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It’s almost Easter, and around the stock market, investors feel a spring in their step and the irresistible urge to hop into some new stocks. Value is always there if you look closely enough, so here are my top three ‘good eggs’ in the small-cap sector.
Fleet management and salary packaging specialist Eclipx Group has come down in price from a high of $4.32 in November 2017 to levels around $3.60, but that has opened up good value for buyers. The company is well down the path of integrating the acquisitions of online retail and vehicles, plant and equipment auction company Grays eCommerce (May 2017) and car buying platform Car Buyers Australia (December 2017), and investors will be hoping that Eclipx does as good a job with these as it has done with car rental services business Right2Drive, which was acquired in 2016. Right2Drive – which provides an accident repair rental car to a driver who is not at-fault in a car accident, with the at-fault party billed for the cost of the rental – accounted for about half of the company’s 14% profit growth in FY17. In December 2016, Eclipx bought Onyx car rentals, to boost the scale of the Right2Drive business. In June 2017, the company launched “Georgie,” its car buying business targeting the Australian consumer market: Georgie sourced more than $30 million worth of new vehicles in its first six months of operations.
Eclipx now has in place the business mix that will drive it over the medium term – a diversified financial services group with specialist expertise in fleet and consumer motor finance, accident replacement vehicle rental and equipment financing, in Australia and in New Zealand.
Eclipx has a panel of green lights – ‘buy’ or ‘outperform’ – from the six broking firms that cover the stock, says FN Arena, and an analysts’ consensus target price substantially north of the current price. The company used its annual general meeting (AGM) last month to reaffirm guidance for the full-year (to September 2018): Eclipx expects “continued strong earnings momentum” into FY18, and is targeting 10%–12% growth in earnings per share (EPS). Trading on about 12.7 times expected FY18 earnings, Eclipx looks exceptional value, with an attractive yield to boot, projected at 4.7% fully franked for FY18 and 5.4% fully franked for FY19.
Advertising and marketing services group WPP AUNZ Limited (WPP) is the former STW Communications Group Limited, which merged with the Australian and New Zealand businesses of UK company WPP Plc to create WPP AUNZ. The company is a group of more than 90 marketing services companies that collaborate to create world-class customer experiences and drive growth for its clients. WPP AUNZ operates on the parent group’s model of “horizontality,” which means that it tries to leverage the ‘connected know-how’ of its diverse skill set, to deliver seamless solutions for clients.
The rationale for “horizontality” is that the company’s clients demand this coordination of skills and services. It’s easy to roll your eyes at this kind of talk, but WPP has more than 205,000 “individual brains” into which it can tap: it says – cue eye-roll – that this represents “the planet’s greatest store of advertising and marketing services insight, expertise, creativity and experience.” Park your cynicism, and this does offer a powerful network into which the Australian business can tap.
The company believes this model is gaining traction with the industry because it provides clients with better value for their spending. It appeared to help WPP AUNZ deliver a 3.1% lift in profit before tax in 2017 (WPP uses the calendar year as its financial year), to $125 million, beating broker estimates – and the company’s guidance of October 2017 – in a flat media market. Net sales were $869.9 million, up 0.6%, while the full-year dividend was boosted by 5%, to 6.3 cents a share, fully franked, in the second set of full-year results since WPP and STW merged.
WPP’s momentum has continued into 2018, with new contract wins. The company expects to boost EPS by about 3% in 2018, which should be viewed as a very low bar, and likely to be exceeded. WPP is trading at just under 10 times forecast 2018 earnings, which looks cheap. On analysts’ consensus expected dividends, WPP is well above-market in terms of dividend yield, with 6.8% fully franked projected for 2018, increasing to 7.3% fully franked in 2019.
I was a fan of Global Construction Services (GCS) at 46 cents, back in July 2013, and I still like the stock, at 78.5 cents. The construction and maintenance services company operates across the commercial, residential, resource, industrial and oil and gas sectors. GCS is a leading supplier of integrated on-site products and services to all industries. It offers an onsite workforce, a training centre, scaffolding and access, formwork and concrete, specialised site services such as traffic management and painting, and security. This means it can provide services at any stage of a project’s lifecycle.
Commercial contracting generates about 73% of revenue, with labour services the next biggest contributor, on 15%. About 62% of revenue comes from the western seaboard. At the end of 2016, that west coast proportion was 85%. The company has a growing footprint across Australia and tender activity implies that its project tender pipeline remains robust.
GCS has changed slightly since 2013. It owns a majority stake in one of the top two operators in cladding, Gallery Facades, which it bought in 2014. (Also, late last year GCS sold its WA-focused equipment hire business to industry rival Onsite Rental Group.) Gallery Facades specialises in installation of aluminium panelling on commercial projects. The cladding business has been the focus of huge attention since the deadly Grenfell Tower fire in London in June 2017: audits are being conducted across Australia to identify non-compliant installation of combustible cladding. Thousands of buildings are likely to be affected. Gallery is expected to benefit from large-scale replacement of combustible cladding over the coming years. Interest in this part of the business appears to have helped the stock’s rise from levels around 55 cents in mid-2017.
GCS has not given full-year guidance, but has stated that “strong results, balance sheet and cashflow generation” are expected to continue in the second half. On consensus, analysts expect a 27% boost to EPS for FY18, to 7.2 cents, followed by a similar lift, to 9.1 cents, in FY19. The full-year dividend is projected to more than double this year, to 4.3 cents, and add a further cent in FY19. That places GCS on a fully franked yield of 5.7% this year and almost 7% in FY19, and a P/E ratio of 10.6 times forecast FY18 earnings. With an analysts’ consensus price target of $1, that implies attractive value on a potential total-return basis.