Buy Hold Sell: 5 undervalued small caps with big growth prospects

0:00 - Intro

0:24 - Is EQT Holdings (ASX: EQT) a buy, hold or sell?

1:43 - Is Domain Holdings (ASX: DHG) a buy, hold or sell?

3:02 - Is Australian Clinical Labs (ASX: ACL) a buy, hold or sell?

4:39 - Mike Younger's top growth pick: Lindsay Australia (ASX: LAU)

5:32 - Katie Hudson's top growth pick: Nanosonics (ASX: NAN) Note: This episode was filmed on Wednesday 5 April 2023 and first published for Livewire Markets on Friday 7 April. You can read an edited transcript below: Edited Transcript 

Chris Conway: Hello and welcome to Livewire's Buy Hold Sell. My name is Chris Conway and today we've got a really special one for you. We're going to be taking a look at five small-cap stocks with big growth runways on the horizon. To do that, we're joined by Katie Hudson from Yarra Capital Management and Mike Younger from Prime Value. 

First up today, we have EQT Holdings. Its funds under management, revenues, and net profits all increased in the first half. Katie, starting with you, is it a buy, hold or sell?

EQT Holdings (ASX: EQT)

Katie Hudson (BUY): It's a buy for us. We like Equity Trustees. We think they've got a really great platform, and a really strong, resilient earning stream. The corporate trust business is growing. They've done a great acquisition with IOOF's AET business. We think the synergies from a capital release and a cost perspective will be higher than people are expecting. We think they have an opportunity to sell their UK business, which while unprofitable, we think will release value. Then over time, that platform should be capable of growing leverage to markets and they should get really good operating leverage. Great balance sheet, good management, and one we like.

Chris Conway: Mike, what about you? EQT holdings? Is it a buy, hold, or sell?

Mike Younger (BUY): It's a buy for all the reasons Katie has said. I think she stole my script. The one thing I would add is that over the last few years, notwithstanding this fantastic growth outlook, is that the company's EPS growth is likely to rise about 50% in the next two years. You've seen PE derating in the last few years such that it's trading at a market multiple for a business that is well above market quality.

Domain Holdings Australia (ASX: DHG)

Chris Conway: Mike, we'll stay with you. Next up we have Domain Holdings. Revenues were up about 6.5% in the first half, despite the challenging environment for property buyers. That said net profits didn't follow the revenues up. So is it a buy, hold, or sell for you?

Mike Younger (BUY): For us, Domain is also a buy. It might sound contrarian with house prices falling, but if we zoom out a bit, the actual listings volumes this year are probably going to be within 5% of 15-year lows. So while it could get worse, it's probably not going to get much worse. At the same time, Domain and its main competitor, realestate.com, are putting up their prices, which is cushioning the earnings impact. So it's another stock that we think has 50% earnings per share upside in the next couple of years.

Chris Conway: Katie, Domain's share price is down around 11% over the past year. For you, is it a buy, hold, or sell?

Katie Hudson (BUY): It's a buy for us. This is the sort of opportunity we love to buy, these long-term structural growth companies. Essentially, they're a digital media company transferring value from print and other sources of marketing to online digital platforms. And as Mike highlighted, last year we had listing volumes above historical levels because we were coming out of COVID. This year, they're well below. Through that disruption, the share price has fallen and that feels like a really good opportunity that we're taking advantage of.

Australian Clinical Labs (ASX: ACL)

Chris Conway: Katie, we'll stay with you. Next up, Australian Clinical Labs. It's been a tough period for the pathology providers post-COVID, but ACL continues to grow its revenues and does quite well. Is it a buy, hold, or sell for you?

Katie Hudson (BUY): It's a buy for us as well. We really like the pathology sector. In fact, the whole diagnostic sector at the moment has had a lot of disruption. Coming out of COVID, there's been problems with access to health services. Volumes have been artificially lowered as a consequence, and we think those volumes will resume their normal growth trend over time. The COVID revenues have now largely fallen out of their P&L, so we've got a firm base as to how they look going forward. And that diagnostic sector, particularly pathology and radiology, we think is trading at multiples below private market multiples, which is unusual. Typically, public markets trade at a higher level. We've got an unusual situation here where private markets are trading at a higher level, and if they don't recover, we think they'll get taken over.

Chris Conway: Mike, the share price is down around 29% over the last 12 months, so it has taken a bit of a hit. Buy, hold, or sell for you?

Mike Younger (HOLD): It's a hold for us. Management appears to have done a fantastic job of managing that COVID testing winddown and the valuation looks quite reasonable. The thing that keeps us on the sidelines is the audaciousness of ACL making a bid for a company three times its size (Healius, ASX: HLS), particularly one that's got a chequered financial history.

Chris Conway: All right, I'm really excited about this next part guys. We have asked our fundies to bring a stock that they are most excited about and that has a fantastic growth runway over the next 12 months. Mike, we'll stay with you. Your pick is?

Lindsay Australia (ASX: LAU)

Mike Younger (BUY): Lindsay Australia. So Lindsay has flown under the radar, although it has been listed for almost 30 years. What's been changing over the last half dozen years is it's been moving its business from road transport towards rail. The significance of that is that you get double the returns on capital in rail. The industry itself has also become more rational in recent years. You've had increased private equity ownership. More recently you've had the demise of Scott's Transport, which is the largest player in the market alongside Lindsay. Lindsay stands as the biggest beneficiary of that incident. So the company's guided for $100 million of EBITDA in the next three to five years. We think they can get there probably in the next two. For all of that, you're getting it on a PE of 10 times.

Chris Conway: Katie, what about you? What stock do you think has the greatest growth runway in your portfolio?

Nanosonics (ASX: NAN)

Katie Hudson (BUY): I'm going to call out Nanosonics. They're a global market leader in the medical disinfection area. That's an area that's got structural growth because disinfection in hospital settings is obviously a really important priority for health services both before COVID, and even more so now after COVID. They've got great economics to their business. They generate really strong recurring revenue through the consumables part of their business. So they have an installed base and then generate revenue on the back of their consumables, and so they scale profitably over time.

The one pushback that we often get on Nanosonics is valuation. It does trade on a high PE, but we think of it a little like Cochlear, in terms of when Cochlear was on its early journey. When you unpack the P&L, you find that it's got a really profitable North American business, trading on very high margins. Then below that you've got new markets they're going into that they're developing through their OpEx. So places like Europe, the UK, Japan, and now more recently China - all loss-making at the moment, but we're seeing evidence that they'll scale profitably as they have done in North America. They also have an R&D portfolio, new products coming down the pipeline currently expensed through the P&L, but we think they'll add considerable value over time.

Chris Conway: Well, that's all we have time for today. If you enjoy that episode of Buy Hold Sell as much as I did, make sure to give it a like. And don't forget to follow our YouTube channel because we're adding great new content every week.