If you’re looking for a potentially cheap stock, here are seven interesting stories from the lists of the ASX, all priced under 70 cents.
RCG Corporation (RCG, 72 cents)
Market capitalisation: $193 million.
OK, so footwear group RCG Corporation – owner of The Athlete’s Foot Australia chain – is trading above 70 cents, but I’m still going to use it because the company’s upcoming retail share purchase plan is expected to be priced at 70 cents a share. The share purchase plan is part of the $200 million-plus funding RCG is raising for the “transformative” deal it announced this month, the purchase of New Zealand’s Accent Group, owner of the retail chain Platypus Shoes and the distributor and retailer of some iconic footwear brands, including Vans, Skechers and Dr. Martens.
These will join RCG’s brands, which include Caterpillar, Sperry and Saucony. The deal expands RCG’s brand portfolio from six to 13 licences, with RCG and Accent selling each other’s brands across Australia and New Zealand. The deal will take RCG’s total store numbers from 174 to 269 and boost total group sales from $268 million to $450 million. Profit is expected to double, from $12.3 million to $26.3 million when Accent and RCG are combined. RCG does not expect the deal to affect its ability to pay dividends at or above historical levels: in fact, shareholders could realistically expect a lift. Prior to the deal announcement, RCG was expected to pay a fully franked dividend yield of 6.7% in FY15.
Yowie Group (YOW, 60 cents)
Market capitalisation: $83 million.
Speaking of transformative deals, Australian confectionery company Yowie Group announced a beauty in February, with the news that its Yowie chocolate, which encases a toy animal, will go on sale in 1507 Walmart stores and 1318 Safeway stores throughout the US. Walmart is the largest company in the world and the largest grocery retailer in the United States.
Why the deal is so good is that the company has got around a US ban on selling confectionery with embedded toys, because of choking risks. Yowie has designed a special capsule for the toy, and last year was granted the only patent for a chocolate-encased toy by the US Food and Drug Administration (FDA). Yowie’s much bigger global rival, the Italian-based Ferrero Group, which makes the Kinder Surprise chocolate egg, does not have this and cannot sell the Kinder Surprise in the US.
Yowie also sells in the 1900 North American convenience stores of the Valero Corner Store chain. Yowie is also expanding into Asia, where the product was sold until eight years ago – before Yowie Group owned the rights to the product – and Europe and the Middle East are the priorities for the “second-stage” brand roll-out. The company has created the online presence of yowieworld.com to build brand engagement.
The major caveat with Yowie Group – which has been listed since 2012 – is that it made a loss of $6.4 million in FY14, and a loss of $996,000 for the December half-year. It does not pay a dividend. But cracking the huge US market ahead of its rivals at least gives shareholders some confidence that profitability is not too far away.
Praemium (PPS, 34 cents)
Market capitalisation: $130 million.
Investment ‘platform’ provider Praemium has also struck an excellent deal recently. Praemium provides separately managed account (SMA) systems for bankers, brokers and financial planners in Australia and the UK, and moved earlier this month to acquire UK-based financial planning software provider Plum Software. Praemium operates its SMA investment platform in the UK, and is integrating that platform with its WealthCraft customer relationship management (CRM) and financial planning suite. This system needs third-party data feeds and product provider interfaces, and that is precisely what plum Software will bring.
Apart from dominating the Australian SMA sector Praemium has also positioned itself well to offer exposure to Australia’s massive self-managed superannuation fund (SMSF) industry, by rolling out new functionality that keeps track of SMSF transactions and allows accountants and SMSF advisers to reduce instances of breaches by fund trustees. This is especially important now that the ATO has been given extra regulatory compliance powers to punish breaches of contribution caps or pension limits.
The Australian business is already highly profitable, but the UK has been a loss-maker: the Plum acquisition should solve this over the next few years, giving Praemium scope to boost overall earnings quite nicely.
Pacific Energy Limited (PEA, 44.5 cents)
Market capitalisation: $164 million.
Energy supplier PEA has a good niche business delivering low-cost, tailored ‘off-grid’ power supply to the Australian resources sector, and ‘grid-connected’ renewable hydro power. PEA owns and operates 19 power stations, with a total power generation capacity approaching 211MW, using gas, diesel, dual-fuel or water to generate electricity, which is supplied to customers under long-term contracts.
The core business division, Kalgoorlie Power Systems (KPS), has been delivering its resource sector clients, including some of the world’s biggest mining companies, ‘off-grid’ power supply solutions more than 25 years. The hydro assets also have long-term power purchase agreements.
Despite obvious challenges in the resources sector, PEA has a very strong business. In February it won a contract from AngloGold Ashanti to convert its 44 megawatt Tropicana Gold Mine power station from diesel to gas-fuelled by 2016, which will improve the company’s future earnings. Similarly, the company’s Carosue Dam power station – which serves Saracen Gold Mines’ Carosue Dam project – is to be converted from 100% diesel to an 11 MW dual-fuelled (70% gas, 30% diesel) operation, and the contract extended.
While brokers don’t see much in the way of earnings growth in FY15, FY16 is considered likely to show a big improvement. According to Thomson Reuters, analysts have a consensus target price on the stock of 61 cents, with a forecast fully franked dividend yield of 5.62% in FY15 and 6.74% in FY16 also contributing to return.
Spring FG Limited (SFL, 45.5 cents)
Market capitalisation: $105 million.
New listing Spring FG is an Australian retail financial services company, offering financial education, financial planning, investment, insurance and tax advisory services, and direct share trade and execution services, mainly to SMSFs.
Established in 2010, Spring has been profitable since inception, and has operations in Sydney, Brisbane, Canberra and Melbourne. It has expanded both organically and through acquisitions. Moneytree Partners and Pink Diamond. More than half of earnings come from providing real estate investment advice, which is a specialisation. (Some investors see that sensitivity to the property market as a potential risk for Spring.) The other main specialisation is advising on the establishment, structuring and administration of SMSFs.
Spring has found a good reception on the sharemarket, moving quickly from its issue price of 30 cents to 45.5 cents. Spring forecasts revenue of $15.2 million in FY15 and net profit of $5.03 million. The company expects to pay a fully franked dividend $2.6 cents a share in October 2015: at the issue price of 30 cents that represented a fully franked yield of 8.8%, but at 45.5 cents currently, that prospective yield has come down to a still-attractive 5.7%.
Indoor Skydive Australia Group (IDZ, 50 cents)
Market capitalisation $69 million
When IDZ was listed in January 2013, many people would have dismissed it as a gimmick float: the company operates the iFly Downunder indoor skydiving simulator at Penrith, New South Wales, which opened in May 2014. But those who scoffed at Indoor Skydive Australia have watched in amazement as it has turned its issue price of 20 cents into a 50-cent share price (IDZ shares shot as high as 92 cents in March 2014).
The point that people may have missed is that the skydiving simulator – what the company calls a “vertical windfall” facility – is not solely a fun-park attraction: parachute clubs and the military also use it for parachute training.
IDZ is building its second facility at Surfers Paradise – which will be aimed mainly at the tourism market – and this facility is expected to open in the second half of calendar 2015. Construction of the third facility, in Perth, will begin this year: it is expected to be fully operational by mid 2016. ISA Group has signed a construction contract for the fourth iFLY facility, in Adelaide, and is in the process of completing the site identification and selection process for the iFLY Melbourne facility. The company sees its market opportunity as stretching to about seven facilities (including Penrith) in Australia and up to two in New Zealand. IDZ is also exploring opportunities in Asia.
IDZ certainly has a unique business. But it does not make a profit yet. However, Veritas Securities analyst Brent Mitchell rates the company a buy and has a 12-month price target of 82 cents, citing the popularity of tunnels globally and the success of the Penrith facility among military groups and professional skydivers.
Billabong International (BBG, 60 cents)
Market capitalisation $594 million
Lifestyle apparel company Billabong International is definitely being turned around – the December 2014 half-year profit of $25.7 million was the first profit for the company in three years, and was a big improvement on the loss of $126.3 million in the corresponding period in 2013.
That is very cold comfort to someone who paid more than $11 for the stock in 2007 – before Billabong’s near-death corporate experience – but it might interest some investors today, at 60 cents.
There is a long way to go – Billabong has not paid a dividend since 2012 – but analysts were generally pleased with the half-year result. Billabong appears to have stabilised, and the company managed to lift its gross margin in both Australia and Europe. The turnaround opportunity at Billabong is a big one, but analysts see the stock recovering to at least 70 cents as further progress becomes apparent.
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