Buy Hold Sell: 5 small caps riding structural growth tailwinds

If there's any sweet spot for a growth investor to be in, it's within an industry booming due to a structural shift in demand for a given product or service. However, a growth industry is just half the story; the other critical part, as legendary investor Warren Buffett puts it, is having "able and honest managers".

In this episode, Tobias Yao of Wilson Asset Management and Arden Jennings from Ausbil Investment Management discuss five ASX small caps that fit the bill on both fronts; talented management teams carving out niches within broader industries that are powering ahead.

They include companies benefitting from the explosion in online shopping, soaring data consumption and the needs of an ageing population. 

Notes: Watch, read or listen to the discussion below. This episode was filmed on 29 July 2020.

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Edited Transcript

Vishal Teckchandani: Welcome to Buy, Hold, Sell brought to you by Livewire Markets. My name is Vishal Teckchandani and today we're talking about five small caps being driven by a structural growth story and good management to boot. Joining me on the show is Arden Jennings from Ausbil and Tobias Yao from Wilson. Welcome to the show, gents. 

City Chic (ASX:CCX) 

Vishal Teckchandani: Tobias, let's start off with you. What a week for City Chic. It's raised a lot of money for an acquisition and its share price has gone up. What a chic world we live in. Buy, hold, sell?

Tobias Yao (Buy): City Chic is a buy. We think the market underestimates the fact that 70% of their sales is now online. We really liked the Catherines acquisition. We think the acquisition is de-risked and the return on capital metrics for that acquisition is very high. We think over time City Chic can continue to consolidate the market in the US. So it's a buy for us.

Vishal Teckchandani: Arden, City Chic has a sale going, 30% off for jumpers. Does that portend what's going to happen with its share price? Buy, hold, sell?

Arden Jennings (Buy): Well, I hope they're not discounting too much, but it's a buy, Vishal. It's a high conviction position in both the Ausbil small cap and micro cap funds. The acquisition that was conducted last week or proposed is a transformational one, particularly for the US business. The Catherines businesses is on point in terms of their strategy, their three strategic pillars being curvy, plus size ladies clothing, global and digital. So I think it's on point for strategy. They've paid the right price if they are eventually successful in that stalking horse bidder auction. Management are fantastic. 

They're a well-oiled machine with Phil Ryan as CEO and Manraj his CFO. They have a steady and long-term executive team around them. So they know what they're doing. I think the synergies to come out of this, this is really where it's going to surprise the market in the longer term, adding on Catherines with 67 million US in sales is going to come at very little incremental costs. They only have three employees over in the US I believe, so they will be able to absorb a lot of that cost of doing business within the Australian operation. So it's got that e-commerce tailwind behind it. It's a buy.

Temple and Webster (ASX:TPW)

Vishal Teckchandani: Okay. Staying with you, Temple and Webster, another company that's raised a fair chunk of change to tap into what it claims is a $14 billion market in online furniture. Wouldn't that be nice? Buy, hold, sell?

Arden Jennings (Buy): Yeah, it's a buy, Vishal. You've hit my first point ... nail on the head. It is a very large addressable market that they operate in. The thing I do like about Temple and Webster is they definitely focus on the customer, the customer experience, and also the delivery experience as well, which we know is so important for these online e-commerce businesses. The digital penetration within the homewares and furniture market within Australia is still very low comparative to the US and UK markets. The only question is probably valuation. They did raise money at $5.70 earlier this month, and it's a touch over $8, but from a long-term perspective, it's a buy.

Vishal Teckchandani: Tobias, I bought a couch from Temple and Webster, so far so good. Buy, hold, sell?

Tobias Yao (Buy): Temple and Webster's a buy. We have been strong believers in e-commerce companies, and they had a really good update recently, which is really showing their scale advantage. We believe right now we are seeing a permanent shift in the growth trajectory of e-commerce companies and Temple and Webster is the leading player in homewares and furniture. I think in 2001, JB Hi-Fi's revenue was 140 mil, by 2010, as the category leader their revenue, their sales was over $2.7 billion. So for us, Temple and Webster is a long-term buy. We believe they can continue to gain market share. And as Arden said, they have a balance sheet to be able to acquire companies.

Uniti Group (ASX:UWL)

Vishal Teckchandani: Okay. Next stop is Uniti Group. It's just acquired OptiComm for $532 million. It's upgraded its guidance and OptiComm shareholders even got a 10 cent special fully franked dividend. It's all happening. Buy, hold, sell?

Tobias Yao (Buy): So Uniti Wireless is a buy. We believe that the large telecommunication companies in Australia are constrained in terms of what they can acquire, due to ACCC concerns. As a result, Uniti Wireless is in the box seat to be the consolidator in the space. We like the acquisition of OptiComm, the contractor dwellings underpins a really strong medium-term outlook. We believe it's very synergistic and Uniti Wireless can continue to enter into other adjacencies. So it's a buy for us.

Vishal Teckchandani: Okay. Arden, are you going to show Uniti with Tobias's opinion? Buy, hold, sell?

Arden Jennings (Buy): I agree. Yeah, definitely agree there. It's a buy, Vishal. It's a high conviction position for us. Management are fantastic. They're very experienced, the XM2 telecommunications management team - the old band is back together. We really liked the acquisition of OptiComm that is expected to close in the next few months. We believe there's significant synergies there on offer. So they've outlined $10 million worth of synergies, but there are potentially double or triple that in the OptiComm business. So I think there's plenty of fat in that $10 million synergy number from a cost perspective. The company combined will have around 185,000 active in connected premises. 

And when you include the pipeline, that takes it closer to 400,000 premises, which is a significant number in the market. With the combined business I think, ASX 200 is a potential inclusion, so that will help with passive buying potentially, post-completion of the merger, as it will have a market cap above a billion dollars. And probably the last point, which is a bit of an added bonus, I think, is I think eventually that they may be acquired potentially by a utility player. I can see that there are revenue synergies to be had with a couple of hundred thousand premises wrapping their telecommunications in with perhaps gas and electricity as well. So not the reason we own it, but a potential added bonus. So it's a buy.

Lifestyle Communities (ASX:LIC)

Vishal Teckchandani: Okay. Now it's that time of the episode where our guests tell us about one secret stock they've bought. Arden, what have you got that's a structural growth story with a legendary management team?

Arden Jennings (Buy): Yeah, so probably changing tack a little here with Lifestyle Communities, with ticker LIC. So they provide lifestyle villages, not to be confused with retirement or aged care villages. These are fantastic villages. They operate in Victoria, which I think may be an opportunity at the moment, given the pandemic down there at the moment. 

But really the management are fantastic, led by James Kelly, an entrepreneur. He has skin in the game. He is the founder as well. So fantastic management, ageing population is a great structural trend that we're seeing that will continue, aided with great management. The recurring revenue is really what's attractive here. It's pregnant with cashflows. So we think from a long-term perspective, it's a great addition to our portfolio.

Infomedia (ASX:IFM)

Vishal Teckchandani: Tobias, what have you got for me today?

Tobias Yao (Buy): So continuing on with the tech theme, our company is Infomedia. So Infomedia provides a software solution to car manufacturers globally, particularly in the parts and services division. Over the long term, we believe one of the themes is that car manufacturers will continue to focus on the parts and services part of their value chain, because that's where the margin is. And that's where the customer engagement is. 

So they are looking for best in class solutions, which is where Infomedia comes in. Infomedia weathered the last few months relatively well. They held onto their guidance and now they have a very large net cash balance sheet, which they can deploy into synergistic acquisitions. So for us it's Infomedia.

Vishal Teckchandani: Well, not a lot of selling today, but plenty of optimism from our guests. It just makes you wonder if they're a little bit... Tobias.

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