It’s that time of year, when investors’ thoughts turn to what stocks Santa Claus might bring. We’ve put together a list of six small-caps that could make good Christmas giving, as their prospects brighten in 2017.
First, let’s check in on how the most recent lists have performed.
Most recently, there were the ‘Five Under 50 cents’ from November 7, with their current prices and the share price change:
Then, there were the ‘Four Speculative growth stocks’ from October 10, 2016
Before that, there were the four ‘Promising biotechs‘ from September 26, 2016
Here’s hoping for some similar appreciation for this batch of Christmas stocking stocks:
Senetas Corporation Limited (SEN, 9.9 cents)
Market Capitalisation: $107 million
FY17 forecast yield: nil
Analysts’ consensus target price: 16 cents
Implied upside: 61.6%
(Forecasts: Thomson Reuters)
Senetas is a poster child for Australian innovation: it is one of the rare examples on the Australian Securities Exchange (ASX) of a world leader in its field. The company designs and makes high-speed network data encryptors, which protect cloud and data centre services; government information and secrets; commercially sensitive intellectual property and business secrets; citizen identity and privacy; defence and military information; business and financial data and banking transactions; data centre traffic and closed-circuit TV networks; and critical industrial and infrastructure systems.
Senetas has high-level customers in more than 30 countries, including cloud service providers; government organisations with highly sensitive information, such as the US defence forces; national utilities; commercial and industrial organisations; banks and global financial transactions systems providers. Commercial sales now represent more than half of revenue. The newest product, an ultra-high-speed (100 gigabytes-a-second) encryptor, is currently undergoing testing and certification with first sales expected in late FY2017.
In FY16 Senetas’ revenue rose by 16% to $19.3 million, while net profit surged 30% to a record $5.2 million. Return on equity was 33%. The balance sheet is strong, with no debt and a growing cash balance – cash and cash equivalents stand at $20.8 million. Senetas’ guidance projects revenue growth of 14% in FY17 and net profit growth of 15%, to about $6 million, followed in FY18 by 18% revenue growth and about a 29% boost to net profit, to about $7.7 million. Senetas is not yet a dividend-payer but analysts expect dividends to commence in FY18.
BPS Technology (BPS, 97 cents)
Market Capitalisation: $88 million
FY17 forecast yield: 5.1%, fully franked
Analysts’ consensus target price: $1.575
Implied upside: 62.4%
(Forecasts: Thomson Reuters)
Gold Coast-based payments platform provider BPS Technology is a world leader in the $20 billion trade exchange industry: it owns Bartercard, the world’s largest trade exchange, which has 24,000 merchants transacting in eight countries, racking up $600 million in transactions annually. BPS also owns Bucqi, a loyalty platform for small-to-medium-sized enterprises (SMEs), and TESS, a cloud-based software platform developed to service Bartercard.
In August, BPS made a potentially transformative purchase, buying Entertainment Publications Australia and New Zealand (EP), a restaurant and activity guide that provides discounts from restaurants, hotels and attractions in Australia and New Zealand. Where Bartercard is a business-to-business (B2B) platform, that the EP purchase immediately gave BPS a business-to-consumer (B2C) deals platform, bringing with it access to a network of 36,000 SMEs, 18,000 not-for-profit clients, and 550,000 paying customers. BPS says the business-to-consumer platform will contribute to revenue growth of 118% in FY17 and EBITDA (earnings before interest, tax, depreciation and amortisation) growth of 49%.
BPS earns fees on each and every transaction conducted on all of its platforms. The company is moving to further monetise its base of merchant customers and the combined platforms by partnering with specialists to offer digital marketing services, tailored business finance and insurance packages, and access to sales and distribution into China on Alibaba’s 1688.com.
For the half-year ending 31December 2016, BPS is forecasting earnings per share (EPS) 7.1 cents, up 15%. For the full FY17, BPS projects a return on equity of 18%. Analysts see a rising dividend stream ahead for BPS, with 5 cents a share in FY17 (up from 4 cents in FY16), and 7.8 cents in FY18, placing it, on Thomson Reuters’ consensus collation, on a FY17 fully franked yield of 5.1% and 8% for FY18. The stock looks remarkably cheap, trading on 7.1 times consensus estimate FY17 EPS, and 6.1 times FY18 EPS – not surprisingly, analysts see considerable scope for price appreciation.
Baby Bunting (BBN, $2.31)
Market Capitalisation: $290 million
FY17 forecast yield: 3.6% fully franked
Analysts’ consensus target price: $3.18
Implied upside: 37.8%
(Forecasts: FN Arena)
Specialist retailer Baby Bunting operates in the $2.4 billion Australian baby goods market, selling prams, cots and nursery furniture, car safety products, toys, babywear, feeding products, nappies, linen and associated accessories. Since listing in October 2015 at $1.40 a share, Baby Bunting has moved as high as $3.17 in August, as it beat its prospectus sales and earnings forecasts. The chain was also helped by the collapse of its major competitor, My Baby Warehouse, which gave Baby Bunting a dominant position in the highly fragmented market.
Lime many retailers, Baby Bunting has seen its share price come under pressure as the retail industry prepares for the likely entrance of Amazon to the Australian market, with its high volume/low margin business model. This will put to the test the “category killer” nature of many of the specialist retailers, but a high-quality operation like Baby Bunting should be able to defend its patch – it has built considerable power into its brand.
At its annual general meeting last month, Baby Bunting said sales growth for FY17 so far was running at more than 20%, with same-store sales growth at more than 10%, and that online sales had increased to 5.7% of sales, up 36%. The company confirmed that open six to eight new stores in FY17, and reaffirmed full-year EBITDA guidance for growth of 15% –31%. On consensus, analysts are looking for dividend growth of 32% in FY17 and 23% in FY18.
BWX Limited (BWX, $3.88)
Market Capitalisation: $355 million
FY17 forecast yield: 2.0% fully franked
Analysts’ consensus target price: $5.34
Implied upside: 37.6%
(Forecasts: Thomson Reuters)
Melbourne-based body, hair and skin care company BWX owns, produces and distributes the skin care brands Sukin, DermaSukin, Uspa and Renew Skincare, and the hair products brand Edward Beale. Uspa also operates its own signature day spa and retail outlet, the ‘Immersion Day Spa’ in the upmarket Melbourne suburb of Brighton.
In addition to this portfolio, the company also manufactures a large suite of branded products for third parties. Pharmacy sales – particularly Priceline – are the dominant channel.
BWX listed in November 2015 after raising $39.3 million at $1.50 a share in a heavily over-subscribed float, and the unsatisfied demand propelled the stock to a 41% opening premium. By August 2016, the stock had surged to $5.60. But BWX was sold off after announcing its maiden result, which has to be seen as a buying opportunity, given that it was hard to fault the company’s FY16 performance.
Net profit of $12 million comfortably beat the prospectus estimate of $11.1 million, and revenue rose almost 20% to $54 million. The company kicked off its export strategy, establishing online stores in China with Tmall.com and JD.com, and signing a deal that will see the flagship Sukin brand carried by leading UK pharmacy, health and beauty retailer, Boots. That deal is just about to commence and this financial year BWX will also start to sell some of its products through the UK’s number one health food retailer, Holland and Barrett.
(Prior to the official deals in China, BWX’ range was also a favourite of the “grey market” in Australia, in which “daigou,” (or personal shoppers) buy the products and either courier them directly to customers in China or send them to bonded warehouses in China and on-sell them online. At least some of the 31% price fall in BWX since August could be attributed to fallout from the China sales issues that struck Blackmore’s and Bellamy’s Australia, among others.)
BWX’s guidance for FY17 was also robust, with the company expecting EBITDA to grow by about 30%, and a gross margin of about 62%. The margin is rising as third-party manufacturing decreases as a contributor to revenue: as export sales rise, the margin improvement could surprise.
The price fall has brought BWX nicely back into better-value territory, but the stock is still priced at 20.3 times forecast FY17 earnings – meaning it can’t afford to slip up with any shocks for the market. At 17 times analysts’ consensus estimate for FY18 earnings, BWX becomes a bit more attractive, especially on the back of growing export earnings.
Megaport (MP1, $2.30)
Market Capitalisation: $203 million
FY17 forecast yield: N/A
Analysts’ consensus target price: N/A
Global interconnection services provider Megaport allows business customers to buy technology networking capacity on a pay-per-use basis, at various speeds, wherever and for whatever period they need it, rather than buying long-term, fixed bandwidth circuits between data centres and their cloud providers. The software-based service is called “elastic” inter-connectivity because it is customised to whatever the customer wants: it is built for variable needs, meaning it offers on-demand, high-speed, scaleable connectivity and data use.
The elastic” inter-connectivity market is growing fast, and this year Megaport has expanded into North America and Europe. The Asia-Pacific business (of which Australia represents 86% of revenue) became profitable in FY16, but overall, Megaport is still in loss – that is explained by the set-up costs in North America and Europe. Revenue rose 80% in FY16. Over the financial year Megaport increased its deployment from in 36 locations to 132 – 33 of these are in North America, while 57 are in Europe. Megaport has more than 500 customers in 19 countries: the company is a technology partner with Amazon, Microsoft Azure and Google Cloud.
Megaport listed in December last year after raising $25 million at $1.25 a share. It was founded by noted Australian technology entrepreneur Bevan Slattery, who had previously brought to the ASX data centre operator NEXT DC (NXT) and dark fibre (simply, ‘unlit’ optical fibre that allows a customer to build its own optical fibre network) specialist PIPE Networks, which was sold to TPG Telecom for $420 million in 2010.
Megaport shares came on to the stock market at a 92% premium at $2.40, and in a few weeks had rocketed to $3.62. The stock has come back to $2.30, and at that level, it looks to be worth considering. The major consideration with Megaport is that the establishment costs have been borne in North America and Europe – now the customer uptake has to generate revenue, and then move these businesses to breakeven and then profitability (as has happened with Asia-Pacific). At $2.30, the risk-reward balance in buying Megaport has improved greatly since the levels above $3.60, of earlier this year.
Superloop (SLC, $2.84)
Market Capitalisation: $445 million
FY17 forecast yield: N/A
Analysts’ consensus target price: $3.91
(Forecasts: Thomson Reuters)
Also from the Bevan Slattery stable is super-fast internet services provider Superloop, which listed in June 2015, almost doubling in value on debut to $1.84 from its $1.00 initial public offer price. Superloop invests in fibre-optic telecommunications infrastructure between locations of high inter-connection density within markets experiencing significant growth in interconnectivity.
Like Slattery’s previous business PIPE Networks, Superloop offers dark fibre: customers can choose to have a ‘point-to-point’ link on the network, which provides dedicated connectivity between two specific buildings; a ‘loop’ on the network, which allows them to connect two to four key sites, with protection and high availability; or a ‘superloop,’ which allows them to connect between more than four buildings on the network. A superloop is the ‘gold standard’ in always-available connectivity.
Superloop holds the exclusive rights of use to a 130-kilometre fibre optic network within Sydney, Melbourne and Brisbane, and also has the right to use a 120-kilometre underground duct network in Singapore. The company also provides data centre services for the storage of information in the cloud on behalf of its business clients. The core networks in Australia and Singapore went live in 2015, and both generated gross profits in FY16. Hong Kong is also a major growth opportunity for Superloop: this goes live this month and should contribute to revenue in 2017.
In FY16 Superloop doubled revenue to $7 million, but network establishment costs of $5 million-plus helped to ensure a loss. But once the networks are established, because Superloop’s costs in operating the fibre optic cables or data centres are effectively fixed, adding customers flows directly into profit margins. At this stage, analysts expect Superloop to be profitable in FY17, making 1 cent a share – but for this to surge to 8.9 cents a share in FY18, with a 1-cent dividend to be paid. That’s 32 times expected earnings and a yield that doesn’t even make 0.4% – but don’t look at that. Instead, there looks to be significant growth on the horizon for Superloop. The major risk is in delay of profitability.
Last month Superloop merged with ASX-listed wireless network and IT services provider Big Air, with the aim of creating an NBN rival for enterprises. BigAir is the wireless provider to an impressive list of major corporate customers: the merged entity aims to leverage Superloop’s fibre assets and BigAir’s existing wireless network and capabilities to offer wholesale providers a high-speed NBN alternative in outer metro and regional Australia.
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