Source: Intelligent Investor; price as at 24-Jan-17 close of businessRECOMMENDATION
BUY
below
$7.HOLD
up to
$14.above
$14.SELLSELLat $14.IN BRIEF
TOP 5 IPOS FOR
FIRST QUARTER
2017
Ardea Resources
160%; eSense-Lab
140%; Roto-Gro
International 105%;
Wattle Health
Australia 72.5%;
MetalsTech 55%.
Source: OnMarket.
Performance calculated
from issue price to the
closing price as at 31-
Mar-17.SHARES
XMORE
SHARES
STORIES ON
P82-COMPILED BY SUSAN HELY
I
nvesting in small
companies,
especially in highly
specialised sectors
such as technology, should not be
an endeavour pursued either lightly
or in a part-time manner. While the
rewards are potentially high, so are
the risks. We recommend investing
via a professionally managed fund.
If you are looking to back some
strong trends, NextDC is worth
considering. As time goes on we will
consume ever-larger volumes of data
on our mobile devices. Additionally
most business software is moving
to “software-as-a-service” (SaaS)
over the web. This all translates tosignificant growth in demand for
cloud-based (or data centre) storage
and processing. NextDC has the
largest footprint of vendor-neutral
data centres in Australia and should
see significant growth.
Other beneficiaries of the trend
include TechnologyOne, Aconex
and WiseTech Global. All three
businesses are either regional or
global leaders in their field.
Australia has historically also
done well in medical devices (think
ResMed and Cochlear). In this sector
we believe both AirXpanders (a
“better mousetrap” tissue expander
for use in breast reconstruction)
and ImpediMed (a bioimpedencedevice used to measure body mass/
fluid composition as a precursor to
many serious disease conditions)
have some merit. Both companies
are very early stage and mostly
“pre-revenue” so are very high risk.
Nevertheless they have strong
medium-term growth prospects.
However, they will only make for
good investments if the price paid
for them is below their assessed
intrinsic value. It is this aspect of
the technology sector that provides
investors with their greatest
cautionary challenge.
(All the companies are owned by
the UBS Australian Small Companies
Fund at the time of writing.)Victor Gomes,co-portfolio manager in the
Australian small companies team, UBS Asset ManagementSMALL CAPS
Rewards and risk
can be high
BUY SELL HOLD
TPG Telecom Gaurav Sodhi, Intelligent Investor
T
PG’s recent interim result
showed that shrinking
broadband margins are being
partially offset by the acquisition of
iiNet, build-out of independent fibre
and growth in the corporate business.
In aggregate, revenue grew 9%
while EBITDA grew 28%. Some of
this increase was due to expanding
margins from bringing iiNet
customers onto TPG infrastructure
but cost-cutting was also significant.
iiNet now generates an EBITDA
margin of 26%; before being bought
by TPG it made just 18%. By contrast,
TPG’s consumer business generates
an EBITDA margin of 38%.
The corporate business continues
to perform strongly, increasing
revenue by 4% and EBITDA by
7% and expanding the EBITDA
margin from 40.6% to 41.8%. It
enjoys high incremental margins
because of the low marginal cost
of signing customers onto existingfibre services. While the corporate
business, which accounts for about
a third of EBITDA, won’t be impacted
by the NBN, in the consumer
business ADSL margins of 40%
will be replaced over time by NBN
reseller margins that are much lower.
High reinvestment rates combined
with uncertain rates of returns mean
this recommendation relies to a
degree on our faith in management.
A splendid track record helps in that
regard and, with an enterprise value
to EBITDA multiple of less than nine,
TPG is attractive enough to start
building a position.Brambles is back
in Morningstar’s best
eight high-quality, large-cap
companies that are currently trading
at discounts to the group’s fair values.
It says the best companies, chosen
from more than 200 are: Brambles,
Folkestone Education, Platinum Asset
Management, Ramsay Health
Care, ResMed, Santos, Sonic
Healthcare and Vocus.TOP PICKS