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Four Hot Small-Cap Stocks to Buy

Sep 30, 2015 | Team Kalkine
Four Hot Small-Cap Stocks to Buy

Seven West Media



AFL broadcast rights and Diversification to underpin growth: Seven West Media Ltd (ASX: SWM) continued to witness pressure and reported a revenue decrease of 4.7% to $1,774.7 million for fiscal year of 2015. The group’s core TV segment revenues (which accounts 72% of the overall revenues) fell by 2% yoy to $1,279.2 million during the year. On the other hand, Seven West entered into a new 6-year deal with the Australian Football League (AFL) for the 2017 to 2022 seasons which would add some support to its TV business. Seven West cost control efforts generated a 2.4% yoy decrease in operating costs. Seven West is also boosting its balance sheet and raised over $310.7 million cash through entitlement offer. Accordingly, Seven west decreased its net debt by 36.7% or $425.6 million, while the debt leverage ratio reduced to 1.8x EBITDA, as compared to 2.5x EBITDA during the earlier fiscal year. SWM has been diversifying business to offset FTA market pressure and also focusing on online as well as other communications. The group’s Yahoo7 (partnership with Plus7) has over 3.1 million Daily Active Users, wherein its Mobile audiences rose by 31%. More than 130 million video streams were served during the fiscal year, which is an improvement by 15%. SWM’s Presto SVOD service growth (launched during third quarter of 2015) is also on track. The group is also making new distribution agreements with third party platforms and entered into media partnership with Racing Victoria on Racing.com.


Fiscal year of 2015 highlights (Source: Company Reports)

SWM improved its digital video revenue by 66% and witnessed a 17% growth in content sales. Seven West Media stock delivered a negative year to date returns of 43.5% partly impacted by its poor performance. But Seven West now estimates a better outlook through its newspapers, magazines and digital business. The group’s focus on live-streaming, performance from Yahoo7 and digital businesses of The West Australian and Pacific Magazines might support its revenues to some extent. The latest announcement of a $75 million on-market share buy-back is expected to lift earnings per share in the coming financial year. SWM has an attractive dividend yield of 13.89%. We reiterate our “BUY” recommendation on the stock at the current price of $0.74.

 
SWM Daily Chart (Source: Thomson Reuters)
 

Slater & Gordon Limited



Growth from acquisitions, addressing financial reporting concerns: Slater & Gordon Limited (ASX: SGH) stock plunged over 64.6% in the last six months, partly on the back of investigation by Australian regulators on the company’s errors in financial reporting. British regulators launched an investigation on Quindell, wherein Slater & Gordon acquired Quindell’s professional services division for $1.3 billion. Thus, SGH reacted to these conditions and accordingly changed its extremely aggressive accounting practices. SGH shifted to early adoption of AASB 15 - revenue from contracts with customers during fiscal year of 2016. For the interim, the FY15 financial statements would have better disclosures regarding revenue recognition policies. SGH had also made other accounting changes to enable a better visibility of earnings. Slater also delivered a revenue surge of 27% yoy to $521.9 million in fiscal year of 2015, wherein its Australian Personal Injury Law (PIL) practice revenues increased 12.1% yoy boosted by better performance of Victoria and NSW, while brand awareness at Queensland is increasing.
 
 
Growing revenues over the years (Source: Company reports)
 
Australia’s GL practice revenues also increased 30.9% yoy to $56.7 million, while EBITDAW improved 23.1% yoy to $1.6 million, during the period. United Kingdom Personal Injury Law (PIL) practice surged 47.6% yoy to $211.6 million for the fiscal year of 2015, driven by the rise in new cases opened including in the multi-track (significant injury) area. The group also gave a positive FY16 guidance of more than $205 million EBITDAW and a Gross Operating Cash Flow to EBITDAW of 100%. We believe investors hunting for bargain opportunities should consider investing in this high growth stock with attractive valuations (relatively cheaper  P/E of 7.9x) at the current price of $2.94.


SGH Daily Chart (Source: Thomson Reuters)

Nine Entertainment


 
Other channel investments and NRL rights to drive growth : Nine Entertainment Co Holdings Ltd (ASX: NEC) shares have been under pressure over the last six months, falling over 23%, due to weakening FTA market and growing online advertising market . But the shares have recovered by over 6% in the last three months as the management issues a positive outlook on the firm in spite of weak fiscal 2015 year performance. Moreover, NEC revenues from Metro FTA rose by 0.2 percentage points to 38.9% although the overall industry performance declined by 1.5%. Recently secured National Rugby League (NRL) broadcast rights could offer the firm some support for the coming years. The group’s loss making international programs are nearing expirations. NEC is focusing on the seamless content and audience experience, to offset the pressure coming from the TV advertising market. Nine is also performing well in the Australia’s video on demand market, and was able to generate 345 million streams.


Metro Ratings Share and Revenue Share (Source: Company Reports)

NEC’s Stan has more than 300,000 gross subscribers (households), and over 800,000 users of the service since its launch. Stan is continuously adding premium content and is enhancing its availability across the devices and distribution partnerships. Nine Entertainment finished the sale of 100% of its Nine Live business to funds for over $600 million post costs and tax and diverting these funds to decrease its debt as well as use for its capital management activities. Nine also improved its net debt to $524.3 million as at June 2015, against $537.5 million as at June 2015, in spite of $62 million of on-market share buy-back. At the back of capital management, licence fee-cuts, affiliate fee renegotiations, launch of OzTAM’s cross-platform measurement system, a lot more is expected from NEC. Having a solid dividend yield of 5.9%, we reiterate our positive stance on the stock at the current price of $1.57.
 

NEC Daily Chart (Source: Thomson Reuters)
 

Genworth Mortgage Insurance

Better Outlook: Genworth Mortgage Insurance Australia (ASX: GMA)  shares corrected over 18.5% in the last three months, partly owing to the poor first half of 2015 performance. Genworth Mortgage Net Profit after Tax fell by 25.4% yoy to $113.0 million as Gross Written Premium (GWP) declined by 9.0% yoy to $285.4 million. On the other hand, GMA’s Net Earned Premium rose 3.3% yoy to $225.7 million. The group continues to be an Australian LMI Market leader and even renewed contract with NAB for two years till November 2017. GMA has a major revenue pipeline with already 84% of NIW under contract and $1.38bn of UPR. The Company has recently appointed a new chief risk officer, Andrew Cormack.


First half of 2015 performance (Source: Company Reports)

Investors should also note that GMA has a strong dividend of 11.58% and trading at a very low P/E of 3.6x. We remain bullish on GMA at the current price of $2.3.


GMA Daily Chart (Source: Thomson Reuters)

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The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
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