3 Picks in the Small-cap Sector that we like – DCC, GRB and NTC

Digitalx Ltd

DCC Details

Positive outlook: Digitalx Ltd.’s (ASX: DCC) management offered a positive outlook and reported that they used the crypto asset markets correction for executing strategic business activities which are expected to offer better revenues during market cycles. They see an ongoing growth in the Australian market and intend to expand through Asia, Latin America and the United States in the coming quarter. Management also sees that the recent regulatory news is positive for many countries including Australia and it is well placed to leverage the acceleration towards regulated Blockchain-backed assets.

Expanding cryptocurrencies opportunities: Recently, the group reported that they are starting a funds under management division, DigitalX Investments, to enable high net worth and institutional investors having access to a portfolio of cryptocurrencies. Digitalx first fund, DigitalX Investments, is slated for investments mainly in the leading cryptocurrencies, with a smaller allocation towards special trading opportunities including ICOs. DigitalX has a 73% interest in DigitalX Funds Management Pty Ltd, and infused the fund with over $750,000 from their current Bitcoin and Ethereum asset base. The group sold over 60 Bitcoins at over US$8,500 during April to seed the fund.


Digitalx exchange listed cryptoasset holdings as at 31 March 2018 (Source: Company reports)

Stock performance: The shares of Digitalx recovered over 11.4% in the last four weeks given the positive outlook from the management and their ongoing expansion in Crypto assets space. They made a joint venture with digital media company Multiplier, to launch a new crypto business news website and online cryptocurrency education platform. These two websites are Multipliercrypto.com; and Coin.org, and would be operated by the joint venture, Digital Multiplier firm. DigitalX and Multiplier have shares equal to 50 per cent of the new entity and its assets each. Both the websites are currently under final development and would offer major information to unique audiences in the cryptoasset space. Meanwhile, Bitfinex has appointed DigitalX as cryptoasset listings advisor. We recommend a “Speculative Buy” on the stock at the current price of $ 0.190.
 

DCC Daily Chart (Source: Thomson Reuters)
 

Gage Roads Brewing Co Limited

GRB Details

Solid top line growth in third quarter: Gage Roads Brewing Co Limited (ASX: GRB) delivered an outstanding third quarter of 2018 performance with sales of their brands rising 153% against prior corresponding period (pcp). The independent retail channel sales drove the top line performance with sales rising 183% while draught keg sales rose 445% boosted by starting of keg sales to Optus Stadium during the quarter. The group also enhanced the sales of their brands through the national retail chains, rising 58% against the same quarter last year. Given the solid third quarter performance, the year to date FY18 Sales to the independent retail channel rose 184% against YTD FY17. Single Fin Summer Ale continued to outperform in this market and has delivered a rise of 248% against pcp. Solid third quarter sales to the national retailers have offset the softer sales of Q1 and Q2. Higher-margin, on-premise draught sales lifted the sales by 275% against YTD FY17. Draught volumes rose 121% (Excluding draught sales to Optus Stadium and other marketing events) driven by underlying sales growth to on-premise retailers. The group has $2.1 million in cash generated from operations while appointed former Little Creatures senior marketing executive. Their contract brewing division, Australian Quality Beverages extended its exclusive contract brewing agreement with Matso’s Broome Brewery to a further additional 12 months. The group extended exclusive Fringe World supply contract to 2021.

Stock performance: The combined Gage Roads brand sales and contract brewing volumes led to a total throughput of 8.9 million litres as of YTD18 while the group is on track to meet their full year sales target of at least 11 million Litres of underlying sales. The group is also on track to deliver growth in earnings and margins through the shift in sales mix towards higher-margin Gage Roads brands as the management team delivers on year 2 of its 5-year strategy. Management sees opportunities to continue to shift Gage Roads brands beyond 39% of sales mix which would drive margin growth. GRB stock rose over 31.8% in the last six months (as at May 07, 2018) and we rate a “Speculative Buy” on the stock at the current price of $ 0.087.
 

GRB Daily Chart (Source: Thomson Reuters)
 

NetComm Wireless Ltd

NTC Details

Signed Fixed Wireless Agreement with Bell Canada:NetComm Wireless Ltd (ASX: NTC) signed a Product Purchase Agreement with Bell Canada for the supply of Intelligent Fixed Wireless Access technology devices. The group won this contract with Bell Canada after a successful 4 month in-field trial and is building on their earlier fixed wireless contract wins with Ericsson / nbn in Australia and AT&T in the USA. This contract is another major milestone in the growth of their international footprint servicing tier 1 telecommunications carriers in developed markets. Management sees that this deal would lead to major revenues in the coming financial years. The group expects the initial deliveries of the Intelligent Fixed Wireless Access devices to occur in Financial Year 2019, subsequent to attaining normal customer acceptance and required Canadian regulatory approvals.

Stock performance: NTC stock was removed from S&P/ASX 300 Index effective from March 19, 2018, and has been trading on volatility since the start of the year, but recovered over 19.1% in the last three months. The group delivered a decent first half of 2018 performance with revenues rising 89% to $88.6 million and EBITDA rising 13 times to $9.2 million. NPAT rose to $3.7 million, against a loss of $(1.7) million in pcp. NTC pipeline looks positive given their contracts with nbn signed to supply Network Connection Devices (NCDs) for nbn’s FTTC project and large orders in relation to FTTC DPU contract with nbn. They even delivered initial order of fixed wireless units to AT&T in the US, while strengthening strategic markets in Europe, UK and North America. We rate a “Buy” on the stock at the current price of $ 1.350 (up 3% on May 08, 2018).
 

NTC Daily Chart (Source: Thomson Reuters)

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