On the Radar: Which ASX small caps have the eyeballs and rates from the brokers?
Now that reporting season is over, with the deadline for audited accounts passing yesterday, Stockhead recaps the ASX small caps that have won the attention of the most brokers.
The most analysed small cap is lithium explorer Galaxy Resources (ASX: GXY), with 8 reports this quarter. There is much hype about the lithium market and its future potential in electric vehicles – to the extent one executive suggested we may need to turn to seawater.
But in reality, there is an oversupply because electric vehicle adoption has been slower than analysts forecast, especially in Australia. Companies at the exploration stage with high grade projects such as Liontown Resources (ASX: LTR) have gone well.
But companies like Galaxy that are at the production phase are not getting the return on their investments.
Galaxy made a US$123.5 million impairment of property plant and equipment but still made half year earnings of US$9.4 million. It anticipates Q3 production of 45-55kdmt.
The majority of brokers who have tipped it to rise in the next 12 months have admitted it’s a bear market. Hartleys said its strong balance sheet gave it options to restructure its assets to put it in a better position for the next bull market.
Just because your commodity is in a bull market it doesn’t mean you’re immune. Dacian Gold (ASX: DCN) fell as low as 38 cents in June after production cuts but is now at $1.49. Analysts are divided as to its next direction.
Canaccord has suggested a buy; Argonaut, Nell Potter & RBC suggested hold while Macquarie and Hartleys recommended sell.
Another stock that had suffered crashes, but had not recovered, was satellite stock SpeedCast (ASX: SDA) which has been recommended as a hold by the majority of brokers.
Despite a ‘doom and gloom’ sentiment in the retail sector, Adairs (ASX: ADH) and City Chic Collective (ASX: CCX) were liked by the brokers. The latter stock was 11 cents back in December 2017 but is now $2.50.
Notably, one of its earlier investors, Cotton On founder Nigel Evans, sold out at $1.50 back in April. He netted $46.5 million but had he held until now that stake would be worth $77.5 million.
Ainsworth Gaming Technology (ASX: AGI) was not in the good books of analysts due to its result which Baillieu deemed ‘very weak’. It had been hit by gaming taxes in key markets and lower sales. It still recorded a net profit before tax of $8.7 million but this was 78 per cent lower than the year before.
“The breadth of game performance is not there (at present) for investors to make a leap of faith at this time”, said Baillieu analyst Nick Caley, noting this was its fifth year of declining profitability.
JP Morgan also said Ainsworth had a challenge on its hands to win back sales. It predicted some of its games look like they will have success but should target clubs rather than hotels for its Mad Millions and Crazy Jackpots games.
Here are the ASX small cap stocks with the most broker reports in Q3 2019:
Swipe or scroll to reveal the full table. Click headings to sort
One stock that has won attention of brokers last quarter is Opthea (ASX: OPT) which showed its anti-AMD drug as a class above existing treatments in a clinical trial.
Consequently it is now over four times its pre-trial result price and firms ordinarily large-cap focused like Goldman Sachs they are taking notice and thinking long-term – to the commercialisation stage.
Goldman viewed a global licensing arrangement with a big ophthalmology firm as most likely. While its 12 month target was $4.90, it could go as high as $11.
Judging by a 2014 deal between Opthotech and Novartis for the rights to the former’s anti-AMD drug, it said a similar deal structure could imply a share price of $11.
And it said the value of an anti-AMD drug is greater now because alternative drugs like PDGF and nesvacumab have since fallen out of favour.
“We would expect all established players in wAMD (and potentially others) to be evaluating this opportunity closely and believe that the OPT-NOVN deal forms a relevant base case for negotiations”, said analyst Chris Cooper.
Other options included a total acquisition, where there were more recent examples but a capital raise would likely be required to fund clinical trials of its upcoming Phase III study – it modelled US$70 million by 2020.
It has been a big quarter for zircon miner Sheffield Resources (ASX: SFX). Sheffield has released its Bankable Feasibility study and raised another $18 million.
The stock is only 42 cents now and will need another $140 million, but Blue Ocean Equities has set a target of $2.10.
Why? It argued it has a lower capital expenditure and simpler project. Sheffield could meet the remaining funding need by selling a 20-25 per cent stake in the project – which has a post-tax net project value of $980 million.
While zircon demand has been softening due to the US-China trade war, it argued zircon was ‘compelling due to declining supply’.
Half of zircon supply came from three large mines where grades and ore reserves are declining and one of these (Iluka Resource’s Jacinth-Ambrosia mine) will close soon.