Wading tentatively in the big pool
Currency means confidence Companies, which have the currency wind in their sails, have been much more bullish about their outlook statements. This stands out in a results season characterised by many senior executives too afraid to put their necks on the block and make predictions.
Companies that have significant offshore earnings are more confident about future earnings because they have battled for years with a highly valued Australian dollar. Now that it's coming off, they have a lot to cheer about. Companies in this category include electronic car parts catalogue producer Infomedia, biotechnology companies Sirtex Medical and Acrux, as well as law firm Slater & Gordon, which is benefiting from its British acquisition.
Some housing recovery stocks aren't seeing the love We acknowledge that real estate sales group AV Jennings had a ripper off the back of growth in house prices. But beneficiaries such as aluminium products manufacturer Capral, furniture manufacturer and retailer Fantastic, and online accommodation group Wotif showed that times are still tough for companies reliant on consumer spending.
The election can't happen fast enough January 30, 2013, is a day Specialty Fashion's chief executive Gary Perlstein remembers well: "The day Julia Gillard called the election for September 14 things slowed down. Normally, we get five weeks' notice, not nine months!" Virtually every senior executive we have spoken to hopes business confidence improves after September 7.
Mining-services companies diversify Forge, Decmil and RCR Tomlinson have all made acquisitions that reduce their exposure to Western Australia and mining. For example, on top of announcing a 27 per cent increase in its net profit to June 30, RCR recently completed its acquisition of Sydney-based Norfolk, an electrical maintenance business.
The pain is there for all to see, as earnings take a dive because of cancelled or delayed mining projects. Just look at results and share price performances of drilling services group Boart Longyear and accommodation specialist Fleetwood.
Stay healthy and keep in touch The health and telco theme has worked at the smaller end of the spectrum. Big performers at the small end include wireless communications specialist BigAir and voice over the internet supplier My NetFone. On the health side, impressive results came from specialty pharmaceuticals company Mayne Pharma, and medical device specialists Sirtex Medical and Allied Health.
Richard Hemming edits the fortnightly newsletter Under the Radar Report: Small Caps.
Frequently Asked Questions about this Article…
In this article, 'small caps' are defined as companies with market capitalisations under $300 million. Over the reporting period (for most companies the 12 months to June 30) small caps generally fared pretty well, showing more resilience than many investors expect, although there are notable exceptions among firms that recently fell into the small-cap category after poor performance.
Companies with significant offshore earnings have been more bullish about future earnings because a falling Australian dollar improves the local value of those offshore revenues. The article notes that firms which have 'battled for years' with a high AUD now have reason to be upbeat as the currency comes off, and that currency momentum is translating into more confident outlook statements.
The article highlights Infomedia (electronic car parts catalogue), biotechnology companies Sirtex Medical and Acrux, and law firm Slater & Gordon (benefiting from a British acquisition) as examples of small caps with meaningful offshore earnings that are showing stronger confidence because of currency tailwinds.
While some companies like AV Jennings saw strong results tied to house-price growth, other businesses that rely on consumer spending did not see the same benefit. The piece cites Capral (aluminium products), Fantastic (furniture manufacturer and retailer) and Wotif (online accommodation) as examples that still face tough conditions despite parts of the housing market recovering.
The article reports that lengthy election uncertainty slowed business activity and commentary — Specialty Fashion's CEO recalls extended delays — and that many senior executives hope business confidence improves after the election (the article references hopes for improvement after September 7). In short, prolonged political uncertainty can dampen management guidance and corporate decision-making.
Several mining-services companies such as Forge, Decmil and RCR Tomlinson have pursued acquisitions to diversify away from heavy exposure to Western Australia and mining. For example, RCR completed the acquisition of Sydney-based Norfolk, an electrical maintenance business, as part of efforts to reduce reliance on mining work amid cancelled or delayed projects.
The health and telco themes worked well at the smaller end. Notable performers mentioned include wireless specialist BigAir and VoIP supplier My NetFone in telecoms, plus Mayne Pharma, Sirtex Medical and Allied Health among health and medical-device specialists.
Everyday investors should note that many small caps are resilient but not immune to sector-specific shocks or recent poor performance that can push a company into the small-cap bucket. Look for companies with diversified revenue (including offshore earnings), be mindful of sensitivity to currency moves and consumer spending, and watch how management commentary and strategic moves—like diversification or acquisitions—reflect risk management.
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