5 under 50 cents

Once again, the Switzer Super Report has trawled through the region of the stock market that has share prices below 50 cents, looking for potentially lucrative opportunities. It’s a region populated mainly by micro-caps, with dividends – let alone fully franked dividends – conspicuous by their absence. But for that small part of your portfolio that is reserved for speculation looking for a good capital-growth opportunity, there are plenty of promising stories. Here are five of them.

1 - Micro X

Market capitalisation: $55 million

Adelaide-based mobile X-ray technology developer Micro-X Limited, which listed in December 2015, is getting ever-closer to the first sales of its DRX Revolution Nano device, which is designed to give hospitals a lightweight, portable X-ray imaging device, allowing them to give patients X-rays in their rooms and wards. The DRX Revolution Nano weighs 85 kilograms, much smaller than the cumbersome 500 kg–600 kg portable X-ray machines currently used in hospitals. Its small size allows radiographers much more flexibility when positioning the device for x-ray examinations. The first target market will be acute care hospitals, followed by aged-care providers.

Micro-X has signed a deal with Carestream Health, which was formerly Eastman Kodak’s health group, to sell and distribute the DRX Revolution Nano globally. In recent months, Micro-X has focused on its approvals: this month, the company received its ‘K’ Number from the US Food & Drug Administration (FDA), which means it can start marketing its product in the US, and Micro-X passed the documentation review for the International Organization for Standardisation (ISO), with its auditor recommending Micro-X for formal accreditation. The formal issue of ISO accreditation is expected by the end of April. This is an essential part of the application for CE Marking, which clears a product to be sold in the European Union.

Down the track, Micro-X has two other products, aimed at the military and security markets. The Ruggedised Nano is intended to be used in military hospitals and disaster and aid response hospitals, which currently are unable to carry a 500-kilogram X-ray device into a remote area. The Mobile Backscatter Imager (MBI) will incorporate the group’s miniature X-ray technology in a remote-controlled robot to allow for safe assessment of improvised explosive devices (IEDs), such as roadside bombs.

But the imminent launch on the global market of the DRX Revolution Nano is the main attraction for investors. Revenue will start to flow, and eventually (investors would expect) profit to follow. The stock must be considered speculative, but the DRX Revolution Nano is impressing a lot of people in the imaging industry: Carestream reports strong interest from trade shows for its early marketing awareness campaign for the product. The analysts who follow Micro-X have a consensus price target on the stock of 97.8 cents, more than twice the current market price.

2 - Compumedics Limited

Market capitalisation: $88 million

Still in the medical device field, Compumedics develops, makes and markets diagnostics technology for the sleep, brain and ultrasonic blood-flow monitoring applications.

Compumedics started off focusing on the sleep medicine market, monitoring and diagnosing conditions that affect sleep. The company has since moved into monitoring neurological disorders, including long-term epilepsy monitoring (LTEM), through its NeuroScan brain analysis software; ultrasonic monitoring of blood flow through the brain, and brain research.

The company’s brain blood-flow Doppler sonography division, based in Germany, is known as DWL. Compumedics has also developed the Somfit, a sleep monitoring device that measures brainwaves, muscle movement, and sleep conditions and then sends detailed information to the user’s smartphone via an app.

In February 2016, Compumedics signed a deal to gain access to state-of-the-art magnetoencephalography (MEG) imaging technology from South Korea’s Korean Research Institute of Standards and Science (KRISS). While similar to MRI (magnetic resonance imaging) or PET (positron emission tomography) scans, the MEG system provides 50% greater spatial resolutions, meaning that the MEG system gives clinicians a better visual view of the brain, enabling early detection of neurological disorders.

In February, Compumedics’ December 2016 half-year report left a bit to be desired, with US sales down 11% and sales delays reported at DWL – although the Asia and China businesses delivered a 45% lift in sales, while Latin America revenue surged by 80%.

The hit to revenue from the US business and DWL saw half-year revenue fall by 7%, to $16.2 million, while net profit slumped 88%, although this reflected the fact that the previous year contained once-off favourable adjustment of $500,000, relating to booking of a deferred tax asset.

Nevertheless, Compumedics had to cut its full-year FY17 guidance from revenue in the range of $41 million–$43 million and net profit in the range of $4 million–$6 million, to revenue of $38 million–$42 million and net profit of $2.5 million–$5.5 million. An unforgiving market stripped 34% from the share price.

But that haircut has opened up a bit of value. At 49.5 cents, Compumedics is trading at well under half the analysts’ consensus price target, at $1.11. According to Thomson Reuters, analysts expect earnings per share (EPS) of 3.6 cents in FY17, up from 1.94 cents in FY16, and they expect a big lift in FY18, to 6.5 cents a share. FY18 is also the year that analysts expect the first dividend from Compumedics, at 1.6 cents a share.  The company is a global technological leader, and there will be a lot of “medtech” investors prepared to back it at these levels.

3 - Rhipe

Market capitalisation: $62 million

Cloud-based software distributor rhipe is a managed services business that partners with large software vendors – such as Microsoft, IBM, Citrix, VMWare, Acronis and Trend Micro –  to market their services to enterprise customers through subscription licensing. rhipe’s enterprise customers pay for the usage of these services, according to their consumption: rhipe drives this consumption with value-added services such as training, consulting, marketing, support, reporting and subscription billing services. In this manner, Rhipe also drives lead generation for its vendor partners.

Licensing accounts for 96% of the company’s business: that is monthly annuity-based licensing revenue generated from more than 2,000 technology service provider customers. The company’s enduring partnership with Microsoft in Australia and South-East Asia has been the main driver of rhipe’s growth: rhipe is Microsoft’s number one partner in the Asia-Pacific region driving the adoption of cloud services, and helping Microsoft meet its revenue targets. The 32% growth in revenue in FY16 was powered by the company’s appointment as a Microsoft cloud solutions provider (CSP) in April 2015.

Rhipe also has a Microsoft Services Provider Licence Agreement (SPLA) and the software giant has also appointed rhipe as its first (and the world’s first) pure-play cloud licensing solutions provider (LSP), with rhipe piloting a system where it supplies both the enterprise agreement as well as SPLA licensing.

For the half-year ended December 2016, rhipe returned to profitability, making $15,000 profit, compared to a $772,000 loss the previous year. The second quarter of the year was a major turnaround on a poor first quarter, largely driven by a loss in the servicing division, but for the half-year revenue did manage to rise 9%, to $72.5 million, driven by a 12% lift in licensing revenue to $$70 million. The licensing gross margin increased from 15.2% to 15.8%.

The stock market was not greatly impressed with what it saw as slowing revenue growth, and with rhipe also lowering its FY17 revenue guidance in the half-year report, the stage was set for punishment – and the shares were promptly slashed in price by 20%. But the company reconfirmed its FY17 guidance target for EBITDA (earnings before interest, tax, depreciation and amortisation) of $4 million.

The sharp plunge in the share price, when the half-year result was released, has made rhipe a much more attractive proposition. According to Thomson Reuters, analysts are looking for earnings per share (EPS) of 2 cents for the full FY17, up from 0.23 cents in FY16, and a loss of 1.1 cents a share in FY15. In FY18 the analysts expect rhipe’s EPS to double, to 4 cents, with return on equity (ROE) rising to 16.6%, from an expected 8.6% in FY17. The analysts’ consensus price target on RHP is $1.

4 - Eureka Group

Market capitalisation: $98 million

Gold Coast-based retirement village operator Eureka Group specialises in the low-cost sector of the national aged care and retirement market. It is Australia’s largest listed provider of affordable housing for seniors, basing its model on providing rental accommodation and associated care to retirees, who depend on Australian government pension and rent assistance – in Australia 77% of single people over the age of 65 rely on pensions as their primary source of income. Eureka sources almost all of its revenue indirectly from the Federal Government with rent and associated weekly costs coinciding with the social security and rental assistance payments.

Eureka has 35 villages under management – with just over half being in Queensland – with a total of 2,069 units owned and/or managed. The business model starts with Eureka searching regional Australia for low-cost retirement villages, or assets it thinks suitable for “re-purposing” to low-cost rental retirement accommodation. Eureka then concentrates on filling those assets with suitable residents and providing food and associated support services, often in partnership with not-for-profit providers, such as Blue Care. Eureka ensures that all rents and other associated payments are collected, all local, state and federal regulations are complied with, and that all Australian Taxation Office (ATO) and Australian Securities Exchange (ASX) and any other reporting requirements are met, creating significant economies of scale in shared back-office services.

Eureka both operates its own retirement villages and provides complete management services for other retirement village providers. The company’s villages are located near the kind of senior amenities that other providers offer, helping Eureka renters to stretch their dollars further.

Eureka shares were hammered in February on the release of the half-year report, despite a 53% rise in revenue, to $12 million, and a 72% rise in net profit, to $6.3 million. But the company said the result was below expectations due to several proposed purchases failing due diligence, and “vendor difficulties,” which combined to cut its acquisitions from a planned four to six villages, to just two. In response to what was seen as an interruption to the growth trajectory, the shares lost 14%, to 43 cents. That price fall has definitely made Eureka worth a closer look.

Eureka’s medium-term goal is to own and/or manage 5,000 units across Australia. The company says it will acquire 8-12 villages over the next 12 months with 4–6 villages to be acquired by June 30, 2017.

On Thomson Reuters’ collation, the analysts’ consensus earnings expectation for Eureka for the full-year is 4.4 cents a share, up 48% on the 2.97 cents reported in FY16. Analysts expect EPS to increase again in FY18, to 4.8 cents. Return on equity (ROE) in FY17 is expected to come in at 12%, up from 9.2% in FY16. Eureka said in its half-year result that it will consider the feasibility of dividend payouts over the next 18 months. Analysts see the stock moving to 64 cents, which would represent a nice 50% capital gain if achieved.

5 - Cooper Energy

Market capitalisation: $248 million

There are not many good stories in gas supply at the moment, but Cooper Energy is definitely one of them – its Sole gas field is a potential significant source of new gas supply for the eastern Australian market. In fact, the $550 million project is the only major conventional gas supply project under development on the east coast.

The Sole field is located in the eastern part of the Gippsland Basin, about 40 kilometres off the Victorian coast. The project has advanced to the final stage before commitment, and all going well, the first gas from Sole to the processing plant at Orbost could flow in the March 2019 quarter.

Central to the progress has been some innovative thinking on marketing the gas. Rather than rely on selling into the Gladstone LNG projects for export, Cooper Energy has signed four cornerstone customers for its gas, namely Alinta Energy, AGL, EnergyAustralia and glass-maker O-I Australia, locking in 80% of the 25 petajoules of gas a year that Cooper will produce from Sole – and later, the Manta project that is next on the company’s agenda – until 2027.

Last month, Cooper Energy signed a deal with pipeline operator APA Group under which the latter will buy the Orbost gas processing plant from Cooper, and invest $250 million in upgrading the plant. APA will process the gas from Sole – and later, the nearby Manta project that is next on Cooper’s agenda – and deliver it to the market. This marks APA’s first foray into processing.

In a sector where you read the word ‘crisis’ in headlines all the time, Cooper is a great story. It has existing gas production and two new gas projects to supply south-east Australia from 2019 onwards, backed by long-term contracts with blue-chip utility and industrial customers. With Manta scheduled to be developed from FY21, Cooper says that within six years, it plans to be producing more than 20 times what it did in FY16.

For FY17, Cooper expects 1 million barrels of oil equivalent (MMBOE), with 75% of that being gas, up from 300,000 BOE in FY16, which was all oil. Gas now accounts for 90% of the company’s’ 11.6 MMBOE of 2P (proven and probable) reserves.

More importantly, Cooper should be coming into production in 2019 just when the current gas supply shortfall in the Australian east coast market is expected to widen.

According to Thomson Reuters’ collation, analysts expect Cooper to earn 0.6 cents a share in FY17, rising to 1.9 cents in FY18. The analysts’ consensus price target for COE is 61.5 cents, or 64% north of the present share price.