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Tim Boreham
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+ 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.

The New Criterion: Two small caps, come rain, hail or shine

Tuesday, August 08, 2017

By Tim Boreham

A feature of this upcoming agrarian IPO is that unlike the last several hundred small-cap tech listings, it’s not being spruiked as a ‘cloud’ or ‘software-as-a-service’ based offering or a robotics story.

While the Kiwi-based CropLogic is all about predictive analytics to help growers achieve better yields, there’s no agenda to put agronomists out of work with a fully automated approach.

As for clouds, the most relevant ones are in the sky.

CropLogic’s IP is based on gathering data from sensors in the field (and other sources such as aerial pictures) to devise a crop management plan. “The technology allows agronomists to spend less time in the field while still getting the same level of reliable data,” says managing director Jamie Cairns. “There’s no point in them sitting in a car going from field to field, that’s not what they were trained for.”

The sensors pick up soil moisture and multiple depths and measure soil temperature, which give a steer on the crop’s sugar development. The sensors also include a rain gauge, which usually only Eric Olthwaite of Ripping Yarns fame would get excited about. But in this case, the gauges measure not just normal precipitation, but the moisture from irrigators.

While even small-acre cockies are more likely to wield GPS trackers than gumboots these days, CropLogic is squarely aimed at big producers with 1000 acres or more. CropLogic has also been working closely with the crop processors: giants such as PepsiCo (maker of Doritos), Simplot, ConAgra and McCain Foods.

Product trialling to date has centred on the humble spud - which is one of the highest-value crops and most difficult to manage – in the chip-loving US.

The company estimates 29 million addressable acres in the US and 60 million elsewhere. In other words, these tracts of land are in packages of at least 1000 acres (and often much more).

In the state of Washington, CropLogic has captured a 30% share of the 170,000 acres under spud cultivation. The company gained this foothold (and just over $2 million of existing revenue) via the recent acquisition of agronomy business, Professional Ag Services.

CropLogic expects to earn a $US35 per acre fee per annum for its deluxe service that includes a flying squad of agronomists to sort out any bacterial soft rot or root-knot nematode problems on the spot. If every large-scale farmer in the US were to adopt the service – which they won’t – CropLogic would be a $1bn a year business.

But penetrate 5% of this market and that’s a handy $50m-a-year business. And, with the average potato crop returning $US3657 an acre, $US35 is small beer if the service results in improved yields. Field testing to date suggests an average yield improvement of 6.25%, which would lift revenue by $US200,000 for every 1000 acres cultivated.

The company is also eyeing the cotton, corn wheat and soybean sectors as logical expansions and it also has a foothold in China.

CropLogic is currently doing the rounds for $5-6m at 20c apiece, ahead of a planned listing on August 31 under the proposed ASX code CLI. The offer closes next Friday (August 11).

In a sense, Crop Logic is an exposure to the agri-sector without the full cyclical and weather-related risks.

That’s because rain, hail or shine, the growers will always need to avail of the service.

Fluence Corporation (FLC) 81c

Speaking of water, about the only Australian aspect of the globalised, New York headquartered Fluence (formerly Emefcy) is it happens to be listed on the ASX.

But foreign provenance didn’t preclude us from owning Russell Crowe and the late John Clarke and we would claim Lorde if we could. So on these precedents, we shamelessly declare Fluence as an Aussie company taking on the world with its patented reverse-osmosis water purification technology.

Backed by US venture capitalist Richard Irving, predecessor Emefcy listed via the back door in late 2015, raising  $14m at 20c apiece in the process. Shareholders of the ASX-listed Emefcy recently approved the acquisition of US counterpart RWL Water, owned by billionaire entrepreneur Ronald Lauder.

An heir to the Estee Lauder cosmetics empire, Lauder has invested $US20m ($25m) in Fluence, over and above his scrip entitlement of just over 100m Fluence shares, for a 34% stake in the company.

Emefcy stock had done well since listing, racing to as high as $1.07 on management’s promise of selling low-maintenance purification units to users such as resorts and small towns. While Emefcy’s technology is more advanced, the more established RWL had 7000 plants globally in 70 countries and this calendar is expected to generate revenue of around $US90m.

Emefcy’s units based on membrane aerated biofilm reactors, which push the unpure water through the filters using 90% less energy than traditional reverse osmosis.

They require only low operating expenses and are suitable for off-grid locations. Emefcy has operating test sites in water-starved Israel and is gaining traction in China through eight partnerships.

Earlier, Emefcy cited an average set-up cost of $US277,000 for a 100 cubic metre a day plant, compared with around $US660,000 for a standard facility.

Fluence (former Emefcy) director Ross Haghighat says Chinese buyers want the packaged kit, rather than having to acquire bits and pieces to build a plant. “It’s like a Lego kit with all the critical components,” he says.

RWL’s products are more off the shelf, but it brings to the table a client base that includes Halliburton, Coca Cola, Pepsi, GM and Procter & Gamble. Fluence recently announced a deal to build a facility for one of Italy’s biggest chicken processors, Avimecc.

Recently, the $US13bn water treatment sector has undergone consolidation, with the bigger operators such as GE and Veolia taking out the mid-tier companies. Because of this, Fluence emerges as a leading middle-market player with limited competition in the off-grid market (facilities from 50,000 to 10m litres per day).

Currently, Fluence’s market cap nudges $200m.

In comparison, the New York listed desalination specialist Aqua Ventures – market cap $US900m - turned over $US110m and made a $US16m loss last year.

Tim Boreham edits The New Criterion tim.boreham@independentresearch.com.au

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 New Criterion: Testing investor appetite for cobalt

Tuesday, August 01, 2017

By Tim Boreham

Northern Cobalt (not yet listed)

The latest cobalt offering is testing ongoing investor appetite for the battery ingredient, in a climate in which investors are becoming more educated and more discerning about battery wonder metals and blue-sky promises.

We saw the same trend with lithium and graphite.

Currently, about 50 explorers claim to have a cobalt exposure, of which perhaps 20 are the real McCoy (they all claim to be, which doesn’t help).

Few – if any – are likely to be in production any time soon.

Northern Cobalt’s advantage is that its Wollogorang ground – in the northeast corner of the Northern Territory – contains an initial resource so it won’t be drilling holes merely on a promise and a prayer.

The company is seeking to raise $5m-$6m at 20c apiece, with one attached option for every two shares subscribed for.

Wollogorang includes the Stanton deposit, which helpfully was extensively drilled by CRA (now Rio Tinto) in the 1990s. CRA was looking for copper – a quest that proved unrequited – but it unearthed a parcel of “exotic metals”, including cobalt.

The resource (in the lower inferred category) is rated at 500,000 tonnes, grading 0.17% cobalt, 0.09% nickel and 0.11% copper.

While these cobalt grades are decent, the size alone won’t float anyone’s boat, but it’s the starting point for Northern Cobalt which cites an exploration target of up to 10 million tonnes in the same geology.

The IPO is the sternest test of the cobalt market since sulphide nickel-cobalt explorer Ardea Resources (ARL) listed in early February, having raised a tad over $5m. Shares in Ardea, which is drilling the Goongarrie nickel-cobalt project near Kalgoorlie, have zoomed 375% higher.

A spin off from mineral sands developer Broken Hill Prospecting, Cobalt Blue (COB), listed in late January on the back of its Thackaringa copper-cobalt ground near Broken Hill.

The macro story remains supportive: the cobalt price has risen more than three fold since early 2016 and the metal is forecast to be 20,000 tonnes in deficit this year.

While traded on the London Metals Exchange and thus transparent, the cobalt market amounts to only 123,000 tonnes a year. That’s about the amount of iron ore Rio Tinto scoops from the ground every three hours.

Of this output, the Democratic Republic of Congo accounts for 60% and the undemocratic African country is on the nose because of the use of child labour to mine the stuff.

Come to think of it, the troubled nation is in a gnarly political situation generally, with the United Nations threatening sanctions against parties who delay a proposed election scheduled for late 2017.

On the demand, seismic shifts are occurring with global miner Glencore this month struck a deal with a Chinese battery maker to supply 20,000t of cobalt, with end user Volkswagen underpinning the arrangement.

Volvo, meanwhile, has declared that all its vehicles will contain electric engines by 2019 (it’s a moot point whether this makes their cars any less boring).

Cobalt is not a rare metal – it’s ranked number 33 in abundance and is widely scattered in the earth’s crust.

The thing is, though, there aren’t any decent pure-play deposits, with most of the metal produced as a by-product of copper or nickel mining.

Northern Cobalt lists 17 selected cobalt peers, ranging in size from Hammer Metals (HMX, market valuation of $9m) to Robert Friedman’s Clean Teq Holdings (CLQ: $344m).

The latter’s Synerston project in NSW is rated as having 109,000t of contained cobalt, at a grade of 0.1% cobalt and 0.65% copper.

Despite Ardea’s runaway success, not all the cobalt wonder stories have been successful. Cobalt Blue shares are slightly underwater, as are shares in Golden Mile (G88) which listed in June. The latter has started drilling at its WA Quicksilver nickel-cobalt project, which recorded encouraging grades under previous management.

In the deep dark DRC, Tiger Resources (TGR, market cap $98m) produces cobalt as a by-product of its Kopi copper sulphide mine.

Meanwhile, Northern Cobalt plans to hop into it straight away with a 230 hole, 20,000 metre drilling program before the end of the year. So investors who brave the offering ahead of the August 7 close won’t have to wait long to find out whether their punt pays off.

Whitebark Energy (WBE) 0.07c

The dawning of the battery era comes at a time when oil and coal are cheaper they’ve been for years. The resulting cobalt, lithium and graphite craze is thus being driven more by sentiment (environmental concerns) than supply and demand economics.

But did the Stone Age end because the Flintstones ran out of stones?

Like it or not, slimy hydrocarbons will remain dominant in the energy mix and that means fruitful rewards for those who find the stuff. As the reinvented Whitebark points out, this quest has never been cheaper because of lower drill rig costs and improved extraction techniques.

In its former guise as Transerv Energy, Whitebark missed on buying the producing Waitsia gas field from Origin Energy, which decided to retain the asset and then hive it off with other projects (this IPO still hasn’t happened).

Transerv and partner Berkshire Hathaway (of Warren Buffet fame) had put up $160m, so they weren’t mucking around.

After licking its wounds, Transerv changed it name to Whitebark and outlaid $5m for a 20% interest in a Point Loma Resources’ producing field in Alberta, Canada.

Point Loma chugs out 900 barrels of oil equivalent per day (boepd) across 65 wells, but extension drilling should increase this output to around 2000 boepd.

Whitebark chief David Messina says while Canada is a tad nippy there’s a lot for an oil producer to like about the place.

Costs (such as drilling rigs) are a fraction of those in Australia and the approval process is much faster. Pipelines conveniently criss-cross the tenement maps like a nasty case of varicose veins.

 “It’s not going to be a ten-bagger but it’s not going to go backwards,” Messina says of the asset.

What’s of more speculative interest is the Xanadu venture in the Perth basin, in which Whitebark has acquired a 15% interest. The hole, which will target a 160 million barrel prospective resource, will start offshore but meander horizontally to the target zone just offshore.

With a puny market cap of $5m Whitebark is trading at close to half its cash backing. Drilling at Xanadu starts in September and we guess there’s little downside if the hole is a duster.

Whitebark also has an interest in the Warro gas field in the onshore bit of the Perth Basin, in joint venture with Alcoa (which accounts for 23% of WA’s gas consumption).

The trouble is the ‘tight’ gas required hydraulic fracturing to extract, with the controversial practice subject to a moratorium imposed by the incoming Labor administration.

The ban is subject to a review and presumably it’s temporary, in which case the sky’s the frackin’ limit.

Tim Boreham edits The New Criterion tim.boreham@independentresearch.com.au

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 New Criterion: Stocks exposed to the military machine

Tuesday, July 25, 2017

By Tim Boreham

Xtek (XTE) 50c

For a company that promotes itself as a homeland security specialist, life should be rosy as authorities spend up big on anything from protective bollards to bazookas.

As if we don’t need reminding, the urgency of the threat has been highlighted by the federal government’s decision to create an uber national security ministry.

But for the Queanbeyan-based Xtek, sustained profitability has proved elusive over its 12 years as a listed company.

“The problem with defence (procurement) is that it’s feast or famine,’’ says Xtek chief Philippe Odouard. “A small company like us spend a lot of time promoting a product with a pipeline of several years.”

After years of sporadic orders for its products that include armour plating, helmets, bomb-disposal equipment, Xtek has landed the big one: a $100m order from the Department of Defence to supply and maintain a fleet of SUAS (small unmanned aerial systems, or drones).

Put in context, Xtek turned over a measly $3m last year.

Xtek is the exclusive local agent for AeroEnvironment of the US, the world’s biggest drone maker.

Xtek, however, is not just clipping the ticket on AeroEnvironment’s machines. More than half of the value of the order consists of ongoing servicing of the units (which, while sturdy can take a battering in the field), training the users and providing software that enhances the drones’ aerial pics.

As a guide to how long it’s taken to get the military on side, Xtek was involved with trialling unmanned vehicles for the navy a decade ago.

US military heavies are also testing Xtek’s ability to make stronger but lighter helmets and armour with its curing process called XTclave. The US Army has carried out ‘foreign comparative testing’’ on Xtek’s armour plating, which determines whether kit is better and no dearer than that of a preferred apple pie American supplier.

A meeting is scheduled for October but according to Odouard “they are quite happy with the results.”

The Marines have also bought $800,000 of helmets made with a hydro-clave process that involves the headwear being moulded with high-pressure oil.

Xtek’s belated progress hasn’t gone unnoticed by the market, with the stock bounding 38% (to a high of 55c) after the June 1 drone announcement.

The company has also guided to $9m of revenue for 2016-17, building to $11-20m in the current year.

Not to waste the opportunity, Xtek on June 28 launched a $3m placement and a $500,000 share purchase plan at 46c apiece, a then 16% discount to the prevailing price. “We have started communicating this to the market and this has changed the profile of the company to a production story,’’ Odouard says.

Odouard previously headed the carbon composities specialist Quickstep Holdings (QHL). A supplier of parts for the F18 joint strike fighter and Hercules transport planes, Quickstep has experienced a similar snail-like trajectory.

Under Odouard, Xtek has sharpened its focus to military contracts and has shut down a cash-sapping retailing business that’s old hunting rifles and revolvers.

“It was eating a lot of cash in no-one really understood properly.”

Indeed: two good reasons to exit a business.

Alexium International (AJX) 55c

Along with Quickstep, Xtek cites ship builder Austal (ASB), marine propulsion outfit Veem (VEE), weaponry and aerospace play Electro Optic Systems (EOS) and drone surveillance outfit D13 (D13) as listed homeland security peers.

We’ll also throw in the Perth based innovator in flame-retardant (FR) materials, which is targeting the US military complex in relation to uniforms treated with its non-toxic brew that changes the surface properties of materials.

But Alexium’s recent revenue traction stems from its involvement in a ‘softer’ market: comfy mattresses and pillows.

As with so many tech juniors, Alexium’s progress has been a slow burn (pardon the pun) since the stock back door listed in 2010 at 20c apiece. 

Originally, investor excitement centred on Alexium’s ambition to supply the US military with uniform retardant.

“Progress is always slow to break into the defence sector unless there is an immediate unmet need ,’’ says Alexium chairman Gavin Rezos. “The reason is the size and value of the orders and the supply chain changes warrant extensive testing to ensure best product, cost effectiveness and robust supply chain.”

In the meantime, Alexium has targeted a number of industrial markets, including a deal with an unnamed large mattresses maker.

There’s nothing new about FR treatments. The trouble is, most of them are based on highly toxic bromides, blamed for illnesses including thyroid cancer and memory loss. They’ve been banned (or are the process of being outlawed) in most western countries.

Alexium recently reported record shipments of Alexicool in the month of June of 90,000 pounds, more than five times the run rate in January. 

Alexium cites the FR market as a $US7bn global opportunity. Other applications include transportation (such as aircraft seats), decorative fabrics and outdoor fabrics. Another is fireproofing electric components, such as circuit boards.

Another use is coating technology for building materials, including cladding. If anyone doubts the potential there, look no further than London’s cladding-related Grenfell Tower fire that killed at least 79 people.

In the meantime, Alexium maintains the US military market is a “strong focus”, especially given President Trump’s intent to boost the number of battle-ready troops.

Rezos says the US Department of Defence is after a more cost effective and non-toxic retardant on nylon-cotton uniforms to replace the existing cotton-rayon garb, for use by all staff rather than just combat troops.

Alexium has been working with Natick (the US Army Research Center) and the US Marines, along with a prime contractor that currently supplies the uniforms. 

Testing to date shows Alexium’s FR meets their standards and is cost effective.

Rezos says: “once we sell to US Army and US Marines, the other US armed forces and 22 other militaries (such as NATO) will be able to buy without the need for the same level of testing.”

In the March quarter, Alexium reported revenue of $6.47m, cash outgoings of $5.36m and a cash balance of $6.4m.

The June quarter report should show the company in a cash-flow neutral position (on a run-rate basis).

While Alexium shares have rebounded from their May low of 47c after the June update, investors in the main have been snoozing. But if the company gets its intended Nasdaq listing away, a wider audience might take a different view.

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 New Criterion: All things that glisten are not silver

Tuesday, July 18, 2017

By Tim Boreham

In what’s not so much a case of Hi Ho Silver as “oh no!” silver, the grey metal has slumped on global markets after a couple of largely unexplained ‘flash crashes’ including a 7% dumping on July 7.

Not since the Hunt Brothers cornered the silver market in the 1970s has there been such action in the oft-overlooked metal. The sell-off was attributed, in part, to a computer glitch and also to hedge fund activity (the latter being shorthand for no-one has a clue).

The sell-off comes at an inconvenient juncture for a handful of ASX-listed resource juniors who are seeking to further silver projects (typically associated with lead and zinc) to feasibility or construction phase.

Like gold, silver is a store of value and historically has followed gold’s movements. But rather like Dannii Minogue, silver has lived in the shadow of its better-known ‘sister’.

Like Dannii, silver is versatile: it can’t sing or judge talent shows but it has numerous industrial uses because of its conductive, anti-corrosive and antibacterial properties.

The silver price has slumped 8% over the last month to around $US15.80 an ounce ($20.70/oz.), taking the decline over the last 12 months to more than 20%.

The gold price has retreated 4% over the last month and 10.5% over the last year, to around $US1210/oz. ($1588/oz.).

Historically, gold has traded on a ratio of 27 times to silver (in other words, one Kylie is worth 27 Danniis).

Currently, that ratio has blown out to 76 times. So that means ‘Dannii’ should be worth almost three times as much as its current price in relative terms – or that ‘Kylie’ is overvalued.

We’ll never know for sure.

In the case of both gold and silver, investors have tired of the theme of precious metals as a hedge against geopolitical risk and the inflationary hazards of central banks printing too much money.

Not even North Korea’s missile misbehaviour moved the metals.

With silver, there’s a sharper focus on ‘real’ supply and demand, given the metal’s myriad industrial uses.

The Silver Institute estimated a 20 million ounce physical global silver deficit in 2016 – 1.027bn ounces of demand compared with 1.007bn ounces of production – the fourth year of a shortfall.

Jewellery demand in China and India remains strong, as does demand for silver in electronics (which should put silver in the wonder metal category as graphite or lithium).

Locally, the undisputed leading silver producer is the Cannington mine, once owned by BHP Billiton and now by South32 (S32). With annual output of 16 million ounces, it lays claim to being the largest and lowest cost silver-lead mine in the world.

There’s daylight between Cannington and a group of putative producers, who are positioning themselves with some bold product claims.

Investigator Resources (IVR) claims its Paris ground in South Australia is the “best underdeveloped silver project in Australia”, even if it is far from a decent boulangerie.

Silver Mines (SVL) asserts its Bowdens project near Mudgee in NSW is “one of the largest undeveloped silver deposits in Australia and one of the largest globally.”

Not to be outdone, Moreton Resources (MRV) chirps that its Granite Belt project near Texas in south-east Queensland is the “purest near term leverage to silver on the ASX.”

Bowdens, discovered by Rio Tinto predecessor CRA in 1989, is subject to a soon-to-be-completed feasibility study due by the end of calendar 2017.

Bowdens currently is a 182 million ounce resource (silver equivalent, allowing for lead and zinc content) grading an average 64 grams a tonne. The project initially has been costed at $150-200m, based on a two million tonnes a year operation over a minimum 17 years.

Bowdens has changed hands more times than a Captain Cook 50c coin, having been owned by CRA, Silver Standard, Golden Shamrock and Kingsgate Consolidated. Last year, Silver Mines acquired the asset from the troubled Kingsgate for a knock-down $25m.

Similarly, Moreton Resources is testing the theory that the first one or two mine owners are never the ones to turn a quid.

Moreton’s Granite Belt project in Queensland is based around the Twin Hills mine, which produced 1.5 million ounces under two owners – Macmin Silver and Alcyone Resources. Sadly, the mine got the better of both companies because of processing issues, “overly ambitious” targets (Moreton’s words) and two one-in-100-year storms (which we guess makes them one-in-50-year events).

Moreton stresses the issues have nothing to do with the actual ore body.

The company is awaiting Qld government mining approval – which it believes to be imminent. Within 12 weeks of this assent, Moreton plans to re-start the mine as a 90,000 oz. a month producer. This will be in a staged process, starting with exploiting silver-enriched ponds and in-situ heap leaches and stockpiles.

To realise the dream, Moreton is in the throes of a fully underwritten $4.66m rights issue, at 1.1c apiece.

The project assumes an average $A silver price of $24.25/oz. over eight years, with all-inclusive costs of $14/oz.

Elks remains confident of silver price in in the “high 20s”, or the high 30s in $A terms. “I’m more bullish on silver than gold,” he says. “The fundamentals of silver are sound because it is a consumable metal.”

For Investigator, Paris beckons as a 42 million ounce resource (averaging 139 g/t), with 55,000t of contained lead thrown in.

Adding some ooh-la-la to the Paris story, Investigator is backed by Chinese giant CITIC, which has an 11% cornerstone stake.

With market valuations of $15m (Investigator), $28m (Moreton) and $47m (Silver Mines), the trio aren’t exactly priced for a Silvereldorado.

But if the silver price doesn’t take inspiration from Dannii’s career hiccoughs and bounce back from the latest setback, capital will dry up faster than an X Factor Australia talent pool.

Even before the silver slump, IPO candidate Manuka Resources deciding to access debt markets rather than pursue a $12.5m equity raising.

Manuka acquired the Wonawinta Silver Mine in NSW from Cobar Consolidated, which went into liquidation in March 2014.

Further afield, White Rock Minerals (WRM) recently released a maiden resource for its Red Mountain zinc-silver project in Trump-loving Alaska. Arguably, the greater driver of value is the company’s Mt Carrington gold project in NSW (this company is covered by IIR).

And Santana Minerals (SMI) reports encouraging grades at its Cuitaboca project in Sinaloa, Mexico. Chaired by ubiquitous industry figure Norm Seckold, Santana is earning an 80% interest in the project by funding the drilling program.

Mexico is the world’s biggest silver producer, accounting for 20% of global output. So at the very least, Santana is hunting in silver elephant country.

All analysis and commentary as at 10 July 2017.

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 New Criterion: technology stocks

Tuesday, July 11, 2017

By Tim Boreham

FASTBRICK ROBOTICS (FBR) 14.5c

The robotics innovator is on the noblest of human quests: to eliminate the scourge of brickie’s crack from building sites globally.

Come to think of it, if Fastbrick succeeds in automating the ancient art there will be no brickies at all to wolf whistle at eligible female passers-by, or to down hods when the wet bulb temperature hits 31.5 degrees.

The Perth-based Fastbrick’s endeavours enjoyed an enormous boost this month, with US machinery giant Caterpillar signing a memorandum of understanding after a year of talks between the parties.

The deal, which also involved Caterpillar signing up for $US2m ($2.6m) Fastbrick shares in a placement at 10c apiece, sent Fastbrick shares soaring 50% on enormous volumes.

The idea is that Caterpillar will make and distribute Fastbrick’s Hadrian X machines, which are capable of laying 1000 bricks and hour to an accuracy of half a millimetre. A good brickie at full clip can manage around 200 an hour.

Caterpillar would pay royalties – possibly on a per-brick basis – to Fastbrick.

“They bring 90 years of machinery manufacturing know-how to the table,’’ says chuffed Fastbrick chief Mike Pivac. Like other machinery makers, Caterpillar has also invested heavily in 3D robotics technology over the last decade.

Hadrian X is Fastbrick’s second iteration of an automated bricklaying gizmo and is in factory testing phase ahead of field testing early next year. The Hadrians, which are expected to sell for around $2m, are the size of a garbage truck with a 30 metre robotic arm.

Your columnist’s earlier aspersions on hard working brickies aside, bricklaying is an arduous trade carried out in dangerous conditions. With pampered millennials not exactly queing to learn the craft, brickies are in short supply.

Initially at least, Hadrians would be used under the guidance of brickies who would still use their skills without having to do the dangerous manual stuff.

But the units are quite capable of working alone and if autonomous vehicles take off they may even drive themselves to the site.

Having backdoor listed in late 2015 after raising $5.75m at 2c a share, Fastbrick looks like being the runaway techie-speccie story of 2017-18.

It’s worth remembering the MOU is just that – an MOU –and both parties can withdraw at any time. But the fact that Caterpillar is bothering with a small investment relative to its $US64bn market cap shows the boys from Illinois are serious.

“These guys don’t have failure in their DNA,” Pivac says.

Fastbrick has attracted the institutional support of Regal Funds Management, which holds 10% after taking half of a stake divested by Pengana Capital and originally owned by Hunter Hall. Pengana acquired Hunter Hall after Hunter chief fundie Peter Hall’s exit, but Pengana’s mandate only covers investing in revenue-generating microcaps.

The ASX listed Brickworks, a foundation shareholder since 2005, retains 2.5%.

Caterpillar has an option to subscribe for $US8m more shares, but at 20c apiece and subject to investor approval.

Should Fastbrick need more cash – which it doesn’t – there are plenty of brokers and instos scrambling to throw some its way.

In addition to its 764m ordinary shares on issue, Fastbrick has 77.6m options on issue. Most of the options have a 2c strike price so are heavily in the money.

Key management figures also hold 503.7m performance shares, which evenly vest when Hadrian builds a three-bedroom, two-bathroom home; when Hadrian completes it stent house under a commercial contract; and when the company achieves $10m of annual revenue.

So if Fastbrick succeeds, there will be far more shares on issue to dilute existing holders.

It’s possible that Caterpillar will acquire Fastbrick – now valued at around $100m – outright. But the history of innovation shows the minnows are much better at inventing stuff than the multinationals.

1st GROUP (1ST) 2.7c

First Group chief Klaus Bartosch says the health services portal’s share price “does not remotely reflect our performance.”

You’re no Robinson Crusoe there, Klaus. But he’s got a point given the group’s subscription based revenue has been building, with the shares languishing well below their June 2015 IPO price of 35c.

While ostensibly oversubscribed, the raising turned into a damp squib after one institution pulled out at the last moment, causing a conga line of others to follow.

Having targeted $5m to $12m, the backers scrambled together $5.3m.

But 1st Group is not exactly friendless: the Gandels (Australia’s fifth richest family) own 15%, having bought into a subsequent $2.9m raise last July.

John Plummer, who founded and then sold the recruiter Chandler McLeod, accounts for 30%.

1st Group is an online search and appointment service for health and beauty care professionals. A similar product, PetYeti, provides a similar service for vet practices and has 500 practices signed up.

Blue-chip customers include Primary Healthcare, Ramsay Healthcare, the Pacific Smiles dental chain, Bupa Optical and Australian Unity.

In December, the company inked a deal with Alphapharm, a subsidiary of global drug company Mylan, to provide online bookings through 320 chemists and 90 retail stores (Priceline).

Customers will be able to book services such as flu shots, diabetes checks and make-up appointments. All up, the company claims a 50% share of the pharmacy market and 25% of the optometry market.

But there’s another reason for the share price malaise: “We haven’t grown as fast as we would have liked in the early days. Stuff took longer than expected.”

You’re no Robinson Crusoe there either, Klaus, but “stuff” is happening.

The company this month reported monthly recurring revenue (MRR) of $261,000 for the June quarter, up 20% from the March quarter tally of $218,000.

MRR measures recurring subscription sales and excludes fees from products such as the company’s appointments reminder app, EasyRecalls.

Bartosch says there’s a time lag of some months between customers deploying the portal and revenue flowing through.

As with so many other ambitious minnows, 1ST Group faces the dilemma of requiring more funds on the back of a trashed share price. 

But at least it has deep pockets to turn to and that could mean the difference between surviving and thriving or withering away like a dog-eared waiting room gossip mag.

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 New Criterion: drug development and computer viruses

Tuesday, July 04, 2017

Redflex (RDF) 41c

Just as the traffic camera operator looked to be “moving forward” – obeying all speed limits and red lights of course – along comes another snafu for the strife-prone company.

This time Redflex is in the poo in its home state of Victoria, after close to 100 of its cameras were afflicted with the WannaCry ransomware virus. The glitch forced Spring Street to cancel or suspend about 10,000 fines and we all know governments love to forego such revenue.

Tetchy Victorian police minister Lisa Neville – who alleges Redflex was tardy in reporting the virus – has ordered a full review, which in political speak means heads will roll other than the minister’s.

Redflex has not commented on the issue and – more pertinently – has not said anything to the ASX. Presumably it’s not material.

The Vic tech glitch comes after a string of good news for Redflex, which from 2013 was embroiled in a US ‘cash for cameras’ bribery scandal that saw the jailing of the company’s US chief, Karen Finley.

In December last year Redflex struck a non-prosecution agreement with the US Department of Justice: no fine, $US100, 000 restitution to Ohio’s City of Columbus and an unquantified payment to the City of Chicago (where most of the shenanigans happened).

Redflex then settled a civil action in Chicago for $US20m, $US10m by December this year and the rest by 2023.   The headline claim was for $US377m.

The City of Chicago then restored Redflex as a “responsible business” able to bid for new contracts. In the company’s words, this reflected “extraordinary changes” to the company’s leadership, culture and risk and compliance practices over the last four years.

In further good tidings, NSW Roads & Maritime Services extended Redflex’s mobile roadside enforcement contract by one year, for expected revenue of $13m over this period.

And the eyes of Irish speedsters are not smiling after the company secured a six-year contract with the GoSafe enforcement arm, worth $8.5m over six years.

The US remains a crucial geography for Redflex, with The Americas (mainly the US) delivering 56% of revenue in the last half. Unlike elsewhere, Redflex operates a “build own operate’ model which involves running the programs on a “per citation” basis.

As you could imagine, that goes down hank with motoring lobby groups and the more populist politicians. But the model can be lucrative, albeit requiring more upfront capital.

“Our contract renewal rate remains strong and the terminations are generally the result of the cessation of photo enforcement in a particular locality, not losses to our competitors,” Redflex says.

In a business update in mid May, Redflex flagged full-year ebitda of $10-12m, compared with last year’s $25.6m. Redflex generated $6.98m in the first half, on revenue of $62m. A $32m pre-tax loss reflected the $25.9m discounted cost of the Chicago city settlement.

Over its 20-year listed life, Redflex has severely tested the patience of investors.

It’s proved too much for long-term holder Thorney Investments, which held a circa 7% stake but has moved below the 5% substantial level.

Redflex shares peaked at $3.35 in November 2007 but now trade well below net tangible asset backing of 53c a share.

Redflex’s balance sheet and cash flow are fine, but the company needs to show it can drive consistently in the fast lane to regain the market’s battered confidence.

Innate Immunotherapeutics (IIL) 6.1c

Innate chief Simon Wilkinson put it succinctly after the multiple sclerosis developer’s phase-two trial bombed out, spurring a share sell off that wiped off 90% of the company’s value in a matter of minutes.

“Clearly it’s been a very bad day at the office for myself and my staff,” he said, adding that he was distressed about the impact on the advanced (SPSM) MS patients involved in the trial.

Not for the first time, the shock result highlights the high stakes of big-ticket drug trials that, in the case of ASX listed developers, have a tendency to fall short.

MS is a disabling condition of the nervous system, with 60% of sufferers advancing to the SPSM stage.

Globally, MS drug development has proved especially tricky and there is no current approved treatment for SPMS.

To management’s credit, the company made little attempt to spin the results as a temporary setback.  It baldly admits the trial drug, MIS416, showed “no clinically meaningful or statistically significant differences in measures of neuromuscular function or patient-reported outcomes.”

The trial – at five sites in Australia and NZ – enrolled 93 patients, 62 of which were randomly (and evenly) assigned the drug or a saline placebo.

Among the group receiving the drug, 17 patients (27%) discontinued treatment for various reasons – a high drop out rate even for a cohort with an advanced disease.

As is the norm, the company plans to parse the data to check if the drug was more effective with a particular sub-group of patients. It is also analysing the treatment effect among the “per protocol” patients, that is, the ones who completed at least 75% of the required study visits. But “there is nothing to suggest at this time that this analysis will result in a favourable conclusion.”

While there are never any guarantees with clinical trials, the results are baffling because MIS416 has been made available to needy patients for the last eight years, under a compassionate use exemption that allows a non-approved drug to be approved.

These patients had reported benefits, such as reduced fatigue and pain or improved hand movement and bowel control  

Only on June 21 received FDA approval for IND application, which would have allowed the company and the regulator to co-operate on the design of a phase-three trial. But without some radically improved data emerging from the clinical review, this one is going nowhere.

Bizarrely, the NZ-based Innate was an investment of choice for a group of White House insiders: Innate’s (biggest) 17% shareholder (and director) Chris Collins is a New York congressman who sits on the health subcommittee of the House Energy and Commerce committee. He is also Trump’s congressional liaison.

Tom Price, Trump’s pick as health secretary, also owns shares acquired when he was a member of the House ways and means sub committee.

Suffice to say, the smart money on Capitol Hill now looks not so clever.

"For those that invested in Innate including me, we all were sophisticated investors who were aware of the inherent risk," says Collins .

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 New Criterion: Syrah Resources

Tuesday, June 27, 2017

By Tim Boreham

Syrah Resources (SYR) $2.69

After five years of speculative hype, the ASX-listed graphite sector is about to come of age with sector big daddy - Syrah - poised to start production at its massive Balama mine in Mozambique.

A 1.2 billion tonne deposit, Balama will be the world’s biggest producer of the grey metal that has myriad industrial uses, most notably in lithium-ion batteries (where it forms the anode).

What’s not to like? Well, the fear is that the mine might be just too successful, flooding a market that – while loaded with potential – is still quite small and linked to steel production levels.

As is the norm, Syrah shares have lost value the closer the $US200m fully financed mine gets to production. The shares have lost 60% over the last year, with 18% of the register short sold compared with 4% 12 months ago. That makes Syrah the second biggest shorted stock, behind only lithium-hopeful Orocobre.

It doesn’t help that Viceroy Resources, the mysterious US investment firm that later dumped on the sandalwood stock Quintis, ascribed a 70c ‘target price’ to Syrah in a scathing report last December.

Syrah reports the mine is 80% complete – and it has the aerial pics to prove it – with first production slated for August.

In the first year, Syrah plans to produce 140,000 to 160,000 tonnes of the stuff, rising to 250,000 to 300,000 tonnes in year two.

Put in context, Syrah cites the market for natural graphite last year at 950,000 tonnes, including 650,000t for flake graphite, plus a further 1.4mt million for the synthetic material (made from petroleum coke and tar pitch).

(Other figures put the natural graphite market at 1.2mt for the natural stuff, half of it flake).

On Syrah’s own reckoning, it will have a 40% share of the flake graphite market by 2020, “driven almost solely by batteries for consumer electronics, electric cars and power storage.”

In a recent report on both lithium and graphite, UBS says graphite oversupply concerns are a “legitimate fear”. Synthetic graphite will also service some of the expected increased demand and will “continue to compete on cost and performance.”

But the firm also cautions the potential new supply might be exaggerated, because producing high-quality battery material requires “skillful execution”.

The trouble in appraising the supply-demand outlook is that graphite is a less-than-transparent market and the price received depends on the size and quality of the flake and the end use.

For a while, the graphite players were playing a marketing war based on the size of the flake, with the term ‘jumbo’ and ‘super jumbo’ entering the industry lexicon.

“To a point, size is a furphy, it’s really about purity in the battery market,’’ says one graphite watcher. “When it comes to producing the spherical material (used in batteries), the flake has to be ground down anyway.”

Syrah cites a going rate of $US575-1100/t  for the flake material and $US2800-4000 for the value added spherical stuff. No prizes for guessing what market Syrah is targeting.

At Balama, Syrah enjoys not just a capacious deposit but overall high quality as well. The 114mt of reserves contains 186mt of contained graphite at an average grade of 16.6%, close to double the average grade for current global producers.

Syrah also has no shortage of buyers, having signed an offtake agreement (among others) with the Shenzen-based BTR New Energy Materials, the world’s biggest anode battery maker.

With some finesse, Syrah can use its unusual position of market dominance to avoid a market glut, especially for the lower-grade material. Management is certainly aware of the dangers.

Arguably, the greater risk is for the fast followers with projects at the financing stage.

The sector has already undergone a shakeout, with the opportunists moving on to the next hot story (most likely lithium or cobalt).

As our observer says: ““Everyone jumped on the bandwagon at first but the sheep have well and truly been separated from the goats with only the serious players left.”

The two other advanced ASX plays – Magnis Resources (MNS, 51c) and Kibaran Resources (KNL, 18c) – will be watching the pioneering Syrah with interest.

Kibaran has completed a bankable feasibility study on its Epanko project in Tanzania, predicated on output of 60,000t over an 18-year life.

Also in Tanzania, Magnis is in financing stages for its Nachu project. Costed at $US270m, Nachu has been scoped at a 240,000 tpa producer.

Kibaran and Magnis shares have fallen 30% and 45% respectively over the last year as well.

Traditionally, investors in junior resources prefer the early-stage stories because blue sky is more exciting than the drudgery of actually commissioning a mine. The games of short sellers aside, valuations slide when the first sod is ceremonially turned.

Over the next 12 months, we’ll get some feel for whether Syrah is worth 70c a share, or the $7.45/sh valuation ascribed by Credit Suisse in a report on the stock this week.

The firm, by the way, forecasts Syrah to generate $84m of ebitda in 2017-18, rising to $US249m in 2018-19.

And investors will enjoy more of the goodies because the Mozambique government has dropped plans for a super resource profit tax, a template nicked from Julia (remember her?) Gillard.

Alderan Resources (AL8) 44c

Golden Mile Resources (G88) 18c

We wouldn’t describe demand for new junior resource listings as effervescent, but this duo has made it to the starting line, despite June being more of a time to shed dud scrip rather than take on new speccie plays.

There’s a Syrah segue to Alderan, in that Syrah’s founding chairman, Tom Eadie, is on the board and former Syrah MD Tolga Kumova holds 13% via a family vehicle.

But there’s not a flake of the grey stuff in sight: Alderan’s target is a primarily porphyry copper ground in Utah, which has a rich history of both mining and Mormonism.

Alderan’s Frisco project includes mineralisation of both copper-gold-silver and copper-molybdenum-gold, so there’s a few marketing options there should commodity fashions change.

Golden Mile, meanwhile, is also hedging its bets as a multi-commodity play but its headline investor appeal lies with that other battery ingredient of the moment, cobalt.

“It’s no surprise that when people who have got cobalt in a project then they are talking about cobalt,’’ says CEO Tim Putt.

Strictly speaking, there are few pure-play cobalt deposits globally, with the metal produced as a by-product of copper or nickel production. 

Golden Mile’s Quicksilver nickel-cobalt ground is just down the road from laterite nickel producer Ravensthorpe, which just happens to be the biggest local cobalt producer.

Putt says he was looking at copper-cobalt projects in the Congo in the early 2000s, long before cobalt was sexy. Even then, he says, the cobalt credits were valuable enough to carry many a project.

Golden Mile raised $4.5m at 20c apiece. While oversubscribed, the shares have ebbed below the issue price since listing last Monday.

Sigh!

Not to be confused with the doomed Star Wars planet Alderaan, Alderan raised $8.5m, also at 20c but the stock has more than doubled.

May the force be with you!

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 New Criterion: Two stocks to watch

Tuesday, June 20, 2017

By Tim Boreham

From thwarting terrorist attacks to helping divorcees snare an alimony payment, small-cap Veriluma has it covered. In the meantime, internet-of-things champion, CCP, will ensure the milk in the fridge doesn’t go off.

VERILUMA (VRI) 2.6c

Just as we got used to the notion of big data analysis, along comes a tool that doesn’t even need hard numbers to analyse and predict a particular situation.

Sadly, Veriluma – a leader in the emerging art of prescriptive analytics – isn’t offering up this weekend’s winning Lotto numbers.

But its black box IP may be able to predict when and where the next terrorist attack is likely to happen, or the likelihood of North Korea firing off a ballistic missile that actually works.

In essence, says Veriluma chief Elizabeth Whitelock, prescriptive analytics combines number crunching with gut feeling based on ‘softer’ inputs.

Or, in a more Donald Rumsfeld-esque vein, “it takes known factors and associated unknown factors and applies an algorithmic framework to reach conclusions about a stated hypothesis.’

Veriluma, which listed last September via the shell of Parmelia Resources, is doing hard-core but secret squirrel work for local and US defence and national security agencies.

That’s not surprising, because the IP evolved out of the old Commonwealth Research Centre and has been refined by the Department of Defence Intelligence Organisation for war games and scenario modelling.

Veriluma’s most likely revenue source is from a Department of Defence intelligence project involving up to 1000 staff.

We can’t say too much.

Come to think of it, we don’t know too much.

In the US, Veriluma has anti-money laundering and counter-terrorism and has forged a link with ex-gumshoe John Cassara, an expert in both these fields.

In business circles, Veriluma has been used to assess the chance of an acquisition based not just on financial but ‘soft’ aspects, such as culture and reputation.

Peer-to-peer lender Marketlend uses Veriluma’s analytics to assess credit risk not just on the usual measures such as the borrower’s age and income, but inputs such as the Reserve Bank’s economic commentary.

New Criterion is most intrigued by Veriluma’s pending launch of Legal Logix, an app-based tool for divorcing couples to assess the quantum and likely success of a settlement.

“It creates a brief around your situation you can take into a courtroom or to your lawyer,’’ she says.

Whitelock says 37% of aspiring divorcees represent themselves. With 50,000 divorces annually, that makes about 18,000 people who have a fool for their client.

In theory, Legal Logix has the potential to replace lawyers and their fat hourly fees, but in reality, the robotic tool is likely to compliment their offerings or allow them to take on more cases.

Veriluma has also attracted the attention of Gilbert + Tobin, which is trialling the software as a way to provide complex corporate advice earlier. The company expects to know this quarter whether the trial will lead to ongoing revenue.

“The goal of the trial is to take one scenario and distil it into something they can use again and again,’’ Whitelock says.

“Some lawyers will find it difficult to concede their hourly rate will be diminished but the reality is the world is moving this way.”

With the divorce app costing up to $250 for the user, it’s not going to move the revenue dial in the short term.

Management envisages that government bodies or large companies will pay subscription fees to a cloud-based platform, perhaps with an annual licence fee.

Veriluma’s shares March quarter statement recorded nil revenue, operating outflows of $585,000 and cash of $810,000.

While the company will bank $500,000 by selling a residual mining tenement, we don’t need prescriptive analytics to know the company will need to raise capital at some stage.

CCP Technologies (CT1) 2c

When Terry the cook from Fawlty Towers said “what the eye don’t see the chef gets away with”, he was oblivious to the enormous business risks posed by food contamination.

For any catering establishment other than Basil’s, regulating and monitoring fridge and freezer temperatures should be taken very seriously indeed.

Enter CCP, as in ‘critical control points’, which has launched an online monitoring system for the food industry. Subscribers are alerted via their phones about temperature variances – in time to avoid a mass outbreak of giardia.

CCP’s IP was devised by Anthony Rowley, a former Telstra internet heavy hitter and was first tested on export tuna.

Rowley says a fridge might record three degrees at closing time and three degrees in the morning. “But if the fridge goes off overnight they will never know and it is in breach of safety rules.”

Food safety is one aspect and efficiency is another: Rowley says cafes average three to four fridges, with cooling accounting for 15% of global electricity usage.

In effect, CCP is another player in the Internet of Things (IoT) sphere: the interconnectivity of devices with equipment for monitoring and business optimisation purposes.

CCP can also improve business efficiency and predict the failure of key equipment.

In the case of Meals on Wheels, this meant avoiding the breakdown of a compressor and several dozen queasy senior citizens.

Recently, CCP cracked it lucky in Las Vegas by winning a monitoring deal with the Stratosphere Casino, home of the Top of the World restaurant.

This establishment won the 2016 Best of Las Vegas Gold Award for fine dining – and one doesn’t get such a gong for serving dodgy prawns.

In all there are 2400 restaurants and one million potential monitoring points in the buffet-loving town, which has led CCP to create a permanent sales presence there.

In its biggest deal to date, CCP snared a $US180,000 ($240,000) deal with a US food consulting firm.

CCP chalked up a mere $70,000 of revenue in the March quarter. Cash outflows were $500,000 and cash on hand stood at $1.07m, with expected current-quarter burn of $620,000.

Sensing its financials were getting tight, CCP this month raised $518,000 in an institutional placement and is tapping a further $850,000 in a rights offer at 1.7c apiece.

CCP doesn’t charge an upfront fee, but levies clients $15 per month per monitoring point, over a two-year contract. 

On our back-of-the-serviette sums, CCP needs about 20,000 monitoring points to break even - it currently has only 800. But, as CCP did not start selling in earnest until January, the new customer run rate should improve dramatically.

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstance there have been any inducements or like made by the company mentioned to either IIR or the Author. The views here independent and has no nexus to IIR’s core research offering (www.independentresearch.com.au). 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 New Criterion: Oliver's Real Food and Eagle Health

Tuesday, June 13, 2017

By Tim Boreham

Oliver's Real Food (not yet listed)

The health food evangelist behind this impending listing faces a (literally) heavyweight task: weaning truckies and travelling families at roadside stops from fried dim sims to chia pods, pita pockets and green beans served in a French-fries style packet.

Adopting the ‘build it and they will come’ ethos, Oliver’s founder Jason Gunn opened his first pit stop at Wyong North in NSW in 2005. The local tourist bureau had vacated the premises, but the head lease was assigned to McDonald’s who – naturally – stipulated that a rival fast food chain could not fill the void.

Perusing the document, Gunn discovered that a fast food chain was defined as having three outlets or more. With the loophole detected, the lease was inked and the first Oliver’s – the world’s only certified organic fast food chain – opened for business.

The company then secured further long-term sites after BP evicted Subway and put all its highway servos to tender.

With a current spread of 22 outlets and revenue of $21 million, Oliver’s is tapping investors for funds to grow to 45 outlets over the next two years.

With the minimum $9m in the can, the IPO closed on Friday ahead of a planned listing on June 21.

Initially, institutional investors weren’t hungry: the deal only got away after the vendors agreed to reduce the offer price from 30c to 20c a share. But retail takeup was strong, especially from loyal customers hoping the offer is as tasty as the food.

One reason for the revision was the valuation comparative provided by the mooted IPO of Craveable, which owns the Red Rooster and Oporto chicken joint names here.

Think of Oliver’s as the healthy entrée to the big one.

At the original 30c, the Oliver’s offer was pitched on a multiple (enterprise value to ebitda) of nine times. This is based on the prospectus guidance for 2017-18 of ebitda of $4.76m on revenue of $42m, compared with the forecast current year loss of $1.9m.

At 20c/sh, this falls to 8.8 times. While no formal guidance for 2018-19 was offered, this should fall further as the new stores ramp up.

The Craveable offer reportedly is being valued at $450m to $530m and will be struck on a multiple of around 12 times. So while the Craveable IPO ostensibly is more expensive than Oliver’s even at the latter’s original price, the premium is understandable given Craveable is the more substantive and established player.

Arguably though, Oliver’s has more scope to supersize given its modest presence in the first place.

For a nation fond of our burgers and chicken nuggets, we’ve had relatively few listed fast-food exposures beyond Dominos (DMP) and Collins Foods (CKF), owner of KFC and Sizzler outlets in Qld and WA.

Oliver’s is a niche play in comparison but the New Criterion is impressed by its ability to divert weary travellers away from the high-fat siren call of adjacent McDonald’s and KFC outlets. 

The eastern seaboard arterial roadside market is estimated at $1bn, which means that Oliver’s has a 2-4% chunk and plenty of room for profitable growth. Oliver’s also claims to serve two million customers annually, if only for an organic fair trade cappuccino.

Oliver’s, by the way, bears no relation to Jamie Oliver, fellow fresh food evangelist (as long as the stuff is bought from Woolworths).

Eagle Health Holdings (not yet listed)

It’s tempting to view this one as a miniature Chinese version of nutraceuticals group Blackmores or the privately owned Suisse – because it is.

There’s a key difference as well: Blackmores and Suisse sell their product to China predominantly online, while Eagle Health distributes its wares purely by bricks and mortar channels, via 250 pharmacies and supermarkets around its base at Xiamen in the capacious nation’s south.

Being China domiciled, Eagle Health faces none of the cross-border regulatory issues besetting foreign suppliers.

Eagle is following the well-worn path of Chinese aspirants listing on the ASX, with hitherto mixed results. Following a $10m investment from a South African investor, Eagle Health last week was on track to fill its minimum subscription of $25m, with the prospect of the maximum $30m being obtained.

This will value the group at $125-130m.

In comparison, Blackmores (ASX code: BLK) sports a $1.7bn market cap, while the China-focused infant nutrition group Bellamy’s (BAL) is valued at $280m.

Founded six years ago, Eagle has always been profitable, reporting a $15.8m net profit in calendar 2016 on revenue of $84m. Turnover has grown at a compound annual rate of 29% and net profits at 35% over the last three years.

In common with its Chinese peers, Eagle is cash rich with little debt and intends to pay dividends.

As is the norm for a Middle Kingdom play, Eagle has a dominant shareholder: founder Zhang Mingwang, his missus Tina and other related parties will account for 64% of the register post IPO.

In a sense, Eagle strives for the best of both worlds: the distribution benefits of being on the ground in China and the ability to source clean and green Australian products.  

Wisely, no forecasts are provided, but based on 2016 earnings Eagle is being offered on an earnings multiple of six times. This compares with 24 times for Blackmores, 17 times and 13 times for honey exporter Capilano Honey.

To date, the mainland China ASX listings to date – and there have been dozens – have been ascribed the China Discount. This is a reference to the opaque and complex structures of most of the offerings and the difficulty – perceived or otherwise – of getting money out of the joint. 

Eagle claims a deeper-than-usual Australian presence, with former Howard-era sports minister and Sinophile Andrew Thomson chairing the board. Another non-executive director, Rod Hannington, has wide marketing experience at consumer goods outfits including Novartis and Mondelez.

Close to 50% of Eagle’s products are weighted to amino acid and protein lines that enhance the immune system, while throat lozenges (made from exotic ingredients such as honeysuckle, malva nuts and loquats) account for a further 19%.

Others are ginseng and enzyme derivatives and dendrobiums that “enhance physical fitness, improve hypoxia tolerance, improve gastrointestinal function, lower lipid and blood sugar, nourish the skin and improve eyesight.”

Clinical claims for these assertions are sparse. But given the Chinese have been using such pills and potions for thousands of years, at least they won’t kill you.

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The New Criterion: Pot stocks come down from high

Tuesday, June 06, 2017

By Tim Boreham

With the ASX-listed cannabis sector in a sharp retreat since late March, some investors are wondering whether they’re seeing the bourse’s equivalent of Fidget Spinners – those finger-held gadgets infiltrating playgrounds in the same way as marbles and Yo-Yos all those years ago.

The next six months or so will determine whether the extraordinary interest in pot stocks turns out to be just another craze, or something of more substance (so to speak).

Paradoxically, the sell-off has come as the pot companies position themselves with almost daily announcements about regulatory approvals, clinical programs or new tie-ups with offshore partners.

Claims about being ‘sector first’ – whether in growing or importing the stuff or developing specialist applications – abound.

Frankly, it’s hard to see through the fug of claims and counter-claims but some strategy trends are emerging, such as an intriguing ‘mission creep’ from the medical to recreational markets.

When Phytotech (now MMJ Phytotech, ASX code MMJ) blazed the path as the first listed pot stock in early 2015, management stressed its focus on serious medical cannabis applications.

Now, MMJ Phytotech is proudly targeting the Canadian medical and recreational markets, which is expected to have a combined value of $8-9bn by 2024.

A new entrant, the The Hydroponics Company (ASX code: THC) is equally agnostic. 

While THC aims to produce high-quality pharma grade products, its core (and profitable) activity is supplying the hydroponic and other equipment (including nutrients) to cultivate the coveted herb.

This activity does not discriminate between medical and recreational crops.

THC’s Canndeo arm is also developing ‘high quality’ pharma products.

Canndeo chief, Andrew Beehag, says Donald Trump’s surprise presidential win overshadowed a concurrent vote in seven states (including California) to legalise adult recreational use.

From July next year, recreational use will also be allowed in Canada, also a leader in medical cannabis.

“We are not just looking at the Australian medicinal market,’’ Dr Beehag says. “There is a large market for recreational cannabis.”

Unusually for the sector, THC’s equipment side means the company has been operating profitably for five years, with expected current year earnings of $1m rising to $3m next year.

Another feature of our potpourri of pot plays is that while the early emphasis was on the legal local medical sector, they now stress their international activities and partnerships.

Recent federal and state reforms means medical cannabis is decriminalised in most geographies. But supply will be tightly controlled through authorised GPs and specialists who appreciate the myriad therapeutics effects of the weed.

Of all the cannabis stocks, Cann Group (CAN) arguably is the most locally focused. Having only listed last month, Cann became the first pot stock to secure a commercial growing permit from the Office of Drug Control (seven have been issued to date).

Under a two-staged process, Cann first grew low THC industrial hemp to show the regulators the company could handle the growing process. “The difference is we put our licence application in on the basis of proven capability,’’ says CEO Peter Crock.

Crock previously worked at Nufarm, while Cann director and backer Doug Rathbone ran the crop protection giant. That said, Cann should have a head start in keeping the weeds from the “weed” at its southern Melbourne facility.

Auscann (AC8) recently was granted a licence from the Office of Drug Control to grow a stash of medical cannabis in WA. Auscann is also highly credentialed, in that founder and chairman Mal Washer was health minister in the Howard government era. His daughter, Elaine Darby, is CEO.

Meanwhile, our dope pioneer MMJ recently imported its first medical cannabis shipment into the country, via local distribution partner, HL Pharma.

MMJ’s Swiss subsidiary Satipharm makes the pills, which treat a variety of conditions. And speaking of the hilly landlocked nation, Creso Pharma (CPH) has signed a letter of intent with Swiss firm Cannapharm to supply medical cannabis to seven Asian Pacific and Latin American countries.

Despite the local deregulation, the industry is much more developed elsewhere. While the potential size of the local medical market is guesstimated at $100-400m, the US market for legal recreational and medical cannabis is forecast to be worth $US20bn ($26bn) by 2021.

The medical stuff is already legal in 29 US states (and for that matter, 16 other countries including India, Israel and the Netherlands).

Auscann also has ties with Canada’s Canopy Growth (the biggest producer of medical cannabis in North America) and Chilean grower Daya Cann.

Zelda Therapeutics (ZLD), is tied up with the Chilean not for profit advocacy group Fundacion Daya, in view of a clinical program tackling autism, insomnia and eczema.

Zelda promises that successful results will “provide a clear pathway to potential revenue generation from Chile and other South American markets as early as 2018.”

When sizing up the pot plays, the other thing to watch is an emerging dichotomy between those simply growing and supplying the stuff and those pursuing specific medical indications.

For instance, the commercialisation plans of the Europe-based MGC Pharma (MXC) revolve around Dermaplus, a range of skincare products with clinical rather than beauty applications.

MGC recently reported positive clinical results (conducted in Slovenia) in relation to treating redness, flaky and oily skins and “seborrhoea and psoriasis like conditions.”

Locally, MGC has unveiled a collaboration with RMIT University “on a full suite of medicinal cannabis research initiatives.”

One aim is to build an international cannabis library, outlining the genetic makeup of the CBD strains (of which there are hundreds).

MGC says the research will be done at a secure facility; a message that we suspect is pitched more at students than investors.

Zelda chief Stewart Washer (Mal Washer’s son) says there’s plenty of room for legitimate clinical-oriented providers in the local market, where there are 1.8m neuropathic pain patients in Australia.

If a decent chunk of those opt for cannabis at $5-15 per day, it quickly adds up to a billion dollar market.

Five years after medical dope was legalised in Canada, 130,000 patients have been treated. “Here, we are finally getting doctors interested in being authorised practices. The nice thing is we can ride on the coattails of the Canadians.”

On the recreational side, Washer cautions medical cannabis plays to just say no: “If you are a medical company you are a medical company. You don’t play the middle ground.”

Just as the graphite and lithium booms attracted a strong of hangers-on, the dope sector has also won its fair share of opportunists.

Cannabis-infused honey, anyone?

Casualties will emerge. But at least the pullback from such heady valuations shows investors are taking a more clear-headed approach. That means only the stocks with a cogent story are likely to be rewarded.

Having said that, investors who bought into a round of secondary capital raisings at inflated prices may be feeling just a bit dopey.

Disclaimer:  The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR).  Under no circumstance there have been any inducements or like made by the company mentioned to either IIR or the Author.  The views here independent and has no nexus to IIR’s core research offering (www.independentresearch.com.au).  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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