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The Experts

Tim Boreham
+ About Tim Boreham

Welcome to the New Criterion, authored by Tim Boreham.

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

Tim Boreham has now joined Independent Investment Research and is proud to present The New Criterion, which will honour the style and purpose of the old column. These were based on covering largely ignored small- to mid-cap stocks in an accessible and entertaining manner for both retail and professional investors.

The New Criterion will strive to continue the tradition in a weekly online format.

The column will not offer stock recommendations because we think readers can make up their own mind on the facts and opinions presented.

Our coverage will include both the industrial and mining sectors, including listed investment companies and IPOs. The stocks covered will not necessarily be of investment grade with sound financials. But they will have credible management and – at the very least – an interesting story to tell.

We hope readers will find The New Criterion both entertaining and informative.

3 industrial small-cap stocks that represent value

Thursday, April 18, 2019

One value-seeking investor recently proposed a daring mission which, naturally, I chose to accept: identify a handful of small cap stocks with reliable earnings and dividends, trading on an earnings multiple of ten times or less and a yield of more than 5%.

Given that excludes most resource stocks and all the ‘techie speccies’ that inhabit the small-caps pantheon, the task almost amounted to Mission Impossible.

Yet we declare Mission Accomplished – and await a Tom Cruise-sized pay cheque for our efforts.

Our quest for untapped value starts with Mayfield Childcare (MFD, 92c) shares, tumbled 20% since going ex dividend on March 5.  But the 22c decline – since partially recovered - well exceeded the 8.97c a per share payout.

The smallest of the three listed childcare operators – the others are G8 Education (GEM) and Think Childcare (TNK) – Mayfield operates 20 Victorian centres, mainly in Melbourne.

True, Mayfield reported a 1.2% profit decline from continuing operations, to $3.37m (statutory earnings were bolstered by an $897,000 profit from centre disposals).

The subdued reflected a slight slip in occupancies, as well as higher wages after an award increase and higher IT and refurb expenses.

But in essence there was nothing to scare the horses – or the kids – too much.

Based on market expectations of a $4m profit in calendar 2019, Mayfield is trading on a multiple of around seven times – well under the valuations ascribed to G8 (19 times) and Think (16 times).

Assuming only a steady dividend, Mayfield is trading on a yield of around 10%, fully franked. Bear in mind though that the company only pays a final dividend each year.

With a gearing ratio of 37%, Mayfield’s debt levels are similar to G8’s and less than Think’s 48% (before Think’s $18m capital raising this month).

Given the reliance on government subsidies, the sector entails inherent regulatory risk. But a new (favourable) subsidy regime has just been bedded down, while we don’t envisage a future Labor government targeting working families with less generous rules.

In the somewhat distressed retail sector, investors have taken to Shaver Shop Group (SSG, 39c) shares with the number one clippers.

There are reasons: half year normalised net earnings down 6% to $6.75m, with underlying sales rising 7.7% to $95.5m (excluding bonanza sales from Chinese Daigou channels in the previous half, turnover was flat).

However, the first seven weeks of the second half were more positive, with like-for-like sales growth of 8%. Having added 38 greenfield stores to its network over three years, the company has not committed to further new stores.

Broker Ord Minnett forecasts full-year earnings of $7m, 2.7% lower than previously and a 4.5c share full year dividend (the company paid out 2c/sh in the first half, 80% franked).

On those numbers, Shaver Shop is trading on a multiple of 6.7 times and a yield of 12%, fully franked. With 121 outlets largely located in high-rent malls, Shaver Shop could encounter more hairy moments as consumer sentiment ebbs and flows.

But no matter who wields power after the election, that unwanted fuzz will keep growing and 35 of Shaver Shop’s 50 product lines are unique to its stores.

In the housing sector, the relentless misery has taken its toll on the listed real estate exposed plays, none more than land developer and builder AV Jennings (AVJ, 51c).

Now controlled by Singapore’s SG Global Developments, the 87-year old stalwart reported a $1.4m interim profit, down 90% on a 38% revenue decline to $113m.

Punters had been warned.

Management refers to “softer market conditions”, but behind the raw numbers more auspicious second-half trends are in play.  As of December 31 the company had 883 pre-sold lots on its books, with only 157 settled by then.

A further 532 lots are due to settle in the current half, implying a much sturdier full-year showing.

Broker Baillieu forecasts reported earnings of $26.6m – equating to earnings per share of 7c – and a 4c total dividend (1c/sh was paid in the first half, reflecting the “relative strength and visibility” of second half earnings).

The stock trades on an earnings multiple of less than eight times and a 7% yield (fully franked).

AV Jennings operates mainly in the lower end detached housing market - a sector likely to fare better than the inner city apartment market.

Its revised approach also means steering away from land sales to builders in favour of direct-to-consumer house and land packages. However this approach is more capital intensive and it takes longer for revenue to come through.

While we wouldn’t bet the family house on this one, the valuation looks to be more than compensating for the risk.

(By the way, I thought the same about Queensland developer Villa World in mid January, when the stock traded around $1.75. It is now subject to a $230m takeover offer valuing the shares at $2.23).

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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3 ASX water stocks tackling the emerging world shortage of drinkable H2O

Friday, April 05, 2019

Fluence Corporation (FLC) 56c

Fluence chief Henry Charrabe fluently rattles off the reasons why investors should be warming to the global water treatment outfit, which recently won an African contract worth more than the company’s circa $200 million market capitalisation.

Yet despite rallying over the last month, Fluence shares have lost one-third of their value since July 2017, when the company was formed from the merger of the New York based RWL Water with the Israeli-based, ASX listed Emefcy.

“We have reached our target of 74 percent growth in revenue, reduced (operating costs) by 30 percent and exceeded the growth margin we guided to,” Charrabe says.

“At some point I’m out of tricks, there’s no more I can do.”

 The merger combined Emefcy’s more advanced technology with the more established RWL, which sells off-the-shelf products in 70 countries.

Fluence is 29% owned by US entrepreneur Ronald Lauder, heir to the Estee Lauder cosmetics empire. But with clients such as Coca-Cola, Pepsi, Halliburton and Procter & Gamble, no-one can accuse the company of having only a skin-deep presence in the fast-growing water purification sector.

Fluence last month proved its chops by winning its biggest contract to date, a €165 million ($260 million) deal to build a 150,000 cubic metres-per-day plant for the Ivory Coast’s government-owned water utility.

The turnkey plant will provide potable water for the west African nation’s capital Abidjan, which teems with 4.7 million people (the country’s overall population of 25 million has doubled since the 1980s).

 Using proven methods such as ultraviolet disinfection, the facility will clean up water from a lagoon infested with blue algae.

“The uniqueness is not the technology used, but the combination of the engineering and effectively applying it,” Charrabe says.

The project will be funded by the Israeli export credit agency Ashra, which in effect guarantees the quarterly revenue payments to Fluence over the next three years. It’s also expected the Israel Discount Bank will fund the Ivory Coast side of the deal.

 “We never get paid by the government, the government signs invoices and the bank pays us,’’ Charrabe says. ““There is no collection risk or political risk for us.”

Charrabe says algal blooms have become problematic worldwide and he’s in no doubt that climate change is to blame: “There is a direct correlation between algal blooms and increased temperatures in the world.”

Algae or no algae, there’s no shortage of putrid water in both developed and developing geographies, with 2.4 billion people lacking access to clean water.

Latin America last year accounted for close to half of Fluence’s turnover.

China, not surprisingly, is also a key focus, with 26 installations across 16 provinces. Last December, the company won a $US45 million ($63 million) contract to supply 35 purification stations for truck rest stations along 10,000km of highway in the province of Hubei.

Notwithstanding an accounting issue related to Argentina’s hyperinflation, Fluence reported calendar 2018 revenue of $US101.1 million, up 74%. The company also reported an ebitda loss of $US8.1 million, compared with the combined RWL-Emefcy loss of $US35.7 million previously.

Charrabe says Fluence was profitable at ebitda level in the first and second quarters and expects the company to be “sustainably profitable” by the December quarter of this year.

Fluence has no balance sheet debt and cash of $US38.2 million, having raised $US36.5 million in a share placement and share purchase plan last October.

But this month it drew down $US2 million of a $US50 million debt facility provided by Generate Capital, to fund a build-own-operate-transfer desalination plant at a resort in the Bahamas.

Despite the lowly share price, Charrabe says the ASX listing has worked well and the company has no immediate plans to dual list on an exchange such as the Nasdaq.

“We also have a challenge because while Australia has a strong knowledge of water scarcity, the water investment theme is not well known.”

Despite the supposed difficulties faced by US institutions investing in ASX entities, more than half of Fluence shares are held by US entities.

Charrabe expects Fluence shares eventually will align themselves to the more lavish valuations ascribed to Nasdaq-listed equivalents.

“I cannot force someone to buy the stock but I can make sure the company does what it said it would do,’’ Charrabe says.

“Management’s number one goal is to execute and perform. I think we have done that and more than that.” 

Phoslock Environmental Technologies (PET) 39c

In terms of ASX comparisons, Fluence is most similar to Phoslock, which has developed its own patented know-how to bind excessive phosphorous and thus prevent algal blooms.

With two offices and a factory in China, Phoslock has emphasised Middle Kingdom opportunities, although the company provides services to 250 water authorities across five continents.

Phoslock reported December half revenue of $9 million, up 9% and a $1.6 million net profit.

Having just changed to a calendar year balance date, Phoslock expects 2019 revenues of $27-30 milloon and a pre-tax profit of $6-8 millon.

While a smaller business to Fluence, Phoslock’s $210 million market cap rivals that of its New York counterpart. The company has $13 million of cash and is debt free.

 With a miserly $16 million valuation, De.mem (DEM, 14 cents) is a Singaporean-based entity that deploys power-saving filtration technology developed by Singapore’s Nanyang Technological University.

De.mem chalked up calendar 2018 revenue of $10.5 million, up 259% and narrowed a previous $6.3 million net loss to a $2 million deficit.

De.mem shares haven’t exactly set de world on fire since the company’s debut in April 2017, raising $4.5 million at 20 cents apiece.

But after what CEO Andreas Kroell dubs a “stellar” 2018, maybe De.mem is not going down de gurgler after all.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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Debt consolidation sector booms

Thursday, March 28, 2019

As anyone who listens to commercial radio would attest, there’s no shortage of providers spruiking their wares as a panacea for indebted consumers – for a hefty fee, of course.

Debt agreements are binding contracts to repay an agreed amount to creditors over a certain period, while debt consolidation merges several troublesome debts into the one facility.

According to the listed FSA Group (FSA, $1.04), business is booming.

“Consumer debt levels are at a record high, new inquiries are increasing and demand for our product and services is growing,’’ says the company, better known under its trading name of Fox Symes.

What’s most disturbing is that the demand is in the context of historically low interest rates – and no prizes for guessing what happens when rates “normalise”.

FSA is enjoying a purple patch across both its debt management and lending divisions (sub-prime home loans and personal loans, the former being a vehicle for borrowers to consolidate their debts).

As an alternative to bankruptcy, debt agreements have soared in popularity over the last decade, growing at a compound annual growth rate of 7.5% since 2004 (14,000 agreements were inked last year).

FSA’s continuing rosy fortunes flies in the face of a series of amendments to bankruptcy laws clamping down on what the government describes as “unscrupulous practices by a small minority of debt agreement administrators.”

Effective from July 27, the Bankruptcy Amendment (Debt Agreement Reform) Bill caps the maximum period for a debt agreement at three or five years – three years for non homeowners and five years for those who own a home (and presumably are struggling with a monstrous mortgage).

The amendments increase penalties for wrongdoing and expand the power of the Official Receiver in Bankruptcy to reject agreements that would impose “undue hardship” on the debtor.

Also, the minimum bankruptcy period reduced from three years to one year - a move aimed at not discouraging entrepreneurs from having another go and removing the stigma of the condition.

The counter argument is that it makes it easier for the spivs to get back in business.

In a submission to government, a gaggle of consumer law advocates take a less generous approach:  “In our view there is only a very narrow band of people for whom a debt agreements is a suitable option and even fewer for whom it is their best option.”

FSA argues three years is too short for creditors to achieve an adequate return and they will reject these arrangements. “The likely consequence of this may be an increase in non home owners exploring other solutions to manage their unmanageable debt,” the company says.

With a 39% share of the debt agreement market, FSA should be ruffled – at least in theory. But as it points out, unlike most of its rivals, it offers broader services including informal arrangements, personal insolvency agreements and, of course, bankruptcies.

FSA also alludes to a new product in response to the reforms.

The non-conforming loans offered by FSA are the sort of proposals the banks increasingly reject these days. However FSA’s book is backed by Westpac, which in November approved an expanded $75m facility to back FSA’s loan growth.

As of June, FSA claimed 21,885 debt agreement clients, up 8%, accounting for debt of $398m.

The company also reported a half year profit of $7.73m, up 40% on operating income of $35.8m (up 9%). The consumer lending loan pool grew 13%, to $428m, en route to a targeted $500m by 2020.

FSA trades on an attractive multiple of 10 times and dividend yield of 5.5%. The company may be vulnerable to further reforms launched by a Shorten Labor government, but given the groaning debt profile of the average Australian households, debt agreements look like remaining a growth sector for some time yet.


Credit Intelligence (CI1) 1.4c

Lawyer and Credit Intelligence founder and CEO Jimmie Wong has first-hand experience of what a decent property slump can do for one’s personal wealth: he owned five properties in Hong Kong during the Asian financial crisis, when average prices fell 70%.

“I lost all my money,” he says. “Many people in Hong Kong were like me because most properties were in negative equity.”

Naturally, droves of property owners filed for personal bankruptcy, many having used personal loans to finance mortgages. Many took their own lives after being pestered by collection agencies.

Wong and his firm started handling bankruptcy cases, but the trouble is Hong Kong bankrupts can lose their homes and often their job. So he entered the business of arranging debt agreements.

 Wong says that since then he has acted for 9,000 people, for an average fee of $HK12,000 ($2,000) but saving them from a four-year bankruptcy. As it happens, HK property recovered strongly – they’re now six times the value of an average Sydney pad – but all too late for the victims of the financial crisis.

The bad news for Australian home owners is that having built a thriving Honkers business, Wong is now eyeing the two million families in strife over mortgage and consumer debt.

Interest only loans – typically with a three year holiday – pose especially ominous threat.

“There’s a good chance we will get good market share because when property prices drop by 20%’ a lot of problems will emerge.”

As a prelude, Credit Intelligence I last year entered an alliance with the national insolvency firm Cor Cordis, which will adopt the company’s automated case management platform.

 Credit Intelligence listed here in May last year.

Legally, Credit Intelligence benefits from Australia and Hong Kong sharing a similar British-based legal system. Debt agreements, in particular, are similar to the Honkers version.

Wong rues the cost of operating in Australia is too high, so the company plans to replicate its low cost, automated platform, which means it can service Hong Kong clients at an average cost of $100.

Outside of the Cor Cordis tie up, CI’s Australian plans involve acquiring “one or two” debt management companies or insolvency firms and intends to undertake a capital raising to further these ambitions.

“If we are lazy and don’t expand, our profits won’t be able to rise,” he says. “But we will try to continue paying dividends to shareholders if possible.”

Weighed down by ASX listing costs, Credit Intelligence reported a 72% slump in December half year earnings, to $276,466. Revenue grew 40% to $2.8m and new bankruptcy cases increased 10% to 1,542.

 And, no, the company has no debt. After all, it’s the work of the Devil.

Wong accounts for 47% of the company, despite offloading 8% of his stake to two unrelated investors last September.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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Milk, cheese, and baby formula – mooing for more

Friday, March 22, 2019

Bega Cheese (BGA, $4.69) CEO Barry Irvin believes the change is more structural – it will endure long after the rain starts falling again. This emerging milk scarcity is moulding the strategy of the country’s only listed scale processor that sources 1.1 billion litres of milk – 10% of total supply – annually.

“We are very conscious of what we think is a changing dynamic in Australian supply,” Irvin says.

The problem is that western Victoria and Gippsland are the only regions fundamentally suitable for dairying, with south east Queensland, NSW and northern Victorian producers facing water-related and other issues.

At the same time, processors have been merrily expanding capacity, such as Australian Consolidated Milk, which is building an $80m milk powder and butter plant near Girgarre in northern Victoria.

Freedom Foods (FNP, $4.65) is doubling capacity at its Shepparton facility to 500 million litres. The specialist food maker also recently acquired the nearby Coomboona Dairy, the country’s biggest single dairy infamously partly owned by Harvey Norman before going into receivership.

 “The deterioration is as fast as I have seen in terms of Queensland, NSW and northern Victorian supply,” Irvin says. “Some of it will come back but I don’t have the feeling it will come back to its pre-drought levels.”

In south east Queensland, dairy farmer numbers are dwindling and they’re not being replaced. “As they close down, they are not being bought by their neighbour and they can be alternate use or urbanisation,” Irvin says.

As a result, big dairy manufacturers such as Parmalat are eyeing supply from northern Victoria, where water availability issues has seen the volume of milk reduce from three billion litres to one billion litres over the last decade.

Eventually, he says, Victorian farm gate prices will catch up with the traditionally higher prices enjoyed by the Queensland farmers who, ironically, supply most of the supermarket’s $1 a litre milk. (Coles and Aldi this month followed Woolworths’ move to raise its price from $1 to $1.10 a litre).

While partially offset by stronger prices for its end products, Bega’s recent half year results reflected the higher input costs as well as energy, along with higher inventory costs (and higher debt) relating to its acquired Koroit facility in western Victoria.

Bega’s normalised ebitda came in at $57.9 million, down 17%, with full-year guidance confirmed at the lower end of the previously stated $123-130 million range.

Ignoring Irvin’s protest that the numbers were coming off an especially robust previous comparative half, investors sent the stock down 5% in the ensuing two trading days.

Bega’s core strategy involves milking the full potential of its legacy plant in Tatura and its acquired Koroit facility, while not sinking capital into excess capacity.

On this note, Bega announced the closure of its mozzarella and cheddar making factory in Melbourne’s North Coburg, at the cost of an unquantified number of jobs. The company has outsourced supply to “a very large third party producer.”

An urban anachronism on the front line of northern suburbs hipster expansion, the plant had been subject to increasing complaints from residents who love their (goat’s) cheese – as long as it’s made elsewhere.

 Irvin says the shifting supply dynamics highlight the importance of the Koroit factory, in the lush western district. Bega bought the facility from Saputo for $250 million in July 2018, with the Canadian processor forced to divest the factory after it acquired the struggling Murray Goulburn collective.

Bega is looking to expand from butter and nutritional powders to higher value derivatives, such as lactoferran, a protein product that’s been around for decades but is gaining favour as an additive to infant food formula.

Lactoferran has fetched up to $3,000 a kilogram but is still a small market subject to price volatility -- and oversupply if every other producer has the same idea.

Bega’s other main strategy ploy is building its consumer brand portfolio – notably Vegemite and peanut butter and cheese slices – acquired from Mondelez International (formerly Kraft) for $460 million in early 2017.

In the first few months after the purchase, Vegemite sales enjoyed a boost on the back of headlines about the patriotic Bega buying back the farm.

Sales of the yeasty black delight have since reverted to steady-state normality, although Bega argues it never viewed Vegemite as a high-growth play. If anything, there’s better growth in peanut butter even though the sector is more heavily competed.

Without an ounce of schadenfreude – ok, just a bit -- Irvin is “comforted” that Freedom Foods’ half-year results were just as sobering. The point is that Freedom has been winning milk suppliers from Bega at a better price, but this largesse to the cow cockies can’t be sustained.

Evidently, Bega is confident of regaining its mojo, even if it’s in a Stephen Bradbury manner as its rivals falter because of overly aggressive expansion.

But the company needs to overcome Supreme Court legal challenges related to its grocery business, which could greatly affect its emerging acquired consumer business.

The first is from the Kiwi-based Fonterra, the world’s biggest dairy processor which is licensed to use the Bega cheese brand in Australia. 

Unhappy Fonterra alleges that Bega’s intention to rebrand the Kraft lines as Bega products is in breach of contract. Bega has counter claimed, pushing the hearing date out to late 2019.

Separately, Kraft has challenged Bega’s right to use its distinctive yellow packaging on its Vegemite and peanut butter jars.

Judgment on this one is due in April.

Meanwhile, Fonterra and Bega remain in a now loveless marriage until 2025. “We probably don’t have as many beers with them but we are still perfectly polite to one another and get on,” Irvin says.

Australian Nutrition and Sports (AN1) not yet listed

Amid signs of a slowing Chinese infant formula market exacerbated by oversupply, Australian Nutrition and Sports (ANS) is joining the fray with a $5-8 million capital raising ahead of an ASX listing in early April.

As its name suggests, ANS is not so much about the powdered baby nourishment but its range of health and fitness products such as protein bars and shakes and ‘rapid energy gels’.

Having said that, ANS plans to grow its Chinese and Hong Kong presence with its infant (and adult) dairy formula range that is made by a certified third-party Victorian manufacturer.

ANS founder, CEO and former personal trainer Tom Lashan concurs that with about 40 different brands available in Hong Kong alone, consumers are spoiled for choice. But most of the cowboy entrants – inspired by vision of desperate shoppers cleaning out whole shelves of formula – have left the market.

ANS generated revenue of $419,000  in the 2017-18 year, 193% higher but still well short of any meaningful scale.

On the formula side ANS is roughly comparable with Bubs Australia (BUB, 72c) or Wattle Health (WHA, 87c) but on the sports side there’s no real listed comparison.

Post listing, ANS will bear a market cap of $16-19.1 million.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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Not so fertile ground for IVF leader

Thursday, March 14, 2019

Judging from Virtus’s recent half year results from IVF leader Virtus Health (VRT, $3.98), financial considerations are weighing heavily on would-be parents’ willingness to undergo fertility procedures, which aren’t cheap and certainly aren’t guaranteed of success.

The trends point to stronger growth in the no-frills end of the sector, which offers basic reproductive services for patients with simpler needs who aren’t fussed about choosing their own specialist.

Think of Jetstar versus Qantas.

Virtus’s results showed “full service” volumes declined 0.8%, but turnover from its budget The Fertility Clinic chain grew 17%. Overall, Virtus’s Australian cycles grew 2% to 8085, compared with an overall flat market.

While this implies Virtus gained market share, low-cost procedures accounted for 17% of the company’s cycles in the first half, compared with 30% for the overall market. The company reckons its “targeted activities’’ – a.k.a. price cuts in Queensland and NSW – can get this figure up to 20%.

“Low cost is not for everybody,” cautions Virtus CEO Sue Channon. “Some (women) have complex fertility issues and need our premium services.”

Virtus’s NSW home market was especially soft for Virtus, which the company describes as “unusual” as it had been growing strongly over the previous two years.

“We planned a strategy to respond to low cost services and that delivered a market share increase, but at a lower margin,” says Channon.

Channon opines the housing market undoubtedly has been a factor in the subdued NSW performance, but reckons it’s a “slight pause” rather than something more systemic.

“NSW had been growing well. You can have a period of good growth and then it goes flat, it can be impacted by local economics.”

She adds it’s too early to say whether current-half conditions have improved.

The IVF market was shaken up when GP and diagnostic giant Primary Healthcare (now Healius, HLS, $2.69) entered the low-cost, bulk billing IVF sector, starting with a Brisbane clinic in 2017 and then expanding to Sydney, Melbourne and Perth.

The Healius half-year results showed an IVF revenue increase of 18% to $6.6m. In the context of a $1.7bn a year company the fledgling division is barely a line item, but for the booming IVF sector it was a wake-up call to cut the often prohibitive cost of cycles.

Overall, Virtus reported an 11.7% net earnings decline to $14.6m on revenue of $140.6m, up 5%.

Monash IVF (MVF, $1.09), the other pure-play listed assisted reproduction stock, reported a similar profit decline to $10.7m with revenue edging up 0.3% to $77.2m

In contrast to Virtus, the Victorian based Monash IVF saw a 7% increase in premium cycles, which adjust for the impact of the departure of a “fertility specialist” in September 2017.

That’s a reference to celebrity baby whisperer Dr Lynn Burmeister, the company’s busiest practitioner who departed in less than cordial circumstances.

During the half Monash IVF’s overall cycles declined 3.6% to 3392 and the company’s local earnings fell 27% (the overall decline was tempered by the performance of the company’s offshore clinic in Kuala Lumpur).

With the local market maturing, Virtus is pinning its growth hopes of expanding its overseas operations, which account for 20% of the company’s revenue.

Virtus has centres in Ireland, Copenhagen and Singapore and recently opened in Britain’s Southampton. While these centres have been growing well, underlying half-year from the overseas ops declined 20% because of a number of disruptions.

“We are actively trying to increase (the international contribution) to 25% and possibly 30%, “ CFO Glenn Powers says.

 “We are looking to diversify our earnings streams and that’s been the common theme of our strategy since we listed almost six years ago.”

As with so many other industries, the IVF sector is also not immune to digital disruption, which presents threats and opportunities.

Both Virtus and Monash have been investing in time-lapse incubation technology to ensure the best embryos are selected. They are also introducing less invasive procedures for pre-implantation genetic testing, which doesn’t involve taking a biopsy of the embryo.

Valuation wise, there’s not much between the $330m market cap Virtus and the $260m market cap Monash IVF.

 As the world’s first listed IVF company when it debuted in June 2013, Virtus enticed plenty of cooing and clucking from excited investors.

The shares soared as high as $8.70 before a series of growth temper tantrums pared the company’s valuation back to the industrial average.

Monash IVF joined the ASX boards a year later at $1.85 as share and peaked at $2.56.

Trading at or near record lows, Virtus and Monash IVF shares trade on price-earnings multiples of 11-12 times and yield a healthy 6%.

Both have similar gearing levels, while Virtus’s ebitda margin of 32.4% is superior to MVF’s 25% (for the half year, at least).

 Monash also derives revenue from overseas, with its Malaysian clinics accounting for 25% of turnover.

In the longer term, the sector will be supported by the biological reality that one in six couples of reproductive age will struggle to have children. “You may worry about living expenses but fertility doesn’t improve with age,” says Powers.


Meanwhile, Monash IVF is being steered by chairman Richard Davis while the board scours for a replacement for CEO David Morris, who quit for personal reasons last October.

 Davis also sits on the board of funeral operator Invocare, but there is no truth to the rumour the companies plan to merge the world’s first vertically (or horizontally?) integrated cradle-to-grave provider.

Memphasys (MEM) 2.2c

Of course, the infertility problem often lies with the male, with the quality of mankind’s sperm diminishing globally for environmental or other reasons (no-one’s quite sure why).

Minnow Memphasys may have the solution with a device to select the best semen sample for use in IVF and tilt the often poor odds of conception in a couple’s favour.

The device, called Felix, uses polymer membranes to sort sperm by size and electrical charge (the best ‘swimmers’ have a negative charge). This replaces a lab-based method called density gradient centrifuge or “swim up”, which is labour intensive and can damage the sperm’s DNA.

Under a research collaboration with Monash IVF, Monash IVF gets first dibs on any commercialised device.

Memphasys is in the throes of raising $3.64m in a rights issue at 2c apiece to develop Felix which, by the way, is Latin for ‘joy’.

There hasn’t been much joy for Memphasys (formerly NuSep) over the last decade with a revolving door of CEOs and a failed attempt to buy an erectile dysfunction company.

But under new management it finally looks to be leading investors into more fertile territory.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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The dilemma for another ASX-listed pot stocks

Tuesday, March 12, 2019

Last week’s article on pot stocks pointed out that it’s one thing to cultivate the stuff in view of supplying the medical market that locally is in its infancy. But refining the healing herb is not exactly like canning baked beans: specialist facilities are required and, unsurprisingly, they will be heavily regulated. 

According to Althea (AGH) chief, Josh Fegan, there are “quite a few” labs in the country that are compliant with Good Manufacturing principles (GMP) and thus suitable for cannabis processing.

Althea is planning an $11 million growing and processing facility across four hectares leased at Skye, in Melbourne’s outer east. Under the company’s somewhat ambitious timetable, the facility will be completed by the December quarter of this year and the first finished product will appear from June next year.

While a latecomer to the sprouting ASX cannabis cohort – the company listed in November last year -- Althea is already supplying the local market with material sourced from its 25% Canadian shareholder Aphria.

Acknowledging doctors as the true gatekeepers of cannabis therapies, Althea created a web portal called Concierge to enhance the medicos’ and patients’ understanding of the largely unapproved treatments, currently available only under the Therapeutic Goods Administration’s Special Access Scheme.

 So far, 354 patients have been prescribed Althea products across a network of 109 doctors, mainly for pain but also for mental health conditions including post traumatic stress disorder and anxiety.

In keeping with the requirements of the Special Access Scheme, these patients have failed orthodox treatments. Given the regulatory hurdles required, the current market is minute: Althea adviser Pac Partners estimates 2832 patients were approved for cannabis prescriptions at the end of 2018, with 2178 of them actually treated.

Based on the Canadian experience, Althea adviser Pac Partners estimates an eventual Australian market of 250,000 patients.

Althea intends its imported Canadian supply to be a stop-gap measure, ahead of commissioning of the Skye facility that’s slated to produce 300 kilograms a year (with an eventual capacity of 20,000 kg).

Pac Partners estimates overall current local demand of a mere 362 kg, of which Althea provides 62kg (a 17% market share).

Given the low local demand relative to likely supply, forging export markets will be crucial to achieving economies of scale.

In this respect, Althea is planning an entrée into Britain, which last year legalised medical cannabis and which has similar patient access arrangements to Australia.

“There’s no doubt the UK will be a bigger market than Australia,” Fegan says.

Closer to home, drug-wary South Korea and Thailand last year legalised medical cannabis and Malaysia and Indonesia are looking to follow suit.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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Come off the grass

Thursday, March 07, 2019

It’s one thing to cultivate the stuff in view of supplying the medical market which, locally, is in its infancy. But refining the healing herb isn’t exactly like canning baked beans: specialist facilities are required and unsurprisingly they will be heavily regulated.

For THC Global (THC, 55 cents), the solution fell into its lap after Danish drug giant LEO Pharma decided a manufacturing facility at Southport on the Gold Coast was surplus to needs.

THC paid a knock-down $2.5m for the land and the plant – an asset on THC’s books at $16m but with a replacement value north of $35m.

The facility was used to extract material from a different plant -- euphorbia peplus, or radium weed –to make a cancer drug. But a plant is a plant, which meant the facility was virtually purpose built for cannabis.

“You won’t get another one like this in Australia, no chance,’’ says THC CEO Ken Charteris.

Grown at a separate THC facility in Bundaberg, the cannabis will be fed into 400 kilogram vats, in which the desired cannabinoids and turpenes will be extracted with an ethanol-based process.

The only catch is that because THC is yet to receive a manufacturing permit, there’s not an ounce of the stuff in the factory at present. Charteris describes the permit as “forthcoming” and says that as the facility was a drug factory in the first place, it should meet all the quality standards.

While THC awaits the paperwork, the Federal Office of Drug Control has been swamped with applications from parties wanting to grow and research medical cannabis, or import the material (the law was changed last year to allow this).

But many of the happy holders have discovered they’re no Willy Wonka ticket to prosperity. That’s because obtaining a licence is much easier than obtaining the specific permit to grow and handle the dope at a specific facility.

Without a permitted site to send the harvested plants, the growers are legally obliged to destroy the crop.

 “They all have aspirations of building an extraction plant and making little Aussie bottles of cannabis … but it’s far more sophisticated than that,” Charteris says.

 “There’s a big myth that if you are a (licensed) cannabis farmer you are worth a stack of money. But you have to build up expensive infrastructure and a lot of these holders are small companies.”

The gist, of course is that with a generous capacity of 12,000 kg of cannabinoid material a year, the unique Southport factory could become the contract refiner for other people’s ganga.

“We are all friends,” Charteris says, implying that talks about offtake deals have already taken place.

The dearth of refining capacity aside, the sector faces the dilemma of reconciling the boundless potential of the local medical cannabis with the current reality.

At present, there are few approved cannabis drugs and experimental versions are only available to patients under the Therapeutic Goods Administration’s special access scheme (doctor awareness is also low).

 Initially known as The Hydroponics Company, THC listed in May 2017 focused on providing the growing paraphernalia rather cultivating the weed itself.

But after a board coup in March last year, the company 'did a 180' and adopted its current farm-to-pharma strategy of both growing and refining medical dope.

As with most of the pot stocks, THC has a Canadian link via its subsidiary Vertical Canna, which has a cultivation project in Nova Scotia. Canada legalised medical dope way back in 2001 and then allowed recreational usage last year – a reform that has created a pot shortage in the country.

Charteris expects THC initially will export most of its product from the facility, on the proviso Australian needs are met first. 

This is a large scale production pharma plant that now is really the next generation,” he says. “We are probably five years ahead of anyone else.”

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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The missing link

Friday, March 01, 2019

Sealink (SLK) $4.10

Still on a travel theme, official numbers showing a sharp drop in the inbound tourism trade should mean choppy waters for Sealink, operator of nautical delights such as Captain Cook Cruises and the Murray Princess paddle steamer.

But Sealink’s half-year numbers this week showed the company in shipshape form, with earnings rising 15% to $13.1m.  That’s just as well, given management had promised a better performance in 2018-19 after an acquisition dragged last year’s earnings down 18% to $19.6 million.

In its five-year listed life, Sealink has regularly made headlines not least since it once boasted Lucy Turnbull as deputy chairman (she resigned in 2015 just weeks after hubby Malcolm snared the PM’s job).

Sealink has been a keen route acquirer but has been careful to balance the tourism-dependent business with commuter and cargo transport services.

The biggest local ferry operator with a fleet of 83 tubs, Sealink operates three Sydney Harbour routes and recently started the Manly to Barangaroo service. The company has pitched for the contract to operate Sydney Ferry’s 32-vessel fleet, which was worth $800 million when the current operator won the deal in 2012.

 “Sealink’s … balance between its tourism and transport operations has helped to create a resilient earnings base in a more subdued stage of the domestic and international tourism cycle,” says CEO Jeff Ellison.

That’s not to say Sealink has been quiet on the tourism side, last year buying Fraser Island’s passenger and vehicle ferry and the island’s Kingfisher Bay and Eurong Beach resorts for $43 million.

 Sealink also won the mandate to operate a service to the wilds of Bruny Island in Tasmania and started a service to Rottnest Island (much to the chagrin of the two existing operators, given Sealink undercut fares by 30%).

On the flip side, Sealink now faces competition on its mainstay Kangaroo Island route, after KI Connect started operating a high-speed catamaran in June last year. So far, Sealink reports no effect on its own sales but losing a monopoly position tends to be unhelpful in terms of maintaining margins, to say the least.

Sealink has less to worry about, with a $5 billion proposal, championed by Nick Xenophon’s SA Best, to link the island to the mainland with a 14 kilometre bridge.

As the island’s mayor muses, the plan is viable, if an extra 3 million visitors a year were willing to pay $100 each in tolls.

In the meantime, Ellison plans to jump ship after 28 years with the company, 21 years at the CEO helm.

Ellison will hang around until the October 2019 AGM, so there’s plenty of time to rope in a new salt.

In the meantime, keep scanning the shipping news for resolution of the NSW ferry tender before the state’s March 23 election.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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Out for a Jayride

Thursday, February 28, 2019

Jayride (JAY) 36 cents

Having jostled with a corpulent fellow passenger for a fair share of the armrest for most of the flight, the last thing a weary long-haul traveller wants to do is to deal with shuttle bus touts at the airport or face a long queue for the taxi.

Once in the cab, there’s a huge risk of being taken for a ride in more ways than one.

There’s nothing like being met by a uniformed fellow with a peaked cap and being whisked through the melee. Of course, it’s always possible to pre-book a service in any number of ways, but there’s been no way of comparing services on the one platform and then booking them online, a la for flights and hotels.

With its home-grown technology based on a geospatial database, the Sydney-based Jayride is addressing the market gap, with its platform that has now been rolled out in 31 countries.

“I don’t know any ecommerce market place where travellers can compare and book transport,’’ Jayride co-founder Rod Bishop says.

While the platform has universal appeal to business and leisure travellers, it is most useful if there is a “niggly” problem.

“If you and six friends are travelling from Denver Airport to Brackenridge and you all have skis, what are you going to do?”

As much as developing the technology, building the business has involved contacting every ground transportation provider in the relevant geographies. To date, the platform encompasses 3,000 providers across more than 1,000 airports.

Of course, the providers need to be amenable to taking bookings through the platforms and paying Jayride a cut of the fees – typically 25%.

“Transport companies need work and it’s no different to forging a relationship with a concierge,” he says. “They are generally happy to pay a commission.”

A random search of the Jayride site shows 30 operators available for a transfer from Denpasar Airport to Ubud in Bali, with prices ranging from $28.20 to an eye-watering $160.

The traveller pre-pays with Jayride, with the transaction settled in the transport company’s currency at the time of the transaction.

Bishop says there are 110,000 transport companies in the US, while ‘driver’ is the number one job description. For the time being, Jayride is confining itself to airport-based operators who, collectively, carry out 7.7 billion trips (the average return traveller will need four transfers per expedition, two at each end).

Jayride reported $960,000 of revenue in the second (December) quarter, up 93% year-on-year on total transaction value (TTV, the value of the fares) of $3.6 million.

Jayride also lost $1.83 million, holding end of quarter cash of $2.28 million. Given expected cash outflows of $1.98 million for the current quarter, the ASX politely inquired as to the company’s solvency, to which management replied the forecast outflows did not take into account an expected $876,000 of cash receipts.

On management’s “aspirational economics”, the company breaks even when annual TTV reaches $50 million – four times the current run rate of $12.6 million.

With $400 million of annual TTV, the company would make $20 million of earnings before interest tax depreciation and amortisation.

Jayride raised $13 million in pre-IPO funding and then a further $1.5 million on listing in January 2018 (at 50 cents a share). The company raised a further $1.75 million in a placement in December, at 43 cents per share. 

 Two venture capital funds, Follow (the) Seed and Artesian Capital that remain on the register are no longer escrowed.

The company looks to be well placed with a first-mover advantage; management’s job is to build critical scale from its current 0.13% global market share before any putative rivals wake up to the opportunity.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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2 satellite plays

Friday, February 22, 2019

Sky and Space Global (SAS) 5.7c (trading halt)

In an equatorial belt encompassing large swathes of Africa, South America and the Asia Pacific, including Australia’s Top End, about three billion people have access to only rudimentary telecommunications or none at all.

When they are connected, the price of traditional satellite coverage is often prohibitively expensive.

Enter nano satellites, which are smaller alternatives to traditional satellites that are more nimble and up to 80% cheaper. For a start, they aren’t blasted into space on a rocket but are launched in the upper atmosphere from a modified jet (in Sky and Space’s case, a Virgin Orbit Boeing 747).

Via routers, the nano satellites talk to each other and form expanding narrow-band networks. Connected via a normal mobile phone, the satellites provide basic text and voice services and can be used to track people and equipment.

After years of testing and tinkering, Sky and Space Global is on the verge of commissioning the world’s commercial telco network based on nano satellites.

Having sent three units into orbit as a proof of concept, Sky and Space is ready to launch the first 16 of a planned complement of 200 low-orbiting satellites.

 “Not a lot of people can say we were the first to think about something and actually do it,’’ says CEO and co-founder, Meir Moalem.

“Nano satellites have been used commercially for some time, for remote sensing. But we were the first to think about using them for communications.”

One of several ASX tech plays based on Israeli-developed technology, SAS found its way to our bourse after the founders reluctantly agreed to meet a group of Australians looking for interesting companies as reverse takeover (RTO) candidates.

 “What is an RTO and what is the ASX?” the Israelis asked.

Despite this inauspicious start, Sky and Space was persuaded away from venture capital and down the ASX route, raising $4.57m via the shell of Burleson Energy in mid 2016. Since then, SAS has raised a further $30.5m across four funding rounds and has just announced a $12m placement and $3m priority offer, both at 3c a share (a 48% discount to the prevailing price).

 “(Listing on the ASX) was a dilemma because being a listed company has its pros and cons, and certainly for a start up in the early days it is not the natural evolution,” Moalem says.

“But at the end of the day it was a good decision, it provided us with the capital to not only to launch the first satellites but also build the business.”

While most of SAS’s 8,000 shareholders are Australian, the company is largely based in Israel and Poland, where a subsidiary is developing the all-important software.

Little of Sky and Space’s technical activity takes place here, but this might change, given the formation of the Australian Space Agency to pursue commercial opportunities. Funded in last year’s federal budget, the agency will be based in Adelaide and led by former CSIRO CEO Dr Megan Clark.

Moalem says some investors assume the company is serving mainly poor farmers in Africa, but the target applications include government bodies and industries, such as aviation and fishing. He estimates one billion people in the coverage region — up to 18 degrees south and north of the equator — are unconnected.

A further two billion people have only poor coverage.

Even in developing countries, customers are paying $US10-20 a month for traditional satellite based services. So if Sky and Space can achieve market penetration of half a percent of the unconnected audience (five million people) and charge $5 a month, that implies revenue of $US300m a year.

Under its business to business model, Sky and Space has underpinned the launches by signing up 29 customers (mainly telcos) to use the satellite bandwidth.

Ahead of its ASX debut, SAS battled investor sentiment given the spectacular implosion of Newsat a few months earlier. NewSat planned to launch two traditional satellites at huge expense, but administrators were called in 2015 following revelations of poor corporate governance.

In September last year, founder and CEO Adrian Ballintine was committed to trial on fraud charges.

Moalem says apart from being satellite business, there’s no commonality between Newsat and Sky and Space, although he admits the reputational damage has taken its toll.

“If something wrong happens to another company, everyone loses. If Spacex fails in one of their launches, everyone suffers."

Co-founder Meidad Pariente says once the infrastructure is built, users will come.

“We are not that concerned there are other companies targeting the same market. We are not saying we will sell to one billion people, but if we do we will need a larger safe (to house all the revenue).”

 Sky and Space shares haven’t exactly reached for the stars over the last year, having shed two-thirds of their value over the last year.

In mid 2018, 200 million of founder shares went out of escrow, but Moalem insists none of the trio is selling anything.

“This is our lifelong dream and vision and we will ride it through to the very successful endgame.”

Speedcast International (SDA) $3.30

There’s a common boardroom link between Sky and Space and alternative ASX-listed satellite play Speedcast: iiNet founder Michael Malone.

Malone joined the Sky and Space board last October and has been a Speedcast director since May 2014.

Having sold iiNet to TPG Telecom for $1.56bn, it’s fair to say Malone is not motivated by the director fees.

Malone’s presence on both boards highlights that while the two companies are satellite plays, they’re not rivals, even though Speedcast describes itself as the world’s biggest provider of remote communications.

The more substantive Speedcast sells capacity on other parties’ satellites – rather than sending up its own -- and if anything is a potential customer of Sky and Space.

In a Christmas Eve bad news dump, Speedcast said its expected calendar 2018 underlying earnings would be $US135-145m, slightly below expectations but better than the $US120m achieved in calendar 2017.

This resulted mainly from subdued conditions for Speedcast’s energy clients, such as deepwater drillers and oil rigs, which contribute about one-quarter of the company’s revenue.

But the gloom was leavened by news that the world’s biggest cruise line operator, Carnival   Corp had agreed to three-year contract extension to provide communications (including high speed internet) to its fleet of more than 100 liners.

With more than 2000 customers in 140 countries, Speedcast generated $US305 in the June (first) half of 2018 and posted an $US21m profit. The company is due to report its interim numbers on February 26.

In a debt funded purchase, Speedcast paid $US135m for Globecomm, the world’s seventh biggest teleport operator (teleports convey the data to and from satellites).

In 2015, Speedcast acquired the failed Newsat’s Adelaide and Perth teleport stations (plus other bits and bobs) for $12m.

Speedcast shares have lost half their value over the last 12 months but the company still commands a $790m market valuation – around eight times that of Sky and Space. 

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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Time to bank on the small fry?

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Is cannabis a good investment?

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