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Three small-caps to keep for three years

Posted By James Dunn On In Markets,Shares | No Comments

There is a fascinating range of companies on the Australian stock exchange. Here from the smaller end of the market are three small-caps to keep for three years – two where you can expect to be paid a very healthy yield for holding the stock; and a third that doesn’t pay a dividend, but is a highly promising and world-leading Australian medical device maker, which looks poised for success.

Nanosonics

Medical device maker Nanosonics (NAN, $211.5 million) may be a small Australian company, but it has high-powered support in rolling out its innovative disinfection technology: Dow Jones Industrial Average member GE signed a contract to be the exclusive US and Canadian distributor of the lead product – Trophon, a point-of-care ultrasound probe disinfection unit – in early 2011, and recently made a fresh investment to boost the rollout of the device.

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The Trophon technology was a world-first for medical devices that cannot be sterilised by conventional means because of heat sensitivity. Until Trophon, ultrasound probes were disinfected with corrosive chemicals that are only about 80% efficient. Nanosonics’ biocide technology is much more efficient and environmentally friendly. The technology has no competitor and stands every chance of being accepted as the global standard of care.

Trophon achieved US Food & Drug Administration (FDA) approval in 2011 and, shortly afterwards, Nanosonics appointed GE as its North American distributor. Trophon has also been granted a product licence by the South Korean regulator, and has filed for regulatory approval in Mexico and Japan. Trophon is also cleared for sale in the UK and Europe (Toshiba is its non- exclusive partner in the UK).

In FY13, Nanosonics lifted sales by 21% to $14.9 million. Total revenue, which includes government grants and interest, increased by 35% to $17.6 million. The company made a gross profit of $8.5 million, but slipped to a net loss of $5.8 million, once increased investment in market development was booked. The company has $24 million in cash and is in a good position to ramp up marketing further – particularly with GE driving this process in the important American market.

GE has established a dedicated North American sales team to push out the device to medical facilities in the US and Canada. Nanosonics looks poised to follow in the footsteps of other Australian medical device success stories, such as ResMed and Cochlear. The shares started the year at 48.5 cents, but have risen to 80.5 cents as the story continues to strengthen.

Gale Pacific

This Melbourne-based shade products maker has managed a twist on selling ice to the eskimos – it sells shade products to the Arabs. Gale Pacific (GAP, $86.3 million) estimates that it has a 50% share of the market for shade products in its key Middle East regions, Dubai, Oman and Saudi Arabia. The company makes screening and shading products, such as shade cloths and sails, gazebos, umbrellas and awnings, under the Coolaroo brand.

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GAP also makes advanced polymer fabrics under the Synthesis brand for a range of commercial and industrial applications, including building design, construction, agriculture, horticulture and water conservation. As well, it owns home, garden and outdoor furniture brand Zone Hardware and Highgrove Glass, which specialises in high-quality glass fencing, shower screens and splashbacks and window furnishings brand Riva Window Fashions. GAP is also Australia’s largest supplier of artificial grass.

GAP’s main manufacturing facility is in Ningbo, China. It also conducts some manufacturing in Melbourne and Rancho Cucamonga, USA.

GAP had a tough time of it in the mid-2000s, but has bounced back since it set up its manufacturing in China in 2006. In FY13, the company lifted net profit by 7%, to $9.1 million, on the back of revenue that rose by 9% to $120 million. The dividend was also boosted, by 8% to 2.65 cents a share, 80% franked.

The company has patiently built markets in the US, China, the Middle East, Japan and South Africa – as well as Australia, where Bunnings is its largest customer. GAP is 24% owned by the Pratt family’s investment vehicle, Thorney Investments.

Broker CIMB securities expects 2.9 cents a share this financial year, fully franked, which at 29 cents, puts the stock on a 10% yield. If the dividend and franking forecast hold up, that would represent an effective yield of 11.7% to an SMSF in accumulation mode, and 13.4% to an SMSF paying a pension. That is a tall order on the dividend side, but at 29 cents, even matching last year’s 2.65 cents a share would price the stock at a yield north of 9%. Trading on 9.4 times earnings, this stock is cheap as chips given its growth prospects. The company is on record as expecting to double in size within five years.

Ruralco

Hobart-based Ruralco Holdings (RHL, $187 million) is a good exposure to the potential boom in Australian agriculture, as the industry finally starts to get serious about export opportunities to the country’s north. Ruralco sells goods and services to Australian farmers – it operates through a national chain of businesses that specialise in rural merchandise and services.

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The heart of Ruralco’s business is its CRT (Combined Rural Traders) brand, which is the largest network of independently owned rural stores throughout Australia. Ruralco is essentially a buying group for its independent trader members: it performs the same role in the rural services business that IGA does in supermarkets.

The company runs 40 other businesses across wool, livestock, finance, insurance, grain marketing, water and irrigation, real estate and fertiliser manufacturing (Grow Force). It is a major force in the Australian agricultural industry.

For the half-year ended 31 March, RHL lifted sales revenue by 7% to $495.4 million, but saw underlying profit fall by 51% to $5.4 million and a net loss of $500,000 recorded, as RHL wrote-down the value of its investment in Elders – which it subsequently tried to buy in full, in July, but was rejected. The company maintained its interim dividend at 10 cents.

For the year ending 30 September, RHL is expected by broker CIMB Securities to pay 20 cents a share, and extend that to 21 cents in FY14. At $3.40 that prices Ruralco on a nominal fully franked yield of 6.2% in FY14, which equates to after-tax yields of 7.5% for an SMSF in accumulation mode and 8.8% in pension phase. At 11.1 times prospective FY14 earnings, this stock is a very undemanding buy for its prospects.

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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