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Date : 10/12/2022

Not all Small Caps are Speculative

ASX Small Caps are often the subject of a common misconception – they are speculative, either making or breaking your bank balance.

Well, there’s more to it than meets the eye. Here’s a summer analogy – the stock market is like the ocean. The further you venture from the soothing beaches, the better marine life and corals you find.

If you’re looking for ASX small caps with stable cash flow, high dividend yields, and a good growth runway, you need to look away from the usual miners and the tech stocks that are often subject to speculation.

We have found a few this year and in the past years. We just tuned out the noise and looked beneath the myths and the misconceptions. “Seek, and ye Shall Find,” they say!

Of course, finding these hidden gems is not as simple as that. If everyone could do it, you wouldn’t be reading this piece now, would you?

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Small Caps Outperforming the Blue Chip Darlings

Our research team is particularly proud of three ASX small caps findings. They have annual dividend yields of 3%, 6%, and 9%. Each has also delivered over 100% in total returns since we recommended them to members. We have covered these small cap stocks extensively and recommended them at various price points over the past 12-18 months, so as a member, it has been almost impossible to miss their coverage.

These outsized returns and dividends are exactly why ASX small caps play an important role in investor portfolios. For context, in the same time frame, Telstra has returned a meagre 15%, and the best dividend stock on the ASX, BHP, has returned 9%, albeit with similar dividend yields as these small caps. By letting the numbers do the talking, we can rest our case.


XRF Scientific (ASX: XRF)

An Aussie manufacturer that supports the crucial mining and construction industry with its equipment and chemicals. Without getting into the nits and grits of what they do (all in our report), XRF’s technology is mainly applied in industrial quality control and process control for manufacturing processes.

XRF’s products help customers to improve product quality and performance, increase productivity and yield and reduce downtime and waste. It has financial benefits; thus, it’s a service miners require. XRF’s clients include BHP, Rio Tinto, Vale, South 32, Glencore, Alcoa – some of the biggest names in the world.

Sure, it is not a sexy business, but it’s a very efficient one. This year, investors have found out the hard way why most of the ‘sexy businesses’ are usually not great investments.

XRF is consistently growing its revenues and NPAT. A quick glance at the charts, you would think it’s a blue chip. The cash flow generation is solid, and they pay a very healthy dividend. Since we began coverage, the small cap stock has returned 102% and delivered a total yield of 5.6%.

xrf scientific asx small caps stocks eps

Recurring revenues, a proven ability to generate cash flows, and a healthy dividend policy make XRF a compelling play. It’s a gem that yields!


Bisalloy Steel (ASX: BIS)

If you’ve followed Malcolm Turnbull, you would have heard of this one. Bisalloy is Australia’s only producer of high-quality steel that can be used in defence (think armoured trucks, combat armour, and the like). They are also used by BHP, Rio Tinto, Fortescue, and others for mine construction. There is a plethora of industries that Bisalloy caters to.

They have been around for over 40 years, operating under the radar and only really grabbed headlines when the man in the leather jacket decided to take a majority stake in the company (~6%). Since then, Bisalloy has gone on to restructure its management and business model – moulding it to do one thing – generate stacks of cash and pay its shareholders for their belief.

The value of a local manufacturer and supplier has been highlighted by currently disrupted global supply chains and the war in Ukraine. Despite high supply chain costs and other headwinds, Bisalloy has been growing its top and bottom line. Earnings per Share increased over 60% recently, and shareholders benefitted handsomely.

With these cost pressures easing and inflation coming down, Bisalloy is in line to have a very good 2023. Shares have performed exceptionally well this year – returning 37%, while the broad market has seesawed.

bisalloy steel small caps dividend yield ytd

Overall, it’s been another small cap stock that has doubled since we began coverage. Returning 90%, delivering a total yield of 10%. All this for grabs at a P/E of just 6x; we’ll take it!


GR Engineering (ASX: GNG)

This is perhaps the most covered ASX small cap at Shares in Value. We have tracked the firm since it had a market cap of $160m. It has more than doubled to a market cap of $330 million. Additionally, the small cap stock has a dividend yield of over 9% – rivalling the best dividend stocks in the world.

Australia, as we all know, is a miner’s paradise. Companies pop up everywhere, trying to dig more and sell more. GR Engineering enables this by designing and constructing mines and then maintaining them. Prominent clients include Northern Star, Santos, IGO, Shell, etc.

Given how rich Australia is in globally critical resources, mining is a continuous process. As long as someone is out there to mine, GNG’s services are crucial for the industry.

This story is also reflected in GNG’s ASX small cap numbers. Their order book is growing, and GNG has been upgrading its guidance – 4 times in the past 18 months, which is more than once every earnings season.

asx gng dividends per share

Since we caught wind of GNG and recommended it to members, the company has paid out $0.35 in dividends – bringing the total yield to 17%. Of course, this is in addition to the share price doubling.

The diversity in resources in Australia ensures that the commodity cycle is endless. This underpins GNG’s earnings and dividends. There’s more to come, all at a P/E of just 13x.


We Rest our Case

Clearly, these ASX small caps stocks are non-speculative hidden gems. But they often fly under the radar of sophisticated and institutional investors.

Australia is the biggest playground for all three companies, and it’s how we prefer them. Considering the global growth outlook for 2023, looking inward is probably the smart thing to do, as Australia is one of the only developed economies that will likely avoid a recession. The work-in-hand pipeline is robust for all three.

Another similarity among these three is that they all serve the biggest sector Down Under – Materials & Mining.

Despite the returns and the dividends on offer, these small cap stocks continue to trade at low multiples – indicating that they are non-speculative, unlike the off-the-shelf ASX small cap names you come across.

The low multiples and low investor interest mean that the markets are not pricing-in outlandish expectations. This is crucial since low expectations mean any upbeat result will blow the share price out of the water. This has been a recurring theme, evidenced by the returns since we began coverage.

The management of these companies also understands this. They take every opportunity to be pragmatic – under-promising and over-delivering – all good properties to have in the companies you invest in.

We like to believe uncovering these ‘not your typical’ but efficient, unspeculative small cap businesses that pay handsome dividends and grow in share price has gone a long way in Shares in Value winning Product Review’s ‘Best Forex & Share Trading Platform’ award, the only company to do so twice in as many years!

We Rest our Case.

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