Small caps, big returns

Small industrial stocks were among the market’s star performers in 2012.

Summary: Small industrial stocks outperformed the broader market in 2012. The S&P/ASX Small Industrials Accumulation Index gained 25% in 2012, while the Small Ordinaries Accumulation Index was up only 8.9%.

Key take-out: Among the best performers were M2 Telecommunications, which rose more than 40%, and Sirtex Medical, which achieved share price growth of around 38%.

Key beneficiaries: General investors. Category: Growth

The market gods have certainly looked on small industrials favourably during the past 12 months, with the S&P/ASX Small Industrials Accumulation Index up 25.1% by the end of 2012. This compares with the Small Ordinaries Accumulation Index, up just 8.9% (dragged down by the Small Resources component of the index, which was down some 18.7%), and the S&P/ASX 100 Accumulation Index, which finished up 21%.

I wrote on telco reseller M2 Telecommunications (MTU: ASX) in early May (A telco transformed) when it was just bedding down a potentially transformational deal in the acquisition of Primus Telecom. Investors have since voted the transaction an outstanding success, boosting the share price from $3.01 to $4.30 as at January 3, a rise of around 43% over eight months. The impressive performance of MTU has been driven by a record FY12 result and the strategic benefits and excellent execution of the Primus acquisition. MTU was also included in the S&P/ASX 200 Index on June 1, 2012.

When I wrote about biotechnology company Sirtex Medical (SRX: ASX) in September (Swallowing biotechs in small doses), I noted it had delivered 32 consecutive quarters of dose sales growth. Since then it has gone on to report 37% dose sales growth for the September quarter, announced the expansion of its European manufacturing base and, for good measure, was included in the S&P/ASX 200 Index on December 24, 2012. The share price has moved from $9.50 to above $13.00, a very satisfying rise of around 38% in just over three months.

I also noted another biotech Acrux (ACR: ASX) at the same time, and while its performance to date has been disappointing (around minus 10%), there a couple of important catalysts on the horizon which could see the share price improve. Over the coming weeks, investors should be looking for the US sales data for its key product, Axiron, and also the outcome of its US patent extension application (in late January).

During 2012 I remained selective on retailers given the cyclical and structural challenges facing the sector (Stocking up on retail). However, quality always shines through and this has certainly been the case with Super Retail (SUL: ASX) and Breville Group (BRG: ASX). Since mentioning SUL (whose stable of chains includes Super Cheap Auto, Rebel Sport and BCF) in early April, the stock has moved from $7.66 to above $10.00 (up 31%). The share price has been driven by profit upgrades in May and October and an outstanding FY12 result, illustrating the value management had extracted from the Rebel Sport acquisition made in late 2011. BRG was mentioned as a potential beneficiary of the Xmas shopping spree when I wrote on the stock in early November. While I am yet to get a full picture of Xmas trading from BRG, investors are betting on another solid result with the stock moving from $5.72 to $6.58 over the period (up 15%).

Automotive Holdings Group is a stock that has continued to deliver since I first mentioned it at $2.47 in June. AHE has been turbocharged by canny investments, ongoing strong new vehicles sales and an evolving share register that has seen listed rival car dealer AP Eager (APE: ASX) move to an 18.6% shareholding in AHE. The stock is up 31% over the six months at around $3.26.

In November, I mentioned a quartet of micro-caps to put under the microscope (Morsels under the micro-scope). And while it’s still early days, with just under six weeks of trading since this time, I do note speciality asset finance provider Silverchef (ASX: SIV) as a standout. SIV’s market capitalisation has gone from $60 million in March 2012 to about $160 million in early January. The stock price has gained 23% in six weeks, and at these levels investors are certainly looking for it to continue to deliver on its outstanding growth rates to date. Others mentioned included mining services concern, Briety Limited (BYL: ASX), up 5%, electricity and gas retailer Australian Power & Gas (APK: ASX), down 5%, and specialist food producer Freedom Foods (FNP:ASX), up 10%. These companies are worth following as they evolve from being micro-caps and move into the small-caps universe.

I have been disappointed with the share price movements of both Mastermyne (MYE: ASX) and Service Stream (SSM: ASX), however, I take some comfort from the fact that management continue to run their respective businesses well and the share prices have been largely impacted by factors beyond their control.

Queensland exposed coal mining services provider MYE is off some 15% since I mentioned it in May, in the main due to plummeting coal prices impacting sentiment toward the coal sector and all related businesses. Likewise, telco contractor SSM is down some 11% since March due to delays in the awarding of contacts by NBN Co. Each of these businesses are well managed with comfortable debt levels, and are poised for a positive share price reaction based on news flow (SSM) or improving sentiment (MYE).

The final stock I have written on over the past 12 months is Swick Mining Services (SWK: ASX). While I continue to watch SWK with interest, (it recently implemented a share buyback), the stock was sold from my trading portfolio in mid-year 2012.

Note: Price performance based on share prices at the close of business on January 3, 2013.

Robert Calnon is portfolio manager at OC Funds Management Limited. To download the latest OC Funds Management small caps report, click here.

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