Members of our small to mid-cap investment team—Sam Koch, Will Thompson and Cooper Rogers, identify several compelling investment opportunities they believe will outperform this financial year: Beacon Lighting, Mainfreight and Nick Scali.
Why we like Beacon Lighting
For the past 30 years, Beacon Lighting (ASX: BLX) has predominately sold light fittings, globes, ceiling fans and electrical to retail customers. A relatively new strategy is to sell to trade customers (electricians) who buy electrical goods on behalf of their clients. Over the past six years, trade revenues have grown from less than $30m to over $100m and small-cap analyst Will Thompson thinks it can continue to grow.
Will likes Beacon’s exposure to the trade sector because it creates further operational leverage by increasing the potential revenue from each of its stores. Over recent years, the increase in trade sales has offset Beacon’s subdued retail business sales. Will believes retail business sales will return to growth in a more buoyant economic environment—we anticipate the RBA to start cutting rates from early 2025. Traditionally, lower interest rates can result in more renovation and building activity.
Why we like Mainfreight
Over the last few years freight forwarding business Mainfreight (ASX: MFT) has been impacted by falling freight rates that fell with slowing global economic growth. Mainfreight’s management team used this as an opportunity to continue to expand its branch network while its competitors were doing the opposite—this has been a strategy of management since being founded in 1977.
Analyst Sam Koch thinks it’s a high-quality business. Decentralised management that empowers each of its branch managers to take responsibility of their own profit and loss statements is critical to its success. Each employee also has a share profit plan which rewards staff when they perform. While there are still questions on where we are in the economic cycle, Sam believes Mainfreight will be a beneficiary when economic growth reaccelerates.
Why we like Nick Scali
Nick Scali (ASX: NCK) sells furniture in Australia through the Nick Scali and Plush networks and is now going global after purchasing Fabb Furniture in the UK in May 2024. Within Australia, Nick Scali’s ability to gain market share, increase margins and efficiently allocate capital is unparalleled to its peers in the Australian market. What has driven these strong margins is its ability to buy cheaply with scale from its suppliers.
Sam Koch believes that management will be able to emulate this model with Fabb Furniture in the UK. Should management execute on increasing margins through operational efficiencies and expanding the store network, Sam believes there could be upside to the valuation.
To hear more on the team’s current small to mid-cap stock picks, watch the latest video here.
