3 discounted small-cap stocks

As the reporting season draws to a close there have been a few more small-cap stocks that have exceeded consensus forecasts. This typically results in a re-rating of the share price to higher levels. Another catalyst for share price appreciation is a new piece of information. Let’s begin with the following announcement made during an interim profit release.

TFS Corporation (ASX: TFC)

TFS Corporation is a Western Australian company that has become the world’s largest owner and manager of sustainable Indian Sandalwood Plantations. It also owns the distiller of sandalwood oil named Mt Romance. Sandalwood has a distinctive and exotic fragrance and its oil is a key ingredient for perfume. It has a well-entrenched market throughout the world, particularly in the fast growing economies of India and China. Being the world’s most expensive tropical hardwood, it continues to increase in price each year. It has risen at a compound rate of over 15% per annum since 1990.

On Wednesday, a joint venture entity 50% owned by TFS Corporation, announced a new long-term exclusive supply agreement with a global pharmaceutical company. This not only showed an alternative use for sandalwood (an ingredient for dermatology products), but also resulted in yesterday’s share price rise of rise of 14.5% to $1.34.

Promising interim results also revealed total revenue of $55 million and net profit after tax of $3.2 million. The company forecast a steady dividend of 3 cents per share after the release of full year results in August.

Cover-More Group Ltd (ASX: CVO )

Cover-More is Australia’s leading travel insurance/medical assistance provider with a strong brand and multi-channel distribution. It counts Flight Centre (ASX: FLT) as its largest distribution partner and has and an expanding presence in India, China and Malaysia.

It is set for double-digit compound annual growth in earnings after easily exceeding prospectus forecasts across most measures. Travel insurance premiums rose 24%, with growth across both agency and intermediated channels. The company is currently trading at $2.05, just above its initial public offering (IPO) price of $2.00.

One great attribute is Cover-More’s business model, which has undemanding capital needs and generates strong cash flow. This provides the chance of a dividend distribution in the near future. Also, the company offers rare exposure to the growing outbound- leisure travel market. Finally, the company has an enviable track record that has seen earnings grow at an average 27% per annum since 2008.

Pact Group Holdings (ASX: PGH)

Rigid-plastics packaging stock Pact Group provides packaging for hundreds of food or consumer goods manufacturers in Australia and New Zealand. It provides packaging for hundreds of food or consumer goods manufacturers in Australia and New Zealand and  operates in the same sector as Orora (ASX: ORA), which was recently demerged from packaging giant Amcor (ASX: AMC).

In the first half, the recently listed company accounted for 55% of forecast full-year earnings in the prospectus. A strong second half is forecast, despite margins being slightly weaker in Australia. This will largely be due to realising acquisition synergies and a strengthening performance in New Zealand. This result, along with management commentary, is reassuring for investors who are currently down over 11% on the $3.80 IPO issue price.

Foolish takeaway

In my opinion, both TFS Corporation and Cover-More have substantial medium-term growth upside. I am less convinced about Pact Group as it operates in a more competitive environment and has relatively high debt levels.


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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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