While the S&P/ASX 200 Industrials sector is down -2.51% over one year, Bell Potter has identified two standouts that – everything being equal – the broker expects to continue outperforming over the next 12 months.

DGL Group (ASX: DGL)

Sitting just outside the S&P/ASX 300, this mid-cap specialty chemicals and logistics company is up 86% over one year. But since late April the company is down-38% after being sold-off along with the broader market.

The company – which operates a network of 26 sites, both owned and leased, across Australia and NZ – had a strong start to its listed life, comfortably beating prospectus forecasts at its debut FY21 result.

Since then the company has deployed $75m of its balance sheet into acquisitions, reaching critical mass in crop protection, water treatment and entrance into clean energy transport markets.

Competitive advantage

In terms of breadth, Bell Potter believes DGL is currently unrivalled by any Trans-Tasman competitor and has a Buy rating on the stock, with a price target $3.50 – a 26% upside to the current price.

The broker is encouraged by vertical markets being developed across the back-end chemicals lifecycle, including manufacturing, logistics and recycling.

Looking into FY23, the broker foresees a supportive seasonal outlook that can continue to support strong earnings momentum.

“DGL has scope to benefit from further network benefits of FY22 acquisitions and a full 1H23 period of price realisation in key ag-chemicals,” Bell Potter notes.

Expansion

The company continues to expand its operations across Australia, and early July announced the strategic acquisition of silicone-based manufacturer Flexichem Australia for $6.2m.

To the uninitiated Flexichem is a family-owned business specialising in the development and manufacturing of silicone and non-silicone chemicals.

These are used across diverse industries such as food processing, printing, automotive, agrochemical, mining and personal care.

The acquisition is expected to add 1,200 tonnes of additional chemical manufacturing capacity and will be funded by $4.65m in cash and $1.55m in DGL shares.

While the takeover is expected to increase DGL's manufacturing capabilities in SA, the share price was down -1.15% on the day of the announcement.

What other brokers think

Consensus on DGL is strong Buy.

Based on Morningstar’s fair value of $4.10 the stock is significantly undervalued.

Late April UBS initiated coverage of DGL Group with a Neutral rating and a $4.20 target price.

While UBS cautions investors the company is exposed to cyclical end markets and pricing, the broker believes the company is well placed to gain share both organically and via acquisition.

DGL Group share price over six months.

IPD Group (IPG)

The electrical equipment distributor smallcap is up 35% over one year.

Bell Potter believes the company is highly leveraged to electrification growth trend which the broker pegs as a dominant market narratives over the next decade.

The broker expects IPD to benefit from the supply of electrical equipment that reduces buildings energy use and reliance on the transmission network.

What does IPD do?

To the uninitiated, IPD a distributor of electrical equipment in Australia, representing 30 international brands.

IPD consists of two core divisions - The distribution of products for quality global electrical infrastructure brands such as ABB, Elsteel, Emerson and Red Lion and the provision of services, including installation and commissioning, calibration and testing, maintenance and repairs and refurbishment.

Capital and asset light

Bell Potter also likes the fact the business is capital and asset light, operates in segments with few direct competitors, and generates a strong 35%-plus gross margin.

“We consider [these] to be defining characteristics within tight, rising markets,” the broker notes.

“The company is on an 11x FY23 P/E with ample room for further acquisitions ($21m net cash) and offers investors a 4% dividend yield.”

The broker has a Buy rating, and Price Target $1.80.

Upgraded guidance

Due to robust demand experienced in key markets, plus strong contributions from recently acquired businesses, the company recently guided to higher earnings for the financial year ending 30th June 2022.

The company is now expecting FY22 earnings (EBITDA) between $20m - $20.5m, versus original guidance of $17.6m-$18.4m.

Despite global supply chain challenges, CEO Michael Sainsbury notes the investment decision to hold larger inventory levels has also assisted in winning orders and meeting customer needs.

Consensus does not cover this stock.

Based on Morningstar’s fair value of $2.27 the stock appears to be undervalued.

IPD Group share price over six months.