They’re under the radar of most brokers, have less earnings exposure to the domestic market, and look well positioned to benefit from the transition of agrarian-based economies into consumer-driven markets. This is a growing band of ASX-listed small-caps with revenue streams wired to the exponential ‘GDP-growth’ story unfolding within emerging markets.
Efforts to cater for unprecedented domestic consumption is expected to see average real GDP growth of 5.5 percent across Asia over the next five to 10 years – eclipsing Australia’s projected 3.5 percent, and doubling that of the US. Meantime, economic powerhouses like China and India are expected to deliver GDP growth of around 9.5 and 8 percent respectively.
Further evidence that emerging market growth is decoupling from stgeloped economies can be seen in the speed with which the manufacturing and services output within these economies recovered from the global financial crisis. While the FTSE Index of Emerging Markets jumped a whopping 99 percent since its March lows, the ASX-200 only rallied 46 percent.
Asia’s burgeoning middle-class means greater demand for base metals and bulk commodities, notably iron ore. This presents major upside for resource stocks, contractors and myriad service providers further down the food-chain. A recovery in industrial production could see commodity prices move higher.
But it’s not only the ‘big-end-of-town’ that stands to benefit. Here’s a look at six undervalued small-caps also offering strong exposure to the steep growth trajectory of emerging markets, predominantly Asia.
Industrea Ltd (IDL)
According to Dominic Rose analyst with Fosters Stockbroking, Industrea – a global provider of integrated mining products and services is the best ASX industrial for leverage to Chinese growth.
In the first four months of financial year 2009, Industrea announced around $40 million of new product sales into China. Much of this was repeat business with Chinese mining majors for the company’s ‘best of breed’ IME underground longwall chock carriers, AMT directional drilling and methane gas drainage systems.
Efforts by the Chinese Government to drastically boost mine-site safety, says David Shearwood of Atom Funds Management also bodes well for the company’s GPS safety technology designed to track vehicles underground. He says what differentiates Industrea from traditional mining contractors is the repeat consumables revenue stream – now comprising around 20 percent of product sold through its China-based distribution arm.
Trading on a significant discount to its peers on a P/E of 8.2X, Shearwood says Industrea looks decidedly undervalued at current levels (42.5c), and expects it to gravitate slowly towards his target price of 90c over the next 12 months.
Nuplex Industries Ltd (NPX)
Rising demand and lower costs saw Asia double its proportion of the synthetic resin manufacturer’s group profit so far this year. Lyall Taylor analyst with Macquarie Equities Research estimates that Asia contributed 18 percent of Nuplex’s earnings before interest, tax, depreciation and amortisation (EBITDA) in first half 2009, and 35 percent during the second half.
As well as ongoing strength in China and Vietnam, he says Nuplex is also witnessing positive signs from other Asian markets, notably Thailand, Malaysia, and Indonesia.
Even after a 5 percent update to his EBITDA forecast for full year 2010, which puts it on a P/E of 11.9X, Taylor says Nuplex remains cheap for a ‘cyclical’ cycling a low ebb in earnings.
Based on a 12 month target price of around $2.10, Taylor says Nuplex look inexpensive at current levels, and is yet to factor in a material turnaround. With a net debt of around 1.5X EBITDA, he says Nuplex represents a low-risk way to gain exposure to economic recovery. “Our implied full year 2010 Asian EBITDA margin is now 13.5 percent, with a steady reduction in margins to 10 percent by full year 2015 – offset by ongoing sales growth.”
OM Holdings (OMH)
A 31 percent leap in production at its flagship Bootu Creek mine near Tennant Creek has transformed the WA-based resources group into one of the world’s biggest manganese companies. Increased demand from China also led to a threefold increase in the high-carbon ferro manganese processed and sold by its wholly-owned Qinzhou smelter in China.
Based on his target price of $2.20, Greg Chessell of Euroz Securities says the stock looks undervalued at current levels ($1.85) and expects further upgrades to this target on the completion of its current acquisition.
A controlling interest in South Africa’s Tshipi Kalahari manganese project is expected to propel OM Holdings into the league of leading manganese producers with a diversified, long-life, high-grade and low-cost ore resource. What sets OM Holdings apart from typical mid-sized mining companies, adds Chessell is its well established marketing division in China, low-cost/long mine life, and its globally significant production scale.
Hastie Group Ltd (HST)
Specialising in commercial and industrial air-conditioning, mechanical, electrical, hydraulics and refrigeration systems, Hastie operates from three regional hubs in Australasia (Australia, NZ and Singapore), UK/Ireland and the Middle East. Despite some currency headwinds within exports markets – where it conducts 30 percent of its business – revenue this year is expected to hold up relatively well on last year’s 53.7 percent profit increase. Now accounting for 10 percent of earnings, consolidated growth in the Middle East has doubled in the last year.
But to diversity its Middle East exposure beyond Dubai – adversely affected by the GFC – Hastie recently established operations within Oman, Qatar, Saudi Arabia, and Abu Dhabi, where it won a prestigious contract at Zayed University. Also adding to its offshore earnings is a major drafting contract for Hastie in India, and a new contract for it new subsidiary, Rotary in Caribbean.
Trading on a discount to its peers, Denny Younis analyst with Stonebridge, says Hastie makes for attractive entry at current levels (1.86).
Mirabela Nickel (MBN)
With commodity prices on another cyclical upswing, Daniel Rolley equity analyst with the Atom Small Cap Fund says there’s never been a better time for investors to leverage the upside of this nickel sulphide pure-play.
Commercial production of stock-plied ore at its world-class Brazilian-based Santa Rita mine commenced early November, and based on Wilson HTM estimates, the nickel price is expected to peak at US$8.05/lb in 2011. While all current producers stand to benefit from nickel’s projected price peak, Rolley says new-term stgelopers like Mirabela can expect a significant re-rating as they progress through the stgelopment cycle.
Based on net present projections, Macquarie Equities Research says the stock looks radically under-valued, and expects the gap between current price ($2.85) and its 12 month target of $4.00 to progressively close now that Mirabela has entered the league of nickel producers.
Nexbis Ltd (NBS)
Formerly known as Entertainment, Media and Telecom’s Corporation, Nexbis is an ASX-listed technology company with operations head-quartered in Malaysia. Much of the company’s fortunes are wired to government contracts in Asia for its home-grown Nexcode™ security technology. While recovering economic conditions bode well for Nexbis,
Lodge Partners warn that it needs to deliver on critical milestones before it regains investor confidence. What’s needed most is clarity over its contracts with Malaysian and Chinese governments respectively. Much of the market nervousness towards Nexbis relates to uncertainty over whether its pilot with the Malaysian Government will proceed. And while Nexbis has successfully ramped-up its business in China – it is now awaiting payment – for what’s expected to be a $200 million contract over five years.
Assuming China makes good on its existing contract, and a contract in Malaysia proceeds, Lodge Partners expects Nexbis to receive a significant re-rating to its current 20c share price.
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