This pair of stocks may benefit from Australia's tight labour market and M&A possibilities.
Whilst big blue chip names fill the portfolios of self-directed investors looking to have income in their retirement phase, there should be some effort towards looking at the smaller end of town.
A company like Commonwealth Bank (ASX: CBA) is solid, but it gets a lot of attention from fund managers and retail shareholders alike. It's also a very large and mature business that is unlikely to deliver much capital growth in the future.
Like many of the stable dividend-paying stocks in the ASX 200, Commonwealth Bank rarely has moments where valuation is considered "cheap". That is where smaller and growing companies come in.
With small-cap stocks taking a beating in 2022 and interest rates still on the rise, investors could do well looking for high-quality businesses with a longer growth trajectory. These stocks will eventually rise as momentum recovers, and business performance stands out.
Here are two we're looking at in our Australian Small-Cap Income Fund:
PeopleIn (ASX: PPE)
TAMIM fund manager Ron Shamgar currently thinks highly of PeopleIn because of Australia's historically low unemployment rate, its reaffirmed FY23 earnings guidance, and relatively low valuation.
The business provides staff, business services, and operational services, including workforce management, recruiting, onboarding, contracting, rostering, timesheet management, payroll, and workplace health and safety management.
PeopleIn stands to benefit from positive operating conditions including, continued acute shortage of labour and strong market opportunity. The Healthcare & Community vertical is well-placed to address critical supply shortages within this high skills shortage sector. In addition, the Professional Services vertical continues to see strong demand, particularly for cyber security and professional management roles. And finally, the Industrial & Specialist Services vertical is seeing increased demand across multiple sectors.
The operational performance is translating to bottom-line growth. In FY22, PeopleIn generated $47.2 million of normalised earnings before interest, tax, depreciation, and amortisation (EBITDA). In FY23, management guided that it could generate a normalised EBITDA of between $62 million to $66 million.
Shamgar believes the current valuation of 9x PE seems too low for such a quality business that has shown a consistent track record of performance over the last five years. Additionally, the potential grossed-up dividend yield for the 2023 financial year is 7.2%.
COG Financial Services Ltd (ASX: COG)
COG has two complementary business arms: finance broking & aggregation and equipment leasing business for small to medium-sized enterprises (SMEs).
In FY23 to date, COG Financial Services has seen underlying net profit (NPATA) rise by 26% year-over-year to 31 October 2022. Management commented that both segments have continued to perform strongly in what is normally their softest trading quarter and in the face of a higher interest rate environment.
The finance broking segment result is particularly impressive given continued supply-chain constraints on acquiring new vehicles and equipment. There has been "strong activity" in all segments, which is expected to continue "given megatrends supporting mining, infrastructure, transport and agriculture".
The Funds Management and Lending Segment grew funds under management (FUM) by 5.2% for the quarter as well.
The company said its scale means it can now support significant investment in its own software platform, giving it "the advantage of having the best offering in the market".
COG starts the next quarter with a very strong forward order book reflecting strong activity in their core markets. COG Financial is projected to pay a grossed-up dividend yield of 8.6% in FY23. In addition, Shamgar thinks that a key catalyst for COG is M&A and won't be surprised if they make a play for Earlypay (ASX: EPY) in the near term.
Disclaimer: PeopleIn (ASX: PPE) and COG Financial Services (ASX:COG) are currently held in the TAMIM Fund: Small Cap Income Unit Class.
At TAMIM we are committed to educating investors on how best to manage their retirement futures.
Sign up to receive our weekly newsletter:
TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.