Small cap, solid profit

An occupational hazard for sharemarket columnists is being asked to name their top stock ideas at the start of calendar and financial years.

It was with some trepidation that I listed 10 investment grade and 10 speculative ideas for 2012-13 in July in BRW after a poor 12 months for sharemarkets.

Some early price gains have been surprisingly strong, although I’ll wait until June 2013 before claiming any successes or confessing to poor calls. With the sharemarket up 4.2 per cent in July and further gains in August, the portfolio should have had a good start to 2012-13.

The table shows 10 of the 20 best-performed stocks so far.

With the profit season in full swing, it is a good opportunity to assess how these companies are performing operationally.

Not everything has gone to plan. SAI Global was an early disappointment in the reporting period.

Its shares tumbled 8.3 per cent on the day of its profit announcement after the business information provider reported net profit of $53.5 million in 2011-12, down 7.55 per cent on a year earlier.

A weak second-half performance from the compliance services division weighed on the result.

A bigger shock was SAI retreating from earlier profit guidance of about 20 per cent growth in earnings before interest, tax, depreciation and amortisation (EBITDA) for 2012-13.

Like many companies in this reporting season, SAI has taken a more cautious approach with its guidance.

I see no reason to exclude SAI from the portfolio of investment-grade small and mid-cap stocks.

SAI still expects revenue and profit growth across all its divisions in 2012-13 and providing information on business, assurance and compliance risks has strong long-term growth prospects.

Education provider Navitas also disappointed slightly. Its net profit for 2011-12 was $73.1 million, down 5 per cent on a year earlier. The full-year dividend was cut 6 per cent.

Chief executive Rod Jones described the year as the “toughest in the company’s history” because of regulatory and policy changes around visas that dampened demand in the international student market.

Navitas shares dropped from $4.35 in early July to as low as $3.75 this month, then roared back to $4.20. It seems investors have twigged to the improving trend for program enrolments for Navitas bridging courses, which was the key reason it made this list.

Overall, enrolments at Navitas fell 3 per cent in 2011-12 but it looks as if declines have stabilised and are starting to reverse. If the trend continues, Navitas shares have further to rally this financial year.

Among other rising stocks, Carsales.com and REA Group posted results that smashed consensus analyst forecasts. Last week’s column outlined the case for so-called online portal stocks and the performance of Carsales and REA shows why it is worth paying a valuation premium for two of the market’s best mid-cap stocks.

I still kick myself for not including Webjet in that list.

Another strong performer was transport parts manufacturer, Maxitrans Industries.

Maxitrans is one of the few micro-cap stocks this column has featured prominently in 2012.

The EBITDA for 2011-12 more than doubled to $23.5 million and net profit almost quadrupled to $12.3 million. On most measures, it was a cracking result.

The big news was Maxitrans’ order book increasing 70 per cent on a year earlier.

That suggests net profit in 2012-13 could jump again, which explains the 25 per cent jump in Maxitrans’ share price this financial year.

Maxitrans’ trailing price-earnings ratio of about 13 times is high for a micro-cap company but I’m betting its earnings per share (6.7¢ in 2011-12) can do much better this financial year, given its rapidly expanding order book. It could take time but a $1 share price seems a reasonable target.

The litigation funder, IMF Australia, is also trading near its 52-week high. It continues to notch up case settlements and has several key ones due later this year.

I wrote in May that IMF shares, then $1.39, were undervalued.

They have since rallied to $1.63 but investors are still underestimating the potential of settlements from IMF’s case portfolio.

*July 26 **These stocks suit experienced investors comfortable with higher risks Source: Afr.com, BRW

Company	Price at publication* $	Latest price $	Price change %
Maxitrans Industries**	0.66	0.82	24.24
Carsales.com	6.2	7.35	18.55
REA Group	13.41	15.88	18.42
Invocare	8.01	9.01	12.48
Super Retail Group	7.3	8.21	12.47
IRESS	6.32	7.05	11.55
ARB Corp	9.05	10	10.50
IMF Australia	1.48	1.63	10.14
Buru Energy**	2.89	3.13	8.30
Gryphon Minerals**	0.6	0.64	6.67

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