There are no hard-and-fast rules for what constitutes a micro-cap, but it’s typically considered to be the stocks that are outside the S&P/ASX 300, down to about 600 in order of ASX market capitalisation.
The bottom level of the S&P/ASX 300 is about $650 million – so, in effect, any stock below this is a micro-cap. Here are three great examples of the kinds of high-quality opportunities that can be found in micro-cap land.
- AROA Biosurgery (ARX, 90 cents)
Market capitalisation: $309 million
12-month total return: 37.4%
3-year total return: n/a (listed July 2020)
Forecast FY24 dividend yield: no dividend expected.
Analysts’ consensus price target: $1.493 cents (Stock Doctor/Reuters, five analysts)
New Zealand company AROA Biosurgery works in regenerative medicine, where it is developing a range of medical and surgical products based on its AROA extracellular matrix (ECM) technology, which aims to improve the rate and quality of soft-tissue repair. The ECM products are based on the regenerative properties of the forestomach of sheep, a highly vascular organ; the products are manufactured in New Zealand from this material. Higher vascularity allows tissue to resist or fight infection by delivering essential cells, nutrients and oxygen locally, to give the structure and biology required for regenerative healing. The ECM gives both support to weak or absent tissue and a template for natural wound repair; in such a way as to avoid triggering any additional inflammatory/immune response from the body.
The company’s first commercial surgical product, a reinforced “bio-scaffold” developed in collaboration with US company TelaBio, was cleared by the US Food & Drug Administration (FDA) FDA in December 2014, and clinical studies were started in the US in May 2015 for use in ventral hernia repair and abdominal wall reconstruction. In addition to the TelaBio product (AROA receives about 27% of TelaBio’s net sales of Ovitex products), AROA now has:
- The Symphony and Endoform products, suitable for treating diabetic foot ulcers, venous ulcers, pressure ulcers, and chronic wounds.
- The Myriad Matrix, which works for soft tissue repair, reinforcement or complex wounds, and the Myriad Morcells product, which is aimed at the management of acute and chronic wounds. The target markets for these are trauma, tumour removal, general surgery and inflammatory skin disease. The Myriad products have been shown to resist bacterial contamination and can be used in contaminated soft tissue defects without having to wait until a pristine wound environment can be achieved.
- The Ovitex reinforced tissue matrix, used in hernia repair, wound dehiscence (a surgical complication in which a wound ruptures along a surgical incision) and breast surgery.
The products have regulatory approval in 50 countries. So far, more than six million AROA products have been used to treat patients. AROA estimates its total addressable market (TAM) at US$3.1 billion.
The latest product to come out of the platform is the Enivo tissue apposition platform, which has been developed to help address seroma, which is the abnormal build-up of clear fluid inside the body, in a “dead space” after surgery, particularly in breast cancer and plastic surgery. Surgeons currently use surgical drains, adhesives, and quilting sutures to manage dead-space and prevent fluid accumulation, but these techniques are unreliable.
The Enivo platform has three components, a pump and catheter, and an ECM “sleeve,” a specially designed AECM implant. When the product is deployed, the tissue surfaces are drawn together, held in place and tissue fluids are drained by the vacuum to an external fluid collection bag. It potentially offers a more effective method than what surgeons currently use. In April, the FDA cleared the Enivo pump and catheter for use in the removal of surgical and bodily fluids from a closed wound for hematoma and seroma prophylaxis following plastic surgery or other general surgeries where large flaps are formed; AROA plans to seek approval for the ECM sleeve. AROA estimates the TAM for Enivo in the US at about US$1 billion.
In FY23, the product suite brought in revenue of NZ$60.5 million, up 55% and within the company’s guidance range of NZ$60 million–NZ$62 million; and normalised earnings before interest, tax, depreciation and amortisation (EBITDA) of NZ$1.5 million, compared to guidance for a “breakeven” result. The product gross margin was 84%.
For FY24, AROA has given guidance of product revenue in the range of NZ$72 million–NZ$75 million, equivalent to growth of 25%–30%; normalised EBITDA of NZ$1 million–NZ$2 million; and a product gross margin of 85%. It says Myriad will be the main driver of product revenue growth. Between FY24 and FY27, AROA is projecting 25%-plus annual growth in revenue, with EBITDA growth of 20%-plus. The company has almost quadrupled its manufacturing capacity, aimed at being able to support NZ$150 million in sales.
That is an ambitious near-term growth path, but AROA is a biotech that has its products well-established in the largest market in the world, the US, and is showing that its platform can be extended into well-received new products and line extensions. Broker Morgans says AROA has developed a cost-effective technology that is estimated to be 30% cheaper than existing products.
Morgans points out that a large international competitor to AROA, Integra experienced a product recall which potentially will benefit sales for ARX’s Ovitex hernia and breast reconstruction product. Morgans thinks this will be a problem for Integra that will take some time to fix, giving AROA a boost. ARX gives every sign of being a biotech that is going places.
- Big River Industries (BRI, $2.34)
Market capitalisation: $194 million
12-month total return: 20.4%
3-year total return: 23% a year
Forecast FY24 dividend yield: 8% fully franked (grossed-up, 11.4%)
Analysts’ consensus price target: $3.89 (Stock Doctor/Refinitiv, three analysts)
Timber and building products manufacturer and distributor Big River Industries was a rare manufacturing float when it came to the ASX in May 2017. A vertically integrated manufacturer and distributor of timber, wood panels and wood and steel building materials, Big River operates as a kind of Bunnings for the nation’s builders and tradies.
The company has six manufacturing sites across the country and one in New Zealand, and 26 sales and distribution centres. With its roots in Grafton, New South Wales, Big River was a fourth-generation family business before its sale to private equity firm Anacacia Capital in 2016.
Big River is well-diversified by geography, industry segment, construction type and customers. About 21% of its revenue comes from products it manufactures itself, with 59% of revenue from products it sources from local supply partners, and 20% of revenue from products it imports directly.
The detached housing market is its largest, accounting for 41% of revenue, with 21% coming from commercial construction, 15% from multi-residential building, 9% from alterations and additions, 7% from civil construction and 7% from re-manufacturing products from original manufacturers.
Geographically, 93% of revenue comes from Australia – spread reasonably equally across Queensland, Victoria, New South, Wales, South Australia, Western Australia and the ACT, with 7% coming from New Zealand.
In FY22, Big River lifted revenue by 45.4%, to $409.3 million, and almost tripled underlying net profit, to $22.7 million. Reflecting the profit growth, the dividend rose by 177%, to 15.5 cents, fully franked. Then, in the half-year to 30 December 2022, revenue rose just under 20%, to $232.4 million, net profit surged 46%, to $12.8 million, and the interim dividend was lifted 56%, to 8.5 cents.
Big River sees its market opportunity as based on a competitive position in a large industry, with a total addressable market in trade building supplies sized at about $15 billion a year. It’s a consolidating sector, with a lot of ageing business owners and minimal succession options; but it also has a strong medium to long-term outlook, given the under-supply of housing and growing population.
The company says the residential builder order-book and project pipelines expected to continue into FY24, with the civil construction pipeline very strong. Alterations & Additions is expected to be soft, but Big River says this will be offset by growing commercial and multi-residential construction.
Analysts think Big River looks excellent value at these levels. Even if it can’t grow its dividend in FY23 – which the analysts think it will do – if it repeats the FY22 dividend of 15.5 cents, Big River is priced on a prospective fully franked yield of 6.6% or 9.5% grossed-up. That is a solid base for a total-return play.
- Enero Group (EGG, $1.385)
Market capitalisation: $128 million
12-month total return: –46.7%
3-year total return: 4.4% a year
Forecast FY24 dividend yield: no dividend expected
Analysts’ consensus price target: $3.30 (Stock Doctor/Refinitiv, four analysts)
Marketing services business Enero Group has built a global business, with more than 800 staff working in 13 cities. Its service offering covers creative and content;
integrated communications and PR; and digital, data, analytics and technology: its portfolio of marketing, technology and communications businesses includes creative agency BMF; PR and integrated communications agencies the Hotwire Group (Hotwire, ROI DNA and GetIT) and issues management agency CPR; digital and “experiential” agency Orchard; and advertising technology platform, OBMedia.
Enero says it “sits at the centre of a massive and rapidly evolving market, with a strategy and business model that is primed to capture growth.” Its blue-chip client base, across the three crucial industries that it targets – technology, healthcare and consumer goods – contains names such as Amazon, Google, Microsoft, Meta, Pfizer, CSL, Novartis, Hyundai, Audi and Disney. The company says the global marketing services industry is worth just under US$2 trillion a year, with its total addressable market (TAM) about US$1.2 trillion of that. The “brand transformation” and “creative tech and data” businesses are the global businesses that are the key to that aim.
The company’s work to boost its global revenue has been impressive. In FY19, 39% of revenue came from Australia, with 37% from North America and 24% from Europe. As at the first half of the current financial year, Australia contributed just 18% of revenue, with North America now the source of 75% of revenue and Europe 8%. Now the company is working to expand into Asia, led by the Hotwire offering.
Enero posted an almost 39% lift in revenue to $129.5 million in the half-year to November 2022, with net profit up 8.1%, to $14.8 million. Earlier this month, the company announced a trading update that projected FY23 net revenue of between $241 million–$244 million, representing 24% to 26% year-on-year growth, with earnings before interest, tax, depreciation and amortisation (EBITDA) forecast to be in the range of between $78 million and $81 million, up 18%–22%.
To put those estimates in context, in FY22 net revenue was $193.4 million, and EBITDA was $62.2 million. But the market did not like the update – the shares fell almost 10% – as OBMedia had to reduce its traffic purchases from certain publishers, in order to maintain its quality metrics. But in an environment in which macro-economic conditions have cut into the global marketing spend, it has still been a solid effort.
After a 12.5 cents-a-share dividend in FY22, fully franked, analysts expect a slight dip, to 11.4 cents in FY23 (an interim dividend of 6.5 cents has already been paid). The second half would have to have deteriorated badly for the company not to reach 11.4 cents, which puts the shares on a pre-franking yield of 8.2%. Again, that’s a good starting point for total return, supported by reasonable expectations for share price growth.
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