Criterion: Underlooked small caps that can bring home the bacon

• The just-concluded reporting season saw many promising small caps fly below the radar
• Picking value is more about individual dissection, rather than heeding the broader ‘small caps’ performance
• We nominate five underlooked plays that might bring home the bacon – or even a whole pig

Given there are so many ASX small caps, it’s hard to generalise about the sector’s performance during last month’s reporting season.

But investors like what they saw: the small ordinaries industrial gained around 9% in August, compared with the top 200 stocks that edged up 2%.

Over the last year the small ‘uns have gained 22% – about twice the increase of the top stocks.

“The drivers – falling rates, improving consumer activity, stronger capex – are structural shifts that can support earnings growth over the next 12–24 months,” says 1851 Capital’s Chris Stott.

But with the sector trading on an earnings multiple of more than 20 times, does value remain?

Here are our  ‘non-heroes’: unheralded stocks that escaped scrutiny but could still bring home the bacon – or even a whole pig.

Humm-ing along

While the Big Four banks have renewed their interest in business lending, Humm (ASX:HUM) has long offered an alternative funding source.

Humm’s key division, Flexicommercial, has an average loan size of $150,000 – well below what the big banks would bother getting out of their gilded beds for.

Humm also has a consumer buy-now-pay-later division.

A feature of the results was that the international division broke even, saved by a strong performance in Ireland.

Humm trades on an earnings multiple of under six times and a circa 4% yield.

On another measure of value, Humm has $198 million of cash and a $315 million market capitalisation.

Resi-who?

Formerly Homeloans Ltd, the low-key Resimac (ASX:RMC) sells its mortgages through third-party brokers.

With a $13.4 billion home lending book, Resimac has a small but tidy market share. On the asset financing side, Resimac in March acquired Westpac’s $1.5 billion auto book.

Resimac has been rebuilding under the guidance of a new CEO, with a focus on  deeper customer relationship, automation and enhancing core products.

Resimac’s full year earnings were flat at $34.6 million, but net interest income grew 7%.

Bell Potter reckons Resimac can manage a much improved $59 million profit this year, which puts the stock on a stingy multiple of 5.5 times (and an 8.6% franked yield).

Highcom ticks the MAGA boxes

Formerly known as Xtek, HighCom (ASX:HCL) makes lightweight ballistic gear such as helmets and armour, using its patented tech.

With a manufacturing facility in Ohio and an entrée into the booming defence sector, Highcom ticks all the right MAGA boxes.

The company has fluffed up its execution over the years, resulting in excess inventory.

But a turnaround is in train, with Highcom reporting underlying earnings of $200,000, versus a previous $9.6 million loss.

Dubbing Highcom’s circa $30 million market cap as “undemanding”, Bell Potter plugs in current year revenue of $52.6 million and ebitda of $1.8 million.

Acquisitive lighting play is no FOS-bury flop

The maker and distributor of industrial LED lighting, FOS Capital (ASX:FOS) has acquisitions down pat, having bought seven business since 2019.

The latest was the $3.1 million road lighting specialist, Aldridge Traffic Systems.

Quirkily, Aldridge was acquired from the administrators of Traffic Technologies, which FOS founder Con Scrinis co-headed up to 2009.

FOS chalked up full-year sales of $25.5 million, up 4% and improved net profit to $900,000 and $600,000. The company even paid a one cent a share dividend.

Fos aims for a 5-15% market share in a fragmented, $500million a year market.

And – yes – this means more acquisitions as well as organic growth.

Deconstructing Bhagwan’s prospects

Erecting offshore oil and gas facilities is an engineering feat.

But how about the equally tricky (and expensive) matter of removing them when they have chugged out their last useful hydrocarbons?

Having been involved in decommissioning Chevron’s Thevenard Island, fleet owner Baghwan Marine (ASX:BWN) is in line for other jobs, including helping to banish the ageing Barrow Island oilfields.

Baghwan anchored down record full-year revenue of $283 million and all-time high underlying earnings of $50.9 million.

Baghwan is also likely to participate in upgrades and maintenance to extant fields such as Woodside’s Scarborough and Santos’s Barossa.

The stock trades on a yield of around eleven times.

This report does not constitute financial product advice. You should consider obtaining financial advice before making any financial decisions.