Issue #3 - Oysters and Gold 📬
4 microcaps to add to your watchlist
Dear Readers,
Over the past few weeks I have been reading many letters from both fund managers and private investors who have been reporting on their 2023 performance. It’s great to see so many produce outstanding returns.
As we go deeper into the roaring 20’s perhaps a small/microcap active strategy could finally have its day in the sun, like a phoenix rising from the flames flying high above the passive Percy’s.
So for the 3rd edition of Bargain Stocks Radar I would like to highlight a small selection of ‘under-the-radar’ companies that could be worthy of further investigation.
Pearls are a girls best friend
It’s amazing what you find in the public markets when you go off the beaten path. One such stock which piques my interest last year was Atlas Pearls, an ASX listed company with a market cap of $67 million AUD.
Over the past 29 years the company has become one of the world’s largest producers of the highly sought-after white and silver South Sea pearls.
Operating across 7 farming locations throughout the South Seas the company harvests more than 550,000 pearls each year.
It takes over 4 years, from hatchery to harvest to produce these sparkling pearls. Once ready the pearls are sold via auction in Japan, as well as in their own retails stores.
To produce pearls at this scale requires a sophisticated operation which is why they employ over 1,200 people. You need divers, analysts, vessels to transport seeded shell from hatcheries to designated grow-out sites… the list goes on.
Most importantly you need governmental and administrative approvals to be navigated. It’s not easy to set-up an operation like this overnight.
The company was formerly known as Atlas Pearls and Perfumes Limited but in 2017 changed its name to Atlas Pearls Ltd. Since 2020 there has been a remarkable turnaround in the company’s fortunes, from operating at a loss to becoming a highly profitable venture.
The outstanding debt of $1.125M has been repaid and they concluded 2023 in a strong financial position, with cash in the bank of $7.8m AUD.
Operating margins hover around 35%, with returns on capital employed averaging 26%, and return on equity averaging 31%. Dividends are now being paid to shareholders, and future growth plans are in place.
Officially the worlds oldest gem, pearls have been surrounded in history, legend, and myth since before recorded history.
Tim Martin, Non-Executive Director, owns 18%.
The management have a long term mindset and are re-investing into the business for future success. Construction of a steel vessel that will replace some of the aging fleet will commence soon.
Once approvals are received they will also be launching an 8th farm but will not see harvested pearls from this operation until 2026.
The share price has run-up tremendously over the past twelve months and is now fairly valued. It’s a fascinating little business and I look forward to seeing what they can achieve over the next few years.
From Oysters to Gold
From constant debasement of currencies, to countries burdened with the cost of legacy welfare states designed in a bygone age, to a rising middle class in India - there are many reasons to be bullish on gold.
All of this and more has been reflected in the gold price rising to record highs against all fiat currencies including the mighty US dollar.
However, gold producers and miners have not kept up with the increase in the gold price. If the gold price keeps increasing this divergence can’t last forever.
Last year I came across two interesting gold companies…
Dynacor (DNG) is a Canada-based industrial gold ore processor listed on the Toronto Stock Exchange. DNG purchase gold ore from the local Peruvian miners, which is then processed at its plant in Chala, Peru.
Its Anta property is a silver/gold/copper exploration project that is located in the heart of a regionally important epithermal gold-silver belt.
Its Tumipampa property is located near the city of Abancay, roughly 500 km southeast of Lima. Dynacor also holds interests in mineral properties in Peru but these are in the exploration stage.
Management run a very lean operation with a healthy balance sheet, and have paid a rising dividend every year since 2018. The key metrics are impressive too with return on capital employed averaging around 30%
For the nine months ended 30 September 2023, revenues increased 23% to $184.6M. Net income increased 35% to $11.5M.
As long as there is no sudden crash in the gold price the valuation looks good, trading on a forward P/E of 8.5, and PEG of 0.7.
Another company that popped onto the radar is Kingsgate Consolidated (KCN) an ASX listed gold and silver mining company.
The company’s main asset is the Chatree Gold Mine in central Thailand located 280 kilometers north of Bangkok.
Due to environmental accusations and the subsequent government action the Chatree mine was closed for seven years. However, after no evidence was provided to back up the allegations the mine was finally re-opened in March 2023.
Recently KCN announced that operations at the Chatree Gold Mine continue to exceed expectations with approximately 9,512 ounces of gold and 112,191 ounces of silver produced during the quarter to 31 December 2023.
The focus is now squarely on completing the Plant #1 Overhaul Project as quickly as possible and getting the operation back up to a steady state production of 100,000 to 120,000 ounces per annum.
This would produce revenues of $220–$260 million, and cash flow of $80–$115 million per year. If this was to materialise the stock would seem extremely cheap with a current market cap of $200 million. An interesting situation worth keeping an eye on.
From the heat of Thailand to the windy British Isles
Last month it was announced that The Property Franchise Group (TPFG) and Belvoir (BLV) would finally merge. Investors have been predicting such an event would happen for many years now. No cash is being paid, only a share swap.
Both these companies are really well managed and the merger will produce many benefits.
The combined group will have more than 930 locations, managing approximately 152,000 tenanted properties across the UK and will be expected to sell more than 28,000 properties per annum.
TPFG Management state…
As a result of the Merger, the geographic spread of the Combined Group would be enhanced and diversified, which the TPFG Board expects will provide more opportunities for franchisees to serve customers showing an interest in the Combined Group's services via the various platforms.
There will be cost savings such as listing fees and various synergies. Belvoir has an established financial services division in partnership with Mortgage Advice Bureau (MAB1) which will be strategically valuable to TPFG.
Both companies have returns on capital above 20% and operating margins above 30% with little debt, and dividend yield of 4%.
The merger will create a business with a market cap over £200m which should increase the chances of attracting larger institutional money. I remain bullish.
What we’ve enjoyed reading in the past few weeks…
Failing Imperium by Daniel Oliver of Myrmikan Research
Daniel writes why he is so bullish on gold and critical of reckless central banks/governments. As he explains ‘gold is the only geopolitically neutral financial asset. It is the only sure safe haven for Western investors. How ironic that they are selling it fast when they need it most.’
Hong Kong's death has been exaggerated by Michael Fritzell of Asian Century Stocks
Investor sentiment in Hong Kong is worse than it’s been for over a decade. There’s a perception that the city is changing or perhaps even dying. Michael explains why he thinks that view is probably misplaced.
Well that wraps up the 3rd edition of Bargain Stocks Radar. If you’re seeking more ideas make sure to subscribe to our sister publication Capital Employed…
If there are any stocks you think we should look at please let me know in the comments below.
Please note the information in this report is for informational purposes only and should not be seen as investment advice. Please do your own due diligence before investing in any company. Full disclosure: the writer owns shares in Atlas Pearls, Dynacor, and The Property Franchise Group.
Hey there, thanks for your great work! Please take a look at ASX:OEL / Otto Energy Limited a $76.72M Oil and Gas play. Last price was $0.015 and they already proposed a Dividend of $0.005 next Month looking quite undervalued.