Four new stocks for the Uncapped 100

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.

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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.

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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.