Here are 4 candidates from the lower echelons of the small-capitalisation world – and the micro-cap world – that look to be offering decent value at present.
National Tyre & Wheel (NTD, 91 cents)
Market capitalisation: $93 million
Estimated FY19 yield: 6.6%, fully franked
Analysts’ consensus target price: $1.44
Buying a stock that is on the way down is always a wrestle between two conflicting thoughts – is this now good value, or am I catching a falling knife? When the whole market has had a jolt such as October, there is at least comfort in the fact that most prices are lower than they were: at such times, investors have plenty of potential value opportunities to sift through.
National Tyre & Wheel could be just one of these. Floated at $1 a share in December 2017, NTD debuted at $1.30 and extended its rise to $1.44 at one point earlier in the year. The company is a tyre and wheel wholesaler with business in Australia, New Zealand and South Africa. It has long-held the exclusive right to import and distribute Cooper and Mickey Thompson branded 4WD, SUV and passenger tyres and wheels, all Federal tyres in Australia (excluding Queensland) and New Zealand, and the Mastercraft, Dick Cepek and Starfire tyres in Australia and New Zealand.
NTD owns the proprietary brands Dynamic – which specialises in steel wheel importing and distribution in Australia and New Zealand – and MPC, which provides wheels and tyres to caravan and trailer manufacturers in Australia. In June, NTD bought the Adelaide-based Statewide, a leading wholesaler of passenger, van and truck tyres. NTD’s business strategy is to consolidate the wholesale tyre market.
The company’s FY18 results beat prospectus forecasts comfortably, and its balance sheet is healthy. The stock price has slid from $1.44 to 91 cents, back below issue price: in effect, the stock has to do it all over again. But with Statewide, it’s a bigger and better business; and NTD will grow even more as it makes further acquisitions.
There is only one broking firm with a price target on NTD, and that’s Morgans, which floated the company – it sees $1.44 as achievable, with a 6-cent expected dividend for FY19 implying a potential yield of 6.6%, equating to a grossed-up yield of 9.4%.
Paragon Care (PGC, 76 cents)
Market capitalisation: $230 million
Estimated FY19 yield: 3.8%, fully franked
Analysts’ consensus target price: $1.145
Paragon Care is a nice exposure to one of the great demographic themes – Australia’s ageing population, and the growing healthcare spending that will accompany it. The company supplies integrated services, medical equipment and consumables to the hospitals, medical centres and aged care facilities.
Paragon holds exclusive distribution rights in Australia for leading brands of theatre and ward equipment, beds, mattresses, medical carts and trolleys, stainless steel equipment, medical refrigerators, storage, lighting and shelving products, plus a range of consumable items and other capital equipment items. Virtually everything you might see in a hospital or a consulting suite, Paragon supplies.
Medical consumables need to be bought all the time. Examples include pumps, scrubs, masks, cannulas, valves, tubes, needles, surgical instruments, tourniquets, stethoscopes, spare parts for devices, sterilisation products, cleaning and protection products, gel packs, various pieces of diagnostic equipment, wheelchairs – even penlights, nurses’ pouches and watches, and doctors’ bags. Because much of Paragon’s catalogue is non-discretionary, across virtually all the main sub-markets of health, it qualifies as a relatively low-risk exposure to healthcare, but with strong organic growth prospects.
In FY18, Paragon lifted revenue by 17%, to $136.7 million, and boosted net profit by 8%, to $10.9 million. For FY19, analysts see earnings per share (EPS) rising by more than two-thirds, to 6.6 cents, but the fully franked dividend slipping slightly, from 3.1 cents to 2.9 cents, before rebounding to 3.3 cents in FY20. In yield terms that prices Paragon Care at 3.8% fully franked in FY19 and 4.3% in FY20. In addition, analysts’ consensus sees plenty of scope for the share price to grow.
Decmil Group (DCG, 79.5 cents)
Market capitalisation: $160 million
Estimated FY19 yield: no dividend expected
Analysts’ consensus target price: $1.215
Western Australia-based engineering company Decmil Group rose to prominence as part of a group of firms that gorged themselves on the mining boom, but struggled in its aftermath. Decmil still does plenty of work for the resources industry in its home state, but in recent years the company has greatly diversified its business, in particular, moving into east-coast infrastructure and the renewable energy industry – and arguably, the stock market has yet to recognise this much more balanced business.
For example, in FY18, 64% of revenue still came from the resources sector, with 35% from infrastructure and 1% from renewable energy. But in FY19, the order book currently stands at 21% resources, 72% infrastructure and 7% renewable energy. Decmil is particularly well-placed to capitalise on infrastructure spending on the east coast – with very significant infrastructure spending programs on the part of both state and federal governments – with the back-up provided by a recovery in mining expenditure in Western Australia. The company sees its main growth drivers as being resources (WA iron ore, Queensland coal seam gas [CSG]), infrastructure (transport, defence, corrections and education) and renewables (solar and wind).
Decmil recently won the job as lead contractor on the $275 million Sunraysia solar farm at Balranald in New South Wales. Broker Citi says the Sunraysia contract lifts secured FY19 revenue to $535 million – total FY18 revenue was $341.6 million – and FY20 secured revenue to $277 million. With Sunraysia, FY19 revenue could well exceed $600 million.
Decmil has rebounded strongly from a loss in FY17, returning to profitability in FY18, and analysts looking for a surge in profitability this year, from EPS of 0.3 cents to 7.1 cents. However, Decmil did not pay a dividend in FY18, and is not expected to do so this year, either: analysts expect dividends to resume in FY20.
QMS Media (QMS, 95 cents)
Market capitalisation: $310 million
Estimated FY19 yield: 2.5%, fully franked
Analysts’ consensus target price: $1.20
Outdoor advertising is definitely a business with structural growth prospects in Australia, and digital billboard specialist QMS Media is an excellent way to tap into it. The company’s FY18 results were at the top end of its guidance, with revenue up 21%, to $204.2 million, and net profit up 10%, $18.4 million. Digital advertising grew to 70% of revenue, up from 57% in FY17.
The company did report an increase in debt, from $45.8 million to $110.6 million, but that was largely due to $86.4 million of capital investment in its international sports business and digital development program – which is the key to its growth. 37 new landmark billboards were switched on during 2018, and the company says it plans for more than 135 sites to be live by June 30, 2019.
Advertisers like digital signage because it can be updated at any time of the day, making it more relevant and current compared with static billboards. QMS has an industry-leading collection of digital billboards in high-profile metropolitan locations. In particular, the connectivity between mobile phones and digital billboards allows clients to amplify social media/mobile advertising campaigns, and deliver targeted consumer messaging and offers.
QMS is also reported to be in expansion mode, looking at buying free-to-air broadcaster Mediaworks in New Zealand and the Val Morgan cinema advertising business.
QMS has not had a great second half of the year in terms of share price, down from a June peak of $1.15 to the current 95 cents, but analysts see that value as likely to be more than restored in the medium term. Increasing fully franked dividend payouts are also expected, but at present QMS trades on a 2.4% expected yield for FY19, rising to 2.8% for FY20.
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