Stocks to watch: Five stocks under 50 cents

Financial journalist and commentator on 3AW and Sky Business
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Here are five industrial stocks under 50 cents to put on your watch list.

Boom Logistics Limited (BOL, 17.5 cents)

Crane and lifting services provider Boom Logistics was one of the stocks hardest hit by the panic in early 2013 about the effect of a China slowdown on the service companies that work for the mining and energy and resources construction sectors.

From starting 2013 at 26.5 cents, Boom Logistics slumped to 7 cents in early June, on the way to announcing a net loss of $2.5 million for the FY13 year compared to a net profit of $19.7 million the previous year. The sharp pullback in coal-related work was the major culprit: Boom told the market that iron ore, copper and LNG demand was still relatively strong.

Boom cleared the decks in the FY13 result, taking write-offs of $11 million of non-cash asset impairments, $6.8 million of restructuring costs and $1.1 million of other one-off costs, and cutting its workforce by 12%. In August, the company told the market it thought that the activity slump had bottomed out: BOL has moved as high as 19 cents last month, but has settled back at 17.5 cents.

From this point, the consensus of the analysts that follow Boom is that it will out-perform the market going forward. The company’s order book is very robust, having won contracts for the Gorgon LNG project, two large high-voltage transmission line construction projects in Queensland and New South Wales, and supplying cranes for the Solomon Hub iron ore project in Western Australia.

Adding spice to the situation is news in September that earth moving equipment company Emeco (EHL) had received two takeover proposals from private equity firms. That news has the market speculating that Boom would also look attractive at these levels – if not more so. It knocked back a 52-cent-a-share proposal in 2010 as being short of the market.

There is no dividend on the offing: because there will only be limited capital expenditure requirements in FY14, Boom says it will use free cash flow to further deleverage and then to fund an expected on-market share buy back.

The consensus target price is 26 cents.

Adacel Technologies Limited (ADA, 48 cents)

Adacel Technologies is a company most people have probably never heard of, but they should be very glad of their existence. Adacel is a world leader in real-time, satellite-based air traffic management (ATM) automation software, and is also a major global supplier of air traffic control simulators.

Adacel is also a major player in the global market for voice-activated control systems, across the full spectrum of aircraft, from the Joint Strike Fighter speech-driven cockpit to general aviation aircraft and un-manned aerial vehicles.

In September, Lockheed Martin’s contract with the US Federal Aviation Administration (FAA) for the Advanced Technologies & Oceanic Procedures (ATOP) program, was extended for eight years: the ATOP program has been designed to enhance air traffic operational efficiency and safety within the vast US-controlled oceanic air spaces of the Atlantic and the Pacific. The ATOP system uses Adacel’s Aurora ATM software: over the eight-year extension, Adacel expects total revenue of more than US$75 million.

Adacel is also working with Lockheed Martin on its SkyLine Enterprise advanced ATM system. Lockheed Martin is hoping to get this system adopted for Australia’s Airservices/Department of Defence ‘oneSky Australia’ proposal to combine civil and military air traffic control.

In FY2012, Adacel’s net profit fell 81%, from $4.4 million to $810,000, on revenue that was down by 19%, from $38.6 million to $31.3 million. But some large orders arrived too late to contribute to revenue, and the ATOP extension will also be a major boost to revenue.

Legend Corporation (LGD, 31 cents)

IT, power and semiconductor distributor Legend Corporation provides engineering solutions to the electrical, information technology, semiconductor, medical and power utility industries.

A tough business environment saw net profit fall 29% in FY13, from $9.4 million to $6.7 million, on revenue that edged up from $103.2 million to $105.3 million. Legend dealt with a triple whammy of reduced mining activity, a similar downturn in its NSW and Queensland power utility customers, and a further decline in dwelling construction.

Legend has two businesses: the Electrical, Power and Infrastructure division distributes a range of branded electrical connectivity products and tools, cable assemblies, test and measurement instrument, data and computer room products. Most customers operate within the electrical wholesale or power distribution markets.

The Innovative Electrical Solutions division designs, makes and sells innovative industrial electrical and electronic products. The company has operations in Australia, the USA and China.

Legend says its business improved in the second half of FY13. After cutting its interim dividend by 0.4 cents to 0.6 cents a share, the final dividend of 1.1 cents a share matched that of FY12. Total dividends for FY13 were down from 2.1 cents to 1.7 cents, fully franked. Even if Legend paid that same amount in FY14, that would equate to a nominal yield of 5.48%, augmented to 6.66% for an SMSF in accumulation mode and to 7.83% for a fund in pension mode.

Jetset Travelworld (JET, 41 cents)

Travel group Jetset Travelworld has been a major disappointment in recent years, moving from levels above $1.50 at the start of 2010 to 41 cents at present, as its wholesale and corporate businesses have continued to struggle. But the company is at least trying to do something about it: Jetset announced a strategic review in 2012, and that has come up with some radical proposals.

The company’s Travelscene American Express, Jetset, Harvey World Travel and Travelworld brands, icons of the Australian travel industry, look like they’re being ditched, with Jetset Travelworld moving to a single retail brand strategy, with the launch later this year of a new retail brand, helloworld. The new brand is a partnership with US online travel giant Orbitz Worldwide, which will see Jetset Travelworld using Orbitz’s global technology, and build its purchasing power and scale.

In FY13, JET tripled its net profit to $16.5 million, despite revenue falling by 8% to $332.7 million. The major lowlight of the result was the continued decline of Jetset’s corporate business, QBT, where turnover fell 17% because of a downturn in government travel. But the improved earnings per share allowed the full-year dividend to be lifted from 1.1 cents to 1.5 cents, fully franked.

The shares have flatlined for more than a year at current levels. Shareholders will be hoping that the new brand improves the situation, and that improved business confidence also provides a shot in the arm for corporate travel. In the meantime, a 3.66% yield – which rises to 4.44% in an SMSF in accumulation mode and 5.22% in pension phase – provides a buttress.

Gage Roads Brewing (GRB, 25.5 cents)

Fremantle-based Gage Roads – the company is named for the sea channel off Fremantle that serves as the parking anchorage for ships waiting to enter the port – is the only pure brewer listed on the Australian Securities Exchange (ASX).

Established in 2005 and floated in 2006, Gage Roads started out as a niche brewer of its own craft beers, but since 2009, when grocery giant Woolworths bought just over 25% of the company, it has moved more to a low-cost strategy of brewing beer and cider under contract. Much of the production goes to support Woolworths’ exclusive brands strategy, under which Gage Roads makes the Sail & Anchor range, Dry Dock, Clipper Light, and Castaway.

The brewing for Woolworths represents 80% of GRB’s work. The original contract was for 350,000 cartons a year but that has grown to more than one million cases.

Other contract customers include Matso’s Broome Brewery, Two Birds Brewing, McLaren Vale Beer Company, Duckstein Brewery Margaret River and the Australian arm of San Miguel. Gage Roads also brews its own products, including the eponymous range, Wahoo Premium Ale, Atomic Pale Ale, Sleeping Giant India Pale Ale and Blue Angel cider.

In FY13, Gage Roads lifted its revenue by 15% to $22.6 million, and boosted net profit by 72% to $862,090. Volume increased by 10% to 11 million litres, with contract brewing more than doubling its throughput and the company’s proprietary brands frothing out 35% more than in FY12. There was no dividend, but it looks as though good things are brewing at Gage Roads.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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