Criterion: Opportunities abound for small cap ‘dumpster divers’

‘Dumpster diving’ for small-cap opportunities is only for the bold, but the exercise can produce some tasty morsels at a knock-down price.

Scape away the surface mould and those overlooked small caps can come up a treat. Pic via Getty Images

• Small caps tend to perform relatively poorly to large caps when investors become risk averse

• That said, solid performers are trading on low multiples and high dividend yields

• Investors should keep earnings sustainability and balance-sheet strength top of mind

Given the current torrid market conditions, searching for value small caps might seem like dumpster diving and coming up with a handful of rotten bananas.

But fortune favours the brave and a slew of worthy minnows have only become cheaper after reporting solid earnings last month.

Our criteria is the stocks must trade on a price-earnings (PE) multiple of less than ten times and on a sustainable dividend yield of more than 5%.

They also need a decent balance sheet or the story will quickly unravel.

A logi-sti-cal proposition

Getting down to business, CTI Logistics (CLX) rates on our value-o-meter because of its compound revenue growth of 10% over the last three years.

Outstripping that, underlying earnings before interest, tax, depreciation and amortisation (ebitda) grew by 14%.

The Perth-based CTI engages in interstate and domestic WA haulage and owns the GMK Flooring logistics business (as in carpets).

CTI also has side businesses in security and document and media storage.

CTI posted half -year revenue of $166 million, up 2.5% with ebitda up 6% to $28.4 million.

The company has modest debt of $46 million and its valuation is underpinned by the $170 million worth of its freehold properties: $2.14 a share.

Morrison Securities notes that CTI has invested wisely in capacity expansion and is well placed to acquire in a highly-fragmented sector.

The firm puts the company on a current year PE multiple of 8.6 times and a 6% yield.

Motorcycle Holdings revs up earnings

For those who like something faster moving than B-doubles, Motorcycle Holdings (ASX:MTO) has roared back to life after three subdued years.

The biggest motorbike retailer, with a 14% market share, the company reported a 43% profit uplift to $9.4 million on a 12% sales leap to $328 million.

“The outlook appears to be generally robust with a refreshed management team focusing on cost management and targeting growth (via e-commerce and used bikes),” says broker Morgans.

On the firm’s expectation of full-year revenue of $653 million and a $17.5 million profit, the stock trades on a multiple of eight times and an 8% yield.

Dusk smells nice after acrid patch

In niche retailing, scented candle and bath bomb maker Dusk Group (ASX:DSK) had a less-than-fragrant post-pandemic lull, with two years of declining profits.

But half-year sales grew 10% on a same-store basis, to $84.7 million with ebitda improving 17% to $15.8 million.

The company trades on a PE of eight times and yields 9%.

Platinum prospects

The active managed funds sector has been doing it tough, no more so than snubbed takeover target Platinum Asset Management (ASX:PTM).

Maybe the firm’s stock pickers should look closer to home, given the company shows promising signs of a turnaround under new CEO Jeff Peters.

While EPS is still going backwards, the stock looks to be trading on a current-year normalised yield of 6% and a PE multiple of five times.

Used-car financier is no lemon

Solvar (ASX:SVR) (formerly Money 3) operates in the unsecured personal finance sector (especially for used cars).

In a high-rates climate, that’s like surfing once-in-a-lifetime swells in the eye of Cyclone Alfred.

But rates are coming off – or we think they are – and Solvar’s interim update showed delinquencies to be well under control.

Solvar reported a 28% leap in reported net profit, to $18.5 million.

While the lending book grew 7% to $824 million, the bad debt expense fell 18% to $19.5 million, with the problematic loans accounting for a steady 4% of the book.

Solvar’s EPS are tipped to double this year, aided by an ongoing $15 million share buyback.

This puts the stock on a multiple of around eight times and a yield of 7.5%.

That’s it from this week’s bargain bin. If the market rout continues, next week’s marked-down gems will fill not just a dumper, but a garbage truck.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision.

Originally published as Criterion: Opportunities abound for small cap ‘dumpster divers’