Ivers and Younger: T'is the season for well-timed ASX small cap rotating

Stockhead special guests, Richard Ivers and Mike Younger are a part of the Zenith Small Caps Award-winning Prime Value Asset Management team.

(Note: Stockhead spoke to the asset managing expert duo last week, before the current market meltdown.)

Strong buying opportunities are bound to emerge, yet this could be the toughest reporting season seen for a couple of years, according to Richard Ivers and Mike Younger, portfolio managers for the Prime Value Emerging Opportunities Fund.

Ivers: “Some of the quality smaller companies are doing well, following a ‘risk-on’ period which defined late 2023 and early 2024 and drove the market strongly.

“However, the market is in a cyclical slowdown. We’ve seen softening across retail, advertising, and the household sector. The earnings risks in the economy have heightened over the year, and investors will be rewarded for being more selective in smaller companies.”

Younger: “This has been a year defined by macro volatility around interest rates, and it’s possible we could see some surprises before the year is out. Market anxiety about inflation and interest rates continues to linger below the surface.”

Stockhead: Can Australian investors read anything into the big rotation into small cap stocks in the USA?

Younger: “There has been massive momentum into small caps in the USA, partly inspired by the lower inflation numbers over there, and anticipation of a potential interest rate cut.”

Stockhead: While there’s been a slight swing to local small cap stocks, are we seeing the same kind of rotation down here as in the States?

Ivers: “We’re on a different rate cycle than the USA – they hiked interest rates earlier and higher, and are expected to cut sooner.

“But our market often follows the USA, and if the Fed cuts rates later this year there is potential our market will follow a similar path and we’ll see a greater rotation into small cap stocks – though it will be delayed.

Younger: “Closer to home it’s likely to be led by New Zealand. Rate cut expectations continue to grow in New Zealand and we’ll likely see momentum into smaller companies over there.”

But, the duo told Stockhead, investors need to navigate a reporting season which promises to have its fair share of surprises.

Ivers and Youngers: 3 to watch for

Premier Investments (ASX:PMV)

Younger: “Premier won’t report until September due to their July year end. Premier is one of Australia’s best retailers, in a sector with highly variable trading results in recent months. We think Premier is going to provide good insights into the impact of potential interest rate increases affecting the consumer.

Ivers: “Additionally, we’re likely to hear more details on the de-merger of Smiggle & Peter Alexander from the apparel brands, which themselves are likely to be merged with Myer. There is plenty going on at Premier.”

Last month brokers at Morgan Stanley reaffirmed their $39.50 target price on PMV, seeing “meaningful upside” potential in separating out Premier Investments’ Peter Alexander – which MS reckons is Australia’s fastest-growing retailer over the past five years – and children’s stationery brand, Smiggle.

Ivers: “PMV has done well among the retail stocks, it’s up circa 35% in the past 12 months. That’s largely on the back of Peter Alexander, which enjoys a compound annual growth rate (CAGR) of 27% in earnings over the past five years.”

Guzman y Gomez (ASX:GYG)

That was a big IPO for the ASX in 2024. And a welcome one.

Ivers and Younger say Guzman has made swift progress in expanding for scale and now expects another 50% growth in its global network sales to $1.14 billion by FY25.

GYG has circa 185 locations in Australia, with 62 corporate restaurants and 123 franchise restaurants. It plans to open 30 new restaurants in FY25 and increase its annual openings to 40 per year within five years. It has 16 restaurants in Singapore and five in Japan, owned and operated by separate master franchisees. The ASX share earns royalty revenue from franchisee sales. It also has four corporate restaurants in the US.

Younger: “Guzman Y Gomez has been one of the most discussed IPO’s in recent memory. The company has highly ambitious plans and attracted strong initial support when its share price jumped 36% on its first day of listing. But this also caused many market watchers to question how long the good times may last.

Ivers: “It’s possible GYG could report a result above expectations, given what appeared to be relatively conservative FY24 earnings forecasts in its prospectus. GYG’s results will be watched closely by all.”

Corporate Travel Management (ASX:CTD)

Ivers: “This global provider of corporate travel solutions is a former market darling that was hit hard since delivering weak results in February. Analysts have recently been downgrading their forecasts further for FY25 and expectations appear low.”

Younger: “However, we’ve already seen another previously weak company (Credit Corp Group (ASX:CCP) bounce very hard when its outlook was better than expected. Could companies with low expectations be a profitable trade this reporting season? ”

Ivers: “Corporate travel sits in this bucket.”

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.