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• Small cap ASX stocks• ClearView Wealth and

Financial Services• TPG Telecom and the

outlook ahead

This week…

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This week we look at the following topics:• Small cap ASX stocks• ClearView Wealth and Financial Services• TPG Telecom and the outlook ahead

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Over the first two weeks of September we highlighted the top 30 companies listed on the ASX and provided a brief analysis of how we think their results have been. We feel that it is important to spend time going through each company individually, a lot can be overlooked during reporting season when results are all dropped in one large heap on investors.

This week we spend time on 8 small companies from a whole range of sectors which we think reported impressive trends and are worthy to sit on your watchlist. We haven’t spent any time on mining companies which we think are a huge distraction in the current climate. We have maintained this view in Invast Insights now for the past year and this has helped us focus in on some good opportunities.

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Smaller companies are important to look at regardless of what your trading preference is. Even forex traders can learn interesting insights into smaller companies from a bottom up investment approach. For example smaller companies are usually candid and open in their business summaries, the highlight the capital constraints across a whole economy which impacts monetary policy and in turn where currency rates go. They provide insight into employment, inflation and investment trends.

For those who have a stock portfolio, it is vital to keep an eye on small companies during reporting season even if they aren’t worthy of investment. One can learn a lot of smaller companies which usually influence the business trends of larger groups.

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1300 Smiles Limited (ONT) owns and operates full-service dental facilities at its sites in the ten major population centres in Queensland, Adelaide, and South Australia. 1300SMILES enables the delivery of services to patients by providing the use of dental surgeries, practice management and other services to self-employed dentists who carry on their own dental practices. The administrative and corporate services headquarters is in Townsville.

The profit numbers were fairly straight forward and didn’t really have any excitement to them. It has been a tough period for the sector overall but we feel that ONT is doing all the right things to exploit the industry downturn. Eventually the ageing population and trend by governments to continue outsourcing dental procedures to the private sector will work well, it’s just a matter of timing. The stock price has held up relatively well despite the ordinary profit numbers, perhaps those who have been buying into the stock over the past year or so share the same sentiment as we have in terms of sticking it out. We would like to see more announcements around the national expansion.

ONT is still a stock that excites us and provides great insight into the medical dentistry space. The stock goes ex an 8 cent fully franked dividend on 8 October 2014.

1. 1300 Smiles

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Breville Group Limited (BRG) engages in the development, marketing and distribution of small electrical kitchen appliances to the consumer products industry, with the main brand called Breville. BRG has a product development centre in Sydney, as well as a quality assurance centre in Hong Kong. Its products are sold to a number of markets, with principal markets being Australia, North America, New Zealand, and Hong Kong.

Talk about disappointment! The stock was absolutely smashed this reporting season not only because the numbers disappointed by also because the CEO has been given his marching orders. The market was really looking for a good set of numbers and some type of stability here and they didn’t receive any of this. The business now needs to spend the next few years earning back lost credibility with the market, it will be a tough sell. There will be a fair bit of selling as major shareholders adjust their holdings, but we’ll stop short of seeing this as a buying opportunity for now until the storm settles.

We’ll keep this quality business on the watchlist. There are some very attractive parts to the operation, we just need to get some stability.

2. Breville Group

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Capilano Honey Limited (CZZ) is an Australian based company engaged in packing of honey for domestic and export sales. CZZ's key products are 100% Australian Honey, Natural Pot Set Honey, Active Manuka, Honey Shotz, Floral Honey and Honey Fusions. CZZ operates in two segments: domestic and exports. We like the stock because of this very strong brand positioning in the Australian market. Open up your pantry shelf and you are likely to have a Capilano Honey product.

The result was solid to us. Revenue grew by 19% albeit from a low base last year impacted by numerous factors. Earnings were 34% higher to $4.6m which for us suggests the spare capacity in the business is starting to show the full operating leverage impact of being filled up. This is a long term growth story built around a solid brand. We feel that the market wasn’t too pleased with the number because the stock has run up fairly strongly and there might have been a hint of profit taking over the past few weeks.

Building quality brands are very difficult. This is a key advantage. Like our comments on ONT, this is a stock that will continue to grow over time and it will require patience for the market to completely appreciate what is going on. Earnings and revenue growth over the next few years might not be as high, but we will continue to monitor nevertheless.

3. Capilano Honey

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We first mentioned this stock in March when it was trading at around $0.70. It is now at around $1.15 as of the time of writing.Clearview Wealth Limited (CVW) is a financial services company with businesses that specialise in life insurance, wealth management and financial advice solutions. CVW has a network of experienced, accredited financial planners based throughout Australia who can advise on wealth accumulation, retirement strategies and on life insurance.

The big driver for the shares has been a proposed merger with Matrix Holdings. We’re not completely sold on the deal but one of the key reasons for us backing Clearview was management’s track record and the high integrity of the board of directors. Matrix shareholders will be offered $4.407 in cash and 8.776 ClearView shares (subject to performance conditions) per Matrix share. This equates to a total offer amount of $7.75 million in cash plus 15.4 million ClearView shares (subject to performance conditions) valued at 81 cents per share (based on ClearView’s 90 day VWAP to 27 August 2014).

Branding is crucial. We see the combined group growing into a mini AMP, perhaps without the wealth management superiority but strong retail distribution. Matrix has a very strong brand in the independent advice market. ClearView advisers to adopt Matrix brand leading to improved recognition of adviser independence. The merged group provides the ability to attract and recruit financial advisers by leveraging off non-bank aligned model and brand. We continue to see CVW as a favourable exposure and this deal paves the way for more growth.

4. Clearview Wealth

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Another one of our March picks, in fact we have been writing about Empired in this publication since the very first issue in August 2013. Empired Ltd (EPD) is an IT Services Provider, ranging from business consulting to Infrastructure and Applications systems development and support. Empired delivers IT services and business technology solutions to government and private sectors throughout Australia, South East Asia and other countries. Recent acquisitions have helped the business become one of the largest Microsoft CRM partners in Australia.

The earnings numbers were impressive. Revenue added 44% while profit grew by 120%. This was heavily impacted by acquisitions but both key acquisitions made over the past year were strategically sound and expand the group into a very attractive market. Empired was successful in raising another $10m at a negligible discount to the share price, beefing up its fire power to continue making more acquisitions. The stock is now very well placed to become a major technology exposure on the market.

We continue to view the stock favourably and with a big cash backing, the next twelve months will be very interesting.

5. Empired Limited

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One of the market darlings, if you have a pet you would have probably heard of this stock.Greencross Limited (GXL) is a provider of veterinary services and a pet care retailer. GXL has 115 clinics for veterinary services and 175 stores for pet care retails. GXL's divisions include Greencross Vets and Greencross Retail.Greencross Limited’s strategy is to continue to consolidate the fragmented veterinary services, pet food and pet accessories markets in Australia and New Zealand.

The share price has been one way traffic now for more than a year. The 52 week low is $5.95 and the high at $10.64 where the price is close to at the time of writing. The stock hasn’t been high on our radar list but we are starting to take note, it will probably consolidate here before a further upward or major downward leg. We like the story because it fits with the same characteristics with ONT and we have articulated these above. It just comes down to a matter of pricing. All good smaller businesses usually trade on very high earnings multiples during their growth phase and Greencross is no different. It is currently trading on a 2015 earnings multiple of 28x. The current market cap is around $1bn, so the company is not as small as it used to be a couple of years ago.

We’ll pass at this stage, the risk to reward ratio is not attractive enough to now change course.

6. Greencross Limited

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Maverick Drilling and Exploration Limited (MAD) is a diversified oil company focusing on the development and drilling at its existing oil production and reserves. MAD's main assets are large acreage positions with majority ownership over parts of the Blue Ridge, Nash and Boling fields, located in Texas USA.

It’s been a tough few years for the business. Management recently took the tough decision to write down a large portion of reserves and consolidate production, biting the bullet into what many in the market was think anyways. The cleaning up process has attracted some very interesting and highly credible new recruits. The clean-up process is already yielding results with Wells Fargo granting the business a $500m line of credit at an after tax interest rate of just above 2%.

This is very interesting. We see MAD as a high risk type of exposure which has been a shocking investment in the past for many holders, but there is a long road to recovery and if current news flow continues, we could see the case for some lost ground. The stock is also leveraged to energy prices which look weak in the short term but should be supported over the medium term. We have spoken about energy extensively in our reports last month.

7. Maverick Drilling

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TPG Telecom Limited (TPM) is an Australian-based multi-media full service telecommunications company providing consumer, wholesale and corporate telecommunications services. The business offers voice, internet and data solutions to a range of customers from consumer to SME, corporate and government sectors. TPM also provides the services through PIPE Networks (PIPE) and TrustedCloud Pty Ltd (TrustedCloud).

The stock is very well placed to benefit as the telecommunications landscape in Australia evolves. TPG is not just an owner of clients as a services business but also an infrastructure play through their PIPE divisions. The numbers have been consistent and impressive. Revenue added 11% and earnings grew by 15% in the first half of this year, not bad considering many had written the stock off as a mature investment. These growth rates are also a lot higher than major competitor Telstra.

We think the stock is an important, impressive, high quality exposure that will continue to find favour among many investors looking for smaller company exposure. We think TPM fits nicely within a very well diversified portfolio together with smaller but equally higher growth business EPD mentioned above.

8. TPG Telecom

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Next week we will look at the ASX200 index and pinpoint our target assumptions as to where the market is going. In the last week of September, we will look at how all of these companies which we have reviewed over the first three weeks of this month come together to form a portfolio. We will talk through the important elements used in the construction of an investment portfolio and where larger and smaller companies fit within the whole pie.

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Stocks outlook: Join the webinar to discuss these points

Invast Insights editor and contributing author Peter Esho will summarise the September outlook guide for the Australian stock market in this exclusive webinar. Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money Your Call’. In his webinar he will outline:

Performance of key blue-chip companiesPerformance of emerging smaller companiesOutlook for the ASX200 indexPortfolio management tips and tricks

Peter’s webinar will cover both the fundamental and technical outlook going forward plus the key drivers to look out for and is expected to fill fast. Q&A will be open straight after the webinar. Register now by visiting http://www.invast.com.au/webinars.aspx.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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