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

Guy Le Page

RM Corporate Finance

Gold is emerging from the shadows of upstart lithium, helped by a rally to a six-week high last week and an all-time Australian high. You can thank the liquidity crisis in the banking sector, and a bit of US Fed action for that.

So if you’re new to gold, having spent the past two years chasing “transition” moonshots, where’s a good place to make lithium-like gains over the next year or two?

Well, not in gold. But there’s fun to be had in say, something up and coming in a historically high-producing region, getting the drills ready, has a bunch of solid exploration results, and has had no trouble raising a couple of million to firm it all up.

Le Page reckons you could do a lot worse than Great Boulder Resources (ASX:GBR), which ticks all of the above boxes. Its 100% owned Side Well and Gnaweeda Projects are near Meekatharra in the northern Yilgarn Province, a prolific producer of around 4Moz of gold.

GBR has outlined around 66.2Mt @ 2.6g/t gold for 518,000 ounces and believes it is well on its way to 1Moz. If it hits that, you’ve done well to get in at last week’s price of 8.5c. And it will be a prime target as merger activity starts to rise around the Meekatharra region.

With a market cap on just under $40 million, Le Page says it’s “yet another good quality WA gold explorer to accumulate as we prepare for a golden year here in the West”.

Richard Ivers

Portfolio manager, Prime Value Asset Management

Ivers has chops. He’s part of the team that won the Australian Equities Small Cap award at the 2022 Zenith Fund Awards. And right now he’s got his eye on small cap industrials, one of very few asset classes running below the pre-Covid high.

“The Small Industrials Accumulation index (is) down around 10% from their pro-Covid level (Feb 2020),” he told Stockhead this week.

“In contrast, mining stocks (Small Resources Accumulation) are up 45% so there are attractively priced opportunities in the Small Industrials space where the Emerging Opportunities Fund invests.”

“Attractively priced”. We’re listening. Let’s start with Domain (ASX:DHG), because Australia, and real estate.

Domain, the second largest real estate portal in Australia behind REA Group (ASX:REA), is a classic contrarian play, according to Ivers. It’s halved in the past 12 months, from nearly $6/share down to ~$3 as the number of houses listed on its website has fallen.

“We take the view that the listing numbers are potentially at a cyclical low,” he said. “With the stock having halved, there’s a great opportunity to buy a very high quality business with structural growth.”

If you can hold out for prices to rise again, “you get strong earnings growth and potential margin expansion”, Ivers said. “Its margins are about half the level of … REA Group.”

Equity Trustees (ASX:EQT) is a genuine stayer, having been founded in 1888.

Ivers likes the recent acquisition of Australian Executor Trustees from Insignia (ASX:IFL). “(It’s) delivering strong value accretion and there appears upside to consensus earnings estimates,” he said.

“Additionally, capital will be released, strengthening the balance sheet.”

Look for “strong organic revenue growth” and “the likely reduction/removal of losses from the UK/Ireland” to providing earnings upside.

Lindsay Australia (ASX:LAU): As a major refrigerated logistics player, LAU is an potential beneficiary from the demise of major freight company Scott’s Refrigerated Logistics, Ivers reckons.

“Its core products are largely fruit and vegetables, which are staples, and less exposed to the economic cycle.

“Its rail strategy is improving the economics of the business significantly with return on capital rising, and is not reflected in the valuation of the stock, which is still only circa PE of 8x FY24.”

Scott Kelly

Portfolio manager, DNR Capital

Have we slayed the inflation dragon? Maybe not, but Sers Powell and Lowe and co have certainly scored some palpable hits. So Kelly says it’s time to pivot away from the Big Aussie 4.

“The big four banks all reported strong financial updates, and they are well-placed to deliver their strongest revenue growth in over a decade,” he told Stockhead, “but this is already captured in market expectations this year.”

That, and with people still accounting for two thirds of the bank’s cost base, there’s still some exposure to inflationary headwinds.

All in all , Kelly sees better risk return opportunities and more attractive dividend yields elsewhere – namely, insurers.

“We think they provide a meaningful offset to our underweight bank’s position,” he said.

And his preferred insurers are QBE (ASX:QBE) and Suncorp (ASX:SUN), both of whom, he says, “also benefit from higher interest rates through higher yields on their investment books”.

If you absolutely must pile into a bank, Kelly said NAB (ASX:NAB) remains his preferred exposure.

“It’s executing well,” he said, adding that ANZ (ASX:ANZ) and Westpac (ASX:WBC) are “the value alternatives”.

“CBA (ASX:CBA) is just too expensive, and its dividend yield at current prices is just 4%.”

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.