The small cap with the biggest earnings upgrade

Gaming machines distributor eBet has hit the upgrade jackpot.

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

Company

Reason

EPS change (%)

Est FY14 P/E (x)

Total rtn 1yr (%)

Market Cap ($m)

eBet

Sale approval for gaming machines and improved recurring revenue outlook.

36.92

6.35

67.41

17.32

NEXTDC

Bullish company update and new sales contract.

27.05

n.a.

44.29

459.08

Tandou

Company profit upgrade for FY13.

13.46

13.9

2.7

58.70

G8 Education

Acquisitions and increase in dividend forecast.

12.11

16.8

180.8

666.77

Select Harvests

Increase crop estimate for FY13.

10.73

10.14

170.26

181.58

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.

Uncapped 100

Small cap stocks covered by the Uncapped team
CodeNameRationaleMarket 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.1,207,288,33047.94Industrials
MTU M2 Telecommunications Group Amazing growth story and well run company. High free float and strong insto support.980,763,24578.86Telecommunication Services
BRG Breville Group Well covered but good candidate for core holding due to good track record.922,375,85471.67Consumer Discretionary
NHF NIB Holdings /AustraliaOnly listed health insurer. Widely held. Good performer.913,128,66251.16Financials
ARP ARB Corp Well covered but good candidate for core holding due to quality management.824,837,21931.58Consumer Discretionary
MRM Mermaid Marine Australia Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.800,863,46433.35Industrials
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.670,333,069102.7Health Care
AAD Ardent Leisure GroupWidely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.668,310,66944.38Consumer Discretionary
GEM G8 Education Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.666,771,484180.8Consumer Discretionary
AUB Austbrokers Holdings The insurance broker is a strong performer. Widely held and well liked by small cap investors.638,475,76965.15Financials
ACR Acrux One of the most successful Australian biotechs in recent history. Widely held by instos.589,486,877-13.59Health Care
SGN STW Communications Group One of few companies able to benefit from online shift. Widely held and good insto support.560,312,07356.58Consumer Discretionary
RFG Retail Food Group Owns a number of well know franchise brands. Widely followed by instos.504,175,29356.27Consumer Discretionary
NXT NEXTDC The cloud computing company is an IT sector darling. Fairly widely held and followed.459,078,67447.16Telecommunication Services
AMM Amcom Telecommunications Well covered junior telco but good candidate for core holding.453,653,41278.55Telecommunication Services
TOX Tox Free Solutions Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.453,217,92641.1Industrials
CCV Cash Converters International Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.441,875,12277.56Consumer Discretionary
CCP Credit Corp Group Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.436,362,54969.52Industrials
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.414,866,730-9.05Materials
BGA Bega Cheese Corporate interest in Australian food companies makes the cheese maker worth following.399,407,71576.64Consumer 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.376,691,74270.31Energy
CWP Cedar Woods Properties Property developer with good ROE and earnings growth track record.376,334,50352.59Financials
SLX Silex Systems Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.372,845,642-33.23Information Technology
FGE Forge Group One of the better performers in its industry. Good track record and potential core holding.370,095,9172.33Industrials
HZN Horizon Oil One of better regarded small energy stocks that doesn't receive much media attention.368,961,60916.07Energy
MYS MyState Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.366,042,78650.14Financials
BRU Buru Energy Substantial size but not often covered by press. Widely held with good insto support.328,843,719-64.07Energy
RKN Reckon Fierce competition for cloud base accounting software puts it in firing line.323,720,03220.76Information Technology
UXC UXC Company has turned corner and enjoyed re-rating. What's next?319,614,86894.02Information Technology
UNS Unilife CorpThe 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.306,530,853-20.57Health Care
TGA Thorn Group One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.295,425,59847.54Consumer Discretionary
RCR RCR Tomlinson Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?293,335,23637.17Industrials
MOC Mortgage Choice Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.259,205,68874.49Financials
AEU Australian Education TrustWell performing childcare centre property owner. Good yield story and outlook. 240,387,58947.23Financials
NWH NRW Holdings One of the better regarded mining & civil contractors with good track record in delivering on projects.238,449,249-67.42Industrials
MYX Mayne Pharma Group Sizeable generic drug maker with interesting board members.236,441,71144Health Care
SPL Starpharma Holdings Noteworthy for its good pipeline of innovations. Well run, widely followed.235,566,406-34.65Health Care
RIC Ridley Corp High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.230,862,823-14.55Consumer 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.214,987,00035.11Financials
PFL Patties Foods Illiquid stock but has suite of well recognised consumer brands. Defensive yield.208,598,465-2.83Consumer Staples
AJA Astro Japan Property GroupStrong leverage to Japanese economy makes this an interesting stock to watch.202,979,49215.96Materials
SIV Silver Chef Strong jump in the share price of the equipment financing group has attracted a good following.199,901,077128.97Industrials
DWS DWS Will be a big beneficiary if governments start spending on IT again.193,249,63410.77Information 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.192,789,352-2.03Financials
NWT Newsat Potential large cap if it can launch its own satellite in 2015.186,154,587-37.27Telecommunication Services
SHV Select Harvests Noteworthy for turbulent past and exposure to soft commodity market.182,157,242181.54Consumer Staples
MXI MaxiTRANS Industries Transport equipment maker posted good interim result. Has appealing yield and growth.179,393,55578.4Industrials
MLB Melbourne IT A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.179,032,30338.64Information 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 further178,351,303103.67Industrials
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.177,430,000N/AMaterials
GXL Greencross Acquisitive vetinary group. Good profit growth and share price performance, but gets little press.177,054,352112.13Health Care
DTL Data#3 Well respected IT company that receives little press coverage.166,292,9538.85Information Technology
VOC Vocus Communications Telecom stocks are in favour but Vocus is one of the least covered161,792,1758.66Telecommunication Services
NAN Nanosonics A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.157,193,23716.5Health Care
CKF Collins Foods One of the few food franchise listed companies.156,240,00573.06Consumer Discretionary
GID GI Dynamics IncLargely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal shealth on diabetics.149,750,168-40.43Health Care
SFH Specialty Fashion Group In early stages of turnaround. Can the women's apparel retailer sustain the momentum?148,982,98652.06Consumer Discretionary
HSN Hansen Technologies Operates in a high potential/growth industry but is not covered by press or brokers.143,671,1435.99Information 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.143,379,62395.31Consumer Discretionary
IFM Infomedia Interesting tech play in the car parts market. Strong share price gain but gets little air play.141,163,239154.37Information Technology
REX Regional Express Holdings Well run airline that is overshadowed by Virgin and Qantas.138,230,59115.72Industrials
BNO Bionomics One of the larger cancer treatment developers in this market.135,648,16318.55Health Care
IPP iProperty Group Worth watching as it is trying to be the REA Group of Asia.134,996,231-20.74Information Technology
IMD Imdex Drilling company is well supported by instos and should benefit from any rebound in exploration activity.133,650,467-59.89Materials
POH Phosphagenics Sizable biotech with a game changing FY14 year ahead. Good insto following.127,558,243-10.71Health Care
TFC TFS Corp The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.120,237,389-2.27Materials
AZZ Antares Energy Liquid with good insto support. Already in production with exploration upside in Texas.119,849,99828.77Energy
UBI Universal Biosensors IncWell regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.117,055,31317.54Health 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.111,617,744-15.92Consumer 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.111,337,097-26.67Materials
ACL AlchemiaOne of the few biotechs with revenue stream. Good pipeline of oncology treatments.103,694,023-32.63Health 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.96,742,92065.28Telecommunication Services
CLV Clover Corp One of the star performers in 2012. Operates in growing but relatively stable niche.94,979,47761.83Health Care
AMA AMA Group Good turnaround story but under the automotive services group is radar of most.89,488,472106.57Consumer Discretionary
LCM LogiCamms Strong price performance and reasonable valuation attracting interest.87,905,05222.44Industrials
NEA Nearmap A stellar performer with an Interesting business that offers high quality ariel maps to companies & government.87,225,151486.96Information Technology
ESV Eservglobal Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage87,166,10066.67Information Technology
CAA Capral An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose. 76,977,85939.29Materials
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.74,407,898-77.48Materials
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.71,426,20159.35Consumer Discretionary
CUV Clinuvel Pharmaceuticals Interesting skin disorder treatment developer that has done reasonably well over past year68,790,66511.46Health Care
AOH Altona Mining Noteworthy copper play with Xstrata pullout of Roseby project in Australia and the good ramp up of its Finnish project.68,769,051-43.48Materials
PEN Peninsula Energy Widely held by instos and large free float. It's the only uranium miner on the list.65,020,889-29.03Materials
RUL RungePincockMinarco IT company to resource industry. Turnaround potential under new CEO.60,778,44218.55Industrials
TAN  Tandou The only direct equity exposure to cotton prices. Also trades water rights and receives little press.58,697,1512.7Consumer Staples
CKL Colorpak The small cap packaging company has grown via acquisitions over past few years.57,483,68824.41Materials
DRM Doray Minerals Widely held by instos. One of the more favored gold explorers by brokers.56,746,708-53.76Materials
WDS WDS Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.50,659,214-7.56Industrials
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.50,421,00134.65Industrials
LGD Legend Corp Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.49,387,554-24.92Information Technology
UML Unity Mining Growing Tassie gold producer with high free float. Valuation looks compelling too.49,139,847-41.67Materials
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 100.43,568,27592.38Information Technology
TSM ThinkSmart Potential turnaround story worth keeping eye on.42,204,89517.78Financials
YTC YTC Resources Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.39,317,150-41.18Materials
BOL Boom Logistics Crane hire group is riding out the downturn in construction.  It's widely held by instos and is very liquid.39,059,681-61.4Industrials
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.29,993,849-16.31Consumer Discretionary
NTC NetComm Wireless Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.29,791,10988.46Information Technology
MBO Mobilarm Unique product that could change global maritime safety practices with its man-overboard location beacon.19,471,443N/AInformation Technology
EBT eBet Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.17,392,79468.15Consumer Discretionary
PGC Paragon Care Emerging hospital equipment supplier that has been ignored by market.11,176,83537.5Health Care
Source: Eureka Report, Bloomberg

Related Articles