Money Talks: This expert has a hot tip on a potential financial services takeover
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Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to see what’s hot, their top picks and what they’re looking out for. Today, we hear from Lee Iafrate, founding chairman of Melbourne-based boutique investment firm Armytage Private.
At the junior end, fintech appears to be all the rage right now, though it’s popularity may be short lived, according to Iafrate.
“The market is chasing growth and there’s not a lot of growth sectors out there,” he explained.
“It’s all these buy now, pay later things. I think it’s a bubble because what you’re doing is you’re just deferring people’s debt.
“I struggle with it and how it’s become all glamorous and famous and hot is just to me amazing. But it’ll pop. It’s a bit like bitcoin.”
The good news though is the strong ones should go the distance.
“What’ll happen is there will be a couple of good companies that’ll emerge out of it; which ones they’ll be I don’t know,” Iafrate said.
More ecommerce than fintech, Kogan.com (ASX:KGN) is Iafrate’s top pick.
Kogan has, however, now forayed into the world of fintech with its financial services offerings.
The company currently has a market cap of $422.7m at a share price of $5.34c.
Kogan on Thursday announced gross profit growth of 28.4 per cent, revenue growth of 9.5 per cent and EBITDA growth of 96.4 per cent for the third quarter of FY19.
The profit upgrade sent shares up as much as 19.5 per cent to an intra-day high of $5.39.
“Kogan is a big investment for us,” Iafrate said. “We’ve been in that thing basically from not long after it listed.
“They’ve got good fundamentals, they make profits, they pay dividends, they’ve got a positive cash flow. So we like it and it’s a business model that will continue to grow and prosper.”
Iafrate said he has also started doing a fair bit of research into financial services companies and one of his picks there is specialist fund administrator Mainstream Group (ASX:MAI).
Mainstream has a market cap of $77.1m and a share price of 60.5c. The company reported in February a 32 per cent year-over-year increase in revenue to $24.9m and an increase in EBITDA of 20 per cent to $3.6m for the second half of 2018.
It’s net profit after tax was down 76 per cent to $200,000, but it still declared an interim dividend of 75c.
“I think it will get taken over. It’s got a very good strong business,” Iafrate said.
“It’s got exceptionally good clients and it would be cheaper for a big player, an offshore player to take them over and get the market presence that they have rather than try to build it.
“The downside is that yes there is a lot of pressure on fees, but they’re at the lower end already and are very, very profitable.
“They’ve got a beautiful balance sheet, absolutely pristine balance sheet and it would slide straight into a major. I have no doubt about that. So that’s my tip for a takeover for calendar 2019.”
Iafrate’s final pick is AVA Risk Group (ASX:AVA), which has a market value of $28.4m at a share price of 14c.
AVA provides risk management consultancy services and technologies like intrusion detection and location for perimeters, pipelines and data networks, biometrics, card access control and locking.
“It is very profitable, and they’ve got some pretty substantial work coming through,” Iafrate said.
“Its sin has been that it’s rotated MDs and chairmen too regularly in the last six to 12 months, so that has sort of spooked the market a little bit.
“Equity markets don’t like seeing a lot of volatility at managerial level in small caps, but I think their result will be very good.
“If you read their last update it was very, very strong and they’re a good solid profitable little business.”
Lee Iafrate is the founding chairman of Melbourne-based boutique investment firm Armytage Private. He has been in the financial services industry for over 30 years with experience ranging from stock broking and funds management to principal lecturer at the Securities Institute of Australia.