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It’s time for another group of ‘Five Stocks under 50 cents.’ Usually, that means micro-caps – and this time is no exception. Here’s an interesting group of stocks from that world that I like – including a fully-franked dividend payer.
Gale Pacific develops and makes high-performance technical textiles, which it exports around the world. The company invented knitted high-density polyethylene (HDPE) “shade cloth” fabrics in the 1970s and today makes a range of advanced polymer fabrics including knitted HDPE, coated HDPE and waterproof and coated polypropylene (PP) mesh fabrics, which are used in the architectural and construction, agricultural, industrial, horticultural, water and mining industries.
The domestic retail “shade sail” market represents about 70% of sales at the moment – mostly coming through Bunnings – with the commercial market, which comprises a diverse product offering that ranges from cricket pitch covers, school playground and carpark covers and scaffold screening, making up the rest. For example, grain storage and transport company GrainCorp is Gale Pacific’s largest Australian commercial customer, buying grain covers.
In exports, the Americas currently contributes 24% of revenue, with the Middle East/North Africa market accounting for 10.4% of revenue, and Europe/Asia 3.4%. GAP expects to grow these businesses as it develops commercial markets in the US – currently that is all retail – and builds on its commercial fabrics business in Europe and Asia, where it has exited low‐volume and low‐margin retail products.
In January, Gale Pacific announced that its pre-tax profit for the six months to 31 December 2017 would be $1.7 million, much better than the previous guidance of a break-even result, that it had given at the annual general meeting (AGM) in October 2017, and that its full-year pre-tax profit would come in slightly above the FY17 underlying pre-tax profit of $13.5 million. Unfortunately, earlier this month it back-tracked on that, saying that while second-half pre-tax profit was still expected to be higher than in the second half of 2017, full-year FY18 pre-tax profit is now expected to be in the range of $11.7 million–$12.7 million. That earnings downgrade knocked 7% from the share price, but that has made GAP a better entry prospect. There are no forecasts in the market, but a repeat of the 2-cent dividend from FY17 would see a 5.4% unfranked yield.
Gale Pacific has cleaned up its business over the last few years, getting out of non-core activities and focusing solely on its advanced polymer textiles, where it has globally competitive technology. It is looking to boost margins along with revenue, and is an attractive micro-cap global player.
Telecommunications and digital content provider Swift Networks has an interesting niche business, concentrating on providing fully integrated digital entertainment systems to the resources, hotel, lifestyle village, aged care and student accommodation sectors. Swift provides a range of services, including free-to-air television, pay television, telecommunications, internet data, wireless networks and on-demand streaming video to these sectors.
Swift announced a transformational deal last October, with US IT services company DXC Technology, to become the preferred vendor for DXC’s subsidiary Connect, which will offer Swift’s full suite of services to its client base – which stands at 6,000 private and public-sector clients across 70 countries.
Last week, investors saw the kind of deal that can flow from the DXC Technology partnership, with a five-year deal that sees Swift provide services to a major oil and gas company: Swift’s entertainment and crew welfare solutions will be deployed to up to 4,600 rooms a year, in onshore and offshore locations in northwest Australia.
That followed a deal in April with Wollongong-based Illawarra Retirement Trust (IRT), in which Swift will be the exclusive provider to IRT’s existing lifestyle community facilities – more than 30 sites across Australia – and new facilities.
In its half-year ended 31 December 2017, Swift boosted operating revenue by 32%, and more than doubled underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to $1 million. The company generated $1.25 million of cash flows from operating activities in the half-year. It ended with $4.1 million cash in the bank. Swift Networks is not yet profitable – but it can’t be faulted in putting together revenue-generating deals that show investors both a credible international growth strategy, and a pathway to profitability.
Communications and technical services company BSA is a quiet achiever of the micro-cap world: one of the many that are profitable, fully franked dividend payers, but which don’t get noticed because they’re small. To be fair, BSA operates in very competitive markets – in particular, the HVAC (heating, ventilation, and air conditioning) sector – but the company has started to show some good trajectory in its numbers. At the December 2017 half-year, underlying EBITDA was up 11% and net profit up 57%, and margins from recurring business also grew. BSA’s NBN business remains strong, but importantly, the company is growing its fire business quite well, and is also showing success in diversifying into the energy, solar and storage and infrastructure markets, to lessen the impact of the tough HVAC market on its results.
BSA has cut the number of contracts it seeks, to focus on higher-margin, cash-generating opportunities and it estimates that about 60% of FY18 revenue will come from annuity-style contracts – up from 53% four years ago. The growth of the Fire business is expected to lessen reliance on HVAC business, and also enables BSA to tap into a booming infrastructure sector. Having resumed dividends in FY17 with a 0.5 cent payout, analysts expect 1 cent this year and 1.3 cents in FY19, on the back of solid earnings growth in FY18 (+28% expected on consensus estimates) and FY19 (+36%). With the fully franked yield support, BSA looks a good bet at these levels.
Emerging biotech company Orthocell works in the regenerative medicine field: it has successfully developed and begun commercialisation of two autologous (using a patient’s own cells) cell therapies, Ortho-ATI, which treats damaged and degenerated tendons, and Ortho-ACI, which does the same for cartilage. Orthocell has also developed a collagen scaffold product called CelGro, for the repair and reconstruction of soft tissue injuries, such as tendon tears, and which also can be used for bone regeneration in dental and orthopaedic applications.
Orthocell is also developing its “Cell Factory” technology, which derives bio-active molecules that work to generate tissue-specific growth factors to enhance tissue regeneration. The cultivated stem cell-derived proteins produced by “Cell Factory” can potentially be used on their own to help regenerate bone, cartilage and other soft tissue injuries, or can be combined with CelGro. Orthocell has secured both United States and European patents for “Cell Factory.”
In all of its applications, Orthocell’s technology benefits from the combination of the ageing population and surgeons’ preference for bio-absorbable treatment matter. Orthocell estimates that procedures using scaffolds such as CelGro being done annually around the world imply an addressable market of about US$600 million ($800 million) a year. Autologous therapies are going to be an increasingly important field, and Orthocell is right in the thick of it.
Market capitalisation: $187 million
FY19 estimated yield: 1.7%, unfranked
Analysts’ consensus target price: 60.5 cents
14 May 2018 closing price: 46.5 cents
Perth-based IT services provider Empired has had a soft period on the stock market this year, mainly on the back of a slowdown in New Zealand on the back of a public-sector spending pause during the NZ election period, but that potentially opens up some value.
The first-half result came in at the upper end of guidance. Revenue rose 2%, to $85 million – the New Zealand business’ revenue slipped 13% – but underlying EBITDA rose by 14%, to $7.3 million, and net profit surged by 33%, to $1.5 million. US revenue rose by 21%.
Empired said it expected “solid” revenue growth in the current half, with EBITDA to be “significantly stronger” than in the first half, and strong operating cash flow continuing to reduce net debt. The company says Empired is “well placed to deliver strong earnings growth in FY19.”
Analysts back this view, with Thomson Reuters’ collation of forecasts putting the consensus earnings growth expectation at 34% in FY18, to 3.2 cents a share, to be followed by similar growth in FY19, to 4.3 cents. That prices EPD at an undemanding forward price/earnings (P/E) ratio of 10.8 times expected FY19 earnings (it trades at 14.5 times expected FY18 earnings). Analysts expect the first dividend from Empired in FY19, at 0.8 cents a share, unfranked. Empired is a good-quality operator, with services ranging from business consulting to infrastructure and applications systems development and managed cloud services, with good growth opportunities in front of it, and the stock looks to be good value at these levels.