SUNDAY ROAST: The small caps that lit a fire under Stockhead’s experts this week
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Sequoia has just put a price target on online lender Prospa (ASX:PGL) of 53c (versus current price of 30c).
PGL focuses on lending to Australian small businesses, with an extensive $855.8m customer loan portfolio diversified across industry and geography.
“PGL is an early mover in online business lending, with that advantage reinforced by its technology, funding and distribution,” Sequoia says.
Sequioa says the combination of these is driving scale benefits that leads to competitive advantage for PGL, adding that small business lending represents a substantial opportunity as it is a large sector of the economy under-served by banks.
Of the 2.3 million small businesses in Australia, only 1.7m make an annual turnover of >$50,000, representing businesses PGL considers to be of a sufficient size to be funded by business loans.
Meanwhile, PGL’s financial performance is underpinned by attractive per-loan metrics, with an average net loan of >$3,900 and contribution margin of ~42.5%.
“This is supported by a short average customer payback period of <12 months and high levels of repeat loans which benefit from lower acquisition costs,” said the note from Sequioa.
According to the broker, PGL’s business model is also highly cash-generative. In the first half, the company delivered operating cash flow of $47.0m (+98% on pcp).
“Based on current forecasts, we derive a DCF equity value for PGL of $0.53 per share, with potential upside from new products and acquisitions,” Sequioa concluded.
Euroz Hartleys has slapped a Buy recommendation on MLG Oz (ASX:MLG) , a mining services provider across gold, iron ore, and other base metal clients in Australia. Price target is set at $1.21, versus current price of $0.51 at the time of writing.
MLG provides mining services at 29 sites throughout WA and the NT. These services are provided via more than 150 trucks, 500 trailers and dollies, 100+ loaders and five crushing and screening plants.
Euroz is optimistic about MLG’s prospects based on improving conditions on the ground.
“Inflationary pressures are increasingly able to be passed. MLG’s better access to required labour is likely improving fleet productivity, a key margin driver,” said the broker.
MLG has just reported its full year FY23 results, delivering a much improved second half with revenue of $375.2m, up from $286m in FY22 – $203.7m of which was generated in H2.
Its underlying NPAT of $10.5m and financial debt reduced from $64.2m to $54.1m.
“In summary, the strong second half has re-set the business,” said Euroz.
“Our view is this is well understood by the MLG team, and we look to a feature of 2024 being increasing margin and return on assets, as resources (people and gear) are deployed or redeployed at higher utilisation, efficiency and rates.”
Morningstar Director of Equity Research Brian Han
TPG Telecom (ASX:TPM) is Australia’s third-largest integrated telecom services company with an extensive stable of infrastructure assets. It goes the broadband, telephony, mobile and networking solutions route – catering to all market segments (consumer, small business, corporate and wholesale, government).
Brian says TPG’s grown significantly since 2008, via both organic growth and acquisitions, before merging with Vodafone Australia back in July 2020.
Right now, in the telecom sector, earnings recovery is firmly on track for TPG Telecom.
“With mobile benefiting from a more rational competitive market and the return of international travellers, cost-cutting and simplifications ongoing, and the enterprise business showing resilience in terms of high margin maintenance and fibre-infrastructure leverage.
At the start of August, TPG stock jumped after the company confirmed it has entered exclusive non-binding negotiations over a multibillion-dollar transaction with rival Vocus for TPG’s non-mobile fibre assets.
The company’s since said it’s received a number of non-binding expressions of interest in its fixed network infrastructure assets, including its wholesale fibre business Vision Network, which provides broadband access to about 400,000 Australian premises.
“We definitely think TPG shares are still undervalued because the company has been under-earning for a couple of years now and that’s due to a number of factors.”
Shares in Australia’s largest telecommunications group, Telstra (ASX:TLS), are also looking interesting, says Brian.
“With mobile earnings staging a renaissance, costs continuing to be cut and the damaging impact of the NBN transition is finally over. Indeed, earnings are finally on a growth trajectory after years of decline, and current dividends are sustainable, equating a fully franked yield of over 4%, reflecting Telstra’s defensive earnings.
“With material market shares in voice, mobile, data and internet, spanning retail, corporate and wholesale segments. Its fixed-line copper network will gradually be wound down as the government-owned National Broadband
Network rolls out to all Australian households, but the group will be compensated accordingly,” Brian says.
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.