It’s easy to be blinded by the onslaught of profit warnings and earnings downgrades in this market, but there are a handful of small caps that are bucking the trend.
You’ll miss them if you blink. Around a quarter of the emerging stocks in the Uncapped 100 actually received a 2013-14 earnings upgrade from analysts in the past four weeks.
While most of the upward adjustments are not material to the value of the stock, the one that stands out in my mind is eBet (EBT).
Uncapped 100 stocks with the biggest consensus earnings upgrade over the past four weeks
EPS change (%)
Est FY14 P/E (x)
Total rtn 1yr (%)
Market Cap ($m)
Sale approval for gaming machines and improved recurring revenue outlook.
Bullish company update and new sales contract.
Company profit upgrade for FY13.
Acquisitions and increase in dividend forecast.
Increase crop estimate for FY13.
Source: Eureka Report, Bloomberg
News that the gaming systems company has finally received regulatory approval for its WMS poker machines in New South Wales and the Australian Capital Territory was one of the triggers for the 37% earnings per share (EPS) upgrade in the consensus forecast to 17.8 cents for 2013-14.
eBet has an exclusive contract with US-listed WMS to distribute WMS’ electronic gaming machines in ACT, Northern Territory, South Australia, Western Australia and NSW – with the latter being Australia’s largest pokies market.
WMS machines are more engaging than the typical machines and trials done at some local RSL clubs have shown that punters spend 30% more on a WMS machine than the floor average, according to eBet’s chief executive, Tony Toohey.
The upgrade is the biggest among stocks in the Uncapped 100 in the past four weeks and is something investors should get excited about.
While eBet’s total normalised revenue for the six months to end December increased 8% to $21.4 million, sales of gaming machines tumbled 28% to $4 million because the WMS machines had not yet passed the national gaming standards.
Now that eBet can start placing the machines in NSW and the ACT, it should bolster confidence of its ability to post its fourth consecutive year of revenue growth in 2012-13.
“The full annualised benefit [of the WMS machines] we think will go back to what we made in FY12 [in machine sales],” said Toohey. Machine sales that year hit $11 million.
“The other thing is we now have 55% of our business that is recurring through licensing and servicing contracts. The more we expand our systems footprint, the more recurring revenue we get.”
I suspect we will see another round of earnings upgrades flow through, particularly for 2012-13. Analysts are tipping eBet’s EPS to surge by a third this financial year to around 12 cents as total sales climb 3.4% to $42.2 million.
However, this suggests that eBet will produce similar sales and profit figures in the second half to its first half.
eBet has traditionally recorded stronger second-half results due to the nature of its business, and this year should be no different with a likely 40%/60% split between the two periods.
But even without further upgrades, and despite the fact that the stock has run up 68% over the past year, it is looking attractively priced on a one-year forward price-earnings (P/E) that is a little over six times.
While there are no real direct comparisons on the Australian market for the tiny $17 million market cap company, I believe fair value is closer to 10 times. This implies a further 60% plus upside to its share price.
What also strikes me about eBet is that it appears to be the small cap stock for the times. Professional small cap investors are shunning anything related to the mining industry but are keen to look at stocks with a transparent earnings outlook, good growth prospects and that are operating in a relatively stable industry.
eBet checks most of these boxes, and its 33% correction since hitting a five-year high of $1.70 in February represents a good entry point.
On the downside, the market minnow is operating in an industry filled with giants, and my bullish outlook on eBet depends on the company being able to gain significant market share of poker machines with the WMS offering.
We may have to wait a year or so to see concrete proof of that.
Brendon Lau does not own any shares in eBet.
|Small cap stocks covered by the Uncapped team|
|Code||Name||Rationale||Market cap ($m)||Total return 1-year (%)||Sector (GICS)|
|MMS||McMillan Shakespeare||One of the best performers since the GFC, but doesn't get much press or analyst coverage. Good management team.||1,207,288,330||47.94||Industrials|
|MTU||M2 Telecommunications Group||Amazing growth story and well run company. High free float and strong insto support.||980,763,245||78.86||Telecommunication Services|
|BRG||Breville Group||Well covered but good candidate for core holding due to good track record.||922,375,854||71.67||Consumer Discretionary|
|NHF||NIB Holdings /Australia||Only listed health insurer. Widely held. Good performer.||913,128,662||51.16||Financials|
|ARP||ARB Corp||Well covered but good candidate for core holding due to quality management.||824,837,219||31.58||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.||800,863,464||33.35||Industrials|
|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.||670,333,069||102.7||Health Care|
|AAD||Ardent Leisure Group||Widely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.||668,310,669||44.38||Consumer Discretionary|
|GEM||G8 Education||Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.||666,771,484||180.8||Consumer Discretionary|
|AUB||Austbrokers Holdings||The insurance broker is a strong performer. Widely held and well liked by small cap investors.||638,475,769||65.15||Financials|
|ACR||Acrux||One of the most successful Australian biotechs in recent history. Widely held by instos.||589,486,877||-13.59||Health Care|
|SGN||STW Communications Group||One of few companies able to benefit from online shift. Widely held and good insto support.||560,312,073||56.58||Consumer Discretionary|
|RFG||Retail Food Group||Owns a number of well know franchise brands. Widely followed by instos.||504,175,293||56.27||Consumer Discretionary|
|NXT||NEXTDC||The cloud computing company is an IT sector darling. Fairly widely held and followed.||459,078,674||47.16||Telecommunication Services|
|AMM||Amcom Telecommunications||Well covered junior telco but good candidate for core holding.||453,653,412||78.55||Telecommunication Services|
|TOX||Tox Free Solutions||Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.||453,217,926||41.1||Industrials|
|CCV||Cash Converters International||Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.||441,875,122||77.56||Consumer Discretionary|
|CCP||Credit Corp Group||Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.||436,362,549||69.52||Industrials|
|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.||414,866,730||-9.05||Materials|
|BGA||Bega Cheese||Corporate interest in Australian food companies makes the cheese maker worth following.||399,407,715||76.64||Consumer Staples|
|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.||376,691,742||70.31||Energy|
|CWP||Cedar Woods Properties||Property developer with good ROE and earnings growth track record.||376,334,503||52.59||Financials|
|SLX||Silex Systems||Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.||372,845,642||-33.23||Information Technology|
|FGE||Forge Group||One of the better performers in its industry. Good track record and potential core holding.||370,095,917||2.33||Industrials|
|HZN||Horizon Oil||One of better regarded small energy stocks that doesn't receive much media attention.||368,961,609||16.07||Energy|
|MYS||MyState||Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.||366,042,786||50.14||Financials|
|BRU||Buru Energy||Substantial size but not often covered by press. Widely held with good insto support.||328,843,719||-64.07||Energy|
|RKN||Reckon||Fierce competition for cloud base accounting software puts it in firing line.||323,720,032||20.76||Information Technology|
|UXC||UXC||Company has turned corner and enjoyed re-rating. What's next?||319,614,868||94.02||Information Technology|
|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.||306,530,853||-20.57||Health Care|
|TGA||Thorn Group||One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.||295,425,598||47.54||Consumer Discretionary|
|RCR||RCR Tomlinson||Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?||293,335,236||37.17||Industrials|
|MOC||Mortgage Choice||Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.||259,205,688||74.49||Financials|
|AEU||Australian Education Trust||Well performing childcare centre property owner. Good yield story and outlook.||240,387,589||47.23||Financials|
|NWH||NRW Holdings||One of the better regarded mining & civil contractors with good track record in delivering on projects.||238,449,249||-67.42||Industrials|
|MYX||Mayne Pharma Group||Sizeable generic drug maker with interesting board members.||236,441,711||44||Health Care|
|SPL||Starpharma Holdings||Noteworthy for its good pipeline of innovations. Well run, widely followed.||235,566,406||-34.65||Health Care|
|RIC||Ridley Corp||High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.||230,862,823||-14.55||Consumer Staples|
|IMF||IMF Australia||Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.||214,987,000||35.11||Financials|
|PFL||Patties Foods||Illiquid stock but has suite of well recognised consumer brands. Defensive yield.||208,598,465||-2.83||Consumer Staples|
|AJA||Astro Japan Property Group||Strong leverage to Japanese economy makes this an interesting stock to watch.||202,979,492||15.96||Materials|
|SIV||Silver Chef||Strong jump in the share price of the equipment financing group has attracted a good following.||199,901,077||128.97||Industrials|
|DWS||DWS||Will be a big beneficiary if governments start spending on IT again.||193,249,634||10.77||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.||192,789,352||-2.03||Financials|
|NWT||Newsat||Potential large cap if it can launch its own satellite in 2015.||186,154,587||-37.27||Telecommunication Services|
|SHV||Select Harvests||Noteworthy for turbulent past and exposure to soft commodity market.||182,157,242||181.54||Consumer Staples|
|MXI||MaxiTRANS Industries||Transport equipment maker posted good interim result. Has appealing yield and growth.||179,393,555||78.4||Industrials|
|MLB||Melbourne IT||A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.||179,032,303||38.64||Information Technology|
|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||178,351,303||103.67||Industrials|
|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.||177,430,000||N/A||Materials|
|GXL||Greencross||Acquisitive vetinary group. Good profit growth and share price performance, but gets little press.||177,054,352||112.13||Health Care|
|DTL||Data#3||Well respected IT company that receives little press coverage.||166,292,953||8.85||Information Technology|
|VOC||Vocus Communications||Telecom stocks are in favour but Vocus is one of the least covered||161,792,175||8.66||Telecommunication Services|
|NAN||Nanosonics||A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.||157,193,237||16.5||Health Care|
|CKF||Collins Foods||One of the few food franchise listed companies.||156,240,005||73.06||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.||149,750,168||-40.43||Health Care|
|SFH||Specialty Fashion Group||In early stages of turnaround. Can the women's apparel retailer sustain the momentum?||148,982,986||52.06||Consumer Discretionary|
|HSN||Hansen Technologies||Operates in a high potential/growth industry but is not covered by press or brokers.||143,671,143||5.99||Information Technology|
|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.||143,379,623||95.31||Consumer Discretionary|
|IFM||Infomedia||Interesting tech play in the car parts market. Strong share price gain but gets little air play.||141,163,239||154.37||Information Technology|
|REX||Regional Express Holdings||Well run airline that is overshadowed by Virgin and Qantas.||138,230,591||15.72||Industrials|
|BNO||Bionomics||One of the larger cancer treatment developers in this market.||135,648,163||18.55||Health Care|
|IPP||iProperty Group||Worth watching as it is trying to be the REA Group of Asia.||134,996,231||-20.74||Information Technology|
|IMD||Imdex||Drilling company is well supported by instos and should benefit from any rebound in exploration activity.||133,650,467||-59.89||Materials|
|POH||Phosphagenics||Sizable biotech with a game changing FY14 year ahead. Good insto following.||127,558,243||-10.71||Health Care|
|TFC||TFS Corp||The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.||120,237,389||-2.27||Materials|
|AZZ||Antares Energy||Liquid with good insto support. Already in production with exploration upside in Texas.||119,849,998||28.77||Energy|
|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.||117,055,313||17.54||Health 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.||111,617,744||-15.92||Consumer Discretionary|
|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.||111,337,097||-26.67||Materials|
|ACL||Alchemia||One of the few biotechs with revenue stream. Good pipeline of oncology treatments.||103,694,023||-32.63||Health Care|
|BGL||BigAir Group||The wireless microcap has gained strong following over past year or two but is often overlooked by investors and the press.||96,742,920||65.28||Telecommunication Services|
|CLV||Clover Corp||One of the star performers in 2012. Operates in growing but relatively stable niche.||94,979,477||61.83||Health Care|
|AMA||AMA Group||Good turnaround story but under the automotive services group is radar of most.||89,488,472||106.57||Consumer Discretionary|
|LCM||LogiCamms||Strong price performance and reasonable valuation attracting interest.||87,905,052||22.44||Industrials|
|NEA||Nearmap||A stellar performer with an Interesting business that offers high quality ariel maps to companies & government.||87,225,151||486.96||Information Technology|
|ESV||Eservglobal||Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage||87,166,100||66.67||Information Technology|
|CAA||Capral||An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose.||76,977,859||39.29||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.||74,407,898||-77.48||Materials|
|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.||71,426,201||59.35||Consumer Discretionary|
|CUV||Clinuvel Pharmaceuticals||Interesting skin disorder treatment developer that has done reasonably well over past year||68,790,665||11.46||Health Care|
|AOH||Altona Mining||Noteworthy copper play with Xstrata pullout of Roseby project in Australia and the good ramp up of its Finnish project.||68,769,051||-43.48||Materials|
|PEN||Peninsula Energy||Widely held by instos and large free float. It's the only uranium miner on the list.||65,020,889||-29.03||Materials|
|RUL||RungePincockMinarco||IT company to resource industry. Turnaround potential under new CEO.||60,778,442||18.55||Industrials|
|TAN||Tandou||The only direct equity exposure to cotton prices. Also trades water rights and receives little press.||58,697,151||2.7||Consumer Staples|
|CKL||Colorpak||The small cap packaging company has grown via acquisitions over past few years.||57,483,688||24.41||Materials|
|DRM||Doray Minerals||Widely held by instos. One of the more favored gold explorers by brokers.||56,746,708||-53.76||Materials|
|WDS||WDS||Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.||50,659,214||-7.56||Industrials|
|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.||50,421,001||34.65||Industrials|
|LGD||Legend Corp||Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.||49,387,554||-24.92||Information Technology|
|UML||Unity Mining||Growing Tassie gold producer with high free float. Valuation looks compelling too.||49,139,847||-41.67||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.||43,568,275||92.38||Information Technology|
|TSM||ThinkSmart||Potential turnaround story worth keeping eye on.||42,204,895||17.78||Financials|
|YTC||YTC Resources||Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.||39,317,150||-41.18||Materials|
|BOL||Boom Logistics||Crane hire group is riding out the downturn in construction. It's widely held by instos and is very liquid.||39,059,681||-61.4||Industrials|
|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.||29,993,849||-16.31||Consumer Discretionary|
|NTC||NetComm Wireless||Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.||29,791,109||88.46||Information Technology|
|MBO||Mobilarm||Unique product that could change global maritime safety practices with its man-overboard location beacon.||19,471,443||N/A||Information Technology|
|EBT||eBet||Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.||17,392,794||68.15||Consumer Discretionary|
|PGC||Paragon Care||Emerging hospital equipment supplier that has been ignored by market.||11,176,835||37.5||Health Care|
|Source: Eureka Report, Bloomberg|