Are the best bargains gone now that the market has bounced over 7% since hitting its lowest point for the year back in June?
Throw in the reporting season that kicks off in two weeks and the impending federal elections and you can understand why hunting for value is getting to be such a tough sport in this climate.
Some would go so far as to argue that the so-called easy kills are gone, although the term “easy” is a misnomer when volatility is running as high as it is.
But there is little doubt that Australia’s cheapest buys are fast disappearing. The vast majority of stocks with dependable yields have run well north of value territory, and even discounts in the badly embattled resource and engineering services sectors have closed considerably over the last three weeks. See the table below for a list of embattled stocks that have been running hot.
Don’t throw in the towel yet, bargain hunters. Not only are there a number of deals that are still up for grabs in the Uncapped 100, but there are five that can be gotten for under a dollar.
Starpharma Holdings (SPL)
The $270 million market cap biotech may not stay under a buck for much longer given the number of potential catalysts that’s expected over the next six-months.
Regulatory approval for Starpharma’s condom coating in a number of key markets, partnership deals in the agriculture and animal health space and the start of an important anti-cancer clinical trial are some of the important events on the company’s horizon.
VivaGel has been proven to be effective in stopping the spread of sexually transmitted diseases and the company has done a deal with condom makers to coat condoms with it.
I can’t remember a time when Starpharma had this many potential milestones over a relatively short period and even its chief executive, Jackie Fairley, describes the next six-months as the “most exciting” window in the Starpharma’s history.
However, the market is yet to share this same enthusiasm with the company’s share price plunging 35% over the past year.
“The market for stocks that are not yield stories has been tougher and we also had some high profile stocks in our sector [that] have encountered difficulties, such as Pharmaxis,” Fairley tells the Eureka Report.
“I also think there has been some shorting in our stock, and to be perfectly honest, I think [shorting of the stock] is bordering on market manipulation.”
Shorting refers to the process of borrowing a stock to sell on-market in the hope of buying it back at a lower price later.
According to the Australian Securities & Investments Commission’s data, short selling of Starpharma’s stock has nearly tripled since the start of the calendar year to just over 5% of shares on issue.
Disappointment in Starpharma’s VivaGel product also explains the turn in sentiment. The company is trying to prove that VivaGel can be used to cure bacterial vaginosis but the clinical results were mixed and that knocked some confidence out of the company.
However, institutional shareholders (instos) have been using the dip in the share price to add to their positions, and I recommend investors do the same.
The drop in the stock below $1 has also seen a number of offshore instos buy into Starpharma for the first time. Gaining a strong overseas following among professional investors is important to fledging biotechs, and it marked the turning point for stocks like Mesoblast (MSB).
Another good thing about Starpharma is that it has a pretty large pipeline of potential treatments. It’s dendrimer technology, which can be used to change chemical characteristics of drugs (such as making them water soluble), has wide-ranging applications.
The stock is trading at 94c and I believe it has the potential to double in value over the next year or so.
Don’t be fazed by the fact that Newsat is likely to post a drop in 2012-13 earnings next month due to a sharp increase in expenses (such as hiring) as it gears up for the launch of its first satellite in 2015.
The big launch is still the end game, although it does make Newsat’s fate a binomial outcome. If management can put its Jabiru-1 satellite into orbit, the stock is a bargain that is hard to beat.
The key point is that management has de-risked the project as well as it can since it overcame the final project hurdle, which was to raise the more than $US500 million needed to fund Jabiru-1.
The main risks now is whether US defence contractor Lockheed Martin can build the satellite to spec and schedule, and whether French aerospace company Arianespace can successfully execute the launch.
While these risks are outside Newsat’s control, the company’s chief executive Adrian Ballintine says Newsat is not resting on its laurels.
“You would not expect us to be standing still now. We are very focused on filling [orders for] Jabiru-1 as quickly as we can,” Ballintine tells the Eureka Report.
“We are at 18% capacity for whole of life [of Jabiru-1] and we aim to get to 65% capacity when we get to launch.”
That equates to $US3 billion in sales and that is a fairly conservative target given that the average pre-launch fill rate is 74%. This average is even higher at 90% for satellites serving the Middle East, a region that Jabiru-1 is targeting.
It is very hard to put a price target on Newsat. I’ve written recently on how the stars are aligning for the stock and if it does become a fully-fledged satellite company over the coming years, the share price would be worth several times its current value.
The stock is trading at 39.5c.
Shares in the packaging company may have run up close to its 77 cents high, but the stock is still a dollar dazzler in my book.
Of the five bargains featured, Colorpak has the most stable earnings outlook in spite of the enormous pressure the local manufacturing sector is under.
Its acquisition of Carter Holt Harvey’s folding carton business in 2011 was the key event that put the stock on the radar as it made the small $60 million market cap company one of the leading players in the packaging sector.
That company transforming deal allowed Colorpak to more than double in size and its managing director and cycling fanatic, Alex Commins, is quick to point out that there is plenty of growth left in Colorpak’s tank.
“We are not finished with acquisitions and it is our view that there is still more room for rationalisation as the industry is still quite fragmented,” says Commins in a telephone interview from France where he is following the Tour de France.
While he wouldn’t comment on whether Colorpak is working on any deals, it is clear that acquisitions are at the top of his mind. I would not be surprised to see Colorpak announce another takeover within the next six months.
But Colorpak doesn’t need to make another large acquisition to look attractive. Commins believes he can squeeze at least another two percentage point of margin expansion over the next couple of years from the Carter Holt Harvey acquisition, which means the Colorpak can generate decent profit growth even if revenue stagnates.
The stock, which was trading at 72.5c, is also a steady dividend payer that generates a gross-up yield of around 7% and is on a reasonably cheap 2013-14 price-earnings multiple of around seven times.
“Colorpak has been listed for nearly 10 years and we have a solid track record of delivering on what we say,” adds Commins. “This makes us a solid reliable company in an industry that isn’t considered sexy anymore.”
GI Dynamics (GID)
GI Dynamics is one small cap that is quite possibly at a value inflection point.
I don’t say that lightly and the fact that its share price is trading at a more than 10% premium to the 53 cent offer price of its massive capital raising bodes well for the company, which makes an intestinal lining to treat obesity and diabetes.
The chief financial officer for the $160 million market cap company, Robert Crane, also thinks the stock is being re-rated by the market.
“We had some very nice price action with the stock post the [equity capital raising], and I think in part there’s no longer a question of whether the company is adequately funded to pay for the pivotal trial,” explains Crane.
“We have also heard from some investors that there is no longer the worry of an ‘overhang’ – or the question of how much stock will need to be sold.”
Some investors were holding back buying the stock pending the close of GI Dynamics’ oversubscribed $57.5 million placement to professional and sophisticated investors who came from Australia, the US and other regions.
The company is looking to raise another $2.5 million from existing shareholders through a share purchase plan and the proceeds will be used to fund an important trial in the US to show that its EndoBarrier product is effective in treating diabetes.
The results from the trial will determine if GI Dynamics can sell EndoBarrier to diabetics in the US by 2017.
While the success of this trial is an important value driver for the stock, there are many other revenue streams open to GI Dynamics.
A number of countries, including Australia, have already granted approval to use EndoBarrier to treat diabetes.
However, the commercial success in the diabetes market depends on reimbursements – the rebate given to patients by governments or insurance providers. GI Dynamics is hoping to make some announcements on this front in the coming months.
The obesity market is easier to tackle as regulatory approval requirements are lower and patients typically pay for such treatments from their own pocket.
Both markets represent very large opportunities for GI Dynamics as Crane estimates that there are 300 million diabetics and 500 million obese people in the world. GI Dynamics only needs a tiny fraction of the global market to generate profits well in excess of its market cap.
Further, investors can expect to see a material jump in revenue over the next 12-months as Crane says the company is planning on expanding the number of medical centres offering EndoBarrier to 50 from 29.
Most of the expansion will happen in Australia with the introduction of at least five new clinics. There are currently only two centres in Australia.
Crane claims that the doctors running these centres have a financial incentive to recommend EndoBarrier over other alternative treatments, such as bariatric surgery. Surgeons make about the same on an EndoBarrier placement (it’s non-surgical with the product inserted through the mouth) as a lap band, but it only takes 20 minutes to insert an EndoBarrier compared to an hour surgery for a lap band.
The stock last traded at 60c. The average broker price target on the stock is $2.
Horizon Oil (HZN)
The oil & gas junior is another that is expected to undergo a step change in revenue in the current financial year.
Average daily production is expected to jump five-fold to around 5000 barrels of oil equivalent in 2013-14 from the previous year, and Horizon Oil’s finance manager, Richard Beament, believes the next few months will be a very exciting time for shareholders.
“The first [major milestone] on the horizon is the ramp up to peak oil production from our Beibu oil fields in China,” he says.
“The second key development is the award of the petroleum development license [PDL] for our Stanely project in PNG [Papua New Guinea].”
The ramp up in Beibu is important because it will allow the company to capitalise on the current high oil price and give the company a much needed cash injection at a time when capital expenditure is expected to increase significantly.
The license is expected to be granted in the September quarter and Horizon is expected to receive a $130 million milestone payment from its PNG joint venture partner, Osaka Gas, once final investment decision is made for the liquefied natural gas development.
There is a third catalyst for the stock. The PNG JV will start drilling the “Tingu” prospect, which has a resource potential of 459 billion cubic feet of gas. The two-well program is expected to commence in the September quarter as well.
Consensus estimates are tipping a more than 700% surge in 2013-14 net profit to $52.3 million, which puts the stock on very modest seven times price-earnings multiple.
Investors are starting to catch on to this story with the stock now trading at 35.5c. However, it is still well below the average broker price target of 52 cents a share.
Think big, go smalls!
Brendon Lau has interests in SPL, NWT, GID and HZN.
Uncapped 100 - The Real Top 100
|Small cap stocks covered by the Uncapped team|
|Code||Name||Rationale||Market cap ($m)||Total return 1-year (%)||Sector (GICS)|
|MMS||McMillan Shakespeare||One of the best performers since the GFC, but change to FBT rules is threatening growth.||1,145||40.02||Industrials|
|MTU||M2 Telecommunications Grp||Amazing growth story and well run company. High free float and strong insto support.||978||84.52||Telecommunication Services|
|BRG||Breville Group||Well covered but good candidate for core holding due to good track record.||971||76.95||Consumer Discretionary|
|NHF||NIB Holdings /Australia||Only listed health insurer. Widely held. Good performer.||948||48.28||Financials|
|ARP||ARB Corp||Well covered but good candidate for core holding due to quality management.||938||39.39||Consumer Discretionary|
|MRM||Mermaid Marine Australia||Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.||922||56.96||Industrials|
|GEM||G8 Education||Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.||727||192.17||Consumer Discretionary|
|AAD||Ardent Leisure Group||Widely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.||724||55.8||Consumer Discretionary|
|SRX||Sirtex Medical||A shining star in the biotech space and one of the best performing stocks in 2012. Great product (liver cancer treatment) and bright outlook.||667||89.14||Health Care|
|SGN||STW Communications Group||One of few companies able to benefit from online shift. Widely held and good insto support.||656||78.66||Consumer Discretionary|
|AUB||Austbrokers Holdings||The insurance broker is a strong performer. Widely held and well liked by small cap investors.||629||60.27||Financials|
|ACR||Acrux||One of the most successful Australian biotechs in recent history. Widely held by instos.||621||-8.29||Health Care|
|RFG||Retail Food Group||Owns a number of well know franchise brands. Widely followed by instos.||565||79.36||Consumer Discretionary|
|BDR||Beadell Resources||Will be a very big FY14 for miner as it has to prove it aims to produce 200,000 ounces of gold a year.||546||9.92||Materials|
|CCV||Cash Converters Intntl||Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.||500||77.68||Consumer Discretionary|
|BRU||Buru Energy||Substantial size but not often covered by press. Widely held with good insto support.||489||-41.48||Energy|
|NXT||NEXTDC||The cloud computing company is an IT sector darling. Fairly widely held and followed.||475||43.32||Telecommunication Services|
|AMM||Amcom Telecommunications||Well covered junior telco but good candidate for core holding.||472||80.75||Telecommunication Services|
|SEA||Sundance Energy Australia||Analysts have a favorable take on the oil & gas explorer, but stock is still under radar of most. Sundance provides exposure to prospective Eagle Ford shale.||453||86.67||Energy|
|SLX||Silex Systems||Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.||446||-39.07||Information Technology|
|CCP||Credit Corp Group||Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.||441||57.75||Industrials|
|TOX||Tox Free Solutions||Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.||433||29.64||Industrials|
|FGE||Forge Group||One of the better performers in its industry. Good track record and potential core holding.||431||19.67||Industrials|
|BGA||Bega Cheese||Corporate interest in Australian food companies makes the cheese maker worth following.||410||77.88||Consumer Staples|
|HZN||Horizon Oil||One of better regarded small energy stocks that doesn't receive much media attention.||409||30.91||Energy|
|CWP||Cedar Woods Properties||Property developer with good ROE and earnings growth track record.||403||56.98||Financials|
|MYS||MyState||Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.||378||48.24||Financials|
|UNS||Unilife Corp||The developer of one-use prefilled syringes is close to an inflection point as the market is expecting the company to announce a major contract with a pharmaceutical giant in the coming weeks.||337||6.31||Health Care|
|RKN||Reckon||Fierce competition for cloud base accounting software puts it in firing line.||324||18.01||Information Technology|
|UXC||UXC||Company has turned corner and enjoyed re-rating. What's next?||315||92.95||Information Technology|
|TGA||Thorn Group||One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.||307||41.06||Consumer Discretionary|
|RCR||RCR Tomlinson||Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?||305||45.92||Industrials|
|NWH||NRW Holdings||One of the better regarded mining & civil contractors with good track record in delivering on projects.||299||-61.68||Industrials|
|MYX||Mayne Pharma Group||Sizeable generic drug maker with interesting board members.||290||65.54||Health Care|
|MOC||Mortgage Choice||Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.||278||81.38||Financials|
|SPL||Starpharma Holdings||Noteworthy for its good pipeline of innovations. Well run, widely followed.||267||-35.17||Health Care|
|AEU||Australian Education Trust||Well performing childcare centre property owner. Good yield story and outlook.||257||52.17||Financials|
|RIC||Ridley Corp||High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.||245||-9.99||Consumer Staples|
|SIV||Silver Chef||Strong jump in the share price of the equipment financing group has attracted a good following.||232||143.21||Industrials|
|IMF||IMF Australia||Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.||226||31.81||Financials|
|AJA||Astro Japan Property Group||Strong leverage to Japanese economy makes this an interesting stock to watch.||220||19.5||Materials|
|MXI||MaxiTRANS Industries||Transport equipment maker posted good interim result. Has appealing yield and growth.||218||98.05||Industrials|
|CLH||Collection House||In similar space as Credit Corp. Strong stock performance has attracted a following and the stock appears to be well placed to run further||216||147.17||Industrials|
|SHV||Select Harvests||Noteworthy for turbulent past and exposure to soft commodity market.||215||211.74||Consumer Staples|
|NWT||Newsat||Potential large cap if it can launch its own satellite in 2015.||210||-33.33||Telecommunication Services|
|DWS||DWS||Will be a big beneficiary if governments start spending on IT again.||205||15.96||Information Technology|
|WBB||Wide Bay Australia||The building society is trying to turn its fortunes around. Also worth watching for its exposure to Queensland housing market, particularly around major resource projects.||205||-5.78||Financials|
|GXL||Greencross||Acquisitive vetinary group. Good profit growth and share price performance, but gets little press.||203||143.39||Health Care|
|MLB||Melbourne IT||A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.||184||37.73||Information Technology|
|IFM||Infomedia||Interesting tech play in the car parts market. Strong share price gain but gets little air play.||181||209.99||Information Technology|
|NAN||Nanosonics||A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.||179||37||Health Care|
|PFL||Patties Foods||Illiquid stock but has suite of well recognised consumer brands. Defensive yield.||179||-14.1||Consumer Staples|
|DTL||Data#3||Well respected IT company that receives little press coverage.||179||7.68||Information Technology|
|GXY||Galaxy Resources||Good upside potential if it can get its problem-prone Jiangsu plant back on track. Won't be easy to right this ship.||177||n.a.||Materials|
|VOC||Vocus Communications||Telecom stocks are in favour but Vocus is one of the least covered||167||27.07||Telecommunication Services|
|IPP||iProperty Group||Worth watching as it is trying to be the REA Group of Asia.||163||-2.17||Information Technology|
|CKF||Collins Foods||One of the few food franchise listed companies.||163||64.36||Consumer Discretionary|
|GID||GI Dynamics Inc||Largely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal shealth on diabetics.||160||-33.33||Health Care|
|IMD||Imdex||Drilling company is well supported by instos and should benefit from any rebound in exploration activity.||156||-56.18||Materials|
|SFH||Specialty Fashion Group||In early stages of turnaround. Can the women's apparel retailer sustain the momentum?||155||56.45||Consumer Discretionary|
|HSN||Hansen Technologies||Operates in a high potential/growth industry but is not covered by press or brokers.||147||7.17||Information Technology|
|BNO||Bionomics||One of the larger cancer treatment developers in this market.||144||21.4||Health Care|
|RCG||RCG Corp||The footwear retailer is one of the best performing consumer stocks as online competition is not a big threat. Company has a good yield as well.||140||71.15||Consumer Discretionary|
|UBI||Universal Biosensors Inc||Well regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.||136||41.82||Health Care|
|TGS||Tiger Resources||Future lies in its Kipoi copper mine expansion in the Congo but miner is fully funded with DRC govt holding 40% stake in tenement. Next 12mths will be interesting.||135||-29.82||Materials|
|REX||Regional Express Holdings||Well run airline that is overshadowed by Virgin and Qantas.||127||4.47||Industrials|
|TFC||TFS Corp||The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.||120||-8.51||Materials|
|AZZ||Antares Energy||Liquid with good insto support. Already in production with exploration upside in Texas.||115||11.11||Energy|
|MCP||McPherson's||The personal care and household products supplier had been relatively insulated from volatile discretionary spend and online threat, but its latest profit warning shows it's not immune.||115||-18.14||Consumer Discretionary|
|POH||Phosphagenics||Sizable biotech with a game changing FY14 year ahead. Good insto following but accounting irregularities is a cloud hanging over stock.||112||-24.14||Health Care|
|AMA||AMA Group||Good turnaround story but under the automotive services group is radar of most.||111||147.46||Consumer Discretionary|
|ACL||Alchemia /Australia||One of the few biotechs with revenue stream. Good pipeline of oncology treatments.||110||-33.33||Health Care|
|LCM||LogiCamms||Strong price performance and reasonable valuation attracting interest.||102||44.09||Industrials|
|ESV||Eservglobal||Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage||101||76.09||Information Technology|
|BGL||BigAir Group||The wireless microcap has gained strong following over past year or two but is often overlooked by investors and the press.||97||56.69||Telecommunication Services|
|CLV||Clover Corp||One of the star performers in 2012. Operates in growing but relatively stable niche.||96||56.87||Health Care|
|JIN||Jumbo Interactive||Innovative small cap facing off industry dominated by giants. Worth watching to see if it can carve out a profitable global business.||91||80.8||Consumer Discretionary|
|NEA||Nearmap||A stellar performer with an Interesting business that offers high quality ariel maps to companies & government.||90||617.95||Information Technology|
|PEN||Peninsula Energy||Widely held by instos and large free float. It's the only uranium miner on the list.||89||-6.25||Materials|
|CAA||Capral||An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose.||73||32.14||Materials|
|SAR||Saracen Mineral Holdings||Emerging gold producer that is widely held by instos. Hitting milestones and looks cheap. Key asset is close to gold majors, which makes it a potential takeover target.||71||-77.78||Materials|
|AOH||Altona Mining||Noteworthy copper play with Xstrata pullout of Roseby project in Australia and the good ramp up of its Finnish project.||71||-55||Materials|
|DRM||Doray Minerals||Widely held by instos. One of the more favored gold explorers by brokers.||71||-37.97||Materials|
|RUL||RungePincockMinarco||IT company to resource industry. Turnaround potential under new CEO.||69||35.09||Industrials|
|CUV||Clinuvel Pharmaceuticals||Interesting skin disorder treatment developer that has done reasonably well over past year||69||2.84||Health Care|
|TAN||Tandou||The only direct equity exposure to cotton prices. Also trades water rights and receives little press.||62||16.22||Consumer Staples|
|CKL||Colorpak||The small cap packaging company has grown via acquisitions over past few years.||59||38.31||Materials|
|BOL||Boom Logistics||Crane hire group is riding out the downturn in construction. It's widely held by instos and is very liquid.||56||-52||Industrials|
|LGD||Legend Corp||Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.||54||-14.16||Information Technology|
|KOV||Korvest||The construction products and services supplier has been hit by project delays and deferrals. But its relatively high yield could give it some support.||54||46.27||Industrials|
|WDS||WDS||Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.||54||-9.09||Industrials|
|TSM||ThinkSmart||Potential turnaround story worth keeping eye on.||52||48.84||Financials|
|YTC||YTC Resources||Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.||51||-18.75||Materials|
|UML||Unity Mining||Growing Tassie gold producer with high free float. Valuation looks compelling too.||48||-40.87||Materials|
|ISS||ISS Group||Good turnaround story from 2012 but the resource industry software developer under the radar of most. ISS has received a takeover offer after its inclusion in the Uncapped 100.||44||75.85||Information Technology|
|OTH||Onthehouse Holdings||Alternative small cap to online property leader REA Group. It is trying to use more timely housing data as a compeitive edge against REA.||36||-6.63||Consumer Discretionary|
|NTC||NetComm Wireless||Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.||34||116||Information Technology|
|EBT||eBet||Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.||24||106.67||Consumer Discretionary|
|MBO||Mobilarm||Unique product that could change global maritime safety practices with its man-overboard location beacon.||18||100||Information Technology|
|PGC||Paragon Care||Emerging hospital equipment supplier that has been ignored by market.||14||57.14||Health Care|
|Source:||Eureka Report, Bloomberg|