The small-cap space has unearthed meaningful gains and shareholder returns in sectors as varied as metal detection, digital lotteries and premium furniture.

Three names that Clime Asset Management either introduced to their portfolios this year or increased their stake in are Codan (ASX:CDA), Jumbo Interactive (ASX:JIN), and Nick Scali (ASX:NCK).

Clime’s head of investments Adrian Ezquerro praised the companies for their ability to self-fund their strong growth. They also possess strong balance sheets and offer high payouts to shareholders, Ezquerro said during a forum on Tuesday.

Since its inception in April 2017, the Clime Smaller Companies fund, which is outside Morningstar coverage, has returned 18.7 per cent a year versus 12 per cent for its benchmark, which is a blend of 50 per cent of the ASX Small Ordinaries Accumulation Index and 50 per cent of the ASX Emerging Companies Accumulation Index.

Here we profile the three names, which are outside Morningstar coverage, and include some of Ezquerro’s thoughts on their performance and potential.

Codan (CDA), Jumbo Interactive (JIN), Nick Scali (NCK) - YTD

Source: Morningstar Premium

Codan

Codan develops electronics solutions for government, corporate, non-governmental organisation and consumer markets across the globe. It operates through following business segments: The communications segment includes the design, development, manufacture and marketing of communications equipment. The Metal detection segment includes the design, development, manufacture and marketing of metal detection equipment; The tracking solutions segment includes the design, manufacture , maintenance and support of a range of electronic products. The company generates majority revenue from the Metal detection segment.

“Codan has done a wonderful job,” said Ezquerro. “It's a high-margin, high quality business. They've got a very strong balance sheet with about $100 million of cash in the bank, and that will certainly support their growth trajectory. And they've got a global opportunities set, which again is one of the hallmarks of these emerging high quality companies. This year provided a great opportunity to get set in Codan. And since year-end, Codan provided quite an upbeat AGM update, so operational momentum is certainly flowed through into FY21.”

In 2015, Codan had equity of $128 million. The aggregate profit generated in the five years since has been $210 million, of which $98 million has been paid out as fully franked dividends.

“That's an extraordinary outcome,” said Ezquerro. “And if you look at the trajectory of earnings year-on-year, you can see that this business has quadrupled its earnings over that same timeframe.

“Also over the same timeframe, Codan has not raised any further ordinary share capital from shareholders, so all of its growth has been self-funded and off the back of that, after paying out dividends, the equity base has broadly doubled.

“Codan has generated operating cash flow of just under $338 million over that five-year period, so it's been an extraordinary story of value creation, all of which is self-funded and off the back of that the company has generated a shareholder return of 59.7 per cent per annum, which is an extraordinary outcome for investors that have stayed that journey.”­

Jumbo Interactive

Jumbo Interactive operates in the lottery business. It is a digital retailer of both national jackpot lotteries and charity lotteries. The company uses the latest technology to craft an engaging and entertaining purchase experience for the customers across a range of digital platforms. The operating business segments are Internet Lotteries Australia, Other and Software-as-a-Service UK.

“Jumbo is company that we've owned for several years,” said Ezquerro. “It's executed extremely well. They've got a leading position in the digital lotteries space here in Australia. And that's effectively a duopoly business with Tabcorp.

“We see very attractive long-term growth runway. And again it's a company backed by significant cash reserves and a high-quality aligned management team that have owned a significant stake in the business.

“This is another wonderful company that has done extraordinarily well over the past five years. They started with equity of about $22 million. And in five years since they've generated just under $75 million aggregate and about $68.7 million of which has been paid.

“The business has raised $50 million of new ordinary share capital over the past five years but in the context of an $850 million it's not particularly onerous. And a lot of this has been driving the future growth of the business. Shareholders have been rewarded for this with a total shareholder return of about 69 per cent per annum for the past five years.”

Nick Scali

Nick Scali together engages in the retail and importation of household furniture and related accessories in Australia and New Zealand. It offers lounges, dining tables and chairs, armchairs, buffets/cabinets, TV units, coffee tables, consoles, rugs, mirrors, and pendants and lamps.

“We took a position in Nick Scali this year,” said Ezquerro. “It has done particularly well for a long period of time. But one of the real highlights through this pandemic period is that Nick Scali is taking considerable market share. So whilst a lot of the household budget was diverted from travel to home furnishings and renovations, this saw the whole market grow at rates of 20 to 30 per cent. But Nick Scali was growing at sales between 50 and 70 per cent for a good part of this year.

“And again off the back of that, you've seen very strong earnings forecast growth in the order of 75 per cent for this year. So this a business that we remain quite upbeat around. Obviously they've had a strong period in recent months but looking ahead we see a high-quality business with strong and growing market share and a very strong financial position, which will allow management to capitalise on the significant opportunity to continue growing their business into the long term.”

Morningstar's monthly Best Stock Ideas highlights high-quality Australian and New Zealand companies, which are currently trading at discounts to analysts assessed fair values.

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