Hi Crow
The 10 are...WSY Webspy, GBN Gallery Global Networks, TOX Tox Free Solutions, MWR MGM Wireless, TMS Television & Media Services, SIE Scigen, BPO BioProspect, HUG Hugall and Hoyle, LAL Lowan Australia, MXL MXL Limited.
2 i've been watching and think could be good 12 month plays are HUG and TMS. They also missed JUM so I don't put much credence in this report :)
Article below from AFR website.
Embrace them or avoid them - just don't ignore them.
That's the message from stockmarket analysts keeping a watching brief over the more than 300 so-called "penny dreadfuls" that trade below 10¢ a share on the Australian Stock Exchange.
But just how dreadful are their prospects for the coming year?
Rich valuations are being ascribed to large and small cap stocks as the local market conquers new heights, forcing investors to dig even deeper for more attractive - and often more speculative - investment opportunities.
Accounting for just a sliver of the market's total capitalisation, yet experiencing some of the wildest share-price swings, the companies nominated by brokers as offering the most potential cover the IT and telecommunications, waste management, food, education, media, biotechnology and retailing sectors.
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One of the most promising plays cited by several market watchers is MGM Wireless, an Adelaide-based company that is helping schools combat truancy with an SMS messaging system. The service automatically notifies parents when students do not arrive for classes.
MGM, which carried out a backdoor listing through imaging software developer EzyImage in 2003, generated revenue growth of close to 300 per cent in the December half as the number of schools that have a licence to use the product, dubbed "MSGU", reached 110.
An analyst at Adelaide-based broking firm Taylor Collison, Daniel Eddington, expects MGM to record its first profit in the second half.
And he reckons the share price has not yet caught up with the company's growth prospects.
"It appears the current value of the business reflects that of the old entity, EzyImage," Eddington says. "The market size, lack of competition, quality product and business model have huge potential."
Outside broadcasting and post-production outfit Television & Media Services, which counts Ten Network and Kerry Packer's Consolidated Press Holdings as major shareholders, is tipped to be a stand-out performer in the media sector this year.
After a string of losses, the company returned to profitability last year, with December-half revenues rising 9 per cent.
TMS's subsidiary, Global Television, has been at the forefront of the reality television craze in Australia, involved in the production of The Block, Australian Idol and Big Brother.
Restructuring, management shake-ups and acquisitions are a common theme in the "under 10s", underlining the importance of an exhaustive research process prior to investment, analysts said.
"Getting to know the management team is paramount," says Pinnacle Equities analyst Danny Goldberg.
"Effectively, you're backing the people that are running the small business and their ability to execute their strategy."
Paul Barkl, an analyst at boutique investment bank Equity Capital Markets which specialises in small and micro-cap stocks, agrees: "When you're dealing with companies this small, the strength of the management team is really crucial."
Fund managers warn that plumbing the depths of the equity market for potential investments carries increased risk, and liquidity in micro-cap stocks is poor, despite many being a haven for day traders.
Indeed, with only two of the 10stocks identified trading profitably in the December half, and seven experiencing negative share price returns over the past year, analysts peppered their recommendations with warnings that perhaps nowhere is the investment maxim of risk and return more relevant.
A decision to offload its underperforming Mudella dairy business last November is reaping handsome returns for shareholders in cereal, nuts and dried fruits wholesaler Lowan Australia.
The company became the subject of a second takeover offer from the acquisitive Greens Foods in February.
Back in the entertainment realm, Gallery Global Networks, which distributes and sells adult DVDs and other products through mail-order and a website, is believed to be on the radar of a potential acquirer.
Part-owned by German erotic business Beate Uhse, the company controls one of Australia's largest premium rate billing bureaus, Sound Advertising.
"Their telecommunications business could be an attractive target for one of the telcos, but they will probably have to get rid of the porn division through [a management buyout] or something similar before anything will happen," says Simon Fritch, an analyst at Lodge Partners in Melbourne.
ECM's Barkl also likes Hugall and Hoile, an importer and distributor of irrigation supplies, turf-care products, pond equipment, water pumps and purification systems.
Emerging from a three-year restructure last year, Hugall has shifted some of its buying efforts to China, where Barkl says the company can increase profit margins by as much as 30 per cent and also source higher-quality products.
A plan to convert some of Hugall's 39 retail outlets into franchise stores is expected to free up the balance sheet and generate additional earnings, which could be used to reduce the company's significant debt, Barkl says.
Analysts are also tipping higher levels of profitability for hazardous waste management company Tox Free Solutions, which completed a major restructuring program last year, including the appointment of a new management team and a $2.1million capital injection.
The company operates two treatment plants in Western Australia - at Kwinana and Port Hedland - and the latter is experiencing record volumes and a full order book, secretary David McArthur says.
An analyst at Perth-based Cunningham Securities, James Middleweek, predicts the company will turn in a profit of about $700,000 in the second half.
Middleweek says: "The major upside is Kwinana. This site is no longer a cash drain on the group, but if technical issues relating to its problematic thermal desorption unit can be resolved, its longer-term profit potential could be even more significant than Port Hedland."
Damien Klassen, head of retail equities at independent equities research firm Aegis, says education software maker MXL, recently recapitalised biotechnology firm Scigen, and internet content monitoring outfit WebSpy, are among his team's top picks for 2005.
Sydney-based MXL is helping private education providers, including Bond University and Education Queensland, meet the new reporting requirements introduced by the federal government at the beginning of the year with its web-based student administration package called eMinerva.
The product was certified by the New Zealand Ministry of Education last month, which has paved the way for eMinerva to be tendered to the country's 2400 schools, a deal the company estimates could be worth about $30million in licence fees over the next three years.
Aegis Equities technology analyst Rodney Lay says the need to comply with the legislation could underpin further sales of MXL's product suite this year.
Aegis claims Sonic Healthcare-backed biotechnology group Scigen, which markets a portfolio of four drugs targeting hepatitis and diabetes, is successfully minimising the risks associated with biotechnology research by focusing only on late-stage developed products.
"They operate under a lower risk than many other bio-tech companies who have a large R&D spend on products that may never eventuate," Aegis says.
"By coming in at a later stage, Scigen limits their risk. Most of their upside comes from Scigen leveraging local market knowledge, experience with local regulatory approval processes, and relationships with regulatory bodies in target markets."
Elsewhere, Aegis's Klassen believes privacy and productivity concerns will continue to support WebSpy, which sells internet content filtering and email monitoring software designed to improve employee productivity and help companies comply with privacy regulations.
"While WebSpy is still in its early stages of its life cycle where the risks remain high and there is no certainty of success, it operates in a market with only one other major competitor and it is leveraged to relatively small increases in sales," Klassen says.
Brisbane-based BioProspect, which has licences to collect samples of flora and fauna in Queensland and Western Australia, is another Aegis favourite.
MXL
mxl limited.
