AFR – Small-cap fund says market blind to one of ASX’s ‘best bargains’

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Lucas Goode is a portfolio manager at Investors Mutual in Sydney, helping oversee its small-cap funds. The firm manages about $5 billion in assets.

Which stock in your fund has the most near-term upside?

Hipages Group is Australia’s largest platform for trade services, connecting home owners and trades people in a more efficient manner. Strong network effects are driving more consumers to post jobs on Hipages because that’s where the tradies are, while tradies subscribe to find the jobs. As we have seen with Carsales, Seek and REA Group, online marketplaces are typically a winner-takes-all proposition and Hipages is well on its way to being the dominant platform for the trades sector.

The founder-led company has now passed the critical inflection point of generating sustainable cash flow while still growing its top line at double digits, notably guiding to 50 per cent growth in free cash flow in the current financial year. As seen with recent success stories like Catapult and Life360, reaching cash flow breakeven is often a watershed moment for small-cap tech stocks.

Hipages’ guidance for the 2026 financial year implies a roughly 15 times price-to-free-cash-flow multiple, very reasonable for such a fast-growing and dominant business.

What’s a stock you like and own that (most) people haven’t heard of?

We were the first institutional shareholder in Ricegrowers (trading as SunRice Group), which has come onto a few radars in the market after being added to the S&P/ASX 300 Index this week.

From its origins as the single desk for the Australian rice crop, SunRice has evolved into a global fast-moving consumer goods business that sells into more than 50 countries and generates more than half of its revenue outside Australia.

Revenue has grown at a 16 per cent compound annual growth rate over the past four years, while dividends have doubled during that period as the company has diversified into categories such as pet food and rice-based snacks.

There are some investors who may still be turned off by the company’s dual-class share structure (with directors appointed by growers rather than class B shareholders on the exchange).

While we are hopeful that the structure will be eventually collapsed as it would almost certainly drive a re-rating in the share price and provide greater optionality for future inorganic growth, any investor turning their nose up at SunRice purely on that basis is missing out on what we think is one of the ASX’s best bargains.

A valuation of 12 times earnings per share is simply too cheap for a global branded food business in a defensive category led by an A grade management team.

What were your takeaways from earnings season?

Small caps have had a very strong August, handily outperforming the S&P/ASX 100, although this should be considered in the context of several years of material underperformance. We think the small-cap resurgence could have a ways to go yet.

Overall, it’s clear from company commentary that while interest rate cuts are beginning to have a positive impact on consumer confidence, the real economy is not as strong as the sharemarket at an all-time high might imply.

What one piece of advice has influenced your approach to investing?

My old boss Simon Conn always drummed into us that investing in small caps is about investing in people, and if I look at our big winners in recent years, the one thing they all had in common was exceptional people. It goes without saying that we spend a lot of time with company management, who set and execute the strategy. But even more important is talking to boards, who approve the strategy and ultimately have the power to hire and fire chief executives.

Are there any podcasts that you’d recommend?

I’m a huge fan of the Acquired podcast – I’ve even managed to get my wife hooked (starting with the LVMH episode was a masterstroke).

What is your favourite local bar/restaurant?

Hugos in Manly – it’s just the greatest.

This article was first published in the Australian Financial Review on 11 September 2024. 

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