VIDEO: Under the Radar’s Small Cap takeover frenzy

Richard Hemming

We look at why Aussie Small Caps are being snapped up. A couple of buying opportunities in our Buy/Sell/Hold rundown and what’s coming up, including our introduction of Price Targets and associated alerts. You can’t be a successful investor without this!

1. Big Picture: it’s a takeover frenzy!

Takeovers have been predominant because investors big as well as small are hunting for value. A lot of the takeovers have been from offshore companies, which also benefit from the weakening AUD. Growth is hard to come by!

Against this takeover frenzy I think the results of the company’s we’ve covered has been mixed. There have been few surprises, but a few companies commented that the elections have been impacting their business and the associated uncertainty. Consumers are holding off spending. A good example is GTN (GTN), which provides traffic updates for radio and fund this by selling advertising spots. You might have heard of Vic Lorusso – he’s a director.

2. How important is dividend franking and what do the potential changes mean?

Dividends are important for both big and small caps and for all investors. Lately there has been a great deal of noise over the issue of franking credits and what a potential Shorten ALP Government would mean. Under the Radar makes clear, both numerically and in a short explanation, what the effects are. We emphasise why sustainable income growth is more important than income per se, for any investor.

3. Stocks hitting the ball out of the park

Look, we’ve definitely had some stocks taking off: Nanosonics (NAN) and Nearmap (NEA) come to mind, which have really captured the market’s imagination with their strong business models and offshore growth. But we’ve also been emphasing the need to take risk off the table from these growth stocks by taking some profits because they don’t often pay dividends and there is high risk that the party stops.

4. Stocks finding life difficult can be opportunities

Overwhelmingly though there has been uncertainty among stocks big and small. This means investment opportunity, which is exactly what you had when we were buying those companies taken over recently – NetComm (NTC), Spicers (SRS), which was called Paperlinx and Ruralco (RHL).

All those stocks were beaten up to varying degrees by the stock market but had potential, even if this wasn’t immediately evidence in the P&L. What they did have was strong market share, which was growing, and strong balance sheets, which meant they could fund that growth.

Growing market share is much easier for these companies than it is for their bigger counterparts. What is also easier is generating strong returns on a much smaller asset base. It’s all about operating leverage at the small end.

5. BUY/HOLD/SELL

Buy: GBST (GBT)
We looked at GBST because it was coming up on our screens, its price having cratered since 2015. Being a software company, we were worried that we had missed something, or rather was the company’s technology being superseded. We spoke to our industry contacts and gained more confidence that its big spending program wasn’t misguided. We think that the momentum from its first half result will continue because A. the company is great value trading on an EBITDA multiple of 5x; and B. It’s $50m investment program is tracking on time and on budget.

Hold: The Reject Shop (TRS)
The company received an opportunistic bid from Raphael Geminder, which was not successful but underlined the value here. It’s got net cash, it stabilised its earnings in December and it’s got a good niche in retail.

The TRS offer is outside of the mainstream; it’s selling stuff that isn’t vulnerable to online competition; It takes advantage of visitors to shopping malls for other things, who are interested in wrapping paper; dishwashing powder.

The company got the Xmas spirit right – turns out people are happy to spend on tinsel; it’s a cheap way to get the kids excited.

Sell: Alliance aviation (AQZ)
Qantas in there; foot on neck not about to overpay; we don’t see a deal happening quickly.

6. What’s coming up?

This week we’ve gone through our 100 plus small cap universe and we revamp our Best Buys list.

What’s also exciting is our Blue Chip Value research; We’re introducing price targets for all 50 stocks as well as regular updates on big moves and what to do. You can’t live without this!

About the Author

Richard Hemming

Investment analyst and Editor of Under the Radar Report

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