Cabcharge and G8 Education are on UBS list of 9 small caps to...

Cabcharge and G8 Education are on UBS list of 9 small caps to watch

Usually small caps take investors on a wild ride, but in 2015 the smaller end of town was the place to be for investors looking for growth opportunities. There was no particular theme: small caps in health, telcos and technology all proved to have more staying power than traditional bluechips.
UBS is eyeing the impending earnings season warily, which kicks off on February 1, forecasting positive consensus earnings for just one third of their small caps stocks. The other two thirds have seen negative revisions over the period.
From January 1, 2015 until date, the ASX Smallcap Ordinaries Index has fallen 0.8 per cent compared with the 9.3 per cent decline in the benchmark S&P ASX200 index.
Either way, these are nine stocks UBS expects to perform well over earnings season:
Adairs (ADH) is a buy at $3.30.

Retailers exposed to the housing market are expected to have a strong earnings season, including homewares and bedding retailer Adairs. UBS expects ADH to deliver another very strong result in the first half of this year and the bank's forecasts are well above the prospectus forecasts.
Adairs' weakness lies in its exposure to the AUD/USD as falls in the Aussie will be felt in the company's gross margin, but UBS calculates the dollar would need to fall below 8.1 per cent and below 60 per cent respectively before the prospectus forecasts are at risk.
"We also believe the impact of fashion on home furnishings is a larger driver of ADH's success than the overall housing cycle," says UBS.
UBSe: EBIT $17.9m, NPAT $11.9m, DPS 4.1cps.
Cabcharge (CAB) is a buy at $4.70.

Beleaguered taxi payment firm Cabcharge's headline numbers will not look amazing in the first half of 2016 thanks to the advent of Uber (and other app-related competition) chewing up its market share. But UBS points out the second-terminal competitors have either substantially reduced their competitive offering or left the market entirely, allowing CAB to minimise market share loss. That being said, UBS warns the company will need to offer a similar technology to its competitors in order to retain customers.
Meanwhile, Cabcharge's main business in payments will get a boost as cash transactions continue to move to card, increasing the overall size of the electronic market. UBS also sees a strong opportunity in crystalising value through asset sales.
UBS calculates CAB's FY16 PE is "6.6x, which increases to 7.9x if we assume a 5% service fee cap Australia wide."
UBSe: EBITDA $35.2m (-14%), NPAT $27.2m (-13%) and DPS 10cps (0%).
Cover-more (CVO) is a buy at $2.37

A weaker Australian dollar and the slowing growth in outbound travel from Australia should spell discomfort for travel insurance retailer Cover-more, especially considering many of their claims are made in US dollars.
However UBS remains positive on CVO's cash generation, a scalable business model and solid management. Since listing in late 2013, CVO continues to grow above market in Australia as well as offering offshore growth via Asia, New Zealand, the United Kingdom and potentially in North America.
UBSe: GWP $207m (+11%), EBITDA $26m (+5%), EPS $0.05 (+4%), DPS $0.04.
Gateway Lifestyle (GTY) is a buy at 2.96

One of the most successful floats of 2015, GTY's manufactured housing estate sector will continue to be driven by several positive long-term trends, including an ageing population, financial pressure on retirees and the increasing acceptance of housing estates for retirement accommodation.
GTY is expect to deliver 261 homes in FY16, with a skew to the second half given the incremental ramp up in parks under development. As at 31 October, GTY had 64 settlements and 65 committed sales.
Acquisitions remain a feature and GTY has been very active over the last 6 months acquiring 9 parks for circa $90m to take the total portfolio to 45 parks.
"The contribution from these acquisitions sees upside risk to current guidance, with our EBITDA forecasts 9% ahead of prospectus," says UBS.
UBSe: EBITDA $22m (n/a), EPS of $0.08, and DPS of $0.06.
GUD (GUD) is a buy with a $9.65 target.

The GUD portfolio comprises of consumer and industrial products companies based in Australia and New Zealand, and while UBS remains positive on GUD, foreign exchange risk will weigh on the company's margins and Dexion/Sunbeam will continue to drag - with a write-down risk for Dexion.
UBS expects Auto to hold up, aided by the $200 million acquisition of Brown and Watson International.
"We expect the payout to reduce as GUD focuses on lowering debt post BWI acquition," says the bank.
UBSe: Trading EBIT $44m (n/a), EPS of $0.30 (+23%) & DPS of $0.21 (+2.5%).
G8 Education (GEM) is a buy at $4.30

Childcare operator had a lousy 2015, with earnings and revenue falling short of expactations and market watches criticising how much the company was paying for its acquisitons.
However UBS believes revisions have stabilised in the past 3 months, reflecting the sell-side reduction of the number of forecast acquisitions in their estimates.
A new Chair and a new auditor show promise for the firm, and a potential new debt package could see GEM have a good 2016.
UBSe: FY15 EBIT $148m (+50%), EPS of $0.25 (+72%) and DPS of $0.24 (+26%).
Infomedia (IFM) is a buy at $0.95

Infomedia, a software provider to the parts and service sector of the automotive industry, had a volatile 2015 after the loss of the Jaguar Land Rover contract which cost the business about 1.1 million in revenue.
UBS will focus on the underlying growth of IFM's SuperService product, the rollout of a deal with Hyundai, any unfavourable hedging and news on the replacement of the CEO.
"In our view, FY16 will lay the foundation for FY17 earnings growth," says UBS.
UBSe: EBITDA $10.8m (-3%), NPAT $5.0m (-18%) and DPS 1.45cps (-23%).
Mantra (MTR) remains neutral at $4

With positive industry momentum and new properties entering the portfolio, UBS continue to see the balance of risk to the upside for earnings. The market remains focussed on pricing growth in the portfolio given a lot of the uplift in RevPar in FY15 was occupancy driven. With CBD occupancy in FY15 at ~85% in FY15 (and Resorts at ~70%) US sees less room to move on this measure.
In terms of recent industry performance, UBS notes that in the 5 months to November, RevPar in Gold Coast and TNQ were up 6% and 9% YoY respectively. In CBD markets, RevPar in Sydney and Melbourne was up 10% and 3% for the period, while Brisbane and Darwin remain soft (-15% and -16% respectively).
UBSe: EBITDA of $51m (+20%), EPS of $0.10 (+10%) and DPS of $0.065 (+30%).
NextDC (NXT) is a buy at $3.25

NextDC, a data centre operator and designer, hopes to capitalise on cloud-services take-up. UBS will focus on new contract wins over the first half of 2016, an uplift in contracted and active utilisation, recurring revenue per active MW, HoH uplift in EBITDA (UBSe 2H15 $5.0m to 1H16 $9.5m) and an update on plans for M2 and B2.
"Whilst short term earnings will be impacted by B2 and M2, we estimate the new DC's will contribute a project NPV of $125m, EV/IC of 1.38x and IRR of 13.8%. If we allow for the value of land, together with 40% of replacement fit-out cost these increase to $149m, 1.46x and 14.2% respectively. In our view the two DC's are creating shareholder value, whilst strengthening the NXT's competitive advantage."
UBSe: EBITDA $9.5m (+218%), NPAT -$1.7m and DPS 0cps.
Technology One (TNE) remains neutral at $4.60

At its AGM, TNE will provide an update on new contract wins and FY16 guidance. Management have already flagged their expectation that FY16 will be 2H weighted (like FY15).
UBS believes TNE has an attractive business model, exemplified by: increasing proportion of subscription revenues; well positioned product offering for the Cloud; small but growing international presence; and a strong, conservative and aligned management. This has translated into a history of consistent earnings growth and net cash position on the balance sheet.
UBSe: 1H16 & FY16 Revenue $100m (+12%) & $246m (+13%); 1H16 & FY16 NPAT $10.5m (+19%) & $41.4m (+16%).
TFS Corp (TFC) is a buy at $2.80

Positive first half results for TFS, a sandalwood producer, will be reliant on the timing of new establishment sales. UBS sees the major catalysts for TFS at its first half yearly results to be: reaffirming expectations of a 10-fold Indian Sandalwood production increase in mid-2016 (likely at 1H16 result), and providing an update on the sales of the first pharmaceutical product (Benzac acne treatment).
Beyond this result, UBS sees potential catalysts from: additional pharmaceutical products using Sandalwood Oil announced (likely over 2016), andrefinancing the company's USD Notes (likely in FY17E).
UBSe: Cash EBITDA of $9.5m, Reported NPAT $11m, DPS 0cps
With UBS.


Read more: http://www.smh.com.au/business/mark...s-to-watch-20160119-gm9jfh.html#ixzz3yE8Wo0rk
Follow us: @smh on Twitter | sydneymorningherald on Facebook