9 quality small and mid-cap stocks for investors to eye right now

With valuations at a premium in the large-cap space, investors are paying much closer attention to the opportunity in small and mid-caps. While this is a more volatile section of the market – partly because it is highly sensitive to rate changes – there is also typically more growth potential to be found for investors.

The key is being selective and maintaining a focus on quality and outlook.

There are nine ASX-listed stocks that Wilson Asset Management’s Sam Koch, Will Thompson, and Cooper Rogers have their eyes on at the moment, including:

1. Beacon Lighting (ASX: BLX)
2. Mainfreight (NZE: MFT)
3. Firefly Metals (ASX: FFM)
4. Webjet (ASX: WJL)
5. Wagners Holding Company (ASX: WGN)
6. Playside (ASX: PLY)
7. Nick Scali (ASX: NCK)
8. Tasmea (ASX: TEA)
9. Paragon (ASX: PGC)

In this video, they’ll discuss what they like about each of these businesses and the outlook for them.

edited transcript

Camilla Cox:

Hello and welcome. My name's Camilla Cox. I'm a corporate affairs manager here at Wilson Asset Management, and today I'm here with the small and mid-cap guys: Sam Koch, Will Thompson and Cooper Rogers. Thanks guys.

Will, these guys are pretty well-known - Beacon Lighting Group. Why do you think they've got strong upside potential?

Will Thompson:

I think most people would know them as a retailer. You go and you buy your light fittings or a new light. They've also got the ceiling fans, so we're kind of hoping for a hot summer because it usually means that they sell more fans during that period. But I think probably the most interesting thing at the moment is during the COVID period, they've tried to break into the trade segment and trade is a big segment. You might think of it as an electrician just going to buy cabling, but also an electrician will go and buy a ceiling fan on behalf of the customer, or maybe they're buying a light fitting or switches. And there's a really good piece there where if Beacon Lighting can educate the trade customer, instead of buying the cheap fitting can upsell them to the more expensive, nicer fitting and then he or she can upsell the end client.

There's a big piece where they can really grow their revenues and grow margins. You’ve seen in about three years, they've gone from probably about $20 to $30 million. They didn't disclose it to over a hundred million in trade sales. So we think there's a really interesting point right now where trade can continue to grow and then with the Australian consumer potentially coming back a little bit, now that interest rates have stabilised and renovations are going to happen, that you've got this great retail business and this great trade business. I think at the moment there, you chat to management, they're still very under-penetrated in trade across all their store networks. I think it's really exciting over not just the next year, but the next five years about what potentially that could be.

Camilla Cox:

Sam, if we head across the ditch, the team have been pretty keen on New Zealand lately. So what's your outlook for Mainfreight?

Sam Koch:

Mainfreight is one of those global success stories originally founded in New Zealand and from our perspective, the success of this particular logistics company comes back to the fact that they've decentralised their business model. That means they've empowered each one of their branch managers, whether it's in Australia, New Zealand, the US or Europe, to take accountability of their decisions and accountability of their P&L.

Ultimately, these branch managers are well rewarded for their success and Mainfreight discloses how much bonus they actually pay out to the branch managers each year. Now at the moment, Mainfreight is one of those high quality businesses that are caught up in sort of a cyclical headwind for want of a better word. The environment for logistics companies globally with the economy slowing under pressure of interest rates and inflation has meant that trade has come back. Now from our perspective, this is a great time to be adding to high quality cyclicals like Mainfreight because they've been adding capacity during this time and that means on the other side of the cyclical rebound you'll get a supercharged earnings profile. So, we're really excited about Mainfreight and the opportunity.

Camilla Cox:

Fantastic. Cooper to you, Firefly Metals, they're on the hunt for copper at the moment, so what's your outlook for them?

Cooper Rogers:

Yeah, they are. It's a company in Canada. We really like the management team there. They've proven that they can progress projects into production before, so they're really out there just trying to prove that there's mineralization beyond the current resource over there. They've just raised $65 million, so that's in the tin, so there's no risk of raising it. Now they can go out and actually prove that there's more copper in the ground there. They're looking for parallel loads and they're also currently halfway through an extension decline and they're going to put an underground drill rig there and test for more mineralization below or down dip or down plunge of the current mineralization. We’re really looking forward to those kinds of drill results coming in over the next few months. It's also got a resource update, which is happening this month as a catalyst. That drilling that they're doing now is not part of that, so that's further upside down the road. Yeah, we really like the company and the management team and it's a buy for now.

Camilla Cox:

Thank you. Now we were just joking, if the leave balance wasn't so low, we'd use these guys for a trip. Webjet, how do you like them?

Will Thompson:

So Webjet have recently de-merged and I won't go into the bigger Webjet part of the company, but they've demerged the OTA business, which is the online travel agent. So I don’t know about you Camilla, but when I go and look at flights and I'm trying to find the cheapest and most convenient, I go to webjet.com, search and find the flights and often the more value end, which was your Rex and your Jetstars. It's actually cheaper to book through Webjet and so this business has been demerged, it hasn't had a focus within the bigger group for a long time. It's got new management that is going to focus on the branding, they're going to focus on the product offering by doing auxiliary services like insurance and cars and hotels. And it's now sitting with an EV of about $240 million and it's sitting on $90 million cash. There's potential they're going to go out and buy some other things. There's a really good international piece to it as well and I think it's totally undervalued by the market because everyone wants to look at what's happening in the bigger company and this has just been shafted off to the side. I think it's really interesting and it's at a valuation that I think is quite compelling as well.

Camilla Cox:

Fantastic, thanks. Cooper, not one we've spoken about before on here - Wagners. Firstly, what do they do and what's your outlook for the company?

Cooper Rogers:

Wagners is involved in construction materials all up and down southeast Queensland. Concrete Prefabrication works and the like. They smashed it out of the park in FY24. They came in with an EBIT of $40 million versus the guide to $31 to $33 million. I suppose the market was really happy with that.

There is a perception out there that there might be a bit of an earnings sell-off on FY25 because $12 million of that $40 million EBIT came from the Sydney Metro contract, which finished in Q3 last year. However, consensus has come down to meet these numbers. We think the industry has undergone price rationalisation after Boral (ASX: BLD) was swallowed by Seven Group. So, they're increasing margins. The construction materials business is delivering really well. We expect an increased focus on inventory management and cost discipline across the group to see them outperform consensus numbers in FY25 and an added catalyst on that is if they can win any other precast work or prefabrication work to fill that hole.

Camilla Cox:

Fantastic, thanks. Will, you've previously been quite positive on these guys, Playside. Is that still the case?

Will Thompson:

It is and it's been struggling a little bit because the market really isn't happy with how they're performing in 2025 or FY2025, but I think it's so short-term focused and really should focus on 2026.

What Playside do as an example is like a movie developer like Pixar or Disney, these guys do it for games. So, someone comes up with an idea and then they turn it into a game and they publish it on your iPhone or PlayStation or an Xbox. I think they're really good and the feedback in the market is that the games they're creating are really good and as they've grown the business away from - they used to do sort of more work for hire work - they're going into doing their own thing.

They have released a game over the weekend called Kill Night, which has got really good early feedback and then next year they've sort of done a few publishing deals and they're going to be releasing a Game of Thrones game and then they've done another one called Mouse. And what I like about them is, as they mature and as they progress, they're going to be churning out bigger games and the potential for earnings is going to be a lot bigger.

I think while the investors are so focused on FY25 isn't going to be very good, as soon as we get closer to FY26, people are going to start to value what that earnings growth will be and I think investors will be surprised about how well hopefully that earnings growth can go.

Camilla Cox:

Sam, Nick Scali are going to the UK, this is the first time they've gone global. Do you think it'll be a success?

Sam Koch:

We do. Nick Scali is obviously a well-known retailer that we've talked about in the past. Their ability to gain share locally, ability to actually increase margins and allocate capital efficiency is somewhat unparalleled in the local market. And what actually drives that is the ability to actually buy really cheaply with scale from their suppliers over in China and they're going to be leveraging that into the UK as well.

Earlier this year, they made an acquisition of Fab Furniture 2021 stores in the UK. Having been on the ground and through some contacts, it looks like there's plenty of opportunity to improve the performance of Fab Furniture. If you look at just the financial metrics versus I guess Nick Scali here locally, they're like apples and oranges and we see a real opportunity for this to be a 20, 30, 40 store network over time and we believe that Nick Scali isn't really priced for that at the moment. Trading, it is probably at a 50% discount to its global growth peers. And should Nick Scali execute principally on product and ultimately on gross margins, then the stock will ultimately re-rate.

Camilla Cox:

Cooper, Tasmea IPO’d in April. They've been performing well ever since. What does the rest of the year look like?

Cooper Rogers:

Yeah, well still yet to find out, I suppose that's a question we're always trying to answer, but the Tasmea tornado as we refer to it internally has been picking up pace since IPO in April. It's been going extremely well. It came out with a business objective to grow organically and also via acquisitions and the company's proven both of those things over the years. It’s acquired three companies extremely well and it's also growing organically around 15%. It had a great movement in the last month, so we're looking at its valuation from here. The next catalyst is upcoming AGMs, where we expect them to reiterate that organic growth.

The thing we really do like about the company is its long-term incentives management is incentivised to get EBIT up to $110 million and that's compared to the current EBIT of last year's EBIT in FY24 of $55 million. So, it's considerable growth. Management is really aligned with shareholders. We think it's one to watch.

Camilla Cox:

Great. Sam, let's talk about Paragon for a moment. The Sigma and Chemist Warehouse merger, how could that impact the company?

Sam Koch:

The Sigma Chemist Warehouse merger will be a material benefit for Paragon. Stepping back a bit, Paragon Care has recently undergone a transformational merger with the unlisted CH2. CH2 is a pharmaceutical wholesaler that was founded and run by David Collins. He owned 50% of the business and now owns 30% of the stock on-market. And what he's been able to do is grow CH2 from zero revenues in 2016 up to about $3 billion in 2024 through lower prices, reinvesting that back into the customer and ultimately driving higher returns. We believe he'll be transformational for Paragon, which was once a sleepy medical consumables business.

Back to your question regarding Sigma and Chemist Warehouse, if they merge and that still has to go through the ACCC, we ultimately see a number of independent pharmacies potentially churning off Sigma as a wholesaler and ultimately CH2 is the only independent pharmaceutical wholesaler in the country. There's API, which is owned by Wesfarmers, which also has Terry White. CH2 is the ultimate beneficiary of that. So, we believe that the merger is a key catalyst and then going forward you've got the opportunity for Paragon to continue to grow through synergies, post-merger and also better execution in their target markets.

Camilla Cox:

Fantastic. Well, that's everything today. Thanks Sam, Will and Cooper, and thank you for watching.