3 ASX Small Caps Stocks You Need to Know

Click here to give a thumbs up or leave a comment

Host: Now we love talking three stocks here on ausbiz. This one has a technical twist, and the man with the charts is Jason McIntosh from Motion Trader. Good Morning, Jason. We’ve had lots of volatility in the markets. That must be a charter’s dream? Yeah, hasn’t it been interesting a few weeks Annette?

Jason: Look, it’s good to see the market bouncing a bit today, but I think there’s still some vulnerabilities there and below the 100 day moving average still, and the US didn’t close particularly strong last night. So look, maybe this pullback has has some legs in it still. Well, we know there’s plenty of cash. Let’s have a look because you’ve given us three stocks. I had a look at them myself, but we’re here to talk to you, not me. Vista Group. What’s going on there? Yeah, Vista Group’s a really interesting company. It’s one of those stocks probably a lot of people don’t know very much about. It’s got a market cap of about $600 million and it’s not in the All Ordinaries, so look, as soon as the stock is not in the All Ordinaries it just becomes harder for people to define and really be aware of.

But while it’s probably not top of mind for a lot of people, chances are they’ve had some exposure to its products simply by going to the movies. So what Vista does is they provide software and technology to the global cinema industry, and they’ve got this cinema management software, and they’ve got about 38% market share across the globe. And if you exclude China, it’s a 51% market share. And this is for the bigger cinemas, where there’s, like 20 plus screens and look, of course COVID’s been a disaster for the cinema industry generally. So if the movies weren’t closed, operating at partial capacity and then you know where are the blockbusters? There hasn’t been a blockbuster for 18 months. And this is, of course makes it people less likely to go along even if the cinemas opened.

This all translates into their results. Their last yearly result was look, revenue was down 60 odd percent, and they had a $50 odd million loss, so pretty ordinary time. But I think there’s a real turnaround which is starting to take shape in their current results. So the last quarterly update was really encouraging. June quarter revenue was flat, which is probably to be expected, but the positive part was that their recurring revenues are up 13% in a difficult environment. That suggests that they’re maintaining customers and they’re bringing on new customers as well as up selling products. And then you’ve got their EBITDA and they had a $13 million swing in a positive sense there, so they went from a loss to a profit of $6.5 million.

All up, management has done a good job of keeping expenses down, and they got a strong balance sheet of something like $58 million in cash so they’re in a well place to ride this out whilst we do wait for a decent full-on recovery to kick in. And management thinks that recovery’s pretty nearby. And you just have to look at the release schedule for movies over the next 18 months and you start seeing all those blockbusters coming back online, and that’s really, I think, going to help build the resurgence in the cinema industry. And, like, you know, the latest James Bond. It’s out tonight in the UK, the premiere was last night, out into US in that next week, and that just continues on over the next 18 months.

The company is saying, as long as about 80% of cinemas remain open in their key markets that they’re expecting revenue for next financial year about 100 million up from 88 last year. And it’s also worth noting that this company was on the real growth footing prior to COVID. So increased revenues every year from 2015-2019.

And, you know, we just get back to some sort of resemblance of the way the way things used to be, and we get back to those cinemas. I think this is a real good growth and recovery story to play out over the next year or two, and on the charts, we’re starting to see that momentum come through from a low base, so really interesting stock to keep an eye on.

Host: Let’s switch to Family Zone Cybersecurity. Now, I’ve certainly never heard of that one. So enlighten us, Jason.

Jason: Yeah, and that’s the thing with some of these stocks. One of my favourite parts of scanning the market for momentum is that I often find these companies, which I’ve never heard of, either. And there’s 2000 odd stocks out there so once you get outside the ASX 200 maybe 300, they start to become quite unfamiliar.

This is very much a case in point. They’ve got a market cap of about $550 million and hasn’t made its way in the All Ordinaries yet. It’s probably not too far off and what they do, it’s a tech company, and their software basically keeps kids safe when they’re online, and it’s all about, it operates from an app on a parent’s smartphone.

But the most interesting part of the business, I think, is what they’re doing with schools, so their school based focus is where I think the real potential lies. They’ve got something like 18,000 schools around the world using their software, and it’s a segment that’s really growing quickly. So just in the last quarter, in the June quarter, they had record growth, record revenue growth and the average recurring revenue is up something like 95% year on year. Their student licences jumped 164% in their school licences, 127%. So a lot of growth coming through.

And a lot of that’s coming from the US, so they added over a million students and over 2000 schools in the last quarter and what that equates to when you look at the whole US school environment, they’re in around 5% of US schools, and that’s up from 2% a year ago and there’s record funding going into the education system in the US, so the company believes that that’s really going to help grow and roll out their product in that big market. So a lot of growth potential there.

Another interesting thing that’s happened recently is they made an acquisition in the UK and it’s, they bought the UK’s leading provider for kindergarten to year 12 digital safety for kids. It costed them $142 million, a big purchase relative to the size of the company, but it gives them a 38% market share of that UK market, and they also expected to get really good synergies from combining the products from the acquisition with their own suite of products.

So look, there’s a really good growth story there. They’re not profitable as yet, but the growth potential is there to make this look a really valuable company into the future. If they can continue to convert on what they’ve been doing so well up to date. And just lastly, and that’s another positive is that management has a strong stake in the company, and this is one of the things I look for in these more emerging type plays. You want to see management not only having a vision but being on board the vision themselves with their own money. And that’s the case with Family Zone.

So again, one of those stocks which during this market pullback possibly provides an opportunity to sort of have a look at it and prepare to maybe take a position if this sort of thing interests you over the next maybe a year or two.

Host: Jason, we’re bumping up against the clock. So we need a super short update on Bisalloy Steel.

Jason: Okay, well, this is a classic value playing, a lot of things I find are growth orientated. This is this is all value. They’re Australia’s only manufacturer of high spring structural steel. So it’s used in the defence industry as armour. So the current submarine fleet actually use Bisalloy steel as the armour plating. Also used in construction and mining and other applications. It’s a high quality product, they export it around the world. They’ve got a good distribution network in Asia and the United Arab Emirates, and fundamentals look great on this one.

So operating EBITDA for the four years is up, 25%, net profit after tax, up 31% and what’s interesting is when you look back over the last few years, they’ve been increasing EBITDA each year since 2016, and I’ve also had double digit return on equity since 2018. So I think very well run company, management think they’ve got more EBITDA increases next year, depending on like how things go with COVID and they got a history of delivering

All up, I think this is a classic value play with a PE of around 8 and a fully frank divided around 5.6. And good great potential to boot. So if value plays and and these these lower priced stocks are your look, market cap of about $71 million. So you know it’s not not the most liquid of stocks, but a very interesting one nonetheless. So I think good upside potential maybe over the next year or two.

Host: Well, Jason, we love names that we haven’t heard. You certainly had me Googling, and it’s always a pleasure. Thanks so much. See you again.

Meet Jason

I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney. 
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.