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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.

Surge in shared office space

Thursday, August 15, 2019

These days, co-working is less about being a stop-gap measure and more about keeping millennial worker bees buzzing with concepts such as collaborative hubs, creative zones, chill out spaces and “wellness centres”.

In the old days they used to be called desks, meeting rooms, corridors and sick bays.

The cult-like terminology aside, shared space is surging in popularity among users and investors alike and now participants are rushing to list.

A warning sign, perhaps, of an overly frothy market?

Victory Offices (VOL, $2.05) listed in mid June after raising $30m at $2 apiece for a total valuation of $80m.

It’s a case of so far, so good: Victory shares marched to $2.38 and remain above the listing price despite this week’s roiling market.

Now, the listed property fund Blackwall (BWF, $1.03)  plans to demerge and then separately list its WOTSO Workspace business (a capital raising is not planned).

“WOTSO’s network now has the capacity to generate over $30 million of revenue, so we feel the time is right for it to stand alone,” says Blackwall director Seph Glew.

Launched in 2014, WOTSO has 17 sites covering 34,000 square metres, including its flagship Bakehouse Quarter in a former Tim Tams factory at Sydney’s North Strathfield.

Blackwall sold the building in April, but WOTSO remains the tenant under a sale and leaseback deal.

Victory, meanwhile, has 21 locations in Sydney, Melbourne, Brisbane and Perth, this month opening its 20th site in St Kilda Road. Occupying a whole building, the 3000 sq m of space is subject to a seven-year lease with a five-year option.

As with any property, occupancy rates are a key profitability swing factor: Victory claims all of its sites are at least 80% occupied, with the exception of its 72% full 420 George St digs in Sydney that only opened in March.

Victory generated $29m of revenue in 2017-18 and a net profit of $5.4m. Later this month the company expects to report 2018-19 revenue of $45m and a $9.3m profit.

As of 2017, research house Frost and Sullivan valued the “flexible office solutions” sector at $960m, with serviced offices accounting for 51% ($488m) and the go-go co-working sector accounting for 18% ($169m).

Victory reckons flexible workspaces still only account for 1.6% of office space in Melbourne and 2.6% in Sydney, compared with 4% in London, 3.9% in Singapore and 8% in Shanghai.

Citing various industry reports, Victory expects also 30% of Australia’s total office space to be classed as ‘flexible’ by 2030: 8.5 million square metres compared with 505,000 sq m now.

Then there’s the “buts”: competition from deep-pocketed global entrants is intensifying and there are concerns the challengers are pushing for market share at the expense of sustainable earnings.

The London based Regus has 83 centres here, while the aggressive Singapore-based JustCo plans to open six sites by the end of the year.

One of the world’s biggest privately owned companies, equally aggressive US giant WeWork has 17 sites here and reportedly is mulling its own $50 billion plus IPO in the US.

Servcorp is also a formidable player (see below) while other entrants include the home-grown HUB Australia, which has seven locations across 21,000 sq m, including Melbourne’s venerable Georges building.

If that’s not competition enough, traditional landlords are joining the ‘cult’ by carving up space into sub 1000 sq m tenancies. For instance GPT has established Space & Co at 580 George St in Sydney, while Dexus has unveiled similar facilities under the SuiteX banner.

There’s a fundamental weakness in the co-working business model which may become apparent in an economic downturn.

As Victory notes, there’s a “potential asymmetry” between the long-term nature of its own leases - a weighted average of seven years — compared with the short term arrangements of its coworking tenants.

In other words, if the economy has a nervy turn it faces lower occupancies but its own rental overheads are fixed.

Investors should also be cognisant of whether they are investing in a leasehold business, or the underlying property.

Victory leases its space from third party landlords and also has some tenancy arrangements with related parties.

Blackwall owns and controls ten of WOTSO’s properties. The idea is that Blackwall’s 1200 shareholders receive WOTSO shares pro rata, so they will still be involved with property ownership as well as collecting rent.

The timing of the WOTSO spin off hasn’t been specified, as the transaction is subject to shareholder approval and a favourable tax office ruling.

In the meantime Victory is valued at $83m and trades on a defensible earnings multiple of around nine times.

Servcorp (SRV) $3.95

Paradoxically, the flexible workspace pioneer hasn’t benefited from the sector’s growth valuation wise, with Servcorp shares more than halving over the last three years amid claims of uncommercial behaviour by the upstarts.

Founded by CEO and Liberal Party stalwart Alf Moufarrige in 1978 and listed since 1999, Servcorp operates across 160 locations in 54 cities and 23 countries.

With a focus on serviced offices, Servcorp if anything has been disrupted by the more casual coworking models that don’t involve all the support (such as shared receptionists answering the phone in your company name) being laid on.

Not surprisingly, Servcorp has responded by re-doing swathes of space for co-working: so far, 83 locations have been converted at a cost of $15m, with a further $10-12m of expenditure to come.

The headwinds were felt in the first (June) half that saw Servcorp boosting revenue by 5 per cent to $164 million, but posting a statutory loss of $12.8m after writing off $17.7m of leasehold improvements (mainly in New York and Abu Dhabi).

“There are early indications we are countering the pressure from other recent market entrants, who are focused on market share and not profitability or cash flow,” the company said.

As far back as 2016, Mr Moufarrige described co-working hubs as “growing again in plague-like proportions.”

Despite the pressures, Servcorp left its interim div unmolested, at 13c a share (partly franked). At the company’s February 23 full year results investors should expect another 8c/sh, implying a roomy yield of 5.7%.

Servcorp has cash of $71m and no external net debt.

Like Flexigroup in the 'buy now pay later' sector, Servcorp looks like a well-established enterprise overlooked by investors in favour of new trinkets on offer.

Servcorp got chucked out of the ASX300 index in March, which didn’t help

Servcorp, by the way boasts former PM Mark Vaile on the board, while erstwhile Victorian premier Steve Bracks is a Victory director.

We’re not sure why the sector appeals to the pollies, but they sure know about the need for flexible office arrangements come election time.

Disclaimer: 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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Everyone’s talking medical marijuana but what about hemp?

Monday, August 12, 2019

Ecofibre (EOF) $3; Elixinol Global (EXL) $3.04; ECS Botanics (ECS) 6.7 cents

The fastest route to the pot sector is not the medicinal or recreational sectors; rather, it’s the burgeoning market for hemp-based nutraceuticals since the US Hemp Farming Act Bill fully legalised hemp last year.

Ecofibre shares have tripled since listing at $1 apiece earlier this year, with a market cap approaching $1 billion. Ecofibre is also profitable, which affords it unicorn status in the ASX cannabis corner.

In the US, Ecofibre supplies hemp products under the Ananda Health banner to 3,200 pharmacies, while locally it produces grown and processed protein powders, de-hulled hemp seeds and hemp oil.

In 2016, the company abandoned its original remit of developing medical marijuana - a strategy shift that has paid off in spades.

Ecofibre posted $12.3 million of revenue in the June (fourth) quarter and generated cash of $3.2 million, taking the 2018-19 tally to $35.6 million of revenue (up 519%) and a $6 million profit (compared with a previous $8.6 million loss).

Elixinol sells hemp skincare and food products in 40 countries. Its Colorado-based business in the US is the country’s third biggest seller of hemp dietary products.

Here, Elixinol operates the Hemp Foods Australia brand. Through its subsidiary Nunyara, the company is also seeking an Australian medical cannabis cultivation and manufacturing licence.

In June, Elixinol raised $50 million in an institutional placement at $3.90 apiece. The funds will support the company’s plans to double the size of its Colorado facility.

The company reported June quarter revenue of $9.9 million, up 19% and a $19.3 million loss, reflecting an $11.5 million splurge on raw hemp inventories ahead of its US expansion.

The US Farm Act Bill is monumental not just for the legalisation aspect, but because hemp growers now should be able to access finance and insurance on the same basis as other agricultural producers.

Finally, industrial hemp play ECS Botanics quietly debuted last month in a $6.5 million compliance listing and despite this week’s market rout, investors have almost doubled their dough.

Hemp by the way is recognised as a rich source of proteins (amino acids), unsaturated fats, fibre and vitamins and minerals.

ECS chief Alex Keach says: “Everybody has been talking medical marijuana, but in our view the future is hemp and being ‘healthy but not high’”.

Disclaimer: 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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How high can pot stocks go?

Friday, August 09, 2019

Hampered to date by a lack of doctor awareness, perception issues and a dearth of approved treatments, the local medicinal cannabis sector is showing the first buds of meaningful growth.

According to the Therapeutic Goods Administration, the country’s medical gatekeeper, the number of special-access patient approvals for medicinal cannabis increased by 15% in the month of June, to 1576. That’s a 980% year-on-year increase.

Cumulatively, 9,335 patients (equivalent to 0.04% of the population) have been approved. “On this basis, we continue to see 20,000 patients approvals by the end of 2019 as very achievable,” says broker Cannacord’s cannabis watchers.

The uptick is benefiting the ASX-listed pot stocks directly exposed to the local medicinal sector. For instance Althea (AGH, 97 cents) shares have run hard since reporting its 1000th patient prescription in mid June – a figure that has grown to 1,334 as of late July.

Althea plans to build a cultivation and manufacturing facility at Skye, near Frankston. Intriguingly, the council objection process spurred a few complaints about tree removal, but none about the facility itself (which might say something about the locals’ familiarity with the product).

Althea is also eyeing the UK market, where it has been selected to provide material for an upcoming medicinal cannabis national pilot scheme. The program aims to enrol 20,000 patients with pain, post traumatic stress disorder, multiple sclerosis and anxiety possibly about Brexit).

As with other pot plays, Althea is also hedging its bets in the recreational market, last month acquiring Canada’s Peak Processing Solutions in a cash-scrip deal worth around $5.8 million.

Funded via an oversubscribed $30 million capital raising, the deal gives Althea an entrée into the booming market for “cannabis infused” beverages, edibles and nutraceuticals.

A potpourri of interests, one might say.

Althea chief Josh Fegan reckons 250,000 Australians will be using medical cannabis in a few years’ time, while the company itself expects to sign up 20,000-30,000 patients here and in the UK.

1.   MMJ Group Holdings (MMJ) 26 cents

The dilemma for cannabis investors is there are so many stocks purporting to be pot players – some only peripherally so in reality -- that the ASX marijuana menu has become downright confusing.

Recognising this, ASX pioneer MMJ has emerged as an investment vehicle with holdings in other listed and unlisted pot plays globally.

The private-equity approach is the latest iteration for MMJ, which listed as Phytotech Medical in January 2015 and then merged with Canada’s MMJ Bioscience.

Putting a new slant on the term ‘seed capital’, MMJ recently signed up Toronto based venture capitalist Embark Ventures to manage the MMJ portfolio, which consists of 12 stocks with a book value of $94.7 million.

The biggest exposure by far is its 26% stake in Canada’s Harvest One, worth $44 million.

In May MMJ paid $2.2 million for a 7% stake in Volero Brands, which makes ‘vape’ pens and cartridges. It has also sunk a similar amount into a private Polish hemp provider, Sequoya Cannabis.

Embark and MMJ director Michael Curtis co-founded Dosecann which was then sold to Cannabis Wheaton for a 660% return (MMJ also had a $2.2 million investment in Dosecann).

The Embark/MMJ approach clearly is not to fall in love with its stocks and so far has made eight divestments. “We would like to see 70 per cent of those companies going public or chasing liquidity events in the near term (with 18 months),” Curtis says.

MMJ has already partly exited most of its $5 million position in Medipharm Labs, for a 450% gain.

Embark also has a mandate to ‘short’ stocks that are likely to, well, go to pot.

“It's become more of a stock picker's market,” Curtis says. “There will be dead money stocks that do nothing for a while.”

Not surprisingly, Embark/MMJ’s activities are centred in the cannabis epicentre of Canada, where recreational dope was legalised last October. Medical cannabis has been legal there since 2001.

While MMJ’s material highlights involvement in the sector from seed to shelf, Curtis is not so enamored with the heavily-competed ‘growing’ part of the chain, which involves mainly cannabis leaf rather than cannabis oils for more bespoke purposes.

“The recreation market is great but it will be only 10-20 per cent of the hemp market globally,” he says.

“A lot of people are becoming farmers but the farming is not the exciting part. It’s about what you put in the ground and making sure it’s special.”

MMJ shares trade at a 26% discount to the value of the portfolio, despite management’s efforts to close the gap with a share buyback program,

Given the stock’s low liquidity, MMJ may be both the first stock to list on the ASX and the first one to leave. Low liquidity means the company is seeking an alternative exchange, possibly Canada’s TSX.

In the meantime, the Canadian sector has not been without its teething troubles.

The TSX-listed CannTrust is in danger of losing its licence after Health Canada slapping a non-compliance notice on its facilities, leaving a 5,200 kilogram stash in limbo.

Also, the $16 billion market cap gorilla Canopy Growth was rocked after founder and CEO Bruce Linton stepped down (Linton claimed he was sacked). Controlled by the drinks maker Constellation Brands, Canopy lost a thumping $C323 million ($293 million) in the third quarter. 

Disclaimer: 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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Damn, I’ve been booked

Thursday, August 01, 2019

Speeding motorists and errant parkers hope they will never do business with Smart Parking and Redflex. But should investors?

In what’s bad news for British motorists, good news for investors: the parking enforcement and technology group Smart Parking (SPZ, 12c) is regaining its verve after a torrid period marked by the loss of customer contracts and management problems within its core UK business.

At the core of the turnaround is automated number plate recognition (ANPR), which is greatly reducing the odds of errant motorists getting away with overstaying.

ANPR and other efficiencies means that a motorist nabbed in a Smart Parking-operated lot can expect a ticket within five days rather than a month – and that greatly increases their propensity to pay.

“If it gets to 30 days or later, they are more likely to complain,” says CEO Paul Gillespie. “If they infringe on Monday and get it by Friday it’s more a case of ‘fair cop, guv’.”

Smart Parking derives 80% of its revenue from issuing tickets in the UK, where laws are more supportive towards private operators than most other countries (including Australia).

The operators have the right to access the owner’s address via the registration authority, the Driver Vehicle Licensing Agency (DVLA).  Court decisions have also endorsed the legitimacy of the ‘fines’.

Despite these favourable regulatory settings, Smart Parking has been struggling to regain lost ground after last year’s sacking of its UK CEO and CFO over allegations of inappropriate (but not illegal) behaviour.

Three years ago the company lost a major client, the supermarket chain ASDA and more customers followed.

In February this year, the company reported a $600,000 interim loss compared with a $2.2 million surplus previously, with revenue declining 17% to $14.1 million.

Management attributed the off-colour result to the customer losses and improved motorist compliance (tickets issued fell by 8% to 187,309).

During the December half, Smart Parking won 77 more customers, but lost 12. But by February this year the company had won 23 without any losses, taking the tally to 324 with a target of 400 by June.

“We have added some sales people and changed the structure,” Gillespie says. “They are delivering some great numbers and sales are growing month by month.”

But investors -- including chairman and Computershare founder – still require patience. “While you won’t see it in the numbers this year over the next 12 to 24 months, you will see a real change in the company’s performance.” Gillespie says.

Gillespie estimates there are 44,000 off-street parking lots across Britain’s not-so-broad expanses, but of these 15,000 to 20,000 are suitable for ANPR and are thus the company’s addressable market.

In between squabbling about Brexit, the British Parliament late last year introduced the Parking Bill, which imposed stricter rules on the fragmented sector, mid revelations of  a tenfold increase in private ‘fines’ over the last decade.

Penalties are set at a maximum £100 ($178), with a mandatory 40% discount for paying up within 14 days.

As a British Parking Association member, Smart Parking is audited every quarter and also gets scrunitised by the DVLA twice a year. “The level of scrutiny is good because it shows we are not there like Dick Turpin,” he says.

“Too many private companies don’t follow the rules. So anything you can do to raise the profile of the industry and treat customers fairly is a good thing.”

The paradox of Smart Parking’s business model is that the better it does its job, the more compliant drivers become and the less revenue the company receives. To grow its revenue, the company therefore needs more customers.

Gillespie says while the company strives for 100% compliance, in reality it will never happen. The infringement rate has been consistent at 0.5% – one driver for every 200 parkers.

Half of these don’t pay and need to be pursued by debt collectors.

Meanwhile, Smart Parking’s technology division is pursuing a platform called Smart City, which crunches car park usage data for retailers and other users.

Locally, the division installs sensors to detect overstays for customers including Coles and Telstra and numerous local councils.

“(The division) had a really big year last year and got close to profitability but the last few months have been quiet,” Gillespie says.

Smart Parking’s $41 million market cap pales into comparison with the $420 million price tag for ParkingEye, the UK’s biggest car park operator, sold last year to a consortium led by Macquarie Group.

Redflex (RDF) 42 cents

While Australian motorists grumble about copping a speeding or red-light camera fines, they generally pay up without further remonstration. But not so in the US, where camera citations are viewed as unAmerican and increasingly are being banned by governments or subject to adverse court judgments.

The backlash has been an increasing headache for traffic camera maker and operator Redflex, which derives close to half of its revenue from the US.

In May, the Texan government in effect banned traffic cameras. Redflex said the Lone Star state accounted for 13% of its total half-year revenue in the first (December) half – which implies $7.4 million - adding the ban would “materially” affect financial performance.

In July, Arizona’s El Mirage city council turned off its speed cameras, in favour of employing extra cops to dish out the fines personally.

Given the solid evidence that traffic cameras save lives, the authorities’ actions seem retrograde. But a big difference between here and the US is that police chief are elected and thus behoven to popular opinion.

While further US camera programme wind backs seem inevitable, Redflex has had its wins as well. Two days after the Texan ban, the company said Pennsylvanian traffic authorities had awarded an $US30 million ($42 million) multi-year contract to enforce automated speed enforcement on highway work zones.

Canada is also proving more receptive to the ‘cameras save lives’ message. This month the company won a deal from Toronto Council to install and operate automated speed enforcement technology. The five year deal (with a five year) option is worth up to $25 million.

Locally, the Victorian Government this week renewed a contract for Redflex to service 150 cameras, in a three year deal with two one-year extension options (the initial three-year period is worth $15 million of revenue).

 Given the US backlash, Redflex’s mantra is more about “intelligent motorways solutions”: tools to monitor traffic and detect incidents. It is also in Smart Parking’s game of deploying number plate recognition for parking management, such as at Melbourne’s Chadstone mega shopping complex.

In a business update, Redflex reported new business orders of $41.5 million in the year to June 2019, up 42%, with a rolling total contract value of $300 million.

In the first (December) half, Redflex reported revenue of $57 million (up 7%) and underlying earnings before interest tax and depreciation of $9.1 million (up 63%).

But a steep depreciation charge on the cameras resulted in a $945,000 net loss, an improvement on the previous $10.8 million deficit.

Investors slashed the value of Redflex shares by 25% after the Texan revolt, but the strong flow of new orders suggests Redflex isn’t doing everything wrong. If the accident-prone company can avoid further US pot holes and hone its focus on broader traffic management, performance finally might switch to the fast lane.

Disclaimer: 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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Gold’s bonanza run

Thursday, July 25, 2019

Globally gold again is living up to its status as a safe harbour and a store of value in troubled times, even though in economic and geopolitical terms, the ‘troubled’ bit is not exactly new.

The plunge in global bond yields – with expectations of more interest rate cuts to come – has forced investors’ quivering hands as they seek an asset that performs reliably in a downturn the central banks seem to be anticipating.

According to the Perth Royal Mint, since 1971 gold has outperformed both stocks and bonds in periods when Australian interest rates have been below 2%.

And in the five worst calendar years for shares, gold rose 9%, while equities fell an average 12%.

In $US terms, the lustrous metal has gained 10% year-to-date and 16% over the last 12 months. But at around $US1400 an ounce, gold is still well below the peak of just over $U1,800 an ounce attained in September 2011.

In $A terms, gold has increased 11% since January and almost 20% over the last year.

According RBC Capital Markets, the average share price for the producers (both small and large) gained 20% in the June quarter. That’s despite producers Gascoyne Resources and Coolgardie Minerals falling into administration and other production whoopsies elsewhere.

For investors, the purest proxy to having a gold bar under the bed is an established producer such as Newcrest Mining (NCM, $33.77), the biggest ASX-listed gold stock with a $24 billion valuation.

Newcrest should have produced just over 2.4 million ounces in 2018-19, with broker Morgans forecasting an $US564m ($805m) profit on $US3.719 billion of revenue.

But two of Newcrest’s key mines (Telfer and Gosowong) look tired and it will be a while before its offshore growth projects (Wafi-Golpu in Indonesia and Red Chris in Canada) are advanced.

The other sectoral big bananas Northern Star Resources (NST, $13.97) and Evolution Mining (EVN, $5.01) are enjoying robust production, but their shares have run hard and arguably they are fully valued (if not overvalued).

What about the emerging producers and the up and comers?

Gold Road (GOR, $1.40) recently cracked the $1 billion market cap barrier and an entrée into the ASX300 index, after pouring the first three gold bars (1138 ounces worth a handy $2.27m) from its $620m Gruyere project near Kalgoorlie.

A joint venture with South African giant Gold Fields Ltd, the open-cut mine is slated for substantive output of 300,000 ounces over a 12-year mine life.

With a 3.92 million ounce resource, Gruyere is one of the country’s biggest mines. Yet the deposit – unearthed only six years ago – remained undeveloped for decades because it was buried under a thick overlay of sand.

Prudently, Gold Road has hedged (forward sold) 130,000 ounces – 30% of output attributable to the company for the next three years – but CEO Duncan Gibbs isn’t making any rash predictions about the gold price.

“What’s to say gold won’t go to $2500 an ounce or back to $1500 an ounce,” he says. “I just don’t know”.

In the mid-tier, the market has re-rated WA producer Ramelius Resources (RMS, 84c) since the company fended off a rival bidder to acquire listed counterpart Explaurum Ltd in a scrip offer. But arguably Ramelius is still undervalued relative to its peers.

The Explauram takeover added the 485,000 ounce Tampia Hill project to the Ramelius portfolio, which includes the producing Mt Magnet and Edna May mines and the Marda project (picked up from the administrators of Black Oak Minerals for $10m).

Ramelius produced 196,000 ounces in the 2018-19 year at an all-in cost of $1175-1225 an ounce, with forecast output of 205,000 to 225,000 ounces in the current year.

The company is currently valued at $460m, including $104m of cash and gold inventories.

Another mid level play with an interesting valuation is Dacian Gold (DCN, 64c), which lost three quarters of its value after slashing June quarter production guidance and increasing its per-ounce cost estimates.

The shares have strongly recovered since after the company released a revised mine plan for the next eight years.

Dacian’s mainstay Mt Morgan operation is slated to produce an average 170,000 ounces a year over the first five years of the plan, with 150,000-170,000 ounces forecast for the current year.

Broker Citi forecasts a small loss for the 2019-20 year, rebounding to a $63m profit for the current year. On these numbers, the stock is trading on an earnings multiple of a little over two times.

To capitalise on the buoyant gold price, Dacian has hedged 147,000 ounces – 13% of its expected life-of-mine output, at an average $1,810 an ounce.

Dacian’s current valuation stands at $246m with its cash kitty of $45m comfortably servicing $105 million of debt.

At the exploration end of the market, Chalice Gold Mines (CHN, 16c) is the talk around the saloons because of its capacious cash that’s being put to good use at its Pyramid Hill prospect in Victoria.

Chalice has also executed what looks like a handy deal to sell its tenements in Quebec  to O3 Mining, an offshoot of Osisko Mining.

The deal saw Chalice receive 3.092m shares in O3 and is also entitled to a 1% net smelter royalty.

While giving Chalice holders an ongoing exposure to the ground, the Canadian deal allows Chalice to focus on Pyramid Hill, where it is seeking to find out how far the historically fecund Bendigo Zone extends below Murray Basin sediments.

On July 8, the company said a 39,000 metre phase one aircore drilling program had identified three “strike-extensive mineralised trends” for further perusal.

Broker Patersons reckon Chalice has more than a “more than a fair chance of success” at Pyramid Hill, with the prospect (excuse the pun) of catching up with the more advanced Catalyst Metals (CYL) and Navarre Minerals (NML).

Valued at $170m, Catalyst is 14% owned by St Barbara Ltd and 11% by Gina Rinehart’s Hancock Prospecting.

Chalice has also acquired nickel prospects in WA’s Kimberley region. Yes, the ground is remote and hasn’t been worked, but isn’t the best chance of finding something to go where no one has looked?

Chalice’s cash of $21.7m compares with a miserly mark cap of $37m (14c a share). And don’t forget the O3 shares were worth around $11m last time we looked.

As with stories in New York, there are many ASX gold tales and these are just a few of them.

Disclaimer: 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 boom in egaming/esports

Thursday, July 18, 2019

For those who have never heard of Fortnite and are thus showing their advanced age, video gaming (egaming) has become a multi-billion dollar industry sector, which in its organised professional form is attracting serious sponsorship and advertising from mainstream consumer brands.

Egaming isn’t the preserve of vitamin D-deprived joystick jockeys in their dank bedrooms: it’s also a mass spectator sport with attendances at live tournaments eclipsing attendances at AFL football matches (the Adelaide and Essendon clubs have even acquired their own esports teams).

Professional esports teams tour the globe like rock stars, attracting a similar cult following as they pursue serious prize money. The site lists Germany’s Kuro Takhasomi as the sport’s biggest earner, having pocketed $6.2m in prize money from 98 tournaments.

Australia’s own Anathan Pham clocks in at number 11 on the esports rich list, reaping $4.15 million from 22 tournaments.

By the way, Fortnite is a Hunger Games style survival game that involves combatants dealing with adversaries such as zombies by, well, shooting them. While older game titles such as League of Legends and Dota2 remain popular, Fortnite’s popularity – especially among teenagers and even younger kids - is proving to be a game changer in heightening investor awareness.

While game developers such as Nintendo and Epic Games are global names, the ASX offers exposure to egaming and esports (including mobile gaming) via four small caps. Games developer Animoca Brands Corporation (AB1, 15 cents) is the most substantive in terms of revenue and market valuation.

Industry analytics house Newzoo forecasts esports (organised gaming at a professional level) to be worth $US1.1 billion in calendar 2019, rising to $US1.8 billion by 2022. The broader video games market is worth many billions more.

According to Esports Mogul (ESH, 1.3 cents) 20-25% of the broader population have played a mobile game. About half of 16-24s have watched esports and even in the crustier 45-65 year old bracket, 5% have done so.

 “It’s evident the investment community is really only just coming to the fore of how big this sector is,” says Esports Mogul CEO Gernot Abl.

There’s also a strong element of ‘co-opetition’, with the companies executing a number of intertwined deals.  “We all know each other and support what we are doing,” Abl says.

Esports Mogul’s core focus is on a tournament platform called, which enables amateur gamers to hook up and test their wits out on each other.

The company this month hosted the Australian Apex Open Tournament on its platform, with 3850 gamers slugging it out for $35,000 or prize money.

Esports Mogul was also the exclusive platform provider for the Australian Esports League’s Girl Gamer festival, a global jamboree held in Sydney last month.

Meanwhile the South Africa based Emerge Gaming (EM1, 2.3 cents) has announced a string of collaborations, including  May’s memorandum of understanding with US games developer Digital Circus media to launch its products in North America.

These products include its GameCloud game streaming platform.

In June, Emerge teamed with Viacom International Media networks Africa to develop a kids-focused esports tournament platform called NickX, using Viacom’s Nickelodeon gaming content.

The company believes that as the professional market grows, so too will the market for amateur games based around a central hub.

 “Monetisation will be through brand take-up, premium subscriptions, in app subscriptions and advertising across the platform,” the company says.

In March, Emerge Gaming also signed a mobile gaming deal with ASX counterpart iCandy International (ICI, 3.8 cents), to broaden Emerge’s ArcadeX tournament platform. ArcadeX has been dubbed the “Netflix of gaming” in that it allows instant streaming of hundreds of 3D video games.

 iCandy will promote the offering to its 350 million global users. Separately, iCandy also plans to set up its own esports division, with first revenue by the end of 2019.

iCandy has also partnered with Animoca and Alibaba subsidiary 9Games to expand iCandy’s mobile game Groove Planet into the $29 billion mainland China market.

Perhaps not surprisingly, there’s a blockchain theme to the sectoral wheeling and dealing as well. In late June, Animoca said it would buy the US company Gamma Innovations, which enables gamers’ idle processing power to be used to ‘mine’ the cryptocurrency ethereum. The users are rewarded with loyalty-style points that that can be used to play their favourite games.

Despite the hype, the three smaller the ASX proponents have a long way to posting meaningful revenue. In the March quarter, Esports Hero turned over $20,000, “mainly by experimenting with subscription and sponsorship models.”

 iCandy generated $289,000, including from digital advertising and merchandising as well as the games themselves. Emerge had no revenue for the quarter but managed $129,600 of turnover in the December half, mainly from sponsorships of its online tournaments.

Animoca posted revenue from ordinary activities of $13.46 million in calendar 2018, up 107% and reduced its loss to $2.58 million from $8.26 million previously.

According to Esports chief commercial officer Jamie Skella, most of the value of the sector resides in sponsorship, advertising and media rights.

A professional Counter Strike and Cyberathlete League player, Skella sees emerging opportunities are in hosting micro tournaments (including merchandise) and holding ticketed live events.

Skella says egaming used to be the preserve of industry-focused advertisers such as hardware providers Razer Incorporated and Gigabyte Technology; now it’s attracting the interest of mainstream brands such as McDonald’s, Burger King, Coca Cola and the telcos.

 “The 18-34 demographic is increasingly hard to reach but it’s a market segment of super high interest to advertisers,” he says.

All in all, the industry has gone a long way since the 1980s, when organised events for games such as Space Invaders, Pacman and Donkey Kong emerged. Online connectedness means combatants can play another competitor anywhere and at any time.

But for local investors, the reality is that the sector is in its infancy here.

At last glance, Esports Mogul, Emerge and iCandy had market capitalisations of $21 million, $15 million and $13 million respectively. Animoca is worth a less febrile $127 million and its shares have gained 75% since the start of the calendar year.

So while investors might be warming to the macro egaming story, it remains to be seen which stock will step up to the console with a serious winning manoeuvre.

Disclaimer: 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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Put the phone down, Wendy

Thursday, July 11, 2019

With the Victorian government banning primary and secondary state school kids from using mobile phones during school and with a potential national clampdown looming, two listed companies involved in students’ cyber and physical security are eyeing the potential.

Not that the companies concur on the appropriateness and likely efficacy of the measure, which emulates the NSW government’s ban on mobile use in primary schools. Both dictates are effective from 2020.

The French government has led the way globally, forcing under 15s to bid “au revoir” to their mobiles during school hours.

For Mark Fortunatow, local restrictions couldn’t come soon enough.

“We have long felt that mobile phones would one day be banned in schools, it was only a matter of time,” says the head of MGM Wireless (MWR, $3.23).

“The evidence is undeniable. Young kids with mobile phones are subjected to online bullying, image abuse and stress.”

The protector of youth against internet nasties, Family Zone Cyber Safety (FZO, 21 cents) argues that our blessed urchins are savvy enough to bypass such restrictions and that the policy will be an almighty headache for schools to enforce.

“It’s a great headline measure but it does not solve most of the problems,” says Family Zone CEO Tim Levy.

Family Zone says while it supports ‘out of sight’ restrictions – out of sight during lessons , that is - blanket bans just don’t work. In some cases, parents have led the protests – how will they be able to remind Sebastian to attend his violin lesson? – and the bans are too easily ignored by students.

And, we suspect, weary teachers.

Kids being kids, students will circumvent the bans by smuggling in devices connected to wi-fi ‘hotspots’, which circumvent the restrictions of the schools’ networks.

Family Zone claims up to half of students use ‘hotspotting’, which is being made more economic because of unlimited data plans.

Of course, both MGM and Family Zone are not exactly impartial observers in the cyber safety debate.

MGM’s commercial interest in the subject is by way of its ‘wearables’ product Spacetalk, a watch-like device for four to 12 year olds with a GPS tracker and mobile phone.

But the kids can only make phone calls and send text messages to a parental-approved list of contacts and the device also has a ‘school mode’ disablement feature.

Thus, MGM is confident the Spacetalks won’t be covered by the NSW or Victorian bans.

MGM as of March had sold 20,000 of the gadgets since launching them online in October 2017 and expects to have sold 44,500 by September this year.

Locally, MGM has been selling through JB Hi-Fi and Leading Edge, as well as electrical retailer Spark in NZ. The company expects to add more retailers to its coverage.

In May, the company started selling in Britain, initially through online channels but with a view to tying up bricks-and-mortar retailers.

Meanwhile, Family Zone has launched Spotshield, an app-based tool that restricts usage to the purposes and websites allowed by a school.

The idea is that the schools subscribe for the service and force students to install the feature in devices intended to be used for education. “If a school tells (parents) to buy a green pen they will go and do it and if they tell them to use Family Zone they will as well,” Levy says.

Overall, Family Zone is used by more than 839 schools locally and in NZ and the US, covering 482,000 student licences (the school pays $7-10 per year for each student).

These schools predominantly are from the private or Catholic sector.

Via Indonesian telco Telkomsel and Woolworths’ mobile division, Family Zone is trialling a ‘freemium’ model called Family Zone Insights, which allows parents to track their kids and receive alerts if they’re using Tinder rather than a maths tuition app.

 It is hoped the parents then avail of Family Zone’s standard $6 a month screening product to prevent such transgressions.

Family Zone posted receipts of $1.75 million in the third (March) quarter, up 143%, with contract revenue of $1.14 million, up 170%. The company claims a $6 million of pipeline of opportunities across five geographies.

Broker BW Equities forecasts revenue of $5 million in 2018-19, growing to $11 million this financial year.

After burning $2.7 million of cash Family Zone ended the quarter with $2.1 million of cash, but in April this was bolstered by a $5.5 millions placement at 15.5 cents apiece.

Family Zone reports it has signed up 130,000 wholesale (telco) accounts within six months, with 71,000 converting to paid subs.

“80 per cent of our revenues are from schools and we think that will be the case for the next 12 months. Our ultimate objective is to get parents engaged and in control and the best way of doing that is through the schools,” Levy says.

“But in late 2020-21 we think that will turn on its head and most of our revenue will come from consumers (including subs generated from the telcos).”

Meanwhile, MGM Communications posted revenue of $1.4 million in the traditionally quiet March quarter, up 392%. In the first (December) half the company turned over $4.07 million for an underlying profit of $550,000 and a reported loss of $3.27 million.

About half of MGM’s half year revenue derived from the company’s legacy business of communications systems for schools, to record absences and enable SMS messages to parents. This remains a solid business, but lacks the growth potential of the Spacetalks.

With a $40 million market cap, MGM is noted for its tight register with a mere 12.5 million shares on issue.

Investors have warmed to the Spacetalk story, with MGM shares surging from 37 cents in November 2017 to a high of $5.02 in November last year.

As usual, the issue is whether MGM’s sharp share re-rating captures all the potential. Fortunatow admits that at $349 a pop – plus a $5.99 per month app fee - the Spacetalks are a tad pricey. But this sticker price is expected to come down as the company’s manufacturing economies improve.

In a fresh report, broker Cannacord forecasts 2018-19 revenue of $7.4 million and a loss of $2.5 million, improving to revenue of $24.7 million and a $2.1 million profit in the current year.

Family Zone listed in August 2016 and the stock galloped beyond $1 in October 2017. After the usual investor reality check, the company is valued at $43 million.

Family Zone cites research suggesting typical youngsters get access to the internet by four and access the first device by the ripe age of six.

Don’t assume that the subversive Peppa Pig is all that the they’re being corrupted by: by the time our little cherubs are eight they are likely to have accessed adult content.

Disclaimer: 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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Flexigroup flexes its muscles at Afterpay

Friday, June 28, 2019

Flexigroup (FXL) $1.62 is like one of those inventors who devise the next big thing in their garage, only to see someone else bask in the glory years later.

Flexigroup has extended ‘buy now, pay later’ (BNPL) financing for more than 20 years, but unlike the runaway Afterpay it never clearly promoted the offering.  Also, its business covered a confusing array of 20 products and the company has been an ordinary performer overall.

Now, the company has consolidated these products to five, including melding its two BNPL offerings Certigy EziPay and Oxipay into a funkier single product called Humm.

 “It’s definitely the hot topic at the moment,” says CEO Rebecca James of the BNPL sector.

Humm can be used for transactions between $1 and $30,000 – not that one can buy much for a buck these days – repayable over two and a half to 60 months. As with Splitit, users need an existing credit or debit card.

Flexigroup aims to entice 35 to 45 year olds making more expensive purchases. James claims an average purchase of $2,000, compared with $200 for the others.

The 62,000 signed up to date include usual suspects such as Myer and JB Hi Fi, but also the National Hearing chain and City Fertility.

Flexigroup claims a 17% of the BNPL market – as measured by transaction volumes – and 40% of receivables. The company also claims a walk-up start of one million customers here and a further 200,000 in NZ, but that is across the entire company and also covers credit card and leasing products.

James reckons that with the physical Australian retail market worth $320 billion and online sales a further $30 billion, there’s room for everyone. Flexigroup in particular is targeting the $22 billion health market and $65 billion home improvement markets.

In the first (December) half, Flexigroup’s BNPL division made a $17m profit (up 9%) – more than half of the company’s overall cash earnings of $31.9m (down 22%).

“We are not reliant on massive offshore growth to make a profit,” James says – surely not a dig at Afterpay’s US expansion plans.

Flexigroup shares surged from $1.35 to $2 after the company’s revamped management ‘reminded’ investors of its BNPL presence in early May. But the company – the only BNPL currently making money – is worth a relatively modest $680 million.

Not that everything is hunky-dory, according to broker Morgans:  “We note execution of the Humm launch has not been perfect, with poor app ratings still coming through.”

Disclaimer: 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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Reality bite for “buy now, pay later” sector? Or will we see much more?

Thursday, June 27, 2019

The Australian Stock Exchange’s status as the global home of listed “buy now, pay later” (BNPL) stocks  is under scrutiny, with leader Afterpay (APT, $25.72) being probed for money laundering violations and the sector more broadly under the blowtorch for fostering profligate ways among our free-spending youth.

And yet, the BNPL bandwagon keeps rollin’ on, with the Minneapolis based Sezzle pondering an ASX debut in coming months.  From what we can see, Sezzle’s business model is close to Afterpay’s but management says it won’t be competing directly with the Antipodean dazzler.

While BNPL valuations have undergone a steep reality check, Afterpay has just raised $317 million of fresh equity, while the New York based Splitit (SPT, 66 cents) pocketed $30 million from a placement, with up to $10 million to come in a share placement plan.

Shares in the Afterpay and ZipCo (Z1P, $3.03) are both down around 22% and 19% respectively from their May peaks, while newcomer Splitit is 67% off the pace from its March peak.

Having said that, holders of any of the stocks since IPO are well in the money - which can’t be said for consumers caught in the trap of easy money.

The share correction has been attributed to the flow-on effects of the Austrac probe into Afterpay, which follows revelations the proxy agitants Ownership Matters set up an account in the name of Miguel Laucha (Mickey Mouse), while a 16 year old was able to buy $300 of alcohol.

Feeling a little Goofy, the company said it has closed off that avenue of abuse.

More broadly, it’s also just as likely that BNPL investors took a smoke-o given the extravagant valuations the sector’s exponents are trading on (Afterpay is still worth $4.8 billion and Zip is valued at just over $1billion).

The perceived problem with the BNPL model is that customers are not subject to rigorous credit checks, except for a light going over at the point of sale. Think of those attendants at sporting events who have about two seconds to frisk a patron for an explosive device or - worst still – a bourbon and cola UDL.

The approach might work in times of relatively low unemployment, but in tougher times easy credit (not that the BNPL schemes are defined as such) has a way of biting back.

Perceptions of course can be stronger than reality and a Zip says the company rejects 40% of all applications. “Zip does more upfront due diligence on new customers than any other credit provider in Australia, including credit and identity checks for every single application,” the company says.

The Afterpay/Zip/Sezzle models are ‘anti credit’, appealing to largely unbanked millennials without a credit card.

In contrast, Splitit takes the approach of teaming with the banking establishment with a model that intermediates the existing credit or debit card payments chain.

Consumers can split their payments into up to 36 monthly instalments, without incurring interest. The bank credit card providers – who have already vetted the customer -- continue to bear the credit risk.

“From a competitive perspective we are different to the others,” says Splitit chief Gil Don. “Especially in the Australian market, we do not provide new credit or debt.”

If anything, Splitit’s rivals are not BNPL providers, but store cards and perhaps the 30-day interest free capability of a credit card.

While Afterpay’s average balance is around $150, Splitit’s is $1,000 which reflects its older demographic of 28 and above.

Don says it’s healthy to have the option of half a dozen providers at the checkout – physical or virtual – because it’s not a case of one size fits all. A $100 purchase is not really suited to Splitit, because few consumers would bother with $20 instalments over four months.

Having said that, how many payment options at the checkout can a consumer tolerate before the tyranny of choice simply confuses them? And how many schemes can the merchants keep track of with its internal auditing and other procedures?

While endless schemes may well flourish with their tweaks and niches, the most fruitful rewards will go the providers who can emulate PayPal and become the global household name in payments.

With its US momentum reportedly gathering more momentum than a pro-gun rally in Wyoming, Afterpay may well take line honours and silence its sneering critics.

Like Afterpay, the New York based Splitit is focused on the US retail sector which turns over $US8 trillion a year with more than one-thirds still carried out by credit cards.

 “The strategy is to acquire as many merchants as we can, but from a quality rather than quality perspective.”

With revenue last year of only $US790,000 ($1.14m), Splitit is smaller than Afterpay (first half income of $112m) or Zip (first half revenue of $34m). Splitit also lost $US4.64m for the year but Don notes Splitit’s expenses are lower than that of the other BNPL providers because the company doesn’t have to devote resources to chasing delinquent shoppers. “If we can get to the numbers they are doing, you only have to do the math,” he says.

While Splitit operates in 27 countries it has a US revenue bias. This month it also struck a deal with EFT Payments Asia - the partner of Chinese ecommerce titan Alipay - making Splitit available to customers of retailers such as Estee Lauder, Sunglass Hut, Kate Spade and Marriott.

“This is just the beginning of the beginning,” says Don.

Disclaimer: 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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A beam of light

Friday, June 07, 2019

Formerly known as WorldReach and best known for owning the SatPhone Shop retail chain, Beam Communications (BCC) 29 cents, the designer and manufacturer of satellite telco devices bears a lowly $14 million market valuation - below the company’s expected current-year revenues.

“We’re an all-Australian public company that develops world-first tech products that no-one’s ever heard of,” CEO Michael Capocchi says.

Beam actually is well-known in the telco sector for its “narrow band” mobile satellite devices that fill in the gaps where coverage is not otherwise available. Beam’s partners (or clients) include Telstra and the world’s biggest satellite operators:   Iridium, Inmarsat, Thuraya and Japan’s KDDI.

One of Beam’s best-known products is Iridium Go!, a mobile-based satellite phone developed for Iridium, a Virginia-based global satellite company.

Of course, sat-phones have been around for years.  “But going outside with a big chunky satellite phone was not the easiest way to make a call, so we developed a wi-fi hotspot,” Capocchi says.

“So long as (the device) can see the sky, you can open up the app on your Iphone and receive telephone calls or send Facebook or Twitter upgrades anywhere on earth.”

More helpfully for humanity, there’s now no reason why hikers or boaters – or fully laden aircraft – should stay lost for long. Avid adventure seekers can buy a device for around $US700, acquire it under a mobile-plan style arrangement or rent for the weekend.

As with satellites, costs are quickly reducing. A key advantage is that unlike with one-way SOS signals, the two-way communication means emergency responders can assess whether the incident is a genuine crisis or the equivalent of the Uber Eats delivery guy being late.

You would be surprised what some folk consider to be an emergency …

In September last year Beam launched Thuraya WE, an internet connectivity tool for grey nomads.

 “It’s like being connected to wi-fi at home,” Capocchi says. “You won’t be able to have six people watching Netflix at the same time, but you can watch YouTube or download a video.

“Think early days of ADSL (dial-up internet) with speeds of around 250 megabits per second.”

After a torrid two years Beam has also rediscovered a key corporate attribute – black ink — en route to what management promises is “sustained profitability”.

Beam’s December (first) half revenue more than doubled to $10.5 million, with the net profit of $732,000 a turnaround on the previous $580,000 loss.

The March quarter generated receipts of $4.69 million and a $448,000 surplus.

A handy addition to the Beam board is David Stewart - not the former Eurythmics guy but the ex-CEO of the ASX-listed Netcomm (subject to takeover offer from the Nasdaq-listed Casa Systems).

No word yet on whether there’s room around the table for Netcomm chair Justin Milne, who has space in his diary after being jettisoned from the ABC board last year.

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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