A notable highlight was Genesis Energy selecting Gentrack's new g2.0 solution in November 2023, a testament to the confidence in Gentrack's product strategy. Similarly, EnergyAustralia launched its 'Solar Home Bundle' on Gentrack's platform, showcasing groundbreaking distributed energy management solutions.
Gentrack also plays a crucial role in supporting over 50% of UK businesses with water solutions. A significant achievement was the migration of Scottish Water Business Stream’s 200k+ business customers to Gentrack’s cloud-based platform. In Fiji, Gentrack is set to transform the Water Authority of Fiji's platform, further highlighting its impact in its core markets.
Targeting International Expansion for Utilities
Gentrack's expansion strategy has seen it extend its reach beyond its core markets of the UK, Australia, and New Zealand. In November 2022, the company opened an office in Singapore to support local operations and explore opportunities in Southeast Asia. European business development, anchored from London, has also been progressing well.
In 2023, Gentrack established a Middle Eastern regional hub in Saudi Arabia, securing its first Utilities contract win in the region in October 2023. This achievement demonstrates the strength of Gentrack's partnership with Salesforce and the potential of its g2.0 platform.
In 2023, Gentrack established a Middle Eastern regional hub in Saudi Arabia, securing its first Utilities contract win in the region in October 2023. This achievement demonstrates the strength of Gentrack's partnership with Salesforce and the potential of its g2.0 platform.
Growing Airport Customer Base
The aviation sector's recovery has led to a surge in demand for Gentrack’s digital transformation solutions. Veovo has acquired new tier 1 and 2 customers in the Middle East and Europe, seen strong demand for platform upgrades, and explored expansion opportunities in Passenger Flow solutions.
R&D and Market Expansion
Gentrack's significant investment in research and development, and increased sales and marketing efforts, are key drivers for its international expansion. The company's continued success in winning new customers and transitioning them to its software platforms is a crucial factor for future share price growth.
Balancing Optimism with Caution
As we look forward to the possibility of a 'Santa rally' to cap off a successful 2023, we remain cautiously optimistic. While we cherish the momentum we've seen this year, we recognise that relying on seasonal trends is not a substitute for a sound investment strategy. Our focus continues to be on identifying and capitalising on high-quality investment opportunities, driven by thorough analysis and strategic foresight.
Disclaimer: Gentrack's (ASX: GTK) and Adore Beauty Limited (ASX: ABY) are currently held in TAMIM Portfolios.
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Ron Shamgar is the Head of Australian Equity Strategies at TAMIM Asset Management, where he oversees the TAMIM Australia All Cap and Small Cap Income strategies. Ron excels in research, company analysis and portfolio construction. With a deep-rooted passion for equity investing, Ron advocates for a systematic approach to assessing businesses, with a particular emphasis on evaluating management teams. With over 20 years of active investing experience on the ASX, Ron brings a wealth of knowledge to his role. He holds a Bachelor's degree in Manufacturing and Management Engineering from the University of New South Wales.
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The information provided should not be considered financial or investment advice and is general information intended only for wholesale clients (as defined in the Corporations Act). The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein. You should seek personal financial advice before making any financial or investment decisions. Past performance is no guarantee of future returns.
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Ron Shamgar
Head of Australian Equities
TAMIM Asset Management
Ron Shamgar is the Head of Australian Equity Strategies at TAMIM Asset Management, where he oversees the TAMIM Australia All Cap and Small Cap Income strategies. Ron excels in research, company analysis and portfolio construction. With a...
Expertise
No areas of expertise
Ron Shamgar
Head of Australian Equities
TAMIM Asset Management
Ron Shamgar is the Head of Australian Equity Strategies at TAMIM Asset Management, where he oversees the TAMIM Australia All Cap and Small Cap Income strategies. Ron excels in research, company analysis and portfolio construction. With a...
Expertise
No areas of expertise
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