Alliance Aviation, TUAS and Volpara are three small caps to watch

Here’s a handpicked collection of disrupting small caps in very different industries that could go the whole way in the year ahead.

The first Alliance Aviation Embraer 190 lands at Brisbane airport last month. Alliance is probably the only airline in the world that has been profitable throughout this year and raising funds for expansion. Picture: Lyndon Mechielsen

This time last year I came up with some potential disrupters that so far have almost doubled the money of those who were brave enough to wade in and invest. Let’s see if we can do it again.

Those disrupters were the champion of the buy now, pay later market, Afterpay (APT), which was $32 and now is more than $101 a share; hydrogen technology company Hazer (HZR), which was 40c and is 64c at the time of writing; and laboratory technology specialist LBT Innovations (LBT) and David Kirk’s investment vehicle in private information companies Bailador Technology (BTI), which haven’t performed as well but are solidly up about 18 per cent.

Here are this year’s candidates:

TUAS (TUA)

TPG spin-off Tuas is a newly established and disruptive entrant to Singapore’s mobile telco market. The stock offers an opportunity to invest alongside the most successful operators in the space. The company is being run straight from the playbook of David and Vicky Teoh, who control the company along with Millner-backed, Australian Securities Exchange-listed investment vehicle Washington H. Soul Pattinson.

Alliance Aviation (AQZ)

This company redirects assets to meet opportunities as they arise, and this is a tremendous strength in a business with fixed capital. Even if the reborn Virgin and Jetstar duke it out over the low-cost domestic travel market as it recovers, Alliance is still in a position to generate substantial cashflow and retain flexibility to deliver benefits to shareholders across the medium term.

Alliance is probably the only airline in the world that has been profitable throughout this year and raising funds for expansion. The company increased its fleet by 35 per cent, or 14 new Embraer aircraft, and its available revenue passenger miles by a much higher rate, putting the company on the flight path for growth across the next couple of years.

Volpara Health Technology (VHT)

A medical technology disrupter operating a software-as-a service business model that uses artificial intelligence algorithms to improve the early detection of breast cancer by analysing breast images (mammograms) and associated patient data. It has integrated its breast screening technology with a software platform that incorporates patient tracking.

The New Zealand-based company has a first-mover advantage. While its competition has individual products and components, Volpara has a platform that enables it to screen, assess and track patients. This makes its integrated solution more powerful than fragmented product offerings.

Disruption sometimes means smaller companies finding lower-cost ways of doing business, unencumbered as they are by legacy technologies. Alliance Aviation isn’t widely known to be a disrupter because it’s in the aviation industry. But make no mistake, its success is due to its foresight in buying low-maintenance planes on the cheap and using a superior business model based on contracts that avoid day-to-day competition for seats that ties up the bigger airlines. If you doubt that is disruption, go and speak to Virgin Australia’s outgoing chief, Paul Scurrah.

The point about disruption is that across time it becomes obvious, such as in the above situations. But early on, when there is big money to be made, there is always a great deal of uncertainty, which translates to very high risk. Initially it is highly doubtful that a venture that involves shaking up an industry with a new business model or technology will be commercial. Trying something completely new is an unnatural business strategy and fraught with danger. It’s also less obvious sometimes to see the defensible advantage the business may have accumulated.

On that front, sometimes we have a track record to go by. The Teohs should go down in business history as two of the great telco disrupters, as providers of low-cost affordable telecommunications and internet service provision to the masses. We hope they can do it again in Singapore with Tuas.

As for Volpara Health, the med-tech using AI to provide advanced breast screening that provides for decision-making and patient tracking, what makes this company different is that nobody else has come up with an integrated solution. Disruption is not only about being the lowest-cost provider.

There are many companies that have been on the right end of the disruptive wand, including IT cloud specialist Macquarie Telecom; online retailers Kogan and City Chic; med techs Nanosonics, Sirtex Medical (taken over), Medical Developments and Clover Group; geographic technology provider Nearmap; and junior telcos such as BigAir (taken over) and MNF — the list goes on. The key take-out comes back to diversification. By holding a basket of small caps that have disruptive potential you can be the beneficiary of big returns.

Richard Hemming is an independent analyst who edits undertheradarreport.com.au 

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