Five small caps for 2014

Financial journalist
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Small-cap stocks are a hard area to investigate. Broker research is thin, and you have to do most of the hard yards yourself. To help out, here are five small-cap stocks we’ve examined that are worth putting on your watchlist in 2014.

Infomedia Limited (IFM)

Share price: 61.5 cents
Market cap: $187.55 million
One-year total performance: 53.18%

Source: Yahoo

One of the Australian stock market’s true global success stories – but still little-known by investors – Infomedia provides IT solutions to the after-sales parts and service sector of the global car industry. Infomedia supplies online parts selling systems, menu pricing systems, a range of publications, data analysis and information research for carmakers. The core of the system is the electronics parts catalogue, Microcat, the online parts ordering system Microcat Market, and the Superservice suite of sales tools, launched in 2011. Infomedia describes the combined online offering as the “Microsoft Office” for automotive after-sales.

More than 70,000 car dealers in more than 185 countries subscribe to Infomedia’s products: 46% of revenue comes from the EMEA (Europe-Middle East-Africa) region, 27% from Asia-Pacific, and 27% from North America. In FY13, revenue rose by 6.6% to $48.7 million, while net profit was up 19% to $10.1 million, beating the company’s guidance by 6%. IFM paid a dividend of 2.82 cents a share, up from 2.4 cents a share in FY12. But in FY13 only the final dividend (of 1.55 cents a share) was fully franked.

Infomedia is debt-free and had $9.3 million of cash at 30 June 2013.

The company has forecast FY14 sales revenue growing by 8%–12% and net profit rising by 10% –19%. At 61.5 cents, the consensus dividend forecast of 3 cents a share puts it on a prospective FY14 yield of 4.9%, fully franked. The company is well-positioned as ‘big data’ leads carmakers toward collaboration with third-party IT providers like Infomedia. The company also benefits from a weaker A$ against the US$ and euro. On analysts’ projections, IFM sits about 15% below the consensus target price of 73 cents.

Southern Cross Electrical Engineering (SXE)

Share price: 74 cents
Market cap: $119.5 million
One-year total performance: –34.77%

Source: Yahoo

Perth-based Southern Cross is a specialist provider of electrical and instrumentation (E&I) services to the resources sector, in construction and over the life of a project. Southern Cross is exposed to the LNG, iron ore, coal seam gas (CSG), precious and industrial metals, and coal sectors. Major customers include Rio Tinto, BHP, BP, MCC Sino Iron, Silver Lake Resources and AngloGold Ashanti. In late 2012, Southern Cross formed a 50:50 joint venture with Irish-based global oil and gas E&I specialist Kentech – known as KSJV – to tap into the Australian LNG industry, winning its first contract in September 2013, for E&I work at the Australia Pacific LNG project on Curtis Island in Gladstone.

Over FY13 and so far in FY14, the company has racked up a series of impressive contract wins, starting with a $100 million contract at Rio Tinto’s Cape Lambert iron ore port – SXE’s largest ever contract – and followed by a $40 million contract at AngloGold Ashanti’s Tropicana gold project in Western Australia and a $29 million contract at Rio Tinto’s Yandi iron ore mine expansion. Southern Cross has continued the momentum this month, winning two contracts from Rio Tinto, the first a $40 million electrical and instrumentation job at the Cape Lambert port and the second a $10 million electrical and instrumentation sub-contract at the Nammuldi iron ore mine.

In FY13, Southern Cross lifted its revenue by 26% to $278 million, and boosted net profit by 27% to $17.3 million. Revenue has tripled since FY11 – by the fourth quarter of FY13, it was running at an annualised $400 million. The dividend was lifted by one-fifth, to 2.7 cents a share, fully franked. At 74 cents, SXE is trading on a prospective price/earnings (P/E) ratio of 5.9 times earnings and a 4.3% yield – and a long way short of Macquarie’s target price of $1.22.

Reckon (RKN)

Share price: $2.10
Market cap: $269.02 million
One-year total performance: –10.3%

The business model of small-business accounting software company Reckon has been fairly simple over the years: it has held the rights to distribute the Quicken and QuickBooks products of US giant Intuit, the biggest chunk of its revenue. But since March 2012, when the company announced that its Intuit deal would cease on Feb 2014, Reckon has had to convince the market that it could develop its own products, and its own ‘cloud’ strategy.

Source: Yahoo

The business model of small-business accounting software company Reckon has been fairly simple over the years: it has held the rights to distribute the Quicken and QuickBooks products of US giant Intuit, the biggest chunk of its revenue. But since March 2012, when the company announced that its Intuit deal would cease on Feb 2014, Reckon has had to convince the market that it could develop its own products, and its own ‘cloud’ strategy.

Reckon has effectively remade itself as a multi-platform software developer, giving customers the choice between desktop, hosted and cloud – but with a growing emphasis on the cloud.

The Quicken and QuickBooks products have been rebranded Reckon Accounts. Reckon’s own cloud accounting application, Reckon One, was launched in 2013, including a mobile application. Its professional services division has its own cloud application, APS Private Cloud. Reckon’s fully integrated document management system Virtual Cabinet has been introduced across all of the company’s markets. Reckon has invested heavily in its mobile strategy, in both Reckon One and the Reckon Pay mobile payments service – linked with NAB – that will be launched early this year.

RKN now has to prove itself, but the signs are encouraging. The share price has struggled since the Intuit divorce was announced, and appears still about 13% –15% under-valued on consensus target price grounds. The take-up of Reckon One will be pivotal this year. In the meantime, holders should be able to pick up a 4.9% yield in FY14.

Empired (EPD)

Share price: 66 cents
Market cap: $62.74 million
One-year total performance: 47.72%

Source: Yahoo

Perth-based IT services provider Empired positioned itself for a big year in FY14, with some significant announcements in late 2013.

First, in August, Empired partnered with fellow IT house Oakton to land a multi-million dollar services contract with gold miner Barrick Gold Corporation to supply a fully managed Oracle service for Barrick’s core financial accounting system, including real-time replication, in the Asia Pacific region. Empired will provide the infrastructure and managed services through its cloud computing platform, FlexScale.

Then, on one day in September, Empired announced a $15 million acquisition of east coast Microsoft specialist OBS; a $15.5 million equity capital raising to pay for it; and a three-year, $50 million contract – which it termed a “game-changer” – with an un-named mining company to design and implement core operational mining systems to replace the miner’s legacy technologies.

Empired followed these successes in October by winning a hotly contested $46 million tender for infrastructure support services from Main Roads Western Australia (MRWA), managing the-fibre optic network behind WA’s street lights for a period of up to five years. The contract wins are perfect examples of the kind of higher-margin, multi-year, multi-million dollar managed services work that Empired has set itself to land – the company expects to contest $150 million worth of work in FY14.

Net profit has grown from $200,000 in FY11 to $2.1 million in FY13. In FY13, Empired lifted revenue by 8%, to $48 million, and boosted net profit by 68%, to $2.1 million. A maiden dividend of half a cent a share, fully franked, was paid. At a trailing (FY13) yield of 0.76%, EPD is not a yield proposition – but at least it’s a start. The stock is a capital gain prospect for patient investors: keep in mind, though, that traded volume is low.

Quickstep Holdings Limited (QHL)

Share price: 23.5 cents
Market cap: $93.04
One-year total performance: 50%

Source: Yahoo

While the headlines proclaim gloom for Australian manufacturing, composite-materials specialist Quickstep begs to differ. At its Bankstown facility in Sydney, Quickstep makes advanced carbon-fibre parts for aircraft, and hopes to extend this work into car parts.

In February 2011, Quickstep signed a long-term agreement with Northrop Grumman Corporation to make parts for the F-35 Lightning II (Joint Strike Fighter) aircraft, which will be flown by the Royal Australian Air Force (RAAF) as well as ten other air forces. Quickstep will make 21 different parts for the JSF program: the supply agreement is worth up to $700 million to the company, over 20 years. At peak production rates, Quickstep says revenue from the JSF contract will reach $40 million a year. The first parts were delivered in April 2013.

In March 2012 Quickstep won an international tender to supply wing flaps for the C-130J ‘Super Hercules’ military transport aircraft, as sole supplier. The US$75 million deal will see 24 sets of wing flaps delivered each year until 2018. The first production order was for 24 sets of wing flaps, worth US$12 million (Quickstep only counts actual purchase orders in its ‘firm’ order book, which at 30 June 2013 stood at $30 million.) Quickstep expects the Super Hercules contract to generate revenue of between $75 million–$100 million over the next five years, with deliveries beginning in the current financial year.

Quickstep is also working on licensing its patented Quickstep Process and resin spray transfer (RST) technology, which can potentially produce carbon-fibre parts at very low cost: RST is being evaluated by German carmaker Audi, while in July 2013, the Quickstep Process struck its first licence deal, with Russian company, ORPE Technologiya, which will produce large carbon-fibre shields for satellite launching, in a €4.2 million ($A6 million) deal.

Aerospace exposures are very rare on the Australian Securities Exchange (ASX): Quickstep is the only listed Australian company that offers investors exposure to the fast-growing carbon-fibre market. But it does not currently make a profit and its potential must be weighed against that.

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 regards to your circumstances.

 

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