Four new stocks for the Uncapped 100

A rebalance of the Uncapped 100 has seen four added, and four dumped.

There are four new stocks that have made it into the Uncapped 100, with the group of Australia’s most exciting emerging stocks celebrating its first 100 days.

The Uncapped 100 goes through a “refresh” every quarter, where a handful of stocks in the group are dumped because they no longer meet the requirements for inclusion.

The new members have been chosen in part due to the belief that they have the potential to generate robust returns over the longer-run to keep the Uncapped 100 ahead of the broader market. Our collection of stocks is up 24% on a one-year basis, or 6.5% ahead of the ASX All Ordinaries.

Finding suitable candidates for the Uncapped 100 requires a bit of digging anyway, but finding ideal emerging companies that are priced cheaply in this environment is a very big challenge as the market has made a sizeable bounce in the last three months.

This is why acceptance into the Uncapped 100 shouldn’t be taken as a “buy” signal. In fact, only one of the four new entrants can still be considered well priced. The other three have come onto our radar because they are worth keeping a close eye on as they have every chance of being further re-rated by the market over the next 12-months.

We now have 19 “outperform” or “buy” recommendations in the group, and our calls have produced a return of over 20% since we rated the stocks.

This spring clean has resulted in location beacon developer Mobilarm (MBO), retractable syringe maker Unilife Corporation (UNS), software developer ISS Group (ISS) and appliance supplier Breville Group (BRG) leaving the fold.

We have not made any recommendations on these stocks and they are exiting for a variety of reasons – some good, some not so.

However, their exit is not prompted by poor share price performance. If anything, all of them have managed to generate a positive return over a one-year basis.

The new entrants, though, have greater potential to generate “alpha” over the next 12-months if investors time their entry right. Alpha is the difference between the stock and market performance.

Who’s In

emerchants (EML): One stock that could see phenomenal growth in the coming years is emerchants.

The company is looking to change the way governments and large companies disburse cash by introducing a debit card that can be tracked and controlled by its clients.

I wrote about emerchants last week, outlining its market opportunity and its potential of hitting $1 billion in pre-loaded value on its cards.

However, the stock is arguably looking fairly valued after having doubled in price since the start of the calendar year.

There is arguably plenty more upside over the medium term if its card services gains greater traction among potential clients, but until there are more tangible signs of that I have a “neutral” recommendation on the stock.

Mint Wireless (MNW): This company is similar to emerchants in many ways. Its revenue model is primarily based on transactions, it has a sizable market opportunity and it’s trying to carve a niche in an industry that is dominated by giants.

Mint Wireless provides mobile credit card payment solutions that are mainly aimed at small businesses.

Banks already have portable credit card terminals, and other global giants such as PayPal (which is owned by NASDAQ-listed eBay) are trying to muscle into this area.

“One big point of difference in what we offer is that we can take payments from mobile phones,” Mint’s chief executive Alex Teoh tells Eureka Report.

“Seventy per cent of users in Australia and New Zealand want to take payment off their smart phones.”

Banks are reluctant to develop their own mobile phone payment solutions as this is outside their core strength, explains Teoh, who is unrelated to TPG Telecom’s (TPM) David Teoh, although both men are from Malaysia.

PayPal is also trailing in the physical card space. While the online payment giant dominates internet transactions, it isn’t close to launching a service that would allow merchants to swipe or insert a physical credit or debit card into a terminal.

Getting approval to handle such transactions is time consuming and can take two years or more, according to Teoh.

“We are targeting $1 billion of transaction value in the next 12- to 18-months,” he adds.

It he hits that blue sky target, Mint is likely to book revenue of around $23 million, and that would put the stock roughly on a price-earnings multiple of under four times. Even if Teoh only achieves half that goal, the stock would still be undervalued.

Mint has recently signed on Bank of New Zealand and MYOB as customers.

I have a “buy” recommendation on the stock, but Mint is only for those with a strong stomach for volatility and risk.

Generation Healthcare REIT (GHC): Generation Healthcare is one of the more interesting property stocks as it offers a good mix of growth and income that is more defensive than a typical real estate investment trust.

Medical practitioners tend to be the best tenants as they stick around for a long time. This can be seen in Generation Healthcare’s 2012-13 results, with occupancy rates of over 99%, weighted average lease terms of 11.9 years, and rental growth of 8.4% on a like-for-like basis.

The expansion of its Frankston private facility in Victoria, along with the recent acquisitions of a development site beside Casey Public Hospital south-east of Melbourne and the Westmead Hospital in Sydney, should support earnings growth in the coming years.

Management is forecasting a full-year distribution of 7.86 cents a share for 2013-14, which gives Generation Healthcare a yield of around 7%.

However, investors should wait for a better entry price as the stock has run hard recently and is trading at a premium to its net tangible asset value of 98 cents a share compared with Tuesday’s closing price of $1.12.

Generation Healthcare has traded at a 12% average discount to tangible assets over the past three years, and if it mean reverts, this would translate to around 86 cents a share.

Until it gets closer to that price point, I have a “neutral” recommendation on the stock.

Tassal Group (TGR): The stock has more than doubled in value since the start of the calendar year as the company looks like it may have finally turned a corner.

The salmon farmer’s harvest strategy to improve the mortality of its fish stock and the decision to focus primarily on the domestic market is paying off. Its 2012-13 net profit growth of 19.1% to $33.5 million was more than 20% ahead of analysts forecast.

What is also pleasing is Tassal’s stronger-than-expected net margin of 12.3%, which is 1.6% ahead of the previous year. Management says its margin is sustainable as it believes demand will continue to outstrip supply in the coming years.

Tassal’s dividend also came in ahead of expectations and management is aiming to grow distributions this year, with analysts tipping a yield of close to 4%. The difference between the current and past years’ dividends is franking.

Tassal’s 9.5 cents a share 2012-13 dividend was unfranked but management believes 2013-14 dividends will be partially franked. This could lift the yield to over 5% once the tax credit is included.

While there is probably still some upside to the stock around current levels, it is fairly close to fair value. I believe there will be a better entry point for investors in the not too distant future, and I have a “neutral” rating on the stock.

Who’s out

ISS Group (ISS): This was the obvious candidate to go in this rebalance, as the company was successfully taken over by US-based P2ES last month for 33 cents a share. This was a 50% premium to its last traded price before the takeover bid was announced.

I am a little sad to see the company go into foreign hands as this leaves Rungepincockminarco (RUL) the only other Australian-listed management and control systems developer servicing the resources sector.

Rungepincockminarco is part of the Uncapped 100, but the company isn’t as well positioned as ISS as a large part of its revenue comes from consulting services and not licences. Revenue from consulting tends to be lumpy, non-recurring and lower margin.

Rungepincockminarco is trying to lift its earnings exposure to software licences but it’s probably still some way from that goal, although speculation that it might be the next to get bought out could put a floor under the price.

After all, it’s the last man standing in the sector after QMASTORS (QML) and ISS changed owners.

Mobilarm (MBO): The market minnow has been dropped because of questions over its funding and its failure to deliver the turnaround it promised under a relatively new chief executive, Ken Gaunt.

The company should have already shown concrete signs of profitability after the Nigerian government mandated the use of a man-overboard location beacon for every offshore oil and gas worker.

Mobilarm’s device is the only one approved for use in that country, but the take-up has been slower-than-expected.

What is perhaps more alarming is its failed $1.7 million capital raising, with shareholders only taking up around 40% of the stock on offer. The raising should have been a sure thing given that $1.3 million of the offer was being underwritten by Truestone Capital.

However, Truestone requires certain unnamed significant shareholders in Mobilarm to participate fully in the one-for-seven equity raising at 4 cents a new share before the underwriting agreement kicks in. This condition has not been met.

Management is currently negotiating with Truestone and the significant shareholders (this has been going on for nearly three weeks), but the refusal by these investors to take up their rights can only be construed as a sign of no confidence in Mobilarm’s future.

Mobilarm may yet pull through and deliver on its blue-sky potential, but I feel the risks outweigh the rewards.

Unilife Corporation (UNS): When you invest in small caps, you are investing more in management than in the business, and Unilife is a classic example of what this means.

The innovative retractable syringe developer should be exciting the life out of shareholders after it announced a multi-million-dollar deal with pharmaceutical giant Sanofi, which has agreed to pay up to $15 million in milestone payments on top of royalties for each syringe sold.

Sanofi plans to buy 150 million Unilife syringes that are pre-filled with its anti-thrombotic therapy, and will have the exclusive right to use the syringes for this class of drug.

The deal has been a long time coming but the news has been overshadowed by governance concerns, with a former Unilife vice-president of the company filing a lawsuit alleging misconduct. The dual listed company could also be facing a class action lawsuit in the United States.  

Further, the deal with Sanofi is not as great as some investors may be hoping for as Sanofi doesn’t appear to be locked in to buying the 150 million syringes if it is willing to give up the exclusivity.

The turmoil in the company is also likely to keep other potential customers at bay, and all these headwinds mean the stock is likely to stay range-bound. This could last for a while, and it is best that the stock makes way for a more promising candidate.

Breville Group (BRG): The stock is being evicted for all the right reasons – if there is such a thing.

Breville has been one of the star performers on the Uncapped 100, with a 57% jump in the past year, and its market cap has consistently stayed above $1 billion since August 20.

I love how management has turned a budget brand into a global premium product line, but it’s one for the big league now in that earnings growth is likely to be relatively tame compared with the previous years. I think there are higher earnings growth stocks that deserve Breville’s seat in the Uncapped 100.

Think big, go smalls!

Brendon Lau does not currently own shares in any of the companies mentioned in this article.

Uncapped 100 - Australia's most interesting small cap stocks

Small cap stocks covered by the Uncapped team
CodeNameRationaleMarket cap ($m)Total return 1-year (%)Sector (GICS)
MTU M2 Telecommunications Group Amazing growth story and well run company. High free float and strong insto support.1,082.1679.62Telecommunication Services
NHF NIB Holdings /AustraliaOnly listed health insurer. Widely held. Good performer.943.8634.72Financials
GEM G8 Education Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.936.36169.8Consumer Discretionary
ARP ARB Corp Well covered but good candidate for core holding due to quality management.916.8931.96Consumer Discretionary
MMS McMillan Shakespeare One of the best performers since the GFC, but ongoing risk of change to FBT rules is hanging over the company.871.19-2.73Industrials
MRM Mermaid Marine Australia Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.858.4922.92Industrials
AAD Ardent Leisure GroupWidely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.767.4649.79Consumer 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.727.7340.88Health Care
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.656.24-14.18Materials
SGN STW Communications Group One of few companies able to benefit from online shift. Widely held and good insto support.644.1164.49Consumer Discretionary
AUB Austbrokers Holdings The insurance broker is a strong performer. Widely held and well liked by small cap investors.641.5743.68Financials
RFG Retail Food Group Owns a number of well know franchise brands. Widely followed by instos.578.5455.19Consumer Discretionary
CWP Cedar Woods Properties Property developer with good ROE and earnings growth track record.544.3398.15Financials
BGA Bega Cheese Corporate interest in Australian food companies makes the cheese maker worth following.539.12102.52Consumer Staples
CCV Cash Converters International Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.537.3467.08Consumer Discretionary
ACR Acrux One of the most successful Australian biotechs in recent history. Widely held by instos.537.030.39Health Care
NXT NEXTDC The cloud computing company is an IT sector darling. Fairly widely held and followed.504.9635.62Telecommunication Services
BRU Buru Energy Substantial size but not often covered by press. Widely held with good insto support.493.80-44.65Energy
SLX Silex Systems Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.483.51-25.85Information Technology
AMM Amcom Telecommunications Well covered junior telco but good candidate for core holding.476.8955.62Telecommunication Services
SEA Sundance Energy Australia Analysts have a favourable take on the oil & gas explorer, but stock is still under radar of most. Sundance provides exposure to prospective Eagle Ford shale.475.3337Energy
HZN Horizon Oil One of better regarded small energy stocks that doesn't receive much media attention.463.8413.25Energy
CCP Credit Corp Group Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.459.0159.41Industrials
RCR RCR Tomlinson Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?457.83104.31Industrials
TGR Tassal Group Salmon farmer is finally turning a corner with an improved harvest strategy and growing demand for product.446.85126.55Consumer Staples
FGE Forge Group One of the better performers in its industry. Good track record and potential core holding.436.8832.13Industrials
TOX Tox Free Solutions Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.428.0421.98Industrials
NWH NRW Holdings One of the better regarded mining & civil contractors with good track record in delivering on projects.415.54-18.81Industrials
MYS MyState Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.404.5044.5Financials
MYX Mayne Pharma Group Sizeable generic drug maker with interesting board members.363.43124.13Health Care
UXC UXC Company has turned corner and enjoyed re-rating. What's next?347.8518.49Information Technology
TGA Thorn Group One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.346.1931.05Consumer Discretionary
MOC Mortgage Choice Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.344.3788.35Financials
GID GI Dynamics IncLargely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal liner on diabetics.323.6818.57Health Care
BNO Bionomics One of the larger cancer treatment developers in this market.317.20115.15Health Care
IPP iProperty Group Worth watching as it is trying to be the REA Group of Asia.300.2185.96Information Technology
SPL Starpharma Holdings Noteworthy for its good pipeline of innovations. Well run, widely followed.285.38-31.86Health Care
RKN Reckon Fierce competition for cloud base accounting software puts it in firing line.277.98-1.21Information Technology
AEU Australian Education TrustWell performing childcare centre property owner. Good yield story and outlook. 271.9743.51Financials
NWT Newsat Potential large cap if it can launch its own satellite in 2015.265.33-6.73Telecommunication Services
RIC Ridley Corp High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.260.11-19.97Consumer Staples
SHV Select Harvests Noteworthy for turbulent past and exposure to soft commodity market.253.41291.98Consumer Staples
MXI MaxiTRANS Industries Transport equipment maker posted good interim result. Has appealing yield and growth.251.1585.79Industrials
SIV Silver Chef Strong jump in the share price of the equipment financing group has attracted a good following.244.3596.88Industrials
TFC TFS Corp The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.234.88110Materials
AJA Astro Japan Property GroupStrong leverage to Japanese economy makes this an interesting stock to watch.231.8826.95Financials
GXL Greencross Acquisitive veterinary group. Good profit growth and share price performance, but gets little press.230.09123.43Health Care
IMF IMF Australia Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.227.3225.94Financials
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.222.67-2.94Materials
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 further220.4284.1Industrials
VOC Vocus Communications Telecom stocks are in favour but Vocus is one of the least covered214.7055.06Telecommunication Services
NAN Nanosonics A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.214.2066.33Health Care
ACL Alchemia /AustraliaOne of the few biotechs with revenue stream. Good pipeline of oncology treatments.205.9522.12Health Care
DWS DWS Will be a big beneficiary if governments start spending on IT again.202.520.48Information Technology
PFL Patties Foods Illiquid stock but has suite of well recognised consumer brands. Defensive yield.186.35-18.63Consumer Staples
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.183.81100.26Consumer Discretionary
IMD Imdex Drilling company is well supported by instos and should benefit from any rebound in exploration activity.183.64-44.72Materials
DTL Data#3 Well respected IT company that receives little press coverage.183.2312.4Information Technology
IFM Infomedia Interesting tech play in the car parts market. Strong share price gain but gets little air play.182.90130.97Information Technology
SFH Specialty Fashion Group In early stages of turnaround. Can the women's apparel retailer sustain the momentum?178.7893.57Consumer Discretionary
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.176.12-23.11Financials
HSN Hansen Technologies Operates in a high potential/growth industry but is not covered by press or brokers.164.5923.94Information Technology
CKF Collins Foods One of the few food franchise listed companies.159.0362.03Consumer Discretionary
BGL BigAir Group The wireless microcap has gained strong following over past year or two but is often overlooked by investors and the press.147.7954.65Telecommunication Services
MLB Melbourne IT A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.138.3713.46Information Technology
ESV Eservglobal Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage128.26194.29Information Technology
AZZ Antares Energy Liquid with good insto support. Already in production with exploration upside in Texas.127.50-5.66Energy
UBI Universal Biosensors IncWell regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.125.71-15.29Health Care
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.125.01-14.41Consumer Discretionary
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.125.01-60.38Materials
LCM LogiCamms Strong price performance and reasonable valuation attracting interest.124.5673.31Industrials
NEA Nearmap A stellar performer with an Interesting business that offers high quality aerial maps to companies & government.118.021116.67Information Technology
WDS WDS Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.117.2439.12Industrials
REX Regional Express Holdings Well run airline that is overshadowed by Virgin and Qantas.116.14-9.83Industrials
GHC Generation Healthcare REITOne of the more interesting REITs. Income is more defensive than typical property stock and its greenfield expansion gives it earnings growth potential.112.8933.3Financials
AMA AMA Group Good turnaround story but under the automotive services group is radar of most.111.3056.34Consumer Discretionary
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.94.0765.16Consumer Discretionary
CAA Capral An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose. 91.8613.89Materials
BOL Boom Logistics Crane hire group is riding out the downturn in construction.  It's widely held by instos and is very liquid.91.77-40Industrials
POH Phosphagenics Sizable biotech with a game changing FY14 year ahead. Good insto following but questions of poor audit and governance standard could dog company.89.80-29.6Health Care
DRM Doray Minerals Widely held by instos. One of the more favoured gold explorers by brokers.89.38-23.25Materials
CLV Clover Corp One of the star performers in 2012. Operates in growing but relatively stable niche.88.370.38Health Care
RUL RungePincockMinarco IT company to resource industry. Facing tough operating climate with new CEO trying to restructure and turnaround company.84.1038.37Industrials
AOH Altona Mining Noteworthy copper play with Xstrata pull-out of Roseby project in Australia and the good ramp up of its Finnish project.79.83-47.37Materials
PEN Peninsula Energy Widely held by instos and large free float. It's the only uranium miner on the list.76.97-3.7Energy
MNW Mint Wireless Huge market potential if the mobile card payment solutions provider can gain market traction. Management aiming for $1 billion in transaction value a year.72.02#N/A N/AInformation Technology
TAN  Tandou The only direct equity exposure to cotton prices. Also trades water rights and receives little press.70.1522.06Consumer Staples
LGD Legend Corp Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.66.951.92Information Technology
CKL Colorpak The small cap packaging company has grown via acquisitions over past few years.66.4569.11Materials
YTC YTC Resources Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.63.26-20Materials
CUV Clinuvel Pharmaceuticals Interesting skin disorder treatment developer that has done reasonably well over past year61.917.64Health Care
OTH Onthehouse Holdings Alternative small cap to online property leader REA Group. It is trying to use more timely housing data as a competitive edge against REA.61.6342.76Consumer Discretionary
EML Emerchants Trying to change way corporates and governments disburse cash with its trackable and controllable debit card offering. If company can get $1 billion in loaded value on cards, the stock will surge.57.97675Financials
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.56.48-85.03Materials
TSM ThinkSmart Potential turnaround story worth keeping eye on.55.1878.95Financials
UML Unity Mining Growing Tassie gold producer with high free float. Valuation looks compelling too.50.54-48.57Materials
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.48.57-5.99Industrials
EBT eBet Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.40.61145.61Consumer Discretionary
NTC NetComm Wireless Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.30.89128.57Information Technology
PGC Paragon Care Emerging hospital equipment supplier that has been ignored by market.15.3777.5Health Care
Source: Eureka Report, Bloomberg

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