MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from IML’s Marc Whittaker


At the back end of 2023 there was a marked bump in Merger & Acquisition (M&A) activity across the ASX.

In IML’s small and mid-cap funds a stonking nine stocks were the target of takeover offers, including A2B Australia (ASX:A2B) , Invocare (ASX:IVC) , Probiotec (ASX:PBP), Symbio Holdings (ASX:SYM) and Adbri (ASX:ABC) .

This helped contribute to the IML’s super strong returns for the small-mid cap funds which Marc lords it over across the calendar year.

This trend has continued in 2024, Marc says, with a flurry of takeover activity.

“There have been high-profile larger-cap deals including CSR (ASX:CSR) and Boral (ASX:BLD), and the small-mid cap companies held in our portfolios also continue to be targets.

QANTM Intellectual Property (ASX:QIP), an intellectual property law firm, has been the subject of a bidding war while Southern Cross Media Group (ASX:SXL) has re-engaged with fellow radio player, ARN, in a largely scrip-based deal after ARN made an improved offer,” Marc says.

Then, ahead of going to print on Monday, the offshore support vessel operator MMA Offshore (ASX:MRM) also received an offer.

The marine services provider, specialising in the oil and gas industry, was the subject of a $1 billion takeover play Cyan MMA Holdings, a subsidiary of Cyan Renewables which in turn is part of a massive portfolio run by Singaporean private equity infrastructure giant Seraya Partners.

Marc says  there’s plenty more where that came from.

“The uptick in M&A shows no sign of slowing, and we believe the environment is conducive to further activity.”


Why M&A is likely to remain a feature of 2024?

Marc says each while deal is driven by its own set of circumstances, he reckons the main factors driving the pick-up in M&A are:

“We’re in a low growth environment…”

“The recent reporting season revealed that significant revenue growth is difficult to achieve and likely to remain so for some time.

“In this environment, companies are aspiring to grow need to take the initiative and do something transformational – like making an acquisition in order to add a complementary operation and extract synergies, or entering a new market or geography.”

“Interest rates appear to have peaked and are likely to head lower over time.”

Marc says this has given boards and management teams with a solid corporate balance sheet confidence to borrow and commit to M&A.

“Valuations remain attractive – particularly in the small industrials part of the market.”

“Despite the rally we saw towards the end of last year, many small caps trade at discounts to their large cap peers,” Marc says.

“The low Aussie dollar…”

With the AUD low compared to its long-term history, Marc says this makes Australian companies more attractively priced for overseas acquirers, particularly if they have operations overseas.

“And a fast growing population…”

“The Australian market remains attractive to many overseas companies given Australia’s high population growth compared to many other developed markets, where populations are in decline or barely growing.”

Why small cap industrial are looking attractive

“Aussie small industrials have been in something of a bear market, underperforming the small cap indices and the broader sharemarket since 2021,” Marc says.

But that slowly started changing in the second half of 2023.

“With investors becoming more optimistic about market conditions we saw more money flow to smaller companies, with small industrials particularly finding favour.”

Marc says all the factors remain in place for this rally to continue.


ASX100 industrials vs small industrials Feb 2024

Via IML. Source: FactSet 

What to look for in an ASX-listed takeover target

“The companies in our portfolios which have been subject to recent M&A activity are all in different sectors, with very different business drivers, but they share common characteristics.

“They all have strategic value, which gives them a competitive advantage in their industry, they generate resilient earnings streams, and trade at attractive valuations.

“This combination of factors makes these companies attractive to corporate or private equity buyers looking to grow or enter new markets.”

But pay heed, partygoers: Marc says IML don’t just go buying companies because they’re expecting them to suddenly be taken over.

“That said, due to the nature of the companies we buy – quality companies trading at a discount – we do see a lot of our portfolio companies subject to takeover activity.

“In fact, an acquisition is often the result of suitors seeing value in companies where the broader market hasn’t. And often, once one party makes an offer, other parties express interest and a bidding war can result (as we have seen recently with Namoi Cotton and Qantm).”


ASX companies likely attractive to a potential acquirer:

“With that in mind, there are a number of ASX-listed small companies (these ones are held across IML funds) that we believe are candidates for M&A interest in 2024.

“The key is the strategic positions they hold in their industries, which are difficult to replicate organically, hence why acquirers are interested.”


Integral Diagnostics (ASX:IDX)

IDX is the fourth largest provider of diagnostic imaging services in Australia. It is benefitting from the long-term growth drivers of Australia’s ageing population and also from advances in technology. These include AI that enables diagnostic imaging to be used earlier and more widely in the diagnosis and treatment of medical conditions.

After a period of high labour cost increases which impacted margins, management is focused on growing operating margins by shifting the mix of scans to higher margin work and taking costs out of the business. With Medicare indexation of services in place, revenue growth has not been an issue. Over time the earnings of IDX will recover as management execute on their plan.

The network of Diagnostic Imaging centres IDX operates, in largely regional areas, form a strong barrier to entry and make the company attractive to a potential acquirer, in a sector which is experiencing rapid consolidation.

Trading on 8x FY25e EBITDA*, IDX is attractively priced compared to recently reported Private Equity or corporate backed transactions in the sector, which have all occurred at well over 10 times EBITDA.


Ridley Corporation (ASX:RIC)

So. Did you know: Ridley is Australia’s largest provider of bulk animal stock feed and feed ingredients?

According to IML, market leadership has provided Ridley with scale benefits and the ability to invest in building out a more recurring and less volatile business.

“Ridley has grown faster than the market by investing in existing assets to drive additional volume and developing higher margin, premium and branded pet food and ingredient products. This is important as the agricultural sector consolidates and participants look to pursue relationships with scale suppliers.

“The outlook for animal ingredients is positive as the pet food industry continues to grow quickly underpinned by the ‘humanisation of pets’ trend and the demand for biofuels, which can use animal waste products as an input.

“Ridley’s balance sheet has ample capacity to fund this investment, along with acquisitions of its own, as we saw recently with the acquisition of Oceania Meat Processors, a premium producer of frozen meat products for the global pet food industry. Ridley’s valuation is attractive in our view, on 13.5 times FY25 earnings and a yield of 4.4%,” Marc adds.


Bega Cheese (ASX:BGA)

Bega – not far from Batemans Bay, BTW. has built a portfolio of well-known and highly-regarded food brands, including Dairy Farmers, Dare and Pura.

Marc says BGA also operates one of the largest chilled-food distribution networks in Australia. Its brands and network are very difficult to replicate and make the company an attractive target for an acquirer.

“History shows that Australian branded and unbranded food companies often find favour with overseas acquirers with Tassal, United Malt and Coca Cola all receiving takeover bids in recent history from offshore based suitors (with the first two being held in our small-mid cap funds).

“While current year earnings in Bega’s bulk food division have been depressed by a low global dairy price, future year earnings should recover as the global price recovers (which it has done recently).

“Given the strong cashflows food companies can generate, EBITDA multiples are the best way to compare valuations. Bega trades on 8x FY25 EBITDA, which is a discount to the normal multiple for global food peers which typically trade on 10-12x.”


Marc’s final word on stock selection: THINK like an ACQUIRER

“As mentioned before, we don’t buy shares in a company because we think it’s likely to be taken over.”

“We buy companies for the same reasons we always have: competitive advantage, recurring earnings, capable management, the ability to grow earnings and dividends over time and, critically, a reasonable price.

“However, there’s a lot of overlap between why we buy shares in a company and why someone might want to buy the entire business,” Marc says.

“For investors looking at which stocks to invest in it can pay to think like an acquirer: if the market doesn’t recognise the value you’ve identified, someone else just might!”


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.