I’ve been trawling through the ASX’s small caps – which effectively means the companies in the S&P/ASX Small Ordinaries Index, which covers the stocks ranked between 100 and 300 by market capitalisation. There are a lot of interesting stories to be found there – and here are my three small-cap picks for 2023.
1. Jumbo Interactive (JIN, $14.17)
Market capitalisation: $892 million
12-month total return: –21.6%
Three-year total return: –6.7% a year
Expected FY23 dividend yield: 3.2% fully franked (grossed-up, 4.5%)
Analysts’ consensus price target: $17.30 (Stock Doctor/Thomson Reuters, ten analysts), $17.41 (FN Arena, four analysts)
Online lottery ticket seller and platform provider Jumbo Interactive is a digital lottery specialist, providing its market-leading lottery software platform and lottery management expertise to the charity and government lottery sectors in Australia and globally.
Originally a software company, Jumbo found its business niche in lotteries. Its proprietary software makes running lotteries easier, removing for its government and charity clients the complexity involved in running a lottery. The company has three main operating segments, which Jumbo describes as servicing the full lottery management value chain:
- Lottery retailing: selling lottery tickets through the internet and mobile devices;
- Software-as-a-Service (SaaS): licensing its Powered by Jumbo SaaS lottery platform to government and large charity operators; and
- Managed services: providing its lottery platform as well as lottery management services to charities and causes that are looking to establish a lottery program, or enhance an existing program.
In particular, Jumbo sees leveraging its SaaS offerings as a growth opportunity, enabling it to enter the US lottery market. Jumbo’s technology platform has a very strong competitive position, as it would be difficult and costly for a competitor to replicate it. Both the technology and player-centric user experience are market-leading.
Jumbo has expanded both through acquisition and organically. Between FY2017 and FY2022, the company grew revenue by a compound annual growth rate of 26% a year, EBITDA (earnings before interest, tax, depreciation and amortisation) by 31% a year, and operating cashflow by 32% a year — outstanding growth numbers in any business.
The company was humming in FY22, reporting double-digit growth in ticket sales, revenue, and earnings. The full-year FY22 dividend was boosted by 16%, to 42.5 cents a share, fully franked, and the company announced an on-market share buy-back of up to $25 million.
Jumbo has four million active players across Australasia, UK and Canada, and is well-funded for further growth, with a cash balance of $60 million and a new $50 million debt facility. The lottery business has proven to be highly resilient to recessions, and JIN looks to be very well-placed for continued success: in particular, the Powered by Jumbo SaaS platform has a huge global opportunity.
There is an attractive fully franked dividend to go with the share price potential: analysts’ consensus expects a 3.2% yield (grossed-up, 4.5%) in FY23, rising to 3.7% (grossed-up, 5.2%) in FY24. It might not be as lucrative as winning one of the jackpots for the tickets it sells, but Jumbo looks to be excellent value at current levels.
2. Kelsian Group (KLS, $5.80)
Market capitalisation: $1.27 billion
12-month total return: –12.3%
Three-year total return: 7.6% a year
Expected FY23 dividend yield: 3.2% fully franked (grossed-up, 4.6%)
Analysts’ consensus price target: $8.00 (Stock Doctor/Thomson Reuters, ten analysts), $7.91 (FN Arena, three analysts)
The former SeaLink Travel Group is a bus and ferry operator, conducting transport services in Australia, United Kingdom and Singapore. The Adelaide-based business has expanded carefully internationally: through its London bus joint venture, Kelsian employs more than 4,000 people operating 1,250 buses in London, including 300 electric vehicles. It also operates in the Channel Islands. In Singapore, it operates 734 buses at present.
The Australian bus business includes (Sydney metro, Perth metro, Adelaide metro, Melbourne metro, Katherine (NT) region, and the broader nationwide business has three key pillars: public transport, resources transport and education transport.
The Marine and Tourism business operates vehicle and passenger ferry services, barging, coach tours and package holidays, lunch, dinner and charter cruises and accommodation facilities throughout Australia.
At the moment, the Australian bus business generates 61% of revenue, the international bus operations contribute 20%, and Marine and Tourism accounts for 19%. But the Marine and Tourism portfolio is well-poised to take advantage of the return of international visitors, and increased interstate activity.
Analysts see the mix of exposures giving the company solid prospects for earnings growth over the next couple of years – and on consensus, they see Kelsian as under-valued. And there is a solid fully franked dividend yield in the picture, too, with a grossed-up yield of 4.6% expected in FY23, rising to 5.3% in FY24.
3. Select Harvests (SHV, $4.21)
Market capitalisation: $509 million
12-month total return: –32.5%
Three-year total return: –20.1% a year
Expected FY23 dividend yield: 0.5% fully franked (grossed-up, 0.7%)
Analysts’ consensus price target: $6.30 (Stock Doctor/Thomson Reuters, six analysts), $6.40 (FN Arena, one analyst)
One of the ASX’s premier agribusiness exposures, Select Harvests is the largest almond producer in Australia, and as such, accounts for 8% of global production, well behind the US (mainly California), which dominates the global almond production industry, with 79% of the market. But Select’s position is highly valuable, given that it is a counter-seasonal supplier to the northern hemisphere growers.
In that role, the vertically integrated (growing and processing, both primary and value-adding) Select supplies the industrial food markets globally, under its Renshaw and Allinga Farms industrial brands. It supplies supermarkets, health food stores, other food manufacturers, retailers and the almond trade. Select exports almonds and value-added food products to China, India, the rest of Asia, Europe and the Middle East, with about 80% of production exported. China and India account for 63% of export sales.
Select’s almond processing and value-adding facility (Carina West) is located at Wemen in north-west Victoria, in the heart of the almond orchards along the Murray River. Despite challenging wet conditions, Select has told the market that it expects a FY23 crop of 30,000 metric tonnes – subject to normal horticultural conditions – which would represent an increase on the 29,250 metric tonnes delivered in FY22. Although only a 2.6% lift, in the context of floods, that would represent a strong operational performance.
However, the global almond price remains flat, as California works through the hangover of its record crop two years ago. But California is in chronic drought at the moment (the Western part of North America experiences the reverse of what the La Niña oceanic and atmospheric pattern brings to Australia) and eventually, that will flow through to improved pricing. Select is still priced for the almond price weakness, but that means a buying opportunity. Demand for almonds is rising globally; and Select had a recent win when Australian tree nuts including almonds were included in the recently negotiated Free Trade Agreement between Australia and India. India is in the top four global almond markets, and the 2023 Australian almond crop will benefit from this agreement, helping Australian almonds to be more competitive.
While FY22 saw earnings come off significantly, FY23 and FY24 (Select Harvests uses September 30 as its balance date) are shaping up well for potential earnings growth for Select – particularly FY24. There is a small dividend yield on offer – which should be much better in FY24, at about 3.4% before franking, according to analysts – but all things considered, SHV looks a very attractive buy right now.
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.