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Four stocks under $1

Down in the sub-$1 space, there are plenty of interesting opportunities on the ASX. Switzer's James Dunn shares four ideas.

Market capitalisation: $97 million

Three-year total return: –0.2% a year
Historical FY19 yield: 3.3%, fully franked
Price/Earnings ratio: 13.3 times FY19 earnings
Analysts’ consensus valuation: n/a

SDI might be a little-known stock, but it is one of the ASX’s most successful exporters, exporting more than 90% of its products overseas, to more than 100 countries. SDI is an Australian manufacturing success story, making a wide range of dental equipment and consumables, such as adhesives, alloys, composites, cements and accessories. The company is transitioning its product range as the worldwide market for amalgams (compositions of mercury and other metals for filling teeth) declines, as newer materials such as glass ionomers, composites and professional whitening start to dominate. Five years ago, amalgam products represented 43% of SDI’s global sales, but that proportion has halved to 22%. Aesthetics and whitening products now represent 70% of all sales, with dentists’ equipment amounting to 8%.

SDI has a very strong balance sheet, with no debt, $6.5 million in net cash and $4.8 million of free cash flow generated in FY19, allowing $2.6 million to be ploughed back into R&D, and an ordinary dividend of 2.7 cents a share (up from 2.5 cents in FY18) augmented by a one-cent special dividend. Analyst coverage of SDI is very thin on the ground, but if SDI repeats that dividend in FY20, it is trading on a fully franked yield of 3.3%. Favourable currency movements such as a weakening Australian dollar, could boost SDI’s profit this year.

SDI was not always ahead of the curve in terms of the market move away from amalgams, but it has re-oriented its product mix very well to benefit from this trend. It has a global market that trusts it for high-quality products without which dentists can’t operate; and although it does have plenty of competition, its strong brand and distribution network make it one of the ASX’s most successful global businesses.


 2. Michael Hill International (MHJ:ASX)
Market capitalisation: $227 million
Three-year total return: –24.9% a year
Expected FY20 yield: 8.6%, unfranked
FY20 Price/Earnings ratio: 8.6 times earnings
Analysts’ consensus valuation: 71 cents (Thomson Reuters), 67.3 cents (FN Arena)

Like most retailers, international jewellery chain Michael Hill is finding the current environment tough: in FY19, sales slipped 1% to $569.5 million, hampered by a 3.3% decline in same-store sales. Net profit came in at $16.5 million, compared to $1.6 million in FY18, but that was affected by a slew of one-off items: a better measure was underlying earnings before interest and tax (EBIT), which slipped by 14%, to $34.6 million. The full-year dividend was down one cent, to four cents.

In July, Michael Hill revealed that after a review, it had discovered that it had been underpaying some staff for six years: the company said it expected $10 million–$25 million to come off its profit in FY20 as it remediated this. The shares dropped 9% on this news, but that may have opened up some value, when set against analysts’ consensus price targets. Like many retailers, MHJ is concentrating on getting costs out of its business, and that is expected to drive growth in the medium term – the company says the program saved it $5 million in FY19, and will be saving that amount a year by FY21: that is not a small amount in the context of what it currently earns. The company is also moving up-market in terms of increasing its branded collection sales to half of sales. Citi describes Michael Hill as a “retailer in the early stages of a successful turnaround,” with a “heavily undervalued” share price.


3. Freelancer (FLN:ASX)
Market capitalisation: $353 million
Three-year total return: –19.9% a year
Historical FY19 yield: n/a
Price/Earnings ratio: n/a
Analysts’ consensus valuation: $91.5 cents (Thomson Reuters), 88 cents (FN Arena) 

Jobs website operator Freelancer operates the world’s largest marketplace for freelancing, outsourcing and crowd sourcing of jobs and tasks. It allows potential employers to post jobs that freelancers can then bid to complete and also operates online payments companies and Freightlancer, an online marketplace connecting freight owners with transport operators. In March, the company launched the “world’s largest electronics and electrical services marketplace”, in conjunction with Arrow Electronics, a Fortune 500 company with sales exceeding $42 billion: the platform, called “ArrowPlus powered by” is specifically aimed at engineering projects. Companies and individuals can post technological engineering tasks, and be matched with an engineer within 24 hours.

Freelancer is not yet profitable on a full-year basis, but is racking up some impressive numbers: it finished the June half with 34.7 million registered users and 16 million jobs on its platform, with 3.3 million registered users and 900,000 jobs added for the half. The company says it is the number-one online services marketplace, with more than US$4.5 billion ($6.6 billion) in jobs awarded., which Freelancer picked up for just under $10 million in 2015, is also performing strongly for the company: at June 30, it had handled more than US$4 billion ($5.9 billion) worth of transactions. Gross payment volume surged by 11%, to a record $400 million, and net revenue for the June 2019 half-year rose by 16%, to $28.7 million, but most importantly for shareholders, FLN reported its maiden interim profit, earning $200,000 for the first-half. The company lifted its holdings of cash (and cash equivalents) by 9% over the year to June 30, to $34.4 million. Analysts expect full-year earnings per share (EPS) of about 0.2–0.3 cents, rising to 0.5–0.7 cents in FY20 – but a dividend is not yet in sight. However, Freelancer’s numbers are pointing in the right direction, and analysts see healthy upside for the stock.


 4. Frontier Digital Ventures (FDV:ASX)
Market capitalisation: $179 million
Three-year total return: –19.9% a year
Historical FY19 yield: n/a
Price/Earnings ratio: n/a
Analysts’ consensus valuation: $1.03 (Thomson Reuters), 94 cents (FN Arena)

Frontier operates online classifieds businesses in emerging countries or regions, focusing on cars and property, with businesses in Africa, Asia, South America and Central America. While these emerging regions are often seen as higher-risk, Frontier sees only opportunity, with the ability to leverage its knowledge from established markets (CEO Shaun Di Gregorio was the REA Group Limited general manager between 2010 and 2014 and, later CEO of iProperty Group) and get closer to the transactions, in early-stage markets with low entry prices.

The pin-up business for its portfolio is in Pakistan, which has moved to profitability and represents what the company describes as a “case study of how to successfully monetise (a business) from a dominant market position with very high brand awareness.” There are 13 other such businesses in the Frontier portfolio that lead their respective markets, with three others (Myanmar residential property site iMyanmar, Philippines car and motorcycle website AutoDeal and South American online real estate marketplace Infocasas) closest to following the path to become the group’s next profitable and more self-sufficient and autonomous investments.

In the first half of 2019, this portfolio generated $33 million in revenue, up 82%, and a loss at the EBITDA (earnings before interest, tax, depreciation and amortisation) level of $1 million – Frontier is very close to breakeven. Since floating in August 2016, FDV has increased its share of portfolio revenue by 9.2 times. The stock is not expected to make a profit in 2019 or 2020, but Frontier’s portfolio of businesses all show the right trajectory of where their numbers are heading.

About the Author
James Dunn , Switzer Group

James Dunn is an author at Switzer Report, freelance finance journalist and media consultant. James was founding editor of Shares magazine, and formerly, the personal investment editor at The Australian. His first book, Share Investing for Dummies, was published by John Wiley & Co. in September 2002: a second edition was published in March 2007, and a third edition was published in April 2011. There have also been two editions of the mini-version, Getting Started in Shares for Dummies. James is also a regular finance commentator on Australian radio and television.