12 ASX Small Caps

Richard Hemming

This Financial Year, Under the Radar Report has initiated coverage on 12 new Small Caps.

The good news is that because of our investing bias towards long-term, with a horizon of over 3 years, we remain very positive on most of these stocks. There remains significant money to be made from these Small Caps.

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What do we look for in ASX stocks?

We have outlined our criteria previously, but it comes down to solid foundations – a strong balance sheet (net cash or moderate amounts of debt) and cash flow. Most important in Small Caps is that the business has a strong niche in which it can maintain pricing and increase market share. These are the types of companies you should be looking to own and they come in many forms. Sometimes they are in transition (turnarounds), they might be out of favour, they are potentially loss making but generating sales growth, they could be developing an asset.

Protection also exists in the form of dividends. Over 50% of our Small Caps pay dividends. Most importantly, investing successfully is about generating growth and achieving diversification. Under the Radar Report is invaluable for achieving this.

You have to be brave when investing and Under the Radar Report is about helping you to take risks. We do the leg work to investigate when it can pay big dividends.

Airtasker (ASX: ART)

RETURN (inc div) -4.6%
Sector:
E-Commerce services
Current Price: $1.14
Market Cap: $472M
Dividend Yield: 0%
Net Cash: $29.7M

E-Commerce services ART is at around the same price we recommended it in early May, which followed the initial surge and subsequent sell-off post its IPO. Management now expects to exceed FY21 prospectus forecasts of revenue and gross merchandise value, or the value of the work Airtasker facilitates, increased to $25.5m-$26m and $150m respectively.

Last month, the provider of an online market place for local services also announced a $20m placement at $1 a share to fund the $3.4m acquisition of Zaarly in the US, a marketplace focussed on home services that was about to be shuttered due to insufficient scale. This is to be invested in marketing and operations in key cities in the UK and the US, in a total market worth $500bn. Airtasker will use Zaarly to kickstart its US market presence, overcoming what it calls the chicken and egg problem through a relatively inexpensive acquisition.

ART will migrate Zaarly services and demand onto its own horizontal marketplace, which almost unlimited categories of types of work. Individuals or businesses that quote for work are called Taskers. Zarley’s product gives the ability to re-book, creating an opportunity for Taskers to upsell customers and for long-term service relationships, addressed through a different pricing model. n

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Austco Healthcare (ASX: AHC)

RETURN (inc div) +15.0%
Sector:
Health IT
Current Price: $0.12
Market Cap: $34M
Dividend Yield: 0%
Net Cash: $6.1M

We tipped the stock this month and its price has appreciated to close to our valuation. We still like AHC but the big difficulty is that it is almost impossible to get stock.

Ausco’s nurse call product and services are in high demand and the business is profitable. The main problem is that it is sub-scale. Rather than $30m annual sales, this company requires over $100m. Over 55% of the stock is controlled by three shareholders leaving a free float that is too small for meaningful access to minorities. Unless you can get stock at less than our 13 cent valuation, this is one stock to be aware of for when scale does emerge, whether through a meaningful contract or (more likely) an acquisition.

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Damstra (ASX: DTC)

RETURN (inc div) -33.5%
Sector:
Workplace management solutions
Current Price: $0.912
Market Cap: $170M
Dividend Yield: 0%
Net Cash: $4.4M

We like Damstra’s business model, but admit that the company has made some rookies errors in its journey as a listed company on the ASX. The main mistake has been management’s ability to communicate its business risk and manage investor expectations.

The workplace services specialist was founded as a labour hire company in 2002 by current CEO Christian Damstra. In no small way assisted by its $100m acquisition of Vault Intelligence in 2020, DTC has built an impressive niche in health & safety, operating in some 11 countries, although revenues remain heavily skewed to Australia. The company is a developer and implementer of integrated hardware and software as a service (SaaS).

Its key problem has been organic growth, which is lower than expected when you strip out the Vault sales. Forecast FY21 revenue is now $28.5m-$30.5m, a substantial downgrade from the guidance of $33m-$35m at the time of the transaction. When you are expecting growth of 30%-40%, 20% doesn’t hit the spot.

As we recently noted, however, there is cause for optimism: growing user and client numbers; a new enterprise protection platform that embeds its product lines in customer systems.

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Energy One (ASX: EOL)

RETURN (inc div) +53.3%
Sector: Energy trading software
Current Price: $6.39
Market Cap: $165M
Dividend Yield: 0%
Net Cash: $3.2M

EOL is delivering impressive earnings growth with positive signs for FY22, despite little in the way of company announcements from the energy trading and risk management software company.

EOL’s interim result showed strong progress over the prior year through the integration of the acquisitions of Contigo and EZnergy in Europe. This has introduced new markets for EOL’s core product as well as broadening the product range for existing customers, which now number over 200. Contracts won in the first half creates a pipeline of installations for future recurring revenue, on top of organic growth in Europe.

FY21 EBITDA forecast is $8m, delivering an enterprise value multiple of 20 times. That valuation sounds demanding, and reported interim earnings per share of 7.8 cents suggest a forward price-earnings ratio of around 40 times.

On the other hand, if the underlying drivers of FY21 EBITDA growth of 57% remain intact, this valuation multiple could reduce very quickly. We look forward to reviewing more detail in the full year results.

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Impedimed (ASX: IPD)

RETURN (inc div) +77.4%
Sector: Bioimpedance devices
Current Price: $0.105
Market Cap: $157M
Dividend Yield: 0%
Net Cash: $18M

Under the Radar Report first looked at IPD when it was a $40m company and had approval for its lymphedema diagnostic testing. We cashed out soon after the share price spiked when it got the all important re-imbursement. At one point it was our best performing stock – 4 years ago – having returned 700%.

This time last year (2 July 2020) the stock looked exceedingly cheap for its potential. Back then the med-tech had a market cap of $60m and even though it has almost doubled since with a valuation of just under $160m, the stock remains a minnow.

We continue to see an opportunity to make big returns, with the keys being private payer reimbursement and a decision by the National Comprehensive Cancer Network to include IPD’s technology in its cancer treatment guidelines in the US. The key remains to be the publication of the results of the 1200 patient 7 year long PREVENT trial submitted in February 2021, which is touted by the company as, “the largest randomised ever to assess subclinical lymphoedema detection technologies.”

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Kalium Lakes (ASX: KLL)

RETURN (inc div) +30.0%
Sector: Mining
Current Price: $0.27
Market Cap: $227M
Dividend Yield: 0%
Net Debt: $133.3M

Kalium Lakes is delivering a more than respectable 30% return in less than eight months. Can it keep growing? KLL is developing a sulphate of potash (SOP) brine project in WA, which is a new type of fertiliser being produced in Australia.

We chose this company over a number of competing sulphate of potash projects because of its advanced stage; its good resource with high grades; and its proximity to infrastructure and low energy costs. The project is connected to a gas pipeline for power generation. Last and not least, KLL also has crucial offtake agreements covering its initial volume.

The project has exceeded expectations. Commercial SOP production of remains on track for September 2021 and on budget. The company believes ‘debottlenecking’ of the plant will increase base case SOP production to over 100k tonnes a year from 90k tonnes; with potential to increase to 120k tonnes.

Fertiliser prices are strong, assisted by high crop and grain prices. Recent SOP prices have been in a US$450-500/tonne, proving healthy margins with AISC costs before shipping of around US$200/t.

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Karoon Energy (ASX: KAR)

RETURN (inc div) +19.6%
Sector: Mining
Current Price: $0.27
Market Cap: $227M
Dividend Yield: 0%
Net Debt: $133.3M

A 20% return in five months is a good start. This junior oil producer is transforming into a major one, providing strong leverage to the oil price and production growth. Karoon is on track to reboot its portfolio, doubling production from existing 14k barrels of oil per day (bopd) from its Bauna field in SE Brazil. The company has recently contracted a rig for a workover campaign for the first half of CY22, which should increase production by 5-10k bopd.

KAR has also made a Final Investment Decision (FID) for the Patola Development, which is 5km from Bauna. First oil production is targeted for the first quarter CY23 at more than 10k bopd. If that’s not enough, Karoon, has quality light oil discoveries at Neon and Goia, 50-60km from Bauna, which has recently received government approval.

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Paladin Energy (ASX: PDN)

RETURN (inc div) +9.4%
Sector: Nuclear energy
Current Price: $0.465
Market Cap: $1.25BN
Dividend Yield: 0%
Net Cash: US$53.4M (A$68.5M)

With the push for green energy, uranium is making a comeback due to negligible carbon emissions during the generation process. Currently close to 10% of total global energy generation comes from 442 nuclear reactors across 34 countries with another 54 reactors under construction across 19 countries (World Nuclear Association March 2021).

Uranium released from military use has supplied a proportion of generator requirements, displacing mined supply and keeping prices low. With uranium demand increasing and this military stock reducing, supply/demand is getting tighter with an inflection point of higher prices and greater demand expected around 2024/2025.

Paladin feeds into this theme and is developing its Langer Heinrich mine and plant in Namibia, which previously operated until 2018 when it shuttered due to low uranium prices. The company is prepared for reactivation when prices improve, having completed an updated mineral resource, pit design and mine schedule and is planning a product packaging upgrade to provide flexibility for its customers.

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Paragon Care (ASX: PGC)

RETURN (inc div) +24.4%
Sector: Medical equipment distributor
Current Price: $0.28
Market Cap: $95M
Dividend Yield: 6.1%
Net Debt: $76M

Paragon is far from a sexy technology company, but it has what Under the Radar likes: a strong niche in a growing market. Although it must be said that it’s not as cheap as when we tipped it late last month!

We had previously covered the company in May 2019 but judged it too expensive with debt a serious risk. Fast forward to this year and the stock looked better value following Covid related difficulties, which put a halt to elective surgery while in the depths of lockdown. This has been lifted and importantly, its debt repayment schedule has been extended to a period where management’s cost cutting and improved revenues will kick in, producing stronger earnings.

Underlying all this is a solid foundation. PGC is a big operator in a highly fragmented space. The company is one of the biggest medical technology distributors in Australia and New Zealand, with a large suite of products and extensive relationships, selling direct to almost every public and private hospital. The company offers global manufacturers of medical products almost unparalleled access to these markets. It has strength in key areas including eye care and medical devices, which are growth at almost 10% a year.

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PKS Holdings (ASX: PKS)

RETURN (inc div) +15.7%
Sector: Healthcare software
Current Price: $0.40
Market Cap: $90M
Dividend Yield: 0%
Net Cash: $15M

So far so good for this highly speculative health technology stock, which we will be doing more work on to gain comfort over its IP and business model. The company is on track to achieve admittedly low FY21 revenue and earnings forecasts $7.5m in sales (of which 75% is recurring) and $3m in EBITDA. We will be looking very closely at the detail in its next earnings announcement.

PKS is a rising star, albeit starting of a base of close to zero. We were alerted to this stock in the middle of last year after it purchased Pavilion Health in an all scrip deal for $8.5m, then representing 35% of the company post acquisition. Pavilion is a cloud-based software company that provides audit, risk and consulting software services to some 550 hospitals.

Sitting on the PKS board are private equity deal makers, so we expect more activity on this front. The company says it offers customers “clinical decision making systems, which uses patient data and clinical expertise to deliver patient specific reports,” which doesn’t give confidence, but it has what appears to be a seasoned executive in the space as CEO.

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Regis Resources (ASX: RLL)

RETURN (inc div) -51.9%
Sector: Gold mining
Current Price: $2.47RLL
Market Cap: $1.86BN
Dividend Yield: 2.4%
Net Cash: $202M

Part of the thesis for our recommendation was the transformational impact on Regis production and earnings from the development of the McPhillamys gold project, NSW. This has targeted production of 192m ounces a year.

In April, Regis announced its $980m acquisition of a non-operated 30% interest in the Tropicana mine from IGO (formerly Independence Group) with 70% owner AngloGold Ashanti remaining operator, part funded by equity raisings of $650m at $2.70. The asset was highly contested and not cheap.

There has been difficulties relating to government approvals at McPhyllamys. While the Definitive Feasibility Study is well advanced, its completion is dependent on incorporating possible changes by NSW planning authorities. Regis has said a decision on its Development Application for the mine will be made during 2021.

Further, sentiment for the Tropicana acquisition has been impacted by lower near term gold production and higher costs due to an open pit cut back. A real opportunity is a significant increase in Tropicana’s mine life beyond 10 years.

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TUAS (ASX: TUA)

RETURN (inc div) +10.3%
Sector: Telecommunications
Current Price: $0.645
Market Cap: $229M
Dividend Yield: 0%
Net Cash: $143M

It is still too early to know how effective Tuas will be in breaking into the Singapore mobile market with its target of half a million subscribers. We first recommended the stock at 58 cents in October, but downgraded very shortly thereafter on a quick spike in the price.

TUA was spun out of TPG before its merger with Vodafone. It has been a negative for TPG that David Teoh has resigned from the merged company, but he remains chairman of TUA.

The company is in the unusual position of not releasing results since October, and will not release any until late September, when it reports on the year to 31 July. Like Teoh, this company keeps an ultra low profile.

We are upgrading again on the possibility that good news may come out of the full-year results. The upside of signs of growth outweighs risk if numbers disappoint, given the long-term nature of the opportunity and the substantial cash on the balance sheet.

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5G Networks (ASX: 5GN)

RETURN (inc div) -31.8%
Sector:
Data networks
Current Price: $0.925
Market Cap: $106M
Dividend Yield: 0%
Net Cash: $3M

It’s been a difficult period for this complex business, reflected in its poor share price performance. The data networks owner announced the approval of a $16.6m debt facility for Webcentral (WCG), where it took control through a 44% stake in October 2020. The facility allows WCG to reduce its indebtedness to 5GN to around $25m. 5GN will also use the funds for further acquisitions.

Management emphasise the stabilisation of WCG as well as progress in EBITDA and Operating Cash flow, both approaching $1m per month.

WCG’s value is now very much tied to 5GN’s. A lot of 5GN stock was issued at much higher prices to fund the WCG transaction, and this excess supply may impede the share price for a while.

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About the Author

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (AFSL: 409518). The author does not own shares in any of the stocks mentioned.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.

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