Source: Wealth Creator Magazine March/April

Some of the best opportunities for creating wealth from the stock market arise by investing in companies that move from a small-sized company, say between $50-to-100 million market capitalisation, to a medium-sized one of around $500 million.

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Looking For The Next Investment Gem?

Source: Wealth Creator Magazine March/April

Looking for the next investment gem?

Some of the best opportunities for creating wealth from the stock market arise by investing in companies that move from a small-sized company, say between $50-to-100 million market capitalisation, to a medium-sized one of around $500 million. As the mathematics suggest, this is between a five and ten fold increase and it often occurs over just two or three years. The difficulty is finding such companies and having confidence in them.

There are generally six key factors required to be met:
  • The company operates in a growing or improving industry
  • The industry has high barriers to entry
  • The company is financially sound and has improving margins or return on equity
  • The company is a leader in its field or experiencing growth rates that are superior to its competitors
  • The company has strong management, who have a vested interest in the business
  • The investment community is rewarding the company by driving its share price higher.

One company we believe has enormous potential over 2006 and 2007 is Ariadne Limited (ARA).

What do they do?

Aridane is a property development and management company (primary regional focus is on South-East Queensland) and is also involved in car park management ( Kings and Secure brands) along with a modest investment portfolio.

Ariadne’s major investors are Dr Gary Weiss (29%) and Kevin Seymour (29%) who took control of the company in 1995 and since then have been restructuring the company and its businesses for the next major period of growth.

What is so good about their industry?

ARA’s car parking business is a 50:50 joint venture with S&K Unit Trust operating 200 car parks in Brisbane, Sydney, Melbourne and Adelaide making them perfectly positioned to capitalise in the growing demand for car parking services along the Eastern seaboard. Focus is on meeting the on-going demands for residential, office and industrial property needs as the country’s population grows.

The combination of this with their activity in property development within south-eastern Queensland provides a powerful and lucrative stream of not only development income (for all property types) but on-going management rights of any public car parking facilities that are attached.

How are they improving?

The restructure of their car parking business has allowed it to become more focused, better managed and enjoy lower costs. Focus has now turned to expanding its suite of car parking assets.

The recent investment by Watpac (a partner in many developments and refurbishments) of 6.7% of ARA is testimony to the strength of the partnerships that the company has as well as the relative ‘value’ that ARA currently trades at. Watpac has experienced seriously strong growth over the past four years (rising from 25 cents to $1.70) and its investment in ARA is the clearest signal that can be given that the two companies will be working in unison to accelerate their growth over the coming years.

A newly created joint-venture, International Infrastructure Management opens new corridors for growth. And by being able to partner with the highly successful Babcock & Brown is favoured to spur new growth areas that currently are not being recognised by the market.

How is the share price performing and what are the potential targets?

ARA’s share price struggled following its heights in late-1999 but has over the past two years been confined to a range of 43 cents to 26 cents. However, the investment by Watpac has triggered a surge in the share price beyond this range indicating the market is finally beginning to appreciate the potential of the business over the coming years.

With such a long-held range being left behind, it is difficult to rule out that ARA will not be able to follow Watpac’s history which rallied from 40 cents in mid-2003 to $1.70 now. Our targets for ARA are initially 1999 share price peak of 89 cents versus a current share price of 52 cents. The timeframe for such levels being achieved is within 12-to-18 months, with potential after that beyond $1.00

Is our investment criteria met?

The company is exposed to unique industries that have their own growth profiles both in the medium and long-term. Management is amongst the best in the country.

Written by:

Gregory Tolpigin is the MD and chief investment strategist at GT Financial, a boutique investment and funds management firm. Greg has been an investment strategist with Macquarie Bank, Bankers Trust and Citigroup . His work has been ranked number one in the industry by Greenwich Survey. www.gtfinancial.com.au