TOL - 30th Sep, 2024
The ASX small and micro-cap stock that could grow into a "forever" holding
...and two more that are doing something special or unique in their field.
This episode was taped on Tuesday 3 September 2024.
As the song goes, "From little things, big things grow". It is, therefore, no wonder that Australian investors love spotting a small cap that ends up becoming the next household name. After all, the BHP's, the CSL's, and the Wesfarmers' had to start somewhere! But we at Livewire also know how difficult this would be to achieve on our own, given how many landmines there are at the small end of the market.
That's why we have asked Matthew Booker, Co-Founder and Portfolio Manager at Spheria Asset Management and seasoned small-cap stock picker, to do some of the hard work for you.
Booker has been managing portfolios focused on smaller companies since he started at Credit Suisse in August 2005.
In this episode of The Pitch, Booker will share one theme that he is particularly excited about and one that he is steering clear of. Then, we'll delve into a couple of small and micro-cap ASX stocks doing something special or unique in their field.
Finally, we'll put the ultimate crystal ball question to Booker and challenge him to name a company that is small now but could grow into a forever (or at least, long-term mainstay) portfolio holding in the future. You can thank us later.
Edited Transcript
Why should Australian investors consider small and micro-cap stocks?
Booker: I think what you have down the market cap spectrum is a lot of inefficiencies in valuations. Some of that reflects the size of the big super funds. The big industry funds are not going down the market as much and that means if there's less demand, there's more inefficiency. We are finding a lot of opportunities down in the small and micro-cap space from a valuation perspective. We're also finding that investors are crowding into defensive growth names. With interest rates being high, there's been a flight to safety and that means there's quite a lot of opportunity down the small cap and micro cap part of the market spectrum.
What is one theme you are excited about and what is one theme you are steering away from?
Booker: We are not a big thematic investor, but we do look at things from a mean reversion perspective. Coming out of COVID, there was some opportunity. We played the travel names and at the bottom of COVID, we recapped Flight Centre (ASX: FLT), for example, and we really got into that travel mean reversion type story. There is still a lag and if you look at the office space, for example, there are office exposures in the property trust space which we think are interesting. We haven't owned a lot of property trusts in the past, but we think that office could be a good exposure just as occupancy improves. A lot of companies and the New South Wales government have edicts out for people to return to the office and I think gradually over time that will happen.
Cromwell Property Group (ASX: CMW) is one that we've bought an interest in. We think Cromwell is a pure play office exposure now. So they've divested their European operations and they've delivered the balance sheet. They're in a position now where the balance sheet is pristine and they had the actual ability to buy assets at we think good returns at current trough prices. We do think that office occupancy will improve over time. It's not going to be mean reversion in the short term, but over the medium to long-term, we think there'll be good mean reversion in that space.
Tell us about two Australian small and micro-cap stocks that are doing something special or unique in their field.
Booker: Bravura (ASX: BVS) is a company that we entered a couple of years ago. It was a recapitalisation story, so we and a couple of other funds recapped it at a pretty low point in its history. The reason we like it is because it's got software which we think is leading edge in the market and it provides software to industry super funds.
We think it's good software and we think there's potential for it to take market share in that space and that's not factored into the share price at the moment. The share price is just reflecting the current membership and customer base that they have. So if they can take market share in that space and I think there's a good opportunity, that could be a significant step up for the business.
In New Zealand, we own a company called NZME (ASX: NZM) and it's effectively the Fairfax of New Zealand. It's a market though, that is behind Australia, in terms of the property portal side of things. That's why we like NZME. It owns a property portal called One Roof which is similar to Domain here. It's the number two player in the market. That market is probably 5-10 years behind here. It hasn't shifted online fully yet and there's a huge upside as that market shifts online for the number two player to get bigger just like Domain has here.
So we think there is a significant upside in NZME through One Roof. Putting that aside, we think the traditional media assets of NZME are transforming too. They're going from old-world print assets in newspapers to digital subscriptions. The radio assets are converting to digital and so there's good growth in those sort of more traditional lines of business in NZME as well. And, you're getting it at a cheap multiple.
Finally, is there one small or micro-cap company that you think could grow into a future forever holding?
Booker: Supply Network (ASX: SNL) is a company we've owned for over a decade. It was a nano-cap when we first bought it and it now is a true small cap. So it's gone from nano-cap to micro-cap to small-cap. It's the market leader in after-market parts for trucks and buses. So it's got a mid-teens market share in its trucks business and it's got probably over 20% market share in buses.
We think it's going to remain the leader. We think some of its competitors are losing share to it and that will continue over time. And if you look at other industries where you've got industrial distributors like an SNL, they get up to 40-50% market share over time. So we think this company can go from a mid-teen market share up to that 40-50% mark. You're talking about doubling or tripling the size of the business, which is significant when you're talking about a company with a market cap of $1 billion at the moment.
Over time, it can continue to reinvest in its product set, keep competitors out, and continue to put price increases through as well. So I think it's a forever stock. I think that market's going to continue to grow and they'll keep winning market share.
Access to great businesses with strong fundamentals
Matthew's fund focuses on small cap businesses that generate predictable free cash flows at an appropriate multiple for the forecast growth profile. Learn more by visiting Spheria's website, or fund profile below.
Managed Fund
Spheria Australian Smaller Companies Fund
Australian Shares
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Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
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1 fund mentioned
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Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
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Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
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