Michael Glennon's top five future picks

Last week Michael Glennon sat down with us to discuss three stocks currently in Glennon Small Companies Limited (GC1) that he believes have bright futures. We also managed to pry two more stocks out of him off camera.

GC1 focuses on small to mid-cap Australian companies, and the companies that Glennon and his team pick have the following characteristics: 

●      Superior management teams with exceptional track records, who also have skin in the game,

●      Growth prospects within the industry and growth of market share in that industry as well as margin growth,

●      A profitable, sustainable business model with low levels of debt,

●      Companies within industries that have high barriers of entry and

●      Businesses that are undervalued by the market.

Diversa Group Limited (DVA)

Diversa Group is a company that does two things: it provides a retail superannuation fund, and administration services to other superannuation funds and corporates. As part of this, Diversa has also built a platform.

The key attraction to this is that the platform and fund have a fixed cost base and are therefore scalable. The platform also provides Diversa the opportunity to cross sell products (for instance, insurance) into the existing funds under management and further increase margins.

Secondly, the superannuation space is growing at 11 per cent per annum. Glennon and his team are attracted to businesses that are able to grow at a rate faster than GDP. National superannuation assets totalled $2 trillion as at June 30 2015, and 28 per cent of that is classified as retail, which DVA is predominantly exposed to. It is estimated retail super will grow from 28 per cent to 32 per cent over the next ten years.

Diversa is already profitable and has given guidance for FY16 for revenues to be between $12.5 million - $13.5 million, up from FY15 revenue of $9.5m. GC1 is not the only LIC with an interest in DVA – it's also held by with Alex Waislitz and company at Thorney Opportunities Limited (TOP).

National Veterinary Care Limited (NVL)

The management team from NVL come from the largest player in the space, Greencross. NVL is a network of 150 vets across 32 practices. To put this into perspective, this represents 1.3 per cent of the national veterinary industry. Greencross' footprint is 5 per cent.

The veterinary industry is ripe for consolidation with an aging population of vets and the new supply is not enough to keep up with demand. To combat this issue, NVL has established the Centre of Excellence, a training facility for new vets. The group do not just take on people to go into its own practises, but those from all clinics.

NVL has also established a wellness program, which gives preventative health measures to pets – just like you would take a car to the mechanic for a service to avoid future problems down the road. The group has clustered its clinics geographically to effectively improve the supply chain.

NVL is ticking the boxes for Glennon with sound and experienced management, strong industry dynamics for growth from an acquisition – but it's not all about growth by acquisition. Organic growth is there via NVL training vets and the implementation of the wellness programs show management are not just looking at a roll up story.

The Citadel Group (CGL)

Citadel provides education and knowledge management systems for large organisations like governments, military and the health sector. The organisations it targets are large national operations, so when the group's systems are in place they are thoroughly entrenched, making for recurring revenue.

Glennon was impressed with the group paying a dividend so early into its listed life. Citadel has solid government contracts and which makes for strong cashflow and has been able to increase margins. The balance sheet is in good shape and has the ability to access debt to make suitable acquisitions should they present themselves.

Glennon is also impressed by the strength of the board and management. Citadel's managing director, Dr Miles Jakeman, owns just over 17 per cent of the company.

BWX Limited (BWX)

You have probably seen BWX's product on the shelves in pharmacies and supermarkets. BWX manufactures and distributes the hair and skin care brand Sukin. You may also have read about BWX in Simon Dumaresq's piece from last month – read more here: Hunting for the next Blackmores.

The industry has the favourable dynamics for new products to capture market share. Last year Australian consumers spent $5.6bn on over-the-counter skin care products and it is growing at 12.5 per cent pa. The natural skin care segment outperformed the overall market when it comes to growth, growing at 38 per cent last year.

Sales in the mid priced Sukin product have been growing rapidly and the current annual turn over is $45m. Of that $45m, 10 per cent is exports. BWX anticipate this to grow to 40 per cent in the years to come. There is great demand in China, as pointed out in Dumaresq's piece, for natural skin care products made from Australian ingredients.

Gross margins for BWX are up over 50 per cent and growing and in the future BWX has the ability to develop new products to maintain growth.

Silverchef Limited (SIV)

Another stock our analysts have written about (see James Samson's piece here: Keeping an eye on Silver Chef, January 18, 2016), Silverchef, holds a predominant position in the GC1 portfolio.

For those not familiar with Silverchef, the business's main operations are to provide financing and equipment to the hospitality sector and logistics equipment – this includes fridges and cookers in restaurants and trucks and vans.

A few key things stand out for Glennon: Firstly, the growth story coming out of the Canadian operations is exciting. According to Glennon, Canada is really under serviced in the equipment finance sector and Silverchef has a real opportunity to become a dominant player. The Canadian business will be a solid growth driver over time.

The second thing that was really appealing to Glennon is the big banks moving out of the equipment finance space here in Australia. This makes room for a business like Silverchef to come in and become a highly specialised dominant player in the industry and become an industry leader.

Glennon sees another box ticked in the stake the founder and current chief executive Allan English has in the business. English owns approximately 30 per cent – that's significant skin in the game.