Time to sharpen the selection

Performance table of Lau's "outperform" calls since June 2013

Company

Catalysts

1)

AMA Group (AMA)

The automotive services and products group has staged an impressive turnaround over last few years under its new CEO, who has a plan to double earnings in the next three-to-four years. That growth ambition is not reflected in the share price and the stock will re-rate once there are signs of strong earnings growth.

2)

Collins Foods (CKF)

The fast food group is attractive for its ability to grow dividends over the next few years. Stocks that can do this have a high tendency to outperform the wider market.

3)

eBet (EBT)

The company is well placed to be a market leader for gaming management solutions in NSW, Queensland and Victoria. The three states have more than 170,000 machines, or 87% of the national market.

4)

eServGlobal (ESV)

The mobile funds transfer solutions company has developed enough scale in its business to grow significantly from here. The fact that MasterCard has bought into its joint-venture with European telco BICS is a testament of this.

5)

GI Dynamics (GID)

Its intestinal liner is proven to help with weight loss and the company is expanding its global network of clinics, but the real kicker for the stock is securing US approval to use its liner to treat diabetes.

6)

Mint Wireless (MNW)

Mint is a market leader in a rapidly emerging niche market. If its mobile credit card processing system can establish itself as the industry standard, the stock will significantly re-rate. The next 12 months is critical.

7)

Nanosonics (NAN)

Growing international acceptance of its disinfection device though its partnership with GE will see the stock trade well above $1.

8)

NetComm Wireless (NTC)

Management has positioned the company as a significant machine-to-machine (M2M) component supplier. The M2M market is tipped to grow exponentially and if NetComm can ride this wave, it won’t stay a $70 million market cap company for long.

9)

NewSat (NWT)

This is one of those “blue-sky” stocks. The company’s future hinges on a successful launch of its communication satellite in late 2014 or early 2015.

10)

NRW Holdings (NWH)

The engineering contractor is forecasting a pick-up in construction activity this year, but few are willing to give it the benefit of the doubt. The stock is very cheap if management is proven right, and few would argue that NRW has a strong reputation in the market.

11)

Retail Food Group (RFG)

Management is counting on its pizza franchise to deliver its next phase of growth. So far, the signs are good and I expect it to keep increasing dividends like Collins Foods.

12)

Ridley Corporation (RIC)

Ridley is expected to turnaround last year’s losses and post a profit. The stock is a good way of gaining exposure to the food export thematic and the stock valuation looks undemanding.

13)

Silex Systems (SLX)

The event that would set the stock on fire is the final decision by GLE to build a commercial uranium enrichment facility using the Silex laser. Some doubt this will happen due to the poor sentiment towards nuclear power, but there are signs that nuclear power will continue to be an integral part of the energy equation.

14)

Specialty Fashion Group (SFH)

The acquisition of Rivers should deliver substantial earnings growth to the group in 2014-15, and this is above and beyond the company’s initiative to improve its Millers stores.

15)

Starpharma Holdings (SPL)

Its condom manufacturing partner secured approval to sell product coated in Starpharma’s protective gel in Japan and approval from other parts of the world should be forthcoming. Starpharma also has dendrimer technology and I expect to see a major partnering deal this year.

16)

STW Communications (SGN)

I am expecting the rebound in discretionary spend to pick up speed this year and the advertising group is well placed to benefit from the potential trend. Further, its exposure to digital advertising means it is a less risky bet than traditional media stocks.

17)

ThinkSmart (TSM)

The consumer finance company has undergone a major restructure that will see it become a UK-focussed business. The market is still unsure how to value the stock, but there is significant upside to its valuation.

18)

Tiger Resources (TGS)

The emerging copper producer has been re-rated over the past six months, but the stock is set to head higher as it expands production in Africa. Further, its strong management team and corporate appeal makes Tiger one of the most compelling mining juniors to watch.

19)

Universal Biosensors (UBI)

Delays in the launch of its coagulation testing device are hurting the stock. Management now expects the device to reach the market in the September quarter. Management’s credibility is on the line. If it keeps its promise, the stock will re-rate materially.

20)

Wide Bay Australia (WBB)

There are two potential drivers for the Queensland-based financial services company: better-than-expected conditions in the Queensland residential market, particularly around regional towns; and earnings growth from its goal to become a full-service bank.

Company

Coverage cessation rationale

Final thoughts

1)

WDS (WDS)

Downgrade to “neutral” from “outperform” on valuation.

Management has done an exceptional job in navigating what can only be called a very challenging environment for mining contractors. But its strong outperformance has brought the stock close to fair value. There is probably still some upside left and its yield of around 6% will lend support, but the medium-term upside is relatively modest and there are arguably cheaper buys in the sector.

2)

LogiCamms (LCM)

Downgrade to “neutral” from “outperform” on disappointing first-half dividend.

Companies that can sustainably grow dividends have a 70% chance of outperforming the market, even if dividend growth is modest. I recommended the stock on this basis, but management was unable to deliver on this front.

3)

M2 Telecommunications Group (MTU)

The stock has grown too big.

There is further upside to the stock in my opinion and I think the market is underestimating M2’s organic growth potential. But the stock doesn’t quite fit the definition of a “small cap” as its market cap has grown too far ahead of the $1 billion mark.

4)

Horizon Oil (HZN)

Cutting back coverage of resources sector.

Horizon needs to secure the petroleum development licence from the PNG government before its stock can break out of its trading range. The licence will trigger a $74 million payment from Osaka Gas and will help offset the disappointing reserves downgrade at its Maari field.

5)

Altona Mining (AOH)

Cutting back coverage of resources sector.

I still like the emerging copper producer as its flagship Outokumpu copper-gold project in Finland has been delivering ahead of expectation. The key driver for the stock is whether it can find the capital to get its Queensland Roseby project up and running.

6)

Beadell Resources (BDR)

Cutting back coverage of resources sector.

This is one of the best placed ASX-listed gold miners. While costs have been rising, it is still one of the world’s lowest-cost gold producers. But the stock performance is driven more by the vagaries of the gold price than management, and that supports my decision to stop covering Beadell.

7)

YTC Resources (YTC)

Cutting back coverage of resources sector.

Construction of its flagship Hera project is progressing well but further exploration success will be necessary to drive the diversified miner’s share price significantly higher, and I believe YTC has only scratched the surface in terms of proving up the ore body.