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The demise of Australia’s car-manufacturing industry should put the brakes on investors seeking automotive-related stocks. But some of the market’s more interesting small-cap stocks are prospering from providing, installing or supplying information on car parts.

Consider car-parts information provider Infomedia. As a leading player in the global parts industry, Infomedia stgelops and supplies electronic-parts catalogues and service-quoting systems for the car industry. More than 50,000 dealers in 160 countries use its catalogues for parts information and its client list is a who’s who of the global automotive industry.

The star stock lost its way after visionary co-founder Richard Graham retired as CEO in 2004. After tumbling from 85 cents to below 30 cents in 2010, Graham returned as executive chairman to reignite Infomedia’s growth. He stepped down as a non-executive director in November 2014, having sold almost all of his shares a year earlier.

His strategy to refocus the business, reconnect with clients, cut back-office costs and restore Infomedia’s entrepreneurial spark worked a treat. From 20 cents in early 2012, Infomedia soared to $1.32 as the market latched on to its turnaround prospects. It now trades at $1.01.

Sales for 2013-14 increased 17.4 per cent from the previous year to $57.1 million and after-tax net profit leapt by 22 per cent to $12.3 million – a good result in a challenging market.

Infomedia ticks several boxes. It has no debt and consistently high Return on Equity for almost a decade – ROE of 29.2 per cent in 2013-15 impresses. Like all good software companies, Infomedia’s business model provides high recurring income and high profit margins, and the business can be grown without huge extra investment.

At its annual general meeting in November, Infomedia said after-tax net profit would exceed $14.5 million – an 18 per cent increase in the FY14 result. It is little wonder fund managers were willing to pay a valuation premium given Infomedia’s ability to grow quickly in a sluggish economy.

Profit guidance was revised to $13.7 million in January after the non-renewal of one of its agreements with Land Rover and Jaguar, and Infomedia tumbled 10 per cent on the news. But it should still show good profit growth and has potential to beat market expectations if the Australian dollar retreats.  

Share-price weakness would provide a buying opportunity for investors who are comfortable with small-cap stocks and have a higher risk tolerance. Infomedia has good short-term prospects as the Australian dollar falls – about three-quarter of its revenue is earned outside the Asia Pacific – and good long-term prospects as a new version of its software is launched and the successful product rollout in offshore markets continues.

Further share-price falls would not surprise given the Land Rover contract news and the fact that Infomedia was due for consolidation after such strong price gains. Eagle-eyed investors will watch its contract renewals when the first-half result is released on February 29.

Chart 1: Infomedia

Source ASX

Burson Group

Car-parts distributor Burson Group also impresses. It raised $220 million and listed on ASX in April 2014 through an Initial Public Offering. Offered at $1.82, it rallied as high $2.60 as the market appraised its prospects, before easing to $2.35.

I wrote about Burson at $2.18 a share for The Bull in July 2014 and nominated it as one of three small-cap IPOs from that year to follow. The Bull said: “Watch Burson beat market expectations on earnings and lift its return on equity over the next three years, with the share price to follow the company’s intrinsic value higher.”

So far, so good. Australia’s largest trade-focused automotive-parts distributor met prospectus forecasts for sales with 9.7 per cent year-on-year growth and reconfirmed its FY15 after-tax profit forecast of $21.9 million. Its 121-store network should grow to 124, as forecast.

No further earnings guidance was given, but Burson should benefit from rising revenue at each store, a slightly larger store network, improving supplier terms, and more Burson-supplied brands that lift profit margins.

The Victoria-based company’s large network of suppliers, distribution centres and stores means it can supply parts faster and enable workshops to service cars on a same-day basis, thus improving work flows. Burson has a strong position in a reasonably defensive car-parts market and might benefit if a lower oil price and lower fuel bills encourage more people to service their cars, although that would take time to flow through to earnings.

Chart 2: Burson Group

Source: ASX

AMG Group

Listed panelbeater, AMA Group, is also making strong gains through organic growth and acquisitions after being smashed during the GFC. The panelbeating industry is highly fragmented and reasonably defensive.

AMA has rallied from a 52-week low of 22 cents to 38 cents and continues to acquire businesses, most recently in Queensland. Investors should always be wary of fast-growing industry consolidators, but AMA’s potential to improve efficiencies in the panelbeating industry through much greater scale is hard to ignore.  

Chart 3. AMA Group

Source: ASX

Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at January 14, 2014