SUNDAY ROAST: The small caps that lit a fire under Stockhead’s experts this week

Barry Fitzgerald feat. Jake Klein

A bull outlook from experienced industry man and Evolution Mining (ASX:EVN) founder Jake Klein has our own Barry Fitzgerald tickled gold this week.

Klein reckons gold’s time to shine is upon us, and that the current price – particularly in Aussie dollars – was impressive and that there are compelling reasons to believe that the gold price will be much higher in the future.

Talking to investors, Klein summarised his bull story for gold as the five “Ds’’ – debt defaults, the US debt ceiling, dedollarisation, destabilisation and decarbonisation.

“The first three reflect the global financial risks, and the last two reflect a global realignment we can all agree is well underway,’’ Klein said.

Here’s the gist of his thoughts.

Debt defaults: US interest rate hikes (and elsewhere) are clearly causing stress in the financial system. In the last couple of months three US banks had to be rescued. In terms of scale, they were bigger than all of the banks that failed in the GFC.

Debt ceiling: While the issue was resolved, it needs to be remembered that US debt stands at $US31 trillion and is growing by $US100m an hour. Klein said the country’s finances are on increasingly precarious ground.

Dedollarisation: Not sure it is a real word. It goes to the US dollar’s status as the world’s reserve currency. “We are entering the early stages of what has been a Chinese government ambition for the last 25 years – a formidable challenge to the US dollar,’’ Klein said.

Other countries (think Russia among others) harbour the same ambition. “The US dollar is under attack and that is not going away – and it will reshape financial markets of the future.’’

Destabilisation/Decarbonisation: Countries, customers and consumers around the world are at the start of a massive wave of spending to make decarbonisation happen. It is essentially an arms race with a $US125 trillion bill which will only add to the inflationary pressures around the globe.

Ord Minnett

Broker Ord Minnett is of the belief that auto spare parts company Supply Network (ASX:SNL) is worth a punt, putting a target price of $15.40 versus its current price of $14.60 at time of printing.

SNL recently provided trading guidance for FY23, with sales expected to increase by 26% in FY23 to $250m, with the bottom line underlying NPAT expected to increase 33% to $26.5m.

The company says there is strong demand from commercial vehicle customers for parts, driven by industry tailwinds such as an ageing vehicle fleet, increasing freight task, and the increasing complexity of vehicles.

Ord Minnett likes SNL because the company has a solid track record of earnings growth, coupled with high returns on invested capital.

“The commercial vehicle automotive aftermarket industry is fragmented, and we believe there is scope for further market share gains and consolidation,” said the broker.

“We see a meaningful opportunity for expansion in SNL’s operations. We expect sales to continue to grow at above-average levels.”

UBS

And now for something completely different – stocks to avoid.

This is according to UBS, on the back of the Fair Work Commission’s official – and historic – 5.75% increase in award wages.

The retail stocks certainly tumbled, and UBS took the time to compose this handy list of exposed ASX players.

Premier Investments (ASX:PMV): high labour costs/sales; smaller stores; less essential product; ~90% of FY22 sales in ANZ.

Accent Group (ASX:AX1) and Universal Stores (ASX:UNI): high labour costs/sales, smaller stores, less essential products

Lovisa (ASX:LOV): very high labour costs/sales; smaller stores; less essential product but a very low price point; only 38% of sales in ANZ (28% of stores).

Harvey Norman (ASX:HVN): labour costs incurred by franchisees; large stores; but track record of HVN supporting franchisees; non-essential category; 66% of retail network sales in Australia

Super Retail Group (ASX:SUL): super high labour cost/sales; less essential product; active plans to reduce costs (e.g. smart rostering);

JB Hi-Fi (ASX:JBH): low labour cost/sales; less essential product (but strong telecommunications offer); already lean but will reduce casual hours

It wasn’t all bad though – UBS noted these ASX retailers were “comparatively better positioned”

Woolworths (ASX:WOW): low labour costs/sales, largest food retailer in Australia; essential products; large stores; well established and ongoing productivity initiatives including in-store automation.

Wesfarmers (ASX:WES): existing cost saving programmes in place across its retail divisions; Bunnings, Kmart ($7 average ticket size) and Officeworks enjoy strong value positions in market; Bunnings’ enterprise agreement at 10.5% for 3 years with productivity initiatives including its ‘bank of hours’ model.

Coles (ASX:COL): low labour costs/sales; second largest food retailer in Australia; essential products; large stores; ‘Smarter Selling’ cost savings programme expected to continue in FY24E onwards, although yet to be announced.

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.