Australia’s Small-Cap Moment: Industrials, Earnings Season, and 5 Stock Picks for 2026

Australia’s economy continues to show resilience – headline inflation is within target, GDP growth is solid, and the labour market remains strong.

But the real opportunities for investors may lie beyond the mega-caps, in small- and mid-cap industrials trading at historic discounts.

Our latest insights highlight companies like SRG, GNG, GNP, SHA, and DVP that combine recurring revenue, strong balance sheets, and disciplined execution, positioning them for long-term wealth creation as market leadership broadens.

With selective exposure, these names could outperform in a market still adjusting to interest-rate shifts and evolving growth trends.

Australia’s Macro Backdrop and the Implications of the August Reporting Season for Growth, Inflation, and Labour Markets

Australia’s soft-landing story is still holding together, though not without a few tremors. Headline CPI rose 0.7% q/q in the June quarter and 2.1% y/y, while trimmed-mean inflation slipped to 2.7% y/y the lowest since 2021 and comfortably within the RBA’s 2 – 3% band. Growth has surprised on the upside: Q2 GDP expanded 0.6% q/q and 1.8% y/y, powered by a long-awaited pickup in household consumption. The labour market remains steady, with unemployment at 4.2% in July and participation near record highs. Employment rose by 25,000 people, while the unemployed fell by 10,000, nudging the jobless rate down by 0.1 percentage points.

Monetary policy has edged looser. The RBA trimmed the cash rate to 3.60% in August, citing inflation’s return to target and softer hiring momentum. Futures suggest a high chance of another cut before year-end, though September looks less certain given firmer GDP and spending prints.

Equities met headwinds as September began, with global yields climbing and “higher-for-longer” fears pushing the ASX 200 to its worst session since April on 3 September.

Yet, the market closed FY25 with an impressive 13% return (including distributions), supported by banks, defensives, and technology names with AI exposure.

The August reporting season proved more pragmatic than exuberant. Beat/miss ratios were balanced, leaning slightly cautious, with cost discipline and backlog quality the key differentiators. Management guidance for FY26 suggested input costs are easing, and rate relief will help margins, but project timing and labour constraints remain watchpoints.

Small-Cap and Industrial Sector Performance versus the ASX 200 Index and Global Small-Cap Trends

The US small-cap Russell 2000 is up about 6.8% YTD (to 9 September), lagging the mega-cap driven benchmarks – a pattern mirrored in Australia.

The S&P/ASX Small Ordinaries (XSO) continues to trade at a discount to large caps. Research from managers and ETF providers highlights this gap as one of the widest in decades, with faster expected earnings growth in 2025–26 underpinning the relative case.

The Industrials cohort within the S&P/ASX 200 (XNJ) has held up well, supported by lower input costs, resilient demand in essential services, and strong order-book visibility.

However, rate-sensitive names wavered in early September as bond yields spiked.

Opportunities for Long-Term Wealth Creation through Small-Cap Leadership Beyond Mega-Caps

Our work suggests small caps are priced at a double-digit discount to large caps on historical P/E and P/B multiples, with the spread hovering near 20-year extremes. These conditions often mean-revert as monetary policy eases and market leadership broadens.

If the RBA maintains a careful easing cycle while inflation stays anchored, leadership extending beyond mega-caps looks increasingly plausible.

Within that shift, industrial small and mid-caps tied to infrastructure, maintenance and brownfield capex offer a blend of defensiveness and earnings leverage.

From our stock-picking experience, the companies that stand out combine strong revenue-to-market capitalisation ratios with improving profitability metrics around EBITDA and margins. Add in consistent payout ratios and dividend growth, and the universe of quality small caps narrows to only a select few.

Those are typically the names we include in long-term wealth portfolios.

Genus Plus: Grid and telecom infrastructure services

GenusPlus Group (ASX: GNP) stands out as a “pure play” enabler of Australia’s energy and telecom transition, with core operations spanning critical power and communications infrastructure.

The company’s strategic expansion into high-growth areas such as Battery Energy Storage Systems (BESS) and national broadband upgrades positions it well for multi-year growth. Recent acquisitions have broadened capabilities and geographic reach, reinforcing its role in supporting national infrastructure priorities. By aligning its business with non-discretionary national agendas, GenusPlus offers exposure to long-term megatrends with a relatively lower-risk profile.

FY25 was a record-setting year, with revenue surging 36% to $751.3 million from $551.2 million, while normalized EBITDA jumped 49% to $67.4 million and NPAT climbed 84% to $35.4 million. Basic EPS rose 82.2% to 19.7 cents per share.

The company ended FY25 with $160.8 million in cash, transitioning to a net cash position of $113.5 million from $77.3 million in FY24, providing flexibility for future capex and acquisitions. Recurring revenue grew 39% to $311 million, with forecasts of another 20% increase in FY26, reflecting a shift toward long-term, annuity-style contracts that reduce revenue volatility.

Inorganic growth contributed meaningfully, with acquisitions adding $90.8 million in revenue and $7.9 million in EBITDA, demonstrating management’s ability to integrate and scale new businesses effectively.

Looking ahead, GenusPlus is well-positioned with a record $2 billion orderbook and a tendered pipeline of $2.4 billion. Major wins include an $180 million EPC contract for the Reeves Plains BESS, a $65 million BoP contract for Merredin BESS, and an $80 to 100 million Fibre Connect Upgrade program with nbn Co.

Eastern states operations now contribute 42% of revenue, up from 35% in FY24, diversifying geographic exposure. While the trailing P/E of 26.4x versus the construction industry average of 18.7x and a DCF suggesting 45.6% overvaluation may appear high, the premium reflects GenusPlus’s robust growth trajectory.

Technically, the stock trades near its 52-week high of $5.40, with an RSI of 63.51 indicating strong momentum and further upside potential.

SHAPE Australia: Fit-out, modular construction and refurbishment specialist

SHAPE Australia Corporation (ASX: SHA) has successfully transformed from a traditional commercial fit-out business into a diversified construction services provider, targeting less-cyclical sectors such as Defence, Education, and modular construction. This shift, combined with a national footprint, has created a more resilient business model with a stable long-term pipeline.

Strong financial metrics, including a net cash position of $104.22 million and an ROE of 62.14%, highlight the company’s ability to generate attractive returns while maintaining low operational risk.

In FY25, SHAPE delivered robust growth, with revenue rising 14% to $956.9 million and NPAT increasing 32% to $21.1 million. While statutory EPS came in slightly below expectations at $0.25, the overall momentum remains solid, supported by a high ROIC of 33.63% and a strong Piotroski F-Score of 7. These results reflect both operational efficiency and financial strength, providing a solid buffer against economic fluctuations and enabling continued investment in strategic growth initiatives.

The company’s strategic evolution is evident in its growing focus on non-office projects, which now account for a significant portion of its business, including a 25% surge in project wins to $497.3 million. Education and modular construction sectors have seen particularly strong gains, backed by government-supported projects.

The addition of Peter Massey to the board signals a push toward accelerating inorganic growth through M&A, complementing a massive $4.0 billion identified project pipeline.

Combined with a low beta of 0.26 and high insider ownership, SHAPE demonstrates both stability and potential for long-term growth, supported by strong technical and financial indicators.

SRG Global: Specialist engineering, asset integrity and mining services

SRG Global (ASX: SRG) has successfully transformed into a diversified infrastructure services company, focusing on high-margin, recurring maintenance work. A key driver of this evolution has been the acquisition and integration of Diona, SRG’s water and energy services business, which has strengthened its position in sectors with long-term structural growth. This strategic pivot has allowed SRG to build a resilient business model that combines both organic and acquisitional growth, providing a solid foundation for long-term performance.

The FY25 results highlight the strength of SRG’s business, with revenue rising 24% to $1.32 billion and underlying EBITDA up 29% to $127.1 million. NPATA surged 52% to $60.95 million, while NPATA per share climbed 34% to 10.3 cents.

Exceptional cash generation, with EBITDA to cash conversion at 102%, helped the company move from a proforma net debt of $38.2 million post-Diona acquisition to a net cash position of $16.2 million. This strong cash flow also supported a 22% increase in the full-year dividend to 5.5 cents per share, reflecting confidence in ongoing earnings and shareholder returns.

SRG’s growth is underpinned by both the successful Diona integration and a strong project pipeline. Annuitized recurring revenue surpassed $1 billion in FY25, while Work in Hand reached $3.6 billion and the Opportunity Pipeline sits at $8.5 billion.

The company’s diversification across water, defence, resources, transport, and energy sectors adds flexibility and resilience, with recent wins including the Hunter Water contract and a first data centre project with NextDC. Despite a re-rating, SRG still trades at a modest EV/EBITDA discount to peers, and its strong earnings trajectory, diversified operations, and proven acquisition integration make it an attractive long-term buy.

GR Engineering: Design and construction for minerals processing

GR Engineering Services Ltd (ASX: GNG) has carved out a strong position in mineral processing engineering and construction, underpinned by its niche expertise and high-quality project delivery. The company’s focus on both project-based and recurring services has led to a solid balance sheet, stable earnings from repeat blue-chip clients, and a consistently growing dividend stream, making it an appealing long-term holding even in the cyclical mining sector.

Its strategy combines stability with growth, reinforced by a pipeline of projects and a move into services-based revenue through subsidiaries like GR Production Services and Mipac/Paradigm.

FY25 results highlight this strength. Revenue rose to $479 million from $424.1 million in FY24, while EBITDA increased to $57.2 million from $50.9 million, driving NPAT to $34.2 million from $31.2 million.

The company ended the year with $71 million in net cash and no borrowings, providing a robust financial foundation. GR Engineering also increased its fully franked dividend to 22.0 cents per share from 19.0 cents, supported by strong operating cash flow and a net cash surplus. The Dividend Reinvestment Plan (DRP) at a 2.5% discount further balances rewarding shareholders with retaining capital for future projects.

Looking ahead, GR Engineering has a strong project pipeline and recurring service contracts that enhance medium- to long-term visibility. Recent wins like the $77.6 million Eloise Copper expansion and King of the Hills Stage 2 upgrade underscore ongoing project momentum, while over 30 studies across multiple commodities signal potential future work.

Valuation metrics present a contrast: a DCF model suggests the company is 50.5% undervalued at $8.17, while the trailing P/E of 20.8x sits above the industry average of 16.3x, showing that the market prices in growth but perhaps not fully.

With low stock volatility, a solid uptrend, and neutral RSI, GR Engineering combines technical resilience with strong fundamentals, making it a compelling long-term investment in mining services.

Develop Global: Mining services and copper-zinc development

Develop Global Ltd (ASX: DVP) stands out with a dual-pillar strategy that blends a cash-generative mining services business with the development of high-grade copper-zinc assets. This hybrid approach provides stability from ongoing services revenue while offering the upside of its key projects, Sulphur Springs and Woodlawn. By actively de-risking these assets—through early works, underground capital development, and a shift to a “bottom-up” mining sequence—the company is setting a clear path to unlocking significant value for shareholders, while improving productivity and reducing ore dilution.

On the financial front, Develop Global is a pre-profit development-stage company, meaning traditional earnings metrics like P/E are not applicable. The company has secured a $70 million senior secured debt facility from Macquarie Bank, giving it the capital to advance its projects without diluting shareholders.

Meanwhile, its mining services division provides consistent cash flow, allowing the company to fund exploration and early-stage development activities such as dewatering the Woodlawn mine and initial civil works at Sulphur Springs. This financial flexibility is a core differentiator, reducing reliance on volatile market conditions.

The Sulphur Springs project alone holds an Ore Reserve of 8.8 million tonnes at 1.05% copper and 5.6% zinc, with an updated Definitive Feasibility Study expected in the December quarter to reflect rising commodity prices.

Valuation metrics suggest Develop Global is undervalued compared to the broader Australian Metals and Mining sector, with a Price-to-Sales ratio of 6.2x versus the industry average of 78.2x.

While the stock has experienced notable volatility – up 61% year-to-date before a 24% decline – its long-term story is driven by project execution and operational excellence, making it an attractive play for investors with a higher risk tolerance and a focus on future growth.

Outlook and Positioning into 2026

Inflation remains within target, with services disinflation progressing unevenly. The RBA’s 3.60% cash rate allows room for cautious easing if growth wobbles, with futures pricing another cut by late 2025/early 2026. Modest real growth, unemployment around 4 – 4½% and gradually improving real incomes should support domestic-focused industrials.

After a mega-cap led FY25, broader small- and mid-cap participation could improve as rates ease. Global small-cap proxies like the Russell 2000 lag the S&P 500 year-to-date, offering room for catch-up if credit conditions and earnings revisions turn. Australian small caps trade at a valuation discount to large caps while offering higher forecast earnings growth – a compelling combination if confidence returns.

Within industrials, we favour maintenance and operations-linked names with multi-year frameworks (SRG) and EPCs with strong balance sheets and high ROIC (GNG). For specialist contractors (SHA, GNP), backlog quality, working-capital management, and labour retention will determine margin sustainability as pricing normalises. Catalysts for smaller diversified industrials include contract mix, wins, and scalable margin uplift. Optionality names (DVP) carry higher beta; careful position sizing is key.

Bond-yield spikes, project delivery slippage, wage pressure, and China-related commodity shocks. Early-September market moves illustrated how positive macro prints can weigh on duration if rate-cut expectations shift.

We remain overweight quality industrial small and mid-caps with recurring revenue and low-gearing balance sheets. Volatility presents selective buying opportunities while the valuation gap versus large caps persists.

For the five companies reviewed, SRG and GNG stand out for backlog visibility and disciplined returns; GNP and SHA benefit from execution-sensitive non-residential capex and refurbishment demand; DVP offers higher-beta optionality via services and base-metals exposure.