5 ASX small caps conquering the US market
By Shawn Lee, Portfolio Manager, SGH Australian Small Companies Fund
Welcome to Our US Market x ASX Small Caps Series
As part of our ongoing commitment to delivering valuable insights to Australian investors, Shawn Lee, Portfolio Manager of the SGH Australian Small Companies Fund, recently embarked on an extensive research trip across the United States, meeting with over 40 companies spanning critical sectors like technology, automotive, insurance, and healthcare. This series unpacks the essential takeaways from those conversations, providing a closer look at how American businesses navigate challenges such as inflation, labour constraints, regulatory risks, and the fast-approaching U.S. presidential election. In each article, we explore a specific sector, connecting the dots to help you better understand the opportunities and risks on the horizon.
Stay tuned as we explore each sector, from stocks making waves to advancements in AI and more.
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As quality investors, we dive deep into the fundamentals of the markets and the companies we invest in. We look for businesses with a competitive moat, access to end markets, and management capability to grow their earnings sustainably over time. Because of that, we routinely meet with companies and executives as part of our research process to obtain additional information that will inform our stock selection.
We recently undertook a research trip to the US, visiting over 40 companies across a broad range of industries. We visited several American companies and spoke with their executive teams to get a good feel of where the US economy is heading, how they feel about their prospects and how macro developments and political processes may impact their businesses. We also visited several Australian listed businesses with key operations in North America, including some of our portfolio holdings. We have identified five high-quality ASX stocks we believe stand a good chance of proving themselves offshore.
Pro Medicus (ASX: PME)
In San Francisco, we met with the head of global sales at Pro Medicus Limited. Pro Medicus is a diagnostic imaging software provider founded in Australia in 1983. Subsequently, it has scaled its client base globally. The United States is its largest market today and a region with the most profound future growth opportunity.
The company is focusing on increasing opportunities in the private practice segment of the market. Historically, the company’s software solutions may have been most suited to academic and large hospital groups. However, recent contract wins have shown that Pro Medicus also offers superior solutions within the private practice segment, which accounts for about 25% of the market.
This previously untapped market segment gravitates to the Pro Medicus product suite because its solutions can be modularised and are fully cloud-deployed. Our research shows that Pro Medicus is ahead of the competition in these two areas. To support this growth, the company has also recently increased the size of its sales team by approximately 20%, allowing it to respond to the elevated interest that Pro Medicus is now experiencing. This is a positive signal for the shape and size of the contract pipeline.
Cyber security, privacy, and data compliance risks are other emerging areas gaining traction in the US healthcare sector. Hospital boards are increasingly prioritising solutions that best mitigate these risks, which plays into the sweet spot of SaaS solutions such as those offered by Pro Medicus.
Infratil (ASX: IFT)
Long Road Energy was another important business we visited in San Francisco. It is one of the key growth engines within Infratil’s investment portfolio. Infratil is a New Zealand-headquartered infrastructure investment company with assets spanning the telecommunications, transportation, digital infrastructure and new energy sectors.
Long Road Energy is Infratil’s flagship new energy asset. It is a US renewables developer, owner, and operator. We met with its senior executive team in San Francisco. We were impressed by the high level of equity alignment amongst the management team, the depth of experience displayed through project selection, and how they have managed evolving supply chain risks in this sector.
Long Road Energy was one of the few developers who partnered early with US solar panel manufacturers (e.g., First Solar) to ensure they met the domestic content threshold to be eligible for additional tax credits made available as part of the Inflation Reduction Act (IRA). By doing so, they are increasing their project returns. Long Road Energy is currently replicating this first-mover localisation strategy within the US battery supply chain to secure domestically manufactured batteries, maintain favourable treatment under the IRA, and, importantly, stay ahead of more stringent regulations kicking in.
There are some concerns in the market concerning the potential for a Republican’ clean sweep’ at the November US elections and the implications on the IRA. However, after our conversations with numerous renewable industry contacts in the US, we feel confident that these risks will likely be minimal. Much of the supporting supply chain relevant to renewable projects operates from Republican states, which have safe harbour protections to prevent the repelling of prior legislation.
Most importantly, the industry has historically been conditioned to wean off subsidies. Developers like Long Road Energy are not embarking on projects that fail to meet hurdle return rates even without IRA incentives. We remain confident in the strong growth runway available at Long Road Energy.
Siteminder (ASX: SDR)
We had several meetings in Los Angeles related to SiteMinder, a technology software company that provides solutions for travel accommodation businesses. The business was founded in Sydney close to 20 years ago, and since then, it has built a core client base in the USA. We met with an influential hotel software consultant to gain an understanding of the US sector. As a result, we became further convinced of Siteminder’s leadership position in Channel Management software across the hotel middle market.
As a testament to this, one of the more prominent competitors in channel management, Cloudbeds, have recently partnered with Siteminder for mutual benefit. Siteminder’s support from large online travel agencies such as Agoda and Trip.com also validates its strategy. The Cloudbeds partnership expands the company’s potential customer reach further and allows it to develop more holistic integrations into property management solutions.
Beyond Channel Management, Siteminder also aims to grow into the revenue management vertical by launching new products. Our conversations with industry participants were very supportive of Siteminder’s value proposition to its hotel partners, suggesting that the enlarged market opportunity that the company is touting is, in fact, addressable.
Our research meetings in the US reconfirmed that SiteMinder offers a mission-critical product with a sticky/loyal client base supported by high barriers to exit. The growth strategy to expand beyond its core channel management capabilities into revenue management is promising and offers significant upside over a longer-term investment horizon.
IPH Group (ASX: IPH)
Further north, in Toronto, we met with the managing partner at Smart & Biggar, the recently acquired Canadian outpost of leading intellectual property firm IPH Limited. With all corporate acquisitions, particularly those resulting in new operating regions (as is the case with Smart & Biggar), we are always highly cautious about integration and cultural risks. If these are not managed properly, they often result in permanent loss of earnings power within the acquired business.
Our visit reassured us that initial disruptions stemming from the reduction in duplicate roles and cultural differences between the various firms that IPH have acquired in Canada have been relatively minimal to date. We also understand that client losses so far (due to conflict or a reset in rate cards) have been better than expectations.
We continue to monitor IPH’s ability to retain key patent attorneys, especially beyond the initial contracting period. Our visit also supported the view that the Canadian market is similar to other secondary filling locations, such as Australia and Singapore (where IPH has leading market shares), with one exception. In Canada, there is a higher mix of litigation work in the pharmaceutical space, which we view as offering a potential upside to near-term earnings.
We continue to see IPH as a high-quality business with a proven management team that will be rewarded by the market if it can continue to evidence the stabilisation of its Australian market share, deliver stronger-than-expected growth in Canada, and maximise the easing of cyclical headwinds in Asia.
Nanosonics (ASX: NAN)
In Indianapolis, we met with the US president of a medical device company, Nanosonics. Nansonics provides high-level disinfection solutions and has successfully commercialised a disinfection product for ultrasound probes, known as Trophon. The company’s solutions are viewed as the ‘gold standard’ in high-level ultrasound disinfection and have an approximately 50% market share in North America.
We wanted to better understand the recent slowdown in sales of the Trophon product and the remediation actions that management has taken since. Our discussions with the executive team of Nanosonics provided some comfort that the North American sales function has been significantly upgraded regarding people and structure, providing enhanced reporting lines/KPIs. This has also resulted in closer alignment between the sales team and their clinical counterparts, who often perform the legwork for the sales teams, including performing hospital clinical assessments to identify areas where disinfection compliance can be improved.
These positive changes should allow the business to re-accelerate sales momentum once hospital budgetary conditions improve. The sector is starting to see early green shoots with higher procedural volumes. We left our meeting with some confidence that the company is undertaking detailed behind-the-scene preparations for the launch of their long-anticipated endoscopy product, which is currently under FDA review.
The company is also working closely with key opinion leaders to advocate for changes to clinical standards, including commencing installation planning with hospital departments (when purchasing medical devices, hospitals always consider how to best balance their limited available space). As part of this effort, Nanosonics is preemptively expanding the US distribution and repair centre footprint by 25%.
While there is still plenty of water to flow under the bridge, we foresee the potential for a shorter sales ramp-up in this second product launch due to the company’s preparatory activities. Having said so, we placed limited valuation upside on the potential success of the new endoscopy product. We view the standalone earnings stream of the core Trophon product as offering sufficient valuation support, and we have recently initiated a position in Nanosonics.
For more information visit the SGH Australian Small Companies Fund page.
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Thank you for reading this article in our US Market x ASX Small Caps Series.
If you’re interested in exploring more, be sure to check out our previous article covering US Market Outlook. Stay tuned for our next article in the series about Artificial Intelligence Innovations.
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