It’s time for another look into the depths of the share market, to the capitalisation levels that not many investors and analysts visit. Here are three companies priced at 25 cents or less that I think look impressive.
1. Stealth Global Holdings (SGI, 19 cents)
Market capitalisation: $19 million
12-month total return: 52%
3-year total return: 28.3% a year
Analysts’ consensus target price: n/a
At a tiny market capitalisation of $19 million, Perth-based Stealth Global Holdings flies under the radar of most investors, but it is a business that is quite deeply embedded across the Australian economy. Stealth Global is one of Australia’s largest industrial distribution groups combining company-owned and independent retailer assets, which provide more than 1 million products, supplies, parts, and accessories to business, trade, and retail customers.
The branch and store network covers 70 locations, across all states and territories. As a pure-play industrial distributor, the company’s product range includes industrial, tools, safety, Personal protective equipment (PPE), workwear, hardware, building, construction, truck and trailer, automotive, electrical, materials handling, cleaning and janitorial, tapes, workplace consumables and other related products and services. It covers, in effect, the industrial consumables market.
Stealth operates across the business, trade, retail, service and the specialist wholesale sector, serving customers of all sizes from a broad collection of industries including commercial, mining, resources, industrial, government, transport, automotive, agriculture, building, construction, manufacturing, engineering, trade and retail consumers.
The company’s six businesses are arranged in:
- Business Solutions (84% of sales)
- Heatleys Safety & Industrial,
- United Tools
- Industrial Supply Group (ISG)
- Retail Solutions (16% of sales)
- C&L Tool Centre
- Skipper Transport Parts
Across the group, Stealth serves 8,000 business customers. In FY23, revenue rose by 11.4%, to $111 million, and this was all organic growth (after rationalisation of unprofitable contracts, revenue from continuing customers grew 17.8%); net profit surged 50%, to a record $900,000. Positive free cash flow of $5.6 million – a $6 million turnaround – helped to put the company in a situation where it was able to declare, at the FY23 result in August, that it would pay a debut fully franked dividend to shareholders for in FY24. Although the company did not give formal guidance, it said it remains “optimistic that Stealth can maintain its positive momentum into FY2024.”
Stealth Global says it plays in a “large and highly fragmented market,” being the Industrial maintenance, repairs and operations (MRO) market, in which the largest player has a market share of just 4.5%; Stealth is “well-positioned to pursue opportunities and go after the $52 billion of market share we don’t have today.” The beauty of the industrial MRO market is that it supplies non-discretionary products and services – more than 95% of Stealth’s revenue comes from non-discretionary spending – and is a highly resilient business in a strong position to withstand an economic downturn.
Since FY19, Stealth Global has built its sales from $63 million to $111 million (the target is $200 million by FY25); net profit, from $657,000 to $1.1 million; and return on equity, from 5.2% to 7.3%. The company has delivered annual compound growth rates of about 30% in revenue and earnings over the last three years, with an improving return on invested capital.
This is a tiny company, but it is improving in virtually every number – and you can easily see and understand where the revenue and profit come from. It takes time to build up a position in a stock like this, but Stealth Global will eventually be noticed.
2.Bowen Coking Coal (BCB, 9.5 cents)
Market capitalisation: $221 million
12-month total return: –63.9%
3-year total return: 25.9% a year
Analysts’ consensus target price: 35.1 cents (Stock Doctor/Refinitiv, two analysts)
Coal producer Bowen Coking Coal had a transformational financial year in 2023, in one sense, but the calendar year 2023 has also been a tough one.
In the transformational sense, in FY23 BCB moved from the exploration and development phase to become a coal producer, bringing three mines in the Bowen Basin in central Queensland onstream, producing 1.7 million tonnes (Mt) of coal and selling 800,000 tonnes of it.
While I accept that some people won’t want to go anywhere near thermal (electricity) coal, BCB operates mainly in the steel-making coal business, which is different: to make the new steel required for economic growth (and decarbonisation!) we will need more metallurgical coal in the future, and there is no economical substitute on the near horizon.
During FY23, BCB brought into operation its Bluff mine, the Broadmeadow East Pit, which makes up part of the company’s Burton Mine Complex, which mainly produces steelmaking coal for export. Burton operated for almost 20 years, before being suspended in 2016 by then-owner Peabody Energy, due to low coal prices. BCC re-opened Burton in May 2023: the Burton complex contains the Lenton, Broadmeadow East and Burton pits, and three unmined open-cut deposits: Ellensfield South, Plumtree North and Isaac River.
BCB started mining at Bluff in April 2022, and Taiwanese company Formosa Plastics Group received the first coal shipment from Bluff in July 2022. So far, so good, but an unforeseen slump in prices caused the Bluff mine to be placed on ‘care and maintenance’ in September 2023.
The problem, as it turned out to be, at least temporarily, is that Bluff produces a special kind of coal called pulverised coal injection (PCI). This is an ultra-low-volatility product, a softer, non-coking coal that is pulverized and injected into the blast furnace to supply heat, which in return reduces energy use and emissions. PCI does not play a role in the iron-steel conversion and cannot replace hard coking coal in that role.
The PCI coal price is typically about 20% less than prices for top-quality Australian hard coking coal (HCC), but the Ukraine crisis drove Australian PCI prices to parity in early 2022, as steel mills scrambled to replace Russian supplies. But as Russian PCI trade flows resumed, the price was slammed: low-volatility PCI coal halved from US$310 a tonne in the 2022 financial year, before recovering to US$186 a tonne in September 2023. However, in September, Bowen Coking Coal bit the bullet on Bluff, due to reduced PCI prices.
The second mine brought into production was the Broadmeadow East Pit, which is part of the company’s Burton Mine Complex near Moranbah. Broadmeadow East was an undeveloped asset that Bowen bought from Peabody in 2021 for $1 million plus royalties, getting it up and running in 2022 to make the most of bullish markets. First coal was exported from Broadmeadow East in October 2022. Broadmeadow East coal is currently sold as thermal coal but could easily be upgraded through washing to a steel-making coal product. (Conversely, while predominantly a steelmaking coal asset, at 60% hard coking coal, or HCC), Burton could also sell a thermal product should a prolonged energy crisis come about).
The strategic plan is to use the cashflow from Bluff and Broadmeadow East to fund refurbishment and re-commissioning of BCB’s larger-scale and longer-life Burton/Lenton project (2.4 million tonnes a year, 60% HCC), supporting targeted production of 4 million tonnes a year (mtpa) by FY24. Further out, the Isaac River and Hillalong open-cut coal projects that the company is evaluating could also feed coal into the company’s centrally located coal handling and processing plant (CHPP) facility at Burton-Lenton.
To date, Bowen has produced nearly 2 million tonnes (Mt) of coal. According to the Queensland government, the Burton complex is expected to produce up to 4.5 million tonnes a year (mtpa) of mainly steelmaking coal every year, once it reaches full capacity.
While the Bluff mine is on ‘care and maintenance,’ the Ellensfield South Pit within the Burton Mine Complex will become the operation’s cornerstone. First coal was mined from the Ellensfield South Pit in August 2023, and processed through the Burton coal handling and processing plant (CHPP). It is the company’s third – and arguably, most important – open-cut mining area, producing a higher-yielding coking coal. The company expects Ellensfield South to deliver up to 2.4 mtpa of production for a period of approximately two years, after which the mining fleets will transition into the larger adjacent Plumtree North Pit.
Additionally, Bowen holds interests in the Isaac River, Hillalong (85%) Cooroorah, and Comet Ridge coking coal projects and is a joint venture partner in Lilyvale (15% interest) and Mackenzie (5% interest) with Stanmore Coal Limited. Some of these projects will use the existing Burton infrastructure.
Despite the headwinds in 2023, BCC is confident in its future, saying that global coal consumption climbed to a new all-time high in 2022, and will stay near that record level this year led by strong growth in Asia. As demand grows, and supply remains heavily constrained Bowen is well-poised to deliver growth – especially from what is now a cheap entry level.
Earlier this month, Bowen Coking Coal launched a $50 million equity raising, at 9 cents a share. About $31 million of the deal was covered by the company’s existing major shareholders.
Despite a $4 million loss at Bluff in the September quarter, the company reported operating cash flow of $11.5 million, and record high coal shipments, of 555,000 tonnes. Bowen Coking Coal looks very capable of mounting a comeback from 2023’s difficulties, and the brokers that follow the stock back that theory.
3. Dropsuite Limited (DSE, 25 cents)
Market capitalisation: $174 million
12-month total return: 31.6%
3-year total return: 33.5% a year
Analysts’ consensus target price: 36.5 cents (Stock Doctor/Refinitiv, two analysts), 35 cents (FN Arena, one analyst)
Dropsuite is a cloud software platform enabling businesses to easily backup, recover and protect their important business information. The company, founded in 2011, and listed on the ASX in 2016, provides data protection and back-up for cloud-based software for small and medium-sized businesses, in an easy-to-use unified platform that enables them to back-up their critical business information.
It sells back-up solutions for websites, email, servers and productivity software including Microsoft’s fast-growing Office 365 product suite and Google Workplace. Dropsuite has a partner-led business model, with 594 IT reseller partners globally, as well as 3,200 managed service providers (MSPs), selling though IT distributors. (An MSP is an outsourced IT provider that ensures business availability and security for its customers, who are mostly small-to-medium-sized businesses, or SMBs: the MSP manages the customer’s IT environment for a monthly or annual fee). Through this structure, Dropsuite serves 1.1 million users, across micro, small, medium-sized and large businesses.) Dropsuite operates 14 data centres around the world.
Dropsuite benefits as its MSP partners grow their own end-user customer bases, with MSP spending growing at two to three times the rate of overall IT spend for SMBs, an area which is still only around 20% penetrated. And Dropsuite’s 3,200 MSP partners are only about 10% of its target number of partners.
Dropsuite is riding the tailwind of cybersecurity and the rising threat of ransomware attacks: its products allow businesses to restore a clean back-up of their data if they fall victim to a cyberattack that encrypts their systems and demands a ransom. There is a large market for Dropsuite’s products, with research showing that 84% of software-as-a-service (SaaS) businesses in the US alone do not back up their critical data.
In 2022 (Dropsuite uses the calendar year as its financial year), Dropsuite grew annualised recurring revenue (ARR) by 67% to $25.4 million, increasing average revenue per user (ARPU) by 19%, to $2.26 a month. Revenue for the year surged 77%, to $20.7 million, while net profit came in at $1.45 million, after a loss of $31,000 in 2021.
Then, in the half-year to June 2023, total revenue rose 58%, to $14.1 million; ARR grew 51%, to $30.4 million; paid users increased by 33%, to 1.08 million; the gross margin increased from a year earlier by seven percentage points, to 69%; and net profit more than doubled, to $836,000.
In the most recent quarter, to September 2023, ARR increased by 44% on a 12-month basis, to $33.4 million. Since 2015, ARR has grown at a compound annual rate of more than 75%.
Dropsuite is dealing with a short-term headwind in which a legacy partner in a developing country is deactivating users, mainly because of macroeconomic challenges in the region of operation. About 89,000 users have left DSE’s platform, and the remaining 40,000 users will be deactivated in the current quarter. But this effect should wash-through and be offset by organic growth in users in 2024 and beyond.
In fact, Dropsuite is benefiting from the much sought-after ‘network effect,’ the business principle that when more people use a product or service, its value increases, in its MSP partner network; and as broker Canaccord Genuity points out, this should become increasingly valuable to Dropsuite as user penetration expands within this partner network. Dropsuite appears good buying at these levels.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.