Stock picks from a global small cap specialist

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TRANSCRIPTION

The Pengana Global Small Companies Fund team has specialised in investing in the small-cap universe for over 15 years, constructing high-quality, conviction portfolios in the small company space. With a focus on finding, and investing in, the highest quality business in the vast universe of global small companies.

Below, is an excerpt from a recent investor update where the team highlights some recent stock picks from their active portfolio:

Brembo

For those of you who don't know who Brembo is, they make high-end aluminium calliper brakes. They have a long tradition of making brakes for race cars for high-end performance vehicles. Oftentimes, the red and yellow brakes you see on Lamborghinis or Ferraris are Brembo brakes. They have over an 85% market share in the aluminium calliper high-end brake niche.

It's an excellent business that's family-owned. It's been growing for the last 20 years and will continue to grow given the prevalence of aluminium brakes. What makes Brembo brakes so important is that they're lighter and stronger. 

What gets us excited here is we were buying this company at 11 times earnings given some of the challenges in the auto supply chain. As we expect this to normalize, we would expect Brembo to continue to grow moving forward. However, the secular growth behind Brembo should be very appealing over the next five to ten years.

We've seen auto OEMs (original equipment manufacturers) around the world invest heavily in their electric vehicle production. Electric vehicles have two traits that are very important for Brembo. The first is they're heavier than traditional internal combustion engine vehicles. The second is they're a lot faster. When you're making faster and heavier cars, what you need are stronger, lighter brakes and Brembo is well-positioned to capture meaningful market share in the electric vehicle market moving forward. We think this will drive a lot of high-return growth and we're also able to buy this company at an attractive valuation. We think that's a potent combination for value creation moving forward.

Concentrix

Concentrix is in the customer relationship management business. Historically, we used to think about those as just simple call centres where consumers would call in with complaints or with questions about products. Today, it's a technology-led business with BPO (business processing outsourcing) at the core of it.

With long customer relationships, sticky revenue, and very cash generative, we think this is an invaluable business in the customer relationship management space. There are only seven players globally, and Concentrix is among the leaders. It spun out from a larger business in the U.S. but lacks much institutional support, which is why we were able to buy it at 10 times cash earnings a couple of years ago.

What's interesting about Concentrix is it's a business that grows high single digits with high returns and very consistent cash flows, exactly the type of business we want to invest in. Over the last two years, it's done nothing but deliver and I think it's an interesting case study of what has happened in the back half of 2022. The consensus itself fundamentally has never been stronger. However, for a 7 billion U.S. company the stock has little institutional support, and we saw the stock sold off really meaningfully in the back half of last year. We took advantage of this and added to our position. Again, we think the opportunity to buy very high-quality companies at meaningful discounts (given the sell-off that has occurred in many of these small to mid-cap companies around the world is quite meaningful right now ) really gets us excited about the current opportunity set.

Innodisk

Innodisk is a niche Taiwanese flash memory producer. Don't know what flash memory is? Flash memory is in your iPhone or really any type of product right now with computer memory that doesn't spin. Obviously, if you're producing flash memory for iPhones, scale is the name of the game. You need to be a high-production low-cost producer. However, Innodesk operates in the niche space of providing very specific high-end flash memory to very expensive industrial machinery. So, in the case you were making a million-dollar MRI machine, Innodesk would be your solution provider for putting flash memory into your MRI. They've been growing for over 20 years given the secular growth of memory in many different types of industrial machinery and we would consider them a nice secular grower and have continued to grow in this space.

Given the fact that they operate in a niche engineering-led universe, they're able to participate in this space away from the commodity space, drive high returns and growth, and that translates to meaningful shareholder value over time. The management team has been in place for over 15 years here. The business tends to grow by double digits every year. It's a capital-light business that earns high returns on capital and it's trading at just over 10 times forward earnings. This is again another example of the type of businesses we can find today that provide high returns, growth, and a meaningful yield on its current valuation.

Overall, this is what we're excited about in our portfolio. When we look across our portfolio today, what we see is a portfolio trading about 13 times earnings that generate above 20% returns on equity with very little debt and should grow in the high single digits. We think this is an excellent time to put capital to work into this small-cap universe because a collection of these types of businesses at these prices is fairly unusual.