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Host: Well, let’s get to the markets through the charts. Best ideas right now in the small cap space, here on the local boards, we’re bringing Jason McIntosh, from Motion Trader. Jason great to go and see you again. Good morning. What is on the radar for you at the moment? What are the small caps that are moving?
Jason: Morning, David. Yeah look, I’ve got three interesting ones to talk about today. So look, this first stock I’ve got, I want to talk about is a company called QANTM Intellectual Property. So many of the stocks which I find through my momentum scans. They tend to have some sort of exciting new technology, or maybe some mineral deposit or an interesting backstory. This first stock doesn’t really tick any of those boxes, but here’s the thing. You don’t need to be an exciting company to offer an exciting opportunity.
So what this company does is they have a range of intellectual property businesses, and they’re based across Australia, New Zealand, in Singapore and Malaysia. And so it’s basically all things to do with trademarking corporate law and things generally in the IP space.
It’s one of those companies which has really come through the covid period pretty much unscathed. And I think that’s probably largely due to the defensive nature of what they do. And like you can see they’ve been doing quite well through the last yearly results,
Service revenue is up around 2.3% to about $90 million. On the surface, that doesn’t sound overly exciting, but when you adjust for the strong Aussie dollar, on a like for like currency basis, their service revenue was up something like 7.5%. The same sort of story playing out in their EBITDA. When you look at it on a like like currency basis, it comes in at around 13.5%. So they’re seeing some good underlying growth in the business.
Another interesting thing is their patent applications locally were up 11%. That’s good, because local patent applications are up less than that, so they’re actually growing their market share.
Asia is another big area for them, so that’s now represents 14% of the business, and this is an area where they’ve got real potential to grow what they’re doing. So they’re actually looking at mergers and acquisitions in that space and recently bought a fast growing legal tech business in New Zealand.
They’ve got $16 million of debt, down from $17 million on the previous year. But overall, their gearing is around 18% so, so pretty modest.
Another interesting way to look at this is to consider the larger listed IPH. It has a market cap about $1.9 billion, compared to $170 million for QANTM. IPH is trading on a PE of around 30. QANTM is around 15, so I think there’s a value case.
So look, it ticks the value box. There’s a growth perspective. The yield on the stock is around 6% so it’s got a good yield base to go off, and it’s got some positive share price momentum. It might not be exciting, but it’s got some other good things going for it. I think the company could do quite well over the next couple of years.
Host: Let’s talk Xref. Now we’re talking on the programme in the previous hour about how the labour market here in Australia and elsewhere in the world in the world is really starting to ramp up. Is it set to benefit?
Jason: Xref’s a really, really interesting company. It’s probably not a name which is familiar to a lot of investors, it only has a market cap of $120 million, and it’s not in the All Ordinaries. This means it won’t be on the radar for a lot of people. It’s like, how do you find these smaller companies that are outside the top 500?
But for me, it’s about looking for momentum. Xref turned up in my momentum scans a few months back. They provide a cloud based solution to a time consuming HR task. And that task is reference checking. The standard way you do a reference check is you’ve got to pick up the phone, make contact with somebody, maybe play phone tag for a bit and it’s a pretty laborious and time consuming task. What Xref have done is that they have automated the whole process, and that made it a lot faster, and a lot simpler. The data they get from their tech platform is also a lot more reliable, so it makes it harder for people to fudge the truth.
And again, it’s one of these companies, which have done really well through covid because you had a lot of HR teams working remotely. So technology and software, which makes that remote operation easier has been in demand, and you can see this coming through in the growth.
Revenue rose something like 56% to around $12 million last financial year. That positive momentum is coming through in the current year. The last quarter, (September) they had revenue growth of around 126% to around $5 million so that’s on the corresponding period last year.
There are also some big clients on board. They got Fortescue Future Industries, OzCare, in the UK they’ve got H&M Group, and in the US they’ve got the University of Pittsburgh. It’s not just an Australian orientated business. They’ve got potential to grow globally. This really opens up a lot of potential. Why it’s such an interesting stock to have a look at.
They’re cash flow positive, and have just become EBITDA positive for the first time after years of investing in platform and building it up.
As I said earlier, Xref came up in my scans a couple of months ago. It’s had a bit of a run since then, and might consolidate a little bit, but look, I think it’s one of those really interesting small caps with a great growth story, and lots of potential.
And the other big thing I like is that the founders and management are still very much on board with significant stakes. I like that in these smaller companies. I want to see management not just talking the talk, but I want to see them walking the walk with their own capital and that’s very much the case with Xref.
Host: And your third pick sounds a bit ex Facebook, shall we say, Ansarada is where you keep your virtual documents. Sensitive information. A little Aussie tech sector play. How’s that looking?
Jason: This is another one of those Interesting companies that I’ve found through momentum. It has a market cap of $185 million and is not in the All Ordinaries. I hadn’t heard about it myself until it turned up in my momentum scans. And that’s often the case with these emerging businesses. You don’t hear about them until they hit the headlines. But by then, share price is often a lot higher.
So, what they do is they’re using a service as a software platform to create a virtual data room. Companies use it for deal transactions, board management, compliance tenders, all the information a company wants to keep secure. It’s about sharing information with the right people at the right time.
And the company has had some really good growth. Customer numbers are up 23% over the last year to around 3,500 and this is also showing through in their revenue growth. Revenue was up around 44% over the previous quarter to around $10 million.
Some interesting clients are coming on board. The company says they’ve got 10 of the top 10 legal firms in Australia, 10 of the top 10 investment banks, four of the top four accounting firms. And they also say they’ve got 87 of the top 100 ASX companies, so there’s definitely some interest in the product that they’re putting out.
They’ve also recently taken over a small company in the governance compliance and risk sector called TriLine. It’s an interesting business that Ansarada says will add value to the product suite they already have and open up the potential for their product to more and more businesses. It also gives them a foothold in the governance, compliance and risk sector, which they say is worth something like $52 billion annually. So when you have a small company getting a foothold into a big market, that’s where you can potentially get some really good growth over a year, two or more
Ansarada came up in the momentum scans a couple of months ago. A bit like Xref, it’s had a bit of a run and might consolidate a bit. But I think again it’s one of those really interesting little small caps, which has a lot of potential. Management and the founders also still on board. I like these situations where management has skin in the game. They’re backing their own story. That’s very much the case with Ansarada. So look, a company we could see some do some good stuff over the next couple of years.
Host: Thanks for those tips. Always good to go and see what’s going on the small cap space and, we’ll speak soon.
Jason: David, Annette, Pleasure being on. Thank you
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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.