Fund Manager

How Tyndall's small-cap fundie would invest $10,000 right now

Mon 17 Jul 23, 9:45am (AEST)
Untitled design - 2023-07-11T105608.110
Source: Livewire Markets

Key Points

  • Australian small caps have been left out of the rally experienced by their larger counterparts
  • James Nguyen, co-manager of the Tyndall Australian Small Companies Fund, believes there are still investment opportunities available in the small-cap space
  • Nguyen recommends 3 stocks for investors to consider: Smartpay, Lifestyle Communities, and Ardent Leisure

Just as it has been in the US, Australian small caps have been left out of a lot of the rally experienced by their larger counterparts. In the past year, the Australian emerging companies index is up 3% while the ASX 100 is up 6.4%. At the same time, hundreds of businesses that were built on the free money issued by central banks have been forced to close or been whittled down to a shadow of their former selves. 

It also doesn't help that quality is often considered to be more of a large-cap stock's trait than a small-cap stock's trait. But just because small caps have not experienced much of the current rally doesn't mean they can't make a comeback in the second half and beyond.

To kick off FY24, I've been asking Australia's brightest fund managers to nominate some ideas they would invest fresh capital into. 

Today, we're taking this experiment to the smaller end of the market with Tyndall Asset Management's James Nguyen. Nguyen co-manages the Tyndall Australian Small Companies Fund.

Expert Insights PrimaryYoutube (1600 × 595 px)
James Nguyen, Tyndall Asset Management

What's your read on market valuations at the moment?

While markets appear to be trading near fair value relative to history (the ASX 200 is on 13x PE and the Small Ordinaries on 16x PE), there are still a plethora of investment opportunities available for stock pickers. 

As markets have largely traded each month on fear and greed or on macro factors such as whether central banks will further raise rates, this environment creates indiscriminate sell-offs and rallies. This allows stock pickers to buy good quality companies at lower prices, and harvest winners to rotate back into better opportunities. 

How did you pick the assets you did for this experiment?

For all the doom and gloom, markets have been able to grind higher. Those that were bearish 12 months ago on the assumption that inflation would be higher and stickier, and as a result, interest rates would need to be higher, were right from a macro perspective but wrong from a stock market perspective. 

That’s why I try to shy away from picking stocks on macro forecasts, but rather try to identify quality companies that are trading at a discount to future cashflow. 

The three stocks that I have chosen demonstrate that value and thus confirm that investment opportunities can come in different forms. Investors just need to dig a little deeper to identify these opportunities.

Tyndall's $10,000 ideas


Stock code

Allocation (%)




Lifestyle Communities



Ardent Leisure



The case for Smartpay (ASX: SMP)

Smartpay is a payments solution provider with material market share in New Zealand and rapidly growing share in Australia. With a disciplined and aligned management team (Marty Pomeroy the CEO was the founder of a business that was purchased by Smartpay in 2013), the business can deliver >30% p.a. revenue growth for the next two years and even higher EBITDA and NPAT growth as operating leverage comes through. 

The business is trading at a discount to its closest peer Tyro Payments (ASX: TYR), despite better growth prospects. While the share price has done well in the past 12 months, this only really reflects the strong execution of the Australian strategy. The growth optionality not recognised by the market is the intention to convert its NZ terminal business to a model similar to Australia.

Smartpay currently generates $450 of revenue per terminal in NZ compared to $4,800 per terminal in Australia. Given the business has twice as many terminals in NZ as it does in Australia, the potential opportunity is immense.

The case for Lifestyle Communities (ASX: LIC)

Another business where we have high regard for the management team (CEO James Kelly is the founder), Lifestyle Communities is a company that we believe can self-fund and compound earnings growth for the next decade. The business is a land lease provider, which involves building small real estate communities, selling the home/building while retaining ownership of the land, and thus charging residents a site rental fee. 

This rental fee is CPI-indexed and predominantly underpinned by government rental assistance, providing an annuity-style income stream of the highest credit quality. In addition, the business also takes a share of revenue when homes are resold, which is called a Deferred Management Fee (DMF). Lifestyle Communities generated a little over $10 million of revenue (and EBITDA) from its DMF over the past 12 months on a portfolio of 3,300 homes. The company has a pipeline to manage 5,000 homes by FY25. 

On our modelling, once this portfolio matures, the DMF earnings alone from this portfolio could reach $80 million p.a.

I would allocate a greater proportion of the portfolio to Lifestyle Communities because it is a high-quality management team, has annuity-style earnings streams, can compound double-digit earnings growth for the next five years, and only trades at a marginal premium to the broader market despite these high-quality attributes. 

The case for Ardent Leisure (ASX: ALG)

Ardent Leisure is the owner and operator of the theme park Dreamworld as well as a couple of smaller assets. The share price has been soft on the back of concerns around a weaker consumer. 

In our view, this is a classic case of value investing, where the market has indiscriminately sold the stock without doing the work to understand the assets and the balance sheet. 

Ardent Leisure has a market cap of $220 million, of which $140 million is represented by cash sitting on the balance sheet. The company has 55 hectares of land in Coomera worth well over $100 million. As such, an investor is paying nothing for the operating assets, which should generate over $30 million EBITDA once international travel returns to pre-COVID levels. In addition, the company has a Chairman (Gary Weiss) that is aligned with minority shareholders and is looking at capital management options as well as looking to unlock the value of the surplus land. In our view, this is a stock with limited downside risk but immense upside opportunities and clear catalysts to unlock them.

This article was first published for Livewire Markets on Monday, 17 July 2023.

Written By

Hans Lee

Content Editor

Hans is a Content Editor at Livewire Markets and Market Index. He created Signal or Noise and helps write the LW-MI Morning Wrap on Tuesdays and Thursdays.

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