Writing in its August 2018 monthly update, the Spheria Australian Microcap Fund highlighted two small-cap ASX stocks that look to be trading at insanely cheap valuations. One of them even trades on a 9.3 per cent fully franked dividend yield.
The fund has previously discussed Vita Group (ASX:VTG), the company best know as the operator of Telstra branded stores.
The risk with Vita shares is that it has just one supplier, being Telstra Corporation (ASX:TLS). Lose that one contract, and Vita shares go up in smoke.
But such deals cut both ways, with Vita Group also being strategically important to Telstra given the smaller company influences around $1.5 billion of Telstra’s revenue.
The fund says the productivity of the stores Vita runs for Telstra is excellent and it is less prone to competition given its store footprint is skewed to regional markets where Telstra’s network is superior.
The one supplier issue is more than compensated by the depressed Vita share price. The group is highly cash generative and has $18 million of net cash on its balance sheet.
The Vita contract with Telstra has been renewed, its earnings rebased and it’s now trading on only 4 times pre-tax free cash flow, meaning a 4-year payback period.
With the Vita share price at 98 cents, the icing on the cake is the 9.3 per cent fully franked dividend yield.
The fund is a significant shareholder in Prime Media Group Limited (ASX:PRT), which it says is more out of fashion than a straw hat in winter.
The fund says it is seeing signs of stabilisation in the regional TV markets that tend to lag the metro markets, which have returned to growth.
Spheria forecasts Prime Media to generate EBITDA in the $35 to $40 million range in FY19, only slightly down on the $45 million in FY18. The fund calculates Prime is trading on 2.4 times pre-tax free cash flow, which means shareholders will get their money back in 2.4 years – all other things being equal.
In addition to its stand-alone valuation, there are enormous synergies should Seven West Media (ASX:SWM) buy Prime Media, a merger being undeniably a huge win-win for both sets of shareholders.
The Prime Media share price is languishing at 23.5 cents, down 50 per cent over the past 12 months.