Richard Ivers, Portfolio Manager of Prime Value Asset Management’s Emerging Opportunities Fund and Microcap Fund, has detailed the challenging environment currently confronting Australia and New Zealand’s small industrials sector. Prime Value Asset Management, a Melbourne-based firm overseeing approximately $3 billion in assets, specialises in investing in small-cap companies, excluding the more speculative mining sector. The small industrials accumulation index has barely moved, sitting only three per cent above its early 2020 pre-COVID level, enduring one of its worst five-year stretches since 1990, only surpassed by the global financial crisis.
Despite these significant market headwinds, Ivers noted Prime Value’s funds have considerably outperformed the index. He highlighted a “silver lining” in the current climate: small-cap bull markets typically deliver robust returns once initiated, with peaking interest rates identified as a potential catalyst for such a turnaround. The firm observes a clear disconnect between earnings and valuations among quality small industrial stocks, presenting numerous investment opportunities even amidst generally high asset prices elsewhere in the market.
Macroeconomic factors have heavily influenced stock performance, impacting rate-sensitive companies like Australian Finance Group and Qualitas negatively, while Cuscal and New Zealand’s Skellerup have performed better. Recent portfolio adjustments include trimming Dalrymple Bay to increase exposure to Napier Port, and reducing Credit Corp to add to Viva Leisure. Ivers highlighted Napier Port, an NZX-listed entity, as a compelling, monopoly-like asset with strong earnings visibility, a 4% yield, and annual earnings compounding at roughly 15%, yet trading at a valuation similar to the market average and half its nearest peer. He also pointed to Viva Leisure as an undervalued micro-cap, trading at a P/E ratio of seven against a market average of seventeen, with a potential near-term catalyst in the possible sale of its technology business.
