4 Undiscovered Small-Cap Gems with Andrew Mitchell and Rachel Folder

Hinzugefügt: 2026-05-15

[00:00:00]If you want a little known stock to impress your friends at your next dinner party, this episode is for you. Today, we're taking a look at some of the undiscovered small cap gems of the ASX.

[00:00:10]This is buy or sell, your new favorite stock picking show brought to you by the team at Equity Mates. [music] I'm Ali Selby and today we're joined by small cap experts Rachel Folder from Pendal and Andrew Mitchell from Affea.

[00:00:23]Before we begin, a big thank you to our sponsor Good Research for helping to keep all our content free. Let's get into it. First up today, we have Southern Cross Electrical Engineering.

[00:00:33]Provides a range of electrical, security, fire, and maintenance services and products across Australia. Its share price has done very well over the last 12 months. It's up 122%.

[00:00:44]I wish I knew about that one 12 months ago. Andrew, let's start with you. Is it a buy or sell? Well, it's a buy. The fact it's up 120% probably suggests it's not completely undiscovered.

[00:00:55]We've owned this for a while.

[00:00:57]Uh we have a a global perspective looking at Qantas, a 150 billion dollar uh Aussie dollar market cap. Uh Maztech, another big company. What we're seeing is that the multiples of these companies are expanding.

[00:01:12]Uh in the case of uh Qantas, it's now on around 50 times price to earnings. So, Southern Cross Electrical, which is doing that data center installation, that's the bit that the market really likes. But, it's electrification business, as its name says, is really leveraged to that same thematic. So, we're seeing that multiple expand. They have been acquisitive in the past. They haven't made any acquisitions for a while, so they're probably due. That's free upside.

[00:01:37]Uh and we think it's going to continue to beat on earnings as margins go higher and revenue beats. So, it's a buy from us. It's not cheap though. It's trading on a forward PE of around 26 times. I was a bit confused when I was looking at the numbers for this one. Three year had a three year revenue keger of 13%, but it's expected to drop to 6.5% over the next two years. What's happening there, Rachel? Is it a buy or sell? We would agree that it's a buy and it's interesting you bring up the multiple around 26 times. When you compare that to, you know, similar businesses in the Australian market, that's actually pretty on par in that mid-20s level PE.

[00:02:11]Um and as Andrew mentioned, um we still think there's upside. When you look at the US, you know, that data center build-out story is 2 years ahead of where we are. So, we sit here and look at that as being yet to come for this stock as well. So, you know, there's when you think about AI, you think about data centers, you think about chips. I think for us, we're looking at the picks and shovels of that thematic with this company, but none of that actually happens without electricians. So, I think that thematic really needs this business um and it's really well placed to grow on top of that thematic. And it's already grown really strongly, as you mentioned. Um and if you look at earnings, for example, its EPS has grown by over um 20% in the last 5 years on a compound rate.

[00:02:49]So, you're paying for that growth as well uh within the company. So, you know, I think it's not just about um you know, the headline multiple, it's about the thematics that's going on underneath and the growth that the company's going to be able to experience. Um Are those growth expectations priced in already?

[00:03:03]It is up 120%. No, our view would be that it's not yet and there's still more to go. I think the other part that doesn't get captured in today's um prices is the um optionality for M&A. So, as Andrew mentioned, the company's done this before. Um the balance sheet is sound um and they have the ability to continue to execute on that. Um so, from that perspective, uh we think it's a buy.

[00:03:25]Okay, next up today we have G8 Education. The ticker is literally GEM, so this one could be a small cap gem. It provides early child care and education services. It's obviously had a tough year, or not obviously, but it is down 88%. Rachel, what happened there? Is that one a buy or sell? Yeah, GEM is a sell. Um unfortunately, I don't see it as a gem uh on the market at this point uh in its life, but um you're right, it's um it's it's really um, come down in the last year.

[00:03:54]It was over a billion dollars in market cap a year ago and it's around 130 million dollars today. So, that has, you know, really compressed the valuation for the story and it's only trading on a single digit PE at the moment. Um, so, yeah, that potentially would point to it being undiscovered. Um, but I think in this case you've got to be um, careful that it's not a a value trap. Um, so, the company has faced some pretty big headwinds um, very recently and a few of those are structural. So, when you look at affordability of child care, that's been putting pressure on demand for the child care services, which is impacting occupancy. And then there are two other factors as well. The second being the declining birth rate in Australia. Um, and the third being um, the really unfortunate um, thing that we've seen in the news lately, uh, which has impacted child safety in their centers. So, I think we're seeing parents being a little bit more cautious about putting their children in centers, which is reducing demand. And for a business like this, when they've got um, you know, pretty well fixed operating uh, cost base, um, any of that decline in um, occupancy can really hit their bottom line. So, we've seen that impact the company um, and their earnings are, you know, set to go backwards now for two years in a row as a result. Yeah. Um, so, it's in a really challenged place.

[00:05:04]So, even though it's looking really cheap, I would say it's a sell. Okay, expectations are very low for this one.

[00:05:10]So, there is a lot of opportunity for it to surprise to the upside. Andrew, what do you think? Is it a buy or sell? Well, I think it's going to ultimately at this price be a buy, but I'm going to completely disagree with Rachel. This is not a demand problem. This is a supply problem. We were the first or I at my former employer bought 7-8% of G8. We don't own it now, but bought 7-8% of the company when it was around this market cap to start. And the reason was because ABC Learning had blown up. The banks, all the property developers had blown up. The banks were decreasing their LVRs. It went I think it was going from 80 to 50%, so everyone was a seller. The property developers on our work are in big trouble right now. They can't sell their centers. There are a lot of centers been built that unable to be moved. Uh the non-for-profits that are giving above award wages, they are closing down. If you're giving too much wages, you are closing down because of that extra supply that's been coming on. The supply is driven by property developers speculating.

[00:06:15]And that is now coming to an end. Now, they say what the night is darkest before dawn. It's pretty dark now.

[00:06:22]Occupancy is falling off the cliff with the latest supply, but we [clears throat] think there will be a time. I don't know where how soon it is.

[00:06:28]Maybe we're there now. It might be 6, 12 months, so on. But once that supply has been fixed, then the demand that naturally comes will start filling up those places, and you've also got obviously the supply coming off. Um that will make G8 a fantastic buy at some stage. It still makes $50 million of EBIT, so it's still making money. They need to divest obviously a lot of centers. I haven't spoken to the company in a while. They need to cut their corporate overheads hard. They're too high. Mhm. But there's an opportunity to make a lot of money in child care in the future, and if it's not G8 because they trip over themselves, someone else will make a lot of money in child care. But I'm hoping that G8 does so we can make money on the share market through them at a later point. As I said, we don't own it now.

[00:07:17]The the night is very dark. Yeah. Okay, we're going to take a quick break and we'll be back shortly with two under the radar stocks our fundies are really excited about.

[00:07:28]If you love small caps as much as I do, you'll know your edge comes from looking where others aren't. The less coverage a company gets, the more opportunity there is for investors who actually do the work. But finding quality under the radar ASX companies takes a lot of time.

[00:07:44]And even then, a second opinion from someone who really lives and breathes this stuff is invaluable.

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[00:08:09]As an Equity Mates listener tonight, you can save $550 off on a 1-year subscription or $3,300 off a 2-year subscription. Just use the code Equity Mates at checkout. Head to goodresearch.com.au to grab your spot before they're gone.

[00:08:24]And we're back. So, we asked our guest to bring along an under the radar stock that they think you should be talking about at your next dinner party, something that the rest of the market may not know about. Rachel, I'm going to start with you today. What's your stock for us? Okay, the stock I'm going to bring you might not sound all that exciting at first because it's a little contracting business. It's about $700 million market cap. It's based in Perth, but it's definitely under the radar at this point and I think it'll be talked about a lot more in future because it does a lot of work for defense. And this company is called Dira Tech. When you look at this business, it's pretty under the radar. It's only um joined the stock market in 2021. So, it only listed then.

[00:09:02]Um so, it's been around for um you know, a short period of time, but I don't think it's going to stay that way for long. A lot of its work that it does is performing um you know, maintenance um as well as engineering construction uh remediation works for you know, the defense sector, which is a lot of their work and one of the key growth drivers for the business in the next few years.

[00:09:21]Mhm. Does the business jump today off the back of the budget last night? Oh, well, I think there's a it's already been well understood that um there's quite a bit of defense spending there.

[00:09:30]So, um yes, I think what we've seen in the budget last night was just a reaffirming of of that expectation. So, there's a lot of that um that kind of coming through within the business. They've recently won a contract on Garden Island and the government have said that they're going to spend about $8 billion in upgrades to that island.

[00:09:51]The contract that they've won at HMS Sterling directly relates to the Orcus submarines. So they're building the the nuclear capability on the warfs there that enable those submarines to come and be used here. So it's really sensitive and it's really important work that they're doing. So there's actually just not many players that are able to do that and and have the trust of the government to be able to perform those works.

[00:10:16]So we think that it's a really well placed business in order to pick up more of that. So I mentioned Garden Island with $8 billion spend. Just back on the mainland there's an area called Henderson where the government have called out about $20 billion worth of spend that they're looking to do there in order to increase defense capability.

[00:10:33]And already being in that space Austal are really well placed to to pick up some of that work. But it's not just the defense thematic, you know, they also do work within the mining industry and also oil and gas.

[00:10:44]And oil and gas decommissioning work is another tailwind for this business as that continues to come through.

[00:10:51]The management team have done a great job of the business over the last little while and we think it continues to go under the radar. So I think that's one that's a buy here. Okay, over to you Andrew.

[00:11:03]What's your stock that you think the audience won't heard of before? Well, not many people would have heard of this company unless they have a lot of piercings. I think you have a I can see one. I've got a few here.

[00:11:12]>> a pirate. No, okay, you've [laughter] got a you've got a few. It's Skin Candy.

[00:11:16]So this is a ear piercing and actually body piercing retail service format. You'll see it in Westfield and all the shopping centers around Australia or different brands of shopping centers. They're at around 100 stores.

[00:11:31]We think they'll go to 220 in A&Z plus.

[00:11:34]The key thing to like about this business is it's 14-month payback for opening a store to get your money back.

[00:11:41]That is top decile returns for a retailer. And as you're rolling out as they expect to roll out 15 to 20 stores a year, it means their comp store sales, the amount of growth, you got this maturing profile of the stores, which means you're probably doing 5 to 10% comps, maybe even a little bit plus on that in a good year for the next 3 to 5 years just out of A&Z. The really exciting thing on this one though is the international opportunity. We've seen Lovisa obviously become a $2.5 billion company.

[00:12:12]>> ex-Lovisa operations exec in the business, right?

[00:12:15]>> chief executive officer Dane is the ex-chief operating officer of Lovisa and they have quite a few Lovisa ex-staff who have >> And the board members are all like Australian retail royalty. Yeah, they are. So, you've got Trent Peterson who's the chair, fantastic retailer, fantastic coup to get for a person that to run a company that's $250 million as a chair. But getting back to that international rollout, Lovisa is at 80 stores in South Africa. That is where it's best economics are. You get your best margins, low rent and low cost of low labor cost.

[00:12:54]They can get 80 stores in South Africa there in their sleep. Dane is from South Africa, so we've been saying get there now.

[00:13:03]The obvious big, big upside where you will make multiples of your money is can they pull off the United States?

[00:13:10]So, the two players there are Rowan and Studs. There's good and bad. Studs is sort of not as maybe has a a little bit more issues than Rowan. Closer format in sort of where they are in the shopping center. Rowan, I think is doing quite well. They're at about 100 stores, but they're getting fantastic paybacks.

[00:13:29]To me, that's saying that you can get great paybacks as a piercing company in the US. They competed at different part of the shopping center.

[00:13:41]And if they can pull that off, you're going to be making multiple So, this is a company with huge optionality run by very good people, and you're at the early stage of a big rollout. So, that's a great one from us.

[00:13:52]Are you invested pre-IPO? Uh no, we wanted we wanted to be, but the great thing about this business because those paybacks are so phenomenal, they don't need money. So, they're not going to need to raise money to go to the US because it just spins off cash these stores. You don't need more capital to own more stores and grow faster. You can use the cash of the of the business. So, um they're in a good spot. We wish they could have taken our money pre-IPO, but they didn't.

[00:14:18]>> Well, thank you so much both for your time today. I had a lot of fun. I hope you enjoyed that, too. If you did, please leave us a comment, like the show, let us know what stocks you want us to cover next.

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