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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.

Time to bank on the small fry?

Thursday, February 14, 2019

Royal Commissioner Kenneth Madison Haynes’ final report on bank atrocities was never going to make pretty reading after the tome landed on the desk of salivating reporters.

Having said that, the entrails weren’t quite as gory as expected and the heads-on-a-pike stuff was largely reserved for the upcoming finale of Game of Thrones — save for the National Australia Bank’s chairman and CEO of course.

While the inquiry was never formally aimed at the Four Pillars, as it happened the Big Four (as well as AMP and IOOF) were guilty of the multitude of sins, ranging from charging dead customers fees to shoddy lending practices.

As more big bank execs prepare either to spend more time with their families - or to work out who to blame - the smaller banks have emerged with their reputations largely intact.

For the juniors, there’s no better time to woo customers based on their more wholesome image, consistently reflected in surveys showing they are trusted more than the majors.

Should investors make the switch as well? While we can’t see the majors losing their oligopoly status in a hurry, the smaller regional banks can steal valuable market share, if they play their cards right by using digital technology to negate the disadvantages of being small and regional based.

And as my fourth grade teacher said: if you’ve done nothing wrong, you’ve got nothing to fear.

Most investors would be aware of the three remaining ‘super regional’ banks: Bendigo and Adelaide Bank (BEN), Bank of Queensland (BOQ) and bank/insurer/wealth manager Suncorp (SUN).  With market valuations of $5.2bn, $4.1bn and $17bn respectively. they’re not exactly minnows. The trio didn’t exactly escape the wrath of Hayne, either, having been forced to front the Commission over some unsavoury customer case studies.

Reporting her bank’s (disappointing) half year results, Bendigo CEO Marnie Baker noted trust in the banks “was and still is at an all-time low” and this played to the strength of Bendigo’s product offerings and “market leading customer service.”

With a mere $420m market cap, MyState (MYS) resulted from the merger of Tasmania’s Trust Bank and Tasmanian Perpetual Trustees with the Rockhampton based The Rock building society.

MyState is benefiting from the surprise resurgence of Tasmania’s economy, but also has been growing strongly outside of its traditional Tassie and Queensland heartland. Notably, MyState has a wealth management division, last year growing funds under management or advice by 6% to $1.153bn. With all the Big Four except for Westpac retreating from advice and with AMP in disarray, it’s a nice business to emphasise.

Meanwhile, the Bundaberg-based Auswide Bank (ABA) calls out the “Severe Reputational Damage of the Big Banks” (their capitals) and the associated internal investments they will need to make in improving their culture and systems.

“The environment represents an opportunity for Auswide, the only listed Queensland bank that calls regional Queensland home,” the bank says.

While the banking minnows sniff opportunity, they stand to be relatively more affected by the Commission’s unprecedented proposals to rein in the mortgage broking sector by abolishing trail commissions (and then  banishing lender-paid commissions altogether).

Haynes largely dismissed concerns that as the smaller banks are relatively more reliant on brokers to source loans, they would be disadvantaged.

Under the current system, he argues, lenders are competing not on offering the best product at the best price, but on who can offer the highest commissions to the brokers and aggregators (parties that sit between the lenders and the brokers).

Given the timing and uncertainties involved with the broker reforms, any impact on the competitive position of the small fry won’t play out for years.

However, the reforms will have a more immediate and direct effect on Goldfields Money (GMY), which is both a Kalgoorlie-based 'virtual’ bank and a mortgage aggregator (having acquired the business of Finsure last year).

Notably, Goldfields shares were marked down when the rest of the banking sector rallied post the Hayne Report.

On the banking side, Goldfields looks to be doing right, having increased its total loan settlements by 20% to $12bn during the year. In the September quarter, core banking loan settlements grew to $217m, compared with $68.7m a year previously.

Despite their reputational advantage, the small banks also continue to contend with a capital disadvantage, in that the Big Four are perceived as ‘too big to fail’ – or too big to be allowed to fail – and enjoy a higher credit rating.

Arguably, the regional small fry are better placed in a housing downturn because non capital city properties did not rise as much in the first place.

Global capital regulators also require smaller banks to hold more capital to support their lending. But this uneven playing field was partly levelled out in 2017, when then Treasurer Scott Morrison imposed a $6b deposit tax on the majors.

The Hayne pain is not the only obstacle threatening to derail the banks from the golden prosperous run they have enjoyed for the past decade.

Fuelled by the millennials' disdain for traditional banking, fintech rivals are chipping away at most aspects of the banks’ activities.

ASX-listed examples are the crowd funders Domacom (DCL) and Wisr (WZR), rewards card intermediary EML Payments (EML), investing app Raiz Invest (RZI). Of course, there are also the ‘buy now pay later’ conduits, Afterpay (APT) and Zip Co (Z1P), which face their own potential regulatory crackdown.

The obscure Novatti (NOV) has applied for a limited banking licence under APRA’s liberalised regime, targeting the 220,000 underbanked migrants who arrive annually.

The fintechs’ market penetration will be helped by the pending introduction of Open Banking, which will compel the banks to provide customer data to these would-be rivals at the customer’s request.

Or is the peak banking/death of the Four Pillars overplayed? This month’s half-year report from the Commonwealth Bank -- the only one of the Big Four with a June 30 balance date – didn’t exactly scare the pundits. Still, it’s too early to gauge the impact of the Hayne fallout and the housing slump.

It’s likely that devoid of their wealth practices, the Big Four will emerge as stronger institutions as they focus on core retail banking and a business strategy that doesn’t rely so much on screwing customers.

Interestingly, the minnows have fared little better than the majors, share price wise. Over the last 12 months, the Big Four declines range from a very modest 3% for the CBA to -14% for the NAB. Bank of Queensland shares have tumbled 17%, Bendigo shares are down 8%, while Suncorp shares have gained 4%.

MyState shares have fallen 6%, while Auswide stock has treaded water. Shares in Goldfields Money, a special case because of the bank’s aggregator role, have tumbled 50%.

We wouldn’t advise wholesale abandonment of the Four Pillars in their hour of need. But given the ASX banking milieu now strays far beyond the major, now’s the time for investors to mull some much-needed diversification of their banking portfolio.

tim@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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Two true blue stocks

Thursday, February 07, 2019

Bluglass (BLG) 28 cents

A time-honoured way for fledgling tech companies to pump up share valuations is to hint at a pending deal involving a deep-pocketed global partner – with as many references to billion dollar addressable markets as possible.

The trouble is, investors dump the stock twice as quickly if there’s no deal, or the partnering transaction isn’t as lucrative as expected.

An innovator in light-emitting diode (LED) lighting technology, Bluglass learnt a lesson about managing investor expectations, after putative partner Lumileds declined the terms of a deal to commercialise Bluglass’s technology exclusively.

A leader in automotive lighting, Lumileds had been working with Bluglass to develop a prototype of a high performance LED.

Formerly part of Philips but now owned by private equity firm Apollo, Lumileds sells one-third of those day-time running lights that used to be the preserve of upmarket vehicles, but are now equipped in modest Hyundais and Toyotas.

But it looks like Bluglass asked for too high an exclusivity fee and Lumileds baulked, resulting in Bluglass shares tumbling from 29 cents to 18 cents over the next four trading sessions. The stock has since recovered.

“We had what we thought was a fair exclusive offer and they had a counter offer,” CEO Giles Bourne says. “We couldn’t reach a middle ground, so we let the contract expire.”

12 months ago, management described the Lumiled collaboration as a ‘key priority’ for the company. Bourne says it still is and hopes a commercial deal can still be reached.

In the meantime, management is spruiking its technology to an open field of candidates in the hope of creating an auction. That’s called ‘price discovery’ in investment banker circles.

So what’s the fuss about?

Bluglass has been working on its technique to make LEDs that produce more brightness with less power.

 The key to Bluglass’s obscure process is that the semiconductors (on which the LEDs are based) are produced at much lower temperatures (150 degrees Celsius rather than 1200 degrees).

The process, called remote plasma chemical vapour deposition, uses nitrogen rather than ammonia so does not produce toxic waste.

Strictly speaking, Lumileds would not make the LEDs itself but would retrofit the equipment of the two big global semiconductor suppliers Veeco of the US and Aixtron of Germany.

Bluglass recently stumbled on a solution to the problem of ‘efficiency droop’: the lights becoming dimmer after power input reaches a critical point. The solution involves ‘tunnel junctions’ and ‘cascaded’ LEDs and any boffins inclined to learn more should look it up themselves.

Suffice to say, the solution means more LEDs that can be crammed into increasingly smaller applications.

Bluglass has a separate collaboration with IQE Group, an AIM-listed semiconductor business with a $1 billion market capitalisation. But this venture –  which pertains to non-lighting uses such as for radio frequency devices and power switches — has been put on the backburner as Bluglass focuses on tunnel junctions.

In the meantime, long-term holder Sumitomo (SPP Technologies) has sold its 13.6% stake to a financial investor, Lanstead Capital.

SPP said the Bluglass investment was not germane to its immediate business activities, but remains interested enough to retain an exposure to any upside in Bluglass’s share price over the next three years.

It’s called not having your cake and still eating it.

Bluglass has been plugging away for more than a decade, having listed in 2006 after raising $9.8 million at 20 cents apiece. It now boasts a $130 million market capitalisation, bearing in mind the company has raised further $65 million since then.

Bluglass’s long-term investors including Macquarie Group will need to wait longer for the light at the end of an elongated development tunnel.

There’s a bright future for Bluglass, if a vaunted commercialisation deals with deep-pocketed parties comes to fruition.

Currently a $200 million a year global sector, LED lighting promises to overtake halogen globes, in the same way as halogen displaced the old incandescent globes and those bulbous globes replaced candles.

Bluechiip (BCT) 6.7 cents

For the maker of sensors to measure the temperature of cryogenic samples, it’s been a case of honing its strategy from tackling the market in its own right to seeking partnering deals with those who make the lab equipment.

Every year, about 300 million samples of bodily matter are added to the two billion vials already in frozen storage.

Some facilities house millions of samples, yet half of them are still identified with handwritten labels.

As anyone who’s tried to identify a frozen chook or leg of lamb would know, it’s not easy to identify the item beneath a layer of permafrost.

Bluechiip’s brainwave – a wireless tracking method based on an embedded sensor – should be of interest to commercial and research labs globally.

The Bluechiip device is a sensor embedded into vials or sample bags, recording the details (and temperature) of the specimens in question.

The data is wirelessly conveyed to a reader (which looks like a TV remote) and is stored and displayed with associated software.

The sensors are tiny buttons of less than a millimetre diameter, with 60 tiny metallic beams configured to resonate with specific frequencies.

 Unlike radio frequency identity (RFID) sensors – the main alternative – the sensors can work at any temperature and can survive sterilisation and gamma ray procedures.

Under a ‘razor blade’ model, Bluechiip supplies the sensors to the vial makers. The dot-like sensors are built into the bottom of the vials, while the readers (which look like a TV remote wand) are supplied separately to the labs.

To date, Bluechiip has had most sales success with US laboratory supplier Labcon, which has entered a deal to buy $15.9 million of sensors over the next three years.

Typically, a standard small vial sells for 15-20 cents and a larger one for 70 cents to $1.20.

The Bluechiip-enabled ones will sell $2 to $2.50, which means the company has to work hard to convince the labs about the productivity benefits.

The readers sell for $US4,000 ($5500), or $US9,000 for the deluxe version that can read several vials at once. “We are rarely asked about the cost of readers and infrastructure but are asked more about the cost of the consumables,” CEO Andrew McLellan says.

Wisely, the company high value channels such as pharma research and stem cell therapy. It’s also hard to envisage an IVF patient from baulking at an extra $1 or so for the comfort of knowing her egg can be easily tracked

Bluechiip disclosed revenue of $561,544 for the year to June 2018 and a loss of $2.5 million, but the December quarter showed a more subdued $117,000, ahead of ramp up of the Labcon contract.

The company also $5.6 million of cash, courtesy of a $7.45 million share placement and share purchase plan last September.

The Bluechiip sensors, by the way,  are based on micro electro mechanical systems, or MEMS, the same magic that sent a super nova stock called Panorama Synergy up from 0.4 cents to 50 cents in 2014.

Panorama couldn’t maintain the hype, but we ‘sense’ that Bluechiip is on safer ground with a modest $35 million valuation.

tim@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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6 Aussie seafood shares to savour

Friday, February 01, 2019

Most of the expanding school of piscatorial plays are export oriented – or aspire to be – and leverage Australia’s image of having pristine waters. With an $810m market cap, Tasmanian salmon producer Tassal (TGR, $4.53) is the leader in the ASX pool. But as with fellow Taswegian producer Huon Aquaculture (HUO, $4.70). But there are plenty of tiddlers to choose from, at a time when Tassal and Huon deal with ongoing pollution issues. Here are 6 of them:

1. Murray Cod Australia (MCA) 17c

As far as “mortality events” go, it’s hard to overlook the demise of an estimated one million fish – notably Murray cod -- in the Darling River system because of low oxygen levels apparently resulting from drought.

As is the Australian way, the mass extinction is the subject of much finger pointing and several government-commissioned inquiries.

Not surprisingly, the Griffith-based Murray Cod Australia fielded numerous queries from investors concerned about the quality of the company’s water for its pond-based operations. Chairman Ross Anderson assured them the water was sourced from the Murrumbidgee river system. “As much as these events are deeply distressing to all involved, they have no impact on (the company’s) for this year or coming years,” he said.

The company’s current inventory consists of 840,000 fish across 16 dams, but the company plans for a 35-dam super site this year.

Murray Cod also plans to convert a former orange juice factory in Griffith to a bespoke facility, thus creating economies of scale and allowing for value added products.

Murray Cod sells mainly sells in Australia but recently sold in Japan and plans to export to the US.

In 2017-18, the company reported a 225% revenue boost to $2.6m, but posted a $300,000 loss. But its shares have performed well: a case, we guess of investors placing their faith in Cod.

2. Clean Seas (CSS) $1.03

Clean Seas Tuna chief David Head is diplomatic – well, sort of – when asked about the relative merits of Clean Seas’ farmed yellow finned kingfish.

 “I’m not doing ‘best fish at 10 paces’ but I genuinely think it’s the best fish in the world,” he says of Clean Seas’ tuna, harvested across several leases in the Spencer Gulf.

Well he would say that, wouldn’t he? But Head does have third party endorsement after the company’s reps knocked on the kitchen doors of 2,000 leading chefs, including belligerent British pan wielder Gordon Ramsay, who declared Clean Seas’ product to be “f%&*ing delicious”

More than 40% of the great chefs of the world said they were happy to use the product, which is being served in restaurants including Sydney and Melbourne’s Sake, Melbourne’s Aria, London’s Zuma and, of course, Gordon Ramsay.

Clean Seas’ growing output and its (modest) profitability belies a dark history for the company, which at one time claimed to have discovered the secret to captive breeding of southern bluefin tuna, the Rolls Royce of sushi ingredients.

Sadly, it hadn’t. The company turned to yellow finned kingfish, but then had a problem with unacceptable mortalities. The fishy fatalities are the subject of an ongoing legal claim against a former feed supplier, Gibson’s.

With the new management shingle out, Clean Seas has hit its stride with expected sales of 2750-3000 tonnes in the 2018-19 year, 17% higher (at the midpoint) than last year’s 2353t.

Clean Seas also targets sales of $47-50m, 18% higher than previously, with “further double digit sales growth expected to continue in 2019-20 and beyond”.

Clean Seas’ export hopes lie with freezing kingfish using a nitrogen quick-freeze process that cools the fish 10 times faster than the usual method .That way, there’s less undesirable fluid when the specimens are thawed.

The company late last year signed a deal to sell its “exceptionally high quality” yellowtail kingfish to China, following a distribution agreement with one a premium seafood distributor.

As with the other piscatorial stocks, Clean Seas plays on the global dynamics of soaring demand at a time when wild fish stocks have peaked and in some cases are being rapidly depleted.

Long-suffering investors are yet to buy the Clean Seas story, with the shares marking time over the last 12 months.

Clean Seas had cash of $2.23m at the end of the September quarter, which may be too close to comfort for some punters.

3. Seafarms Group (SFG, 12c)

Seafarms is already Australia’s biggest farmed prawn producer, having operated from its Cardwell facility in northern Queensland since 1988. Last year, the company produced 1500 tonnes of black tiger and banana prawns.

But Seafarms has bigger fish, er,  prawns to fry, having started earthworks on converting Legune Station (near Darwin)  to a massive black tiger prawn facility across 10,000 hectares, capable of producing up to 100,000t  annually.

Currently a cattle property, Legune is based on coastal flood plains and that’s what makes it amenable to prawn farming.

Dubbed Project Sea Dragon, the venture is costed at $1.5 billion over a staged seven-year development. Backers include the offtake partner and 14.99% Seafarms shareholder Nissui, a global seafood giant. The NT, WA and Commonwealth governments have also been supportive with measures such as road upgrades.

 “There have been many doubters that the project would not get to this stage,” says chairman Ian Trahar, who notes the project’s potential to produce $3bn of annual export revenues.

Operating under the Crystal Bay brand, Seafarms last year turned over $35m of revenue but produced a $19m loss, the result of investing in the NT project ($85m to date). The mainstay Queensland ops are expected to produce $5.5m of underlying earnings this year.

4. Meanwhile Angel Seafood (AS1, 13.5c) grows and exports oysters from five tenements covering 67 hectares in South Australia, notably Coffin Bay which is the best known producing region for the slimy crustaceans.

Angel reported a $1.1 million loss on revenue of $1.5m million in the 2017-18 year, but in the September quarter revenue had ticked up to $1.1m for that stanza. Given the demand dynamics and the low contribution of farmed product to the market, the world should be Angel Seafood’s oyster.

5. Let’s not forget abalone – Asian markets certainly don’t – and the role of Ocean Grown Abalone (OGA, 15c) in farming the slow-growing delicacy on artificial reefs at Flinders Bay at Augusta in Western Australia.

In a recent development, Ocean Grown struck a collaboration deal with the WA government to increase the number of these reefs (called abitats) from 10,000 to 15,000. This will enable the company to increase greenlip abalone output from a current maximum of 200 tonnes a year to 300t.

Investors are yet to warm to this one, with Ocean Grown shares drifting from their November 2017 listing price of 25c a share.

6. Still in WA, Mareterram (MTM, 19c)  trawls the heritage-listed Shark Bay (800 km north of Perth) for prawns and scallops but once again its shares have been off the pace. One reason is that last year’s prawn haul of 540 tonnes compared with 830t.  On the flipside, the company is enjoying higher prices and valuation wise the company’s $26m market cap exceeds the value of its fishing permits alone.

tim@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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11 beaten down small caps that might rock in 2019

Thursday, January 31, 2019

As is always the case in a shabby market, investors have taken an indiscriminate approach to baling out of small to medium cap stocks, rather than basing their actions on specific news.  

1. Costa Group (CGC, $5.16)

This year’s notable Biggest Loser to date is the fruit and vegetable grower Costa Group (CGC, $5.16), which has downgraded its expected interim (December half) earnings from a double-digit percent increase to a flat result.

Ripe for revenge, investors wiped 39% off Costa’s valuation, although the stock has partly recovered. The key culprits were those maligned hipster millennials who aren’t smearing their wholegrain sourdough dough with avocado in the same way they were. Given the property correction, perhaps they are saving up to buy a house?

The company also cites subdued demand for tomatoes and berries, which means a punnet of blueberries fetches around $2.50-$3 compared with $3-$3.50 12 months ago.

Management insists the decline is not structural; in other words, it’s the result of temporary oversupplies that afflict any agricultural commodity from time to time.

The company also expects revenue and earnings growth from its recent forays into China (blueberries, raspberries and blackberries) and Morocco (blueberries).

If that’s right, like an immature orchard, Costa shares offer longer term value. But it looks like demand for avocadoes has peaked, having grown at an annual 6% over the last decade.

To better align with the growing seasons, Costa has just changed its reporting to calendar year rather than June 30. Management still expects to achieve double-digit gains for calendar 2019 but this implies a heroic performance in the key January to June period.

2. Fleetwood (FWD, $1.96)

Turning to the grey nomad demographic, the recreational vehicle sector is booming, but the Perth-based Fleetwood (FWD, $1.96) now looks a smarter company after it disposed of its loss-making caravan business.

This means management can now focus on its modular accommodation business, which taps into strong infrastructure spending.

Management cites strong government demand for mobile buildings for miens prisons and schools. Fleetwood also operates the Searipple Village in Karratha for Rio Tinto since 2012, with the miner in December extending its contract by a year.

Fleetwood last year expanded into the eastern seaboard market with the $34m purchase of the Sydney-based Modular Building Systems and the $10m purchase of the Melbourne based caravan plumbing and electrical supplier Northern RV. These were funded by a $60m rights raising.

As Wise-owl’s Simon Herrmann notes, the acquisitions are revenue and earnings per share positive and the raising was well supported by institutional holders.

Post the acquisitions and divestments, Fleetwood is operating on a run rate of $330m of revenue, generating earnings before interest and tax of $31m.

Despite the progress, the shares are well off their February 2017 high of $3. 

3. Villa World (VLW, $1.81)

For those with a bent for more permanent accommodation, shares in Queensland based home builder Villa World (VLW, $1.81) have lost 36% of their value over the last year. In December, Villa World withdrew its guidance of current year earnings of $40 million and didn’t provide any update. That’s as ominous as a black cat walking under a ladder on Friday the 13th.

The company had stuck by that guidance at its mid November AGM, which shows just how much the residential housing market has deteriorated. Villa World’s problem in particular is the reduced availability of finance for home buyers.

There’s always a ‘however’, however, and the company still expects to report a first profit of $16-$17m next month, with an eight cents a share franked dividend.

Assuming a full year profit of $29m and a 12.5c a share full-year div – as broker Baillieu does – and Villa World is trading on a multiple of seven times earnings and on a 7.4% yield.

4. G8 Childcare (GEM, $2.96)

Childcare centres have proven popular with investors because of their defensive characteristics; although in early 2018 the industry was suffering from oversupply issues in some locations.

This capacity problem seems to be abating, while the federal government’s revised childcare subsidy scheme came into effect in July. Under the revised arrangements, more parents are winners than losers.

Industry leader G8 Childcare (GEM, $2.96) has been the ‘go to’ stock, but for investors wary about the company’s $1.3bn market capitalisation, there are two smaller alternatives. 

5. Think Childcare (TNK, $1.45)

Think Childcare (TNK, $1.45) operates 55 centres, mainly in Victoria. The occupancy issues saw Think shares slide some 50% from their January 2017 highs. But in a November update, Think affirmed calendar 2018 earnings expectations of $4.75-$5.25m (earnings per share of 10-11c).

6. Mayfield Childcare (MFD, 96c)

Mayfield Childcare (MFD, 96c) points to a net profit of $4.4m for calendar 2018 and expects to delight investors with a 9.2 cents per share dividend, implying a 10 percent -plus. Mayfield shares have lost 30% of their value since peaking in February 2018. 

7. PMP Group (PMP, 18c)

While the childcare sector touts it defensive credentials, the printing game is far from assured given the pace of the digital revolution. But every stock has its price and those with an elevated speculative appetite might consider PMP Group (PMP, 18c), the country’s biggest commercial printer following the merger with the Hannan family’s IPMG in February 2017.

PMP has a history of delivering misery to shareholders, with the stock trading at five-year lows. But the market might not have twigged on to a few fundamental changes, notably lower debt and the fact that the merger reduced the number of players in the hotly-fought retail catalogue sector from three to two.

PMP last year generated ebitda of $40.6m on turnover of $734m. But complex adjustments resulted in a bottom line loss of $43.8m compared with a $126m deficit previously.

A point of intrigue is that the Hannans, which account for 7% of the register eventually might privatise the company, which now has a measly $90m market capitalisation.

8. Kina Securities (KSL, $1.03c)

Banks shares are not usually seen as speculative, although some might argue the shares in the Big Four are just that, given last year’s value erosion. A quirkier exponent of the sector is the PNG-based Kina Securities (KSL, $1.03c), which operates in a suspect economy but has capital backing and credit quality levels that would put our Four Pillars to shame.

In June last year, Kina acquired the retail assets of the ANZ bank for $10m, increasing its share of the lending market from 5.8% to 8.8%.

Kina also has the advantage of not having been hauled before a Royal Commission.

Kina reported a June half net profit of 20.6m kina ($8.6m) and paid a 4c a share dividend.

Kina’s net interest margin stood at 8.1%, compared with 2% for the Big Four banks in the 2017-18 year. Kina’s return on equity of 16% overshadowed the Aussie banks 12.5%, while Kina’s capital adequacy ratio of 29% is almost twice that of the Four Pillars. 

9. Redhill Education (RDH, $2.60)

The bank describes the PNG economy as resilient, “despite tighter private sector lending and lower employment growth compared with recent years.”

Elsewhere, shares in well-run vocational education provider Redhill Education (RDH, $2.60) ran hard in early 2017, but have retreated since October. A case of back to remedial class, despite management’s solid earnings outlook which should at least earn it an A for effort.

10. Eden Innovation (EDE, 6.7c)

Eden Innovation (EDE, 6.7c) had made good progress in commercialising its concrete technology in the US, targeting the road and bridge building sector. The company reported calendar 2018 sales of just over $1m, more than double the previous run rate. Eden shares, meanwhile are trading at less than half of their valuation of a year ago.

11. Xtek (XTE, 46c)

In the $50bn a year defence sector, Xtek (XTE, 46c) remains a stock to watch as it wins more contracts pertaining to military drones and ballistic plates and helmets. Once again, Xtek shares have sagged despite the company’s expectation of current year revenues of up to $26m, compared with $17.3m in 2017-18.

tim@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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Stellar performers and falling stars

Wednesday, January 23, 2019

A tale of two halves, bookended by elation and misery. That’s our best summation of 2018, which saw the All-Ordinaries Index climb a healthy 5% but then fall some 13% after investors took an angry turn in early September.

Naturally, the initial enthusiasm for speculative sectors such as cannabis, bitcoins/blockchains and early-stage resources vanished in unison.

How did we fare during a year that promised so much but ultimately delivered dollops of misery?

Strictly speaking, I don’t recommend stocks for (a) legal reasons and (b) a profound lack of real insights. But being of sunny disposition, I do try to cover stocks that have a snowflake’s chance in Hades of going somewhere.

On that count, our 2018 coverage produced mixed results and many of the companies are a work in progress. Or maybe we’re just being polite.

In January, we covered the tech tearaway Titomic (TTT), which by then was trading at 80 cents, having listed in September 2017 at 20 cents. Shares in the 3D metal printing play have since risen threefold, having achieved first revenue in the third quarter.

Another stellar performer was the obscure Perth-based recruiter RBR Group (RBR), which was trading at 0.6 cents when we aired their story in mid August.

RBR shares have more than doubled as punters wise up to RBR’s potential in Mozambique, where it has an effective monopoly on recruiting up to 50,000 workers for two huge onshore LNG projects costed at $US50 billion.

RBR remains valued at less than $10 million.

Shares in gambling play Jumbo Interactive (JIN) have more than doubled since we covered them in February. Jumbo holds the exclusive rights to sell lottery tickets online for the merged Tatt’s/Tabcorp and benefits from a regulatory clampdown on the activities of derivate lottery rival Lottoland.

 In the medical sector, Polynovo (PNV) shares have surged 23% since July, when we noted the potential of the company’s Novosorb, a scaffold-type device for surgical and reconstructive wounds using technology developed by the CSIRO.

Avita Medical (AVH) has an alternative spray-on skin treatment called Recell, which won US regulatory approval in October. The shares have proved a slow burn, although the company raised a chunky $40 million in early December.

In January, we pondered whether the emerging blockchain mania was just another form of crypto craziness, or a more respectable iteration of bitcoin and its many cousins.

We boldly proclaimed 2018 as the “year of the blockchain – the underlying technology supporting crypto currencies.”

Sadly, all the blockchain-exposed companies we cited have been routed share-price wise. Logistics group Yojee (YOJ) has lost three quarter of its value, despite reporting reasonable progress.

Still, the rewards still await the companies that are able to harness the complex technology to improve their supply chains.

Some of the companies we mentioned are no longer with us, for better or worse.

As we penned a piece on Viralytics in February, the immune-oncology house was mulling a $500 million takeover by global drug giant Merck. A 160% premium on Viralytics' then share price, the deal reinvigorated the sector’s animal spirits, although similar deals have yet to materialise.

Management of the struggling listed investment company Wealth Defender Equities was taken over Geoff Wilson’s WAM Capital -- a humane act for the fund’s long-suffering shareholders.

Capilano Honey fell into the sticky hands of private equity, amid (unproven) claims that some of its product was not the genuine bee’s knees.

And not for the first time, chemist owners and drug developers Australian Pharmaceutical Industries (API) and Sigma Healthcare (SIP) are planning to merge – a proposal the competition regulator will have much to say about.

As general themes, I still like nickel and tin stocks for the role the commodity plays in electric cars and electronics generally.

Wisely, investors are rediscovering the safe harbour qualities of gold. Australian producers are especially well placed, having chipped away at costs and made some decent discoveries.

In May we noted the potential of the long-subdued uranium sector, given that some big producers had curtailed production. Indeed, the uranium price has since recovered from the $US23 a pound level to around $US29/lb.

Oddly enough, uranium stocks such as Paladin Resources (PDN), Vimy Resources (VMY), Bannerman Resources (BMN) and Toro Energy (TOE) are yet to glow.

 Leading childcare operator GE Education (GEM) stands to benefit from the government enhanced childcare subsidies introduced last July.

Arguably G8’s $1.3 billion market cap takes care of the upside, so perhaps the ones to watch are the smaller rivals Think Childcare (TNK) and Mayfield Childcare (MFD).

 In the vocational education sector, shares in well-run Redhill Education (RDH) ran hard after we mentioned them in early month, but have retreated since October. A case of back to remedial class, despite management’s solid earnings outlook which should at least earn it an A for effort.

 Investors have been especially interested in data centres, which in essence are temperature-controlled buildings to house servers. As long as the cloud economy continues to thrive, so too will data centre operators such as industry leader Next DC (NXT) and the fledgling Data Centre Network (DXN), which listed in April.

Eden Innovation (EDE) had made good progress in commercialising its concrete technology in the US, targeting the road and bridge building sector. But it’s yet to be reflected in the company’s valuation.

In the $50bn a year defence sector, Xtek (XTE) remains a stock to watch as it wins more contracts pertaining to military drones and ballistic plates and helmets. Once again, Xtek shares have sagged despite the company’s expectation of current year revenues of up to $26 million, compared with $17.3 million in 2017-18.

As a topic wealth management platforms aren’t exactly Christmas barbeque stoppers. But they’ve oozed sex appeal as an investment and should continue to do so as trillions of dollars continue to flow into the managed fund and self managed super sectors.

The listed exponents are HUB24 (HUB), Netwealth (NWL), Praemium (PPS) and the smaller Managed Accounts Holdings (MGP)

Holding an eclectic mix of assets, Authorised Investments (AIY) proved a topsy-turvy ride for investors during the year, with its shares spiking from 2 cents to an April peak of 19 cents.

The reason for the interest was a two-stage deal pertaining to Hong Kong based digital advertising assets. As is the case with complex deals it encountered more snags than the aforementioned barbie and the shares are back in that 2 cent territory.

Our key regret for the year was covering the then obscure life insurer Freedom Group (FIG) in May.

We thought the group might have been well placed, given the banks’ retreat from the sector. As it happens, Freedom was part of the problem and the company now struggles to survive after revelations of unsavoury sales practices were aired at the banking Royal Commission.

With a treacherous 2018 now behind us, let’s hope the market gods (and Donald Trump) do the right thing by investors in 2019.

At least investors won’t be buying in at the peak of the market.

tim@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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Regrets, I have a few but…

Tuesday, December 18, 2018

A tale of two halves, bookended by elation and misery.

That’s our best summation of 2018, which saw the all-ordinaries index climb a healthy 5%, but then fall some 13% after investors took an angry turn in early September.

Naturally, the initial enthusiasm for speculative sectors such as cannabis, bitcoins/blockchains and early-stage resources vanished in unison.

How did we fare with our articles during a year that promised so much but ultimately delivered dollops of misery?

Strictly speaking, I don’t recommend stocks for (a) legal reasons and (b) a profound lack of real insights. But being of sunny disposition, I do try to cover stocks that have a snowflake’s chance in Hades of going somewhere.

On that count, our 2018 coverage produced mixed results and many of the companies are a work in progress. Or maybe we’re just being polite.

In January, we covered the tech tearaway Titomic (TTT), which by then was trading at 80 cents, having listed in September 2017 at 20 cents. Shares in the 3D metal printing play have since risen threefold, having achieved first revenue in the third quarter.

Another stellar performer was the obscure Perth-based recruiter RBR Group (RBR), which was trading at 0.6 cents, when we aired their story in mid August.

RBR shares have more than doubled as punters wise up to RBR’s potential in Mozambique, where it has an effective monopoly on recruiting up to 50,000 workers for two huge onshore LNG projects costed at $US50bn.

RBR remains valued at less than $10m.

Shares in gambling play Jumbo Interactive (JIN) have more than doubled since we covered them in February. Jumbo holds the exclusive rights to sell lottery tickets online for the merged Tatt’s/Tabcorp and benefits from a regulatory clampdown on the activities of derivate lottery rival Lottoland.

In the medical sector, Polynovo (PNV) shares have surged 23% since July, when we noted the potential of the company’s Novosorb, a scaffold-type device for surgical and reconstructive wounds using technology developed by the CSIRO.

Avita Medical (AVH) has an alternative spray-on skin treatment called Recell, which won US regulatory approval in October. The shares have proved a slow burn, although the company raised a chunky $40m in early December.

In January, we pondered whether the emerging blockchain mania was just another form of crypto craziness, or a more respectable iteration of bitcoin and its many cousins. We boldly proclaimed 2018 as the “year of the blockchain – the underlying technology supporting crypto currencies.”

Sadly, all the blockchain-exposed companies we cited have been routed share-price wise. Logistics group Yojee (YOJ) has lost three quarter of its value, despite reporting reasonable progress. Still, the rewards still await the companies that are able to harness the complex technology to improve their supply chains.

Some of the companies we mentioned are no longer with us, for better or worse.

As we penned a piece on Viralytics in February, the immune-oncology house was mulling a $500 million takeover by global drug giant Merck. A 160% premium on Viralytics' then share price, the deal reinvigorated the sector’s animal spirits, although similar deals have yet to materialise.

Management of the struggling listed investment company Wealth Defender Equities was taken over Geoff Wilson’s WAM Capital -- a humane act for the fund’s long-suffering shareholders.

Capilano Honey fell into the sticky hands of private equity, amid (unproven) claims that some of its product was not the genuine bee’s knees.

And not for the first time, chemist owners and drug developers Australian Pharmaceutical Industries (API) and Sigma Healthcare (SIP) are planning to merge – a proposal the competition regulator will have much to say about.

As general themes, I still like nickel and tin stocks for the role the commodity plays in electric cars and electronics generally.

Wisely, investors are rediscovering the safe harbour qualities of gold. Australian producers are especially well placed, having chipped away at costs and made some decent discoveries.

In May, we noted the potential of the long-subdued uranium sector, given that some big producers had curtailed production. Indeed, the uranium price has since recovered from the $US23 a pound level to around $US29/lb.

Oddly enough, uranium stocks such as Paladin Resources (PDN), Vimy Resources (VMY), Bannerman Resources (BMN) and Toro Energy (TOE) are yet to glow.

 Leading childcare operator GE Education (GEM) stands to benefit from the government enhanced childcare subsidies introduced last July.

Arguably G8’s $1.3b market cap takes care of the upside, so perhaps the ones to watch are the smaller rivals Think Childcare (TNK) and Mayfield Childcare (MFD).

 In the vocational education sector, shares in well-run Redhill Education (RDH) ran hard after we mentioned them in early month, but have retreated since October. A case of back to remedial class, despite management’s solid earnings outlook, which should at least earn it an A for effort.

Investors have been especially interested in data centres, which in essence are temperature-controlled buildings to house servers. As long as the cloud economy continues to thrive, so too will data centre operators such as industry leader Next DC (NXT) and the fledgling Data Centre Network (DXN), which listed in April.

Eden Innovation (EDE) had made good progress in commercialising its concrete technology in the US, targeting the road and bridge building sector. But it’s yet to be reflected in the company’s valuation.

In the $50bn a year defence sector, Xtek (XTE) remains a stock to watch as it wins more contracts pertaining to military drones and ballistic plates and helmets. Once again, Xtek shares have sagged despite the company’s expectation of current year revenues of up to $26m, compared with $17.3m in 2017-18.

As a topic wealth management platforms aren’t exactly Christmas barbeque stoppers. But they’ve oozed sex appeal as an investment and should continue to do so as trillions of dollars continue to flow into the managed fund and self managed super sectors.

The listed exponents are HUB24 (HUB), Netwealth (NWL), Praemium (PPS) and the smaller Managed Accounts Holdings (MGP).

Holding an eclectic mix of assets, Authorised Investments (AIY) proved a topsy-turvy ride for investors during the year, with its shares spiking from 2 cents to an April peak of 19 cents.

The reason for the interest was a two-stage deal pertaining to Hong Kong based digital advertising assets. As is the case with complex deals, it encountered more snags than the aforementioned barbie and the shares are back in that 2 cent territory.

A key regret for the year was covering the then obscure life insurer Freedom Group (FIG) in May.

We thought the group might have been well placed, given the banks’ retreat from the sector. As it happens, Freedom was part of the problem and the company now struggles to survive after revelations of unsavoury sales practices were aired at the banking royal commission.

With a treacherous 2018 now behind us, let’s hope the market gods (and Donald Trump) do the right thing by investors in 2019.

At least investors won’t be buying in at the peak of the market.

tim@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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Pushing Tin

Thursday, December 13, 2018

Tin might be one of the world’s most strategic metals, but it’s not reflected in the price of the commodity. But with supply issues looming, this could well change in 2019

Touted as the next ‘battery metal’, tin has nine different uses in lithium-ion batteries and plenty of other applications in electronics as a solder.

And, yes, it’s also used for tin cans, with tinplate still accounting for 14% of global demand.

At the same time, tin supply is challenged because (a) the mines aren’t in amenable geographies or (b) they’re too low grade.

The problem – or perhaps opportunity – lies with the fact that not much has happened with the tin price-wise and investors have been disengaged.

Having fluttered close to $US22, 000 ($30,500) a tonne in February, the tin price has retreated to around $US20,000/t.

Even the International Tin Association isn’t going overboard, forecasting a $US19,000 price for 2019 (improving to $US22,000/t by 2022).

With half of tin output used as solder, tin remains a crucial component of electronics generally.

So even without a new ‘big bang ‘application, demand for tin demand looks robust.

But as participants at this year’s Beer & Co tin conference in Melbourne heard, there’s more intrigue on the supply side.

One issue is that the two biggest undeveloped deposits are in difficult locales: Bisie in the Democratic Republic of the Congo and Syrymbet in Kazakhstan.

They’re not exactly places to go for a holiday, let alone build a mine.

Most other prospects are low to medium grade and will struggle to obtain project financing and off take agreements with customers.

The other wildcard is that Myanmar emerged as a major producer after opening up to the west and in 2017 accounted for close to 20% of global supply.  No one’s quite sure, but shipments look to have dropped off because of slipping grades.

“The share price and valuation metrics don’t reflect the fact the tin market is looking quite solid and with ageing incumbent production,” says Stellar Resources CEO Peter Blight.

Kasbah Resources (KAS) 1 cent

The dearth of supply is music to Kasbah Resources, which happens to own 75% of the world’s third biggest untapped deposit: Achmmach in northern Morocco.

The company is currently in funding discussions to kick-start an underground operation, mining 750,000t a year to produce about 4500t of tin in concentrate.

The $US96m of required moolah is likely to come from a funding and off take deal with Japanese interests, who own the remaining 25% of the mine.

With production targeted for mid 2020 for a 10 year mine life, one might have thought investors would be rocking to the Kasbah story.

But the company’s paltry $10m market capitalisation reflects a shabby history, including a disastrous attempted merger with a Vietnam metal producer.

Kasbah’s board and management were overhauled in 2017.

“I’m conscious Kasbah has been around for a while and I deal with a lot of investors who roll their eyes and say ‘here we go again,” CEO Russell Clark says.

He says previous management did good development work on Achmmach, but at a time of declining tin prices. “We are seeing much better prices and new technology and all of this is adding up to make a project that works.”

Metals X (MLX) 38 cents

While Kasbah strives to be the new king of tin, for Metals X it’s a case of getting more from Tasmania’s Renison mine, which has operated for more than a century.

Half-owned by China’s Yunan Tin, Renison is a top 10 global tin producer, chugging out an annualised rate of 6500t.

The partners are on the cusp of expanding Renison’s resource base and production and have invested in ore sorting technology to improve recoveries.

They are also furthering a $205m tailings recovery project, Rentails, which awaits environmental approval.

Once again, the metrics are attractive: a $13,500/t margin based on the current $26,000 $A-denominated tin price.

At the conference, then CEO Warren Hallam described Renison as “the ore body that just keeps giving”.

In mid-November, Hallam was replaced by mining engineer Damien Marantelli, with a clear agenda to ramp up the company’s acquired Nifty copper mine in the East Pilbara.

Metals X also holds the Wingella project, one of the world biggest undeveloped nickel, cobalt and scandium resources

As with Kasbah, investors are keeping a (tin) lid on it. Metals X has a $320 market cap – having lost 50% of its value over the last six months – backed by $100m of cash.

At current tin prices the company’s half share of the Renison output should generate $30-35m of earnings this year.

Stellar Resources (SRZ, 1.7 cents)

Stellar’s Blight describes the company’s Heemskirk project near Zeehan in Tasmania as “the highest grade undeveloped deposit of significance listed on the ASX.”

Stellar’s original feasibility study envisaged a 600,000 tpa plant to produce 4500/t, concurrently mining three deposits within the project.

But management concluded (no doubt wisely) that such a grand project, while economic, entailed too much risk.

As a result, opted for a $45m slimmed down project handling 200,000tpa, with deposits developed sequentially.  The timetable to start mining has also been bought forward by six months.

Not surprisingly, Stellar’s role model is the Renison mine up the road, given Heemskerk and Renison share similar geology.

“The main difference between the two is that Renison has been mining for 50 years, it’s got over 6000 diamond drill holes,” Blight says.

“We have barely scratched the surface and we have probably found 20 percent of what’s been found at Renison over that period.”

Aus Tin (ANW, 1.5 cents)

While the share price of five of Aus Tin’s peers has declined by between 19% and 63% over the last 12 months, Aus Tin’s value has doubled.

Aus Tin two-pronged portfolio consists of the flagship Tarong project in northern NSW and the Granville in the west coast of Tassie.

Tarong, which has a mining licence and development approval, contains 57,000 tonnes of tin (34,000t of reserves) and a handy 26,000t of copper and 4.4m ounces of silver.

Previously owned by BHP and Newmont, the ore body is low grade, but the coarse grained nature of the metallurgy means the good stuff is easily extracted.

Under Aus Tin’s current plan only about 1% of the project’s 344,000t resource will be touched. “We believe there is an enormous opportunity to extend the mine,” says CEO Peter Williams.

Elementos (ELT, 0.5cents)

Elementos targets production from 2025 at its most advanced of its three projects, the Oropesa deposit in Spain’s Andalucia Province.

Slated as a 3500 tpa open-cut producer, the acquired Oropesa is subject to a definitive feasibility study due for release in mid 2019.

Elementos also has projects in Tasmania (Cleveland) and Malaysia (Temengo).

Tim.boreham@independentresearch.com.au

Disclaimer: Independent Investment Research covers Kasbah Resources. 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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Hit the ground bumming

Friday, December 07, 2018

The plunging valuations of some once-storied biotech show that as with resources explorers, there’s usually more fun for investors at the ‘blue sky’ stage. That’s when companies can spruik the potential of billion dollar blockbusters without the discipline of proving their potions actually work.

While the market never lies, some of the biotechs have blamed investors for not understanding the results.

Management’s common narrative is that while the drugs may have missed the primary endpoints (the main purpose of a clinical trial as stated before the program starts), they have shown other beneficial effects to justify the push to commercialisation.

Some companies have stoically waved the white flag and accepted that their key programs are all but dead and buried (hopefully not like their patients).

At Bionomics (BNO, 13.5c) the failure of its trial for post traumatic stress disorder cost the job of CEO Deborah Rathjen, who had led the company tirelessly since 2000.

In early October, Bionomics frankly revealed that its 193-patient, phase two trial showed that its compound BNC210 (touted as an alternative to benzodiazepines such as Valium) did not have a discernibly different effect relative to a placebo drug.

For stem cell play Mesoblast (MSB $1.32), the November 11 results of a long awaited trial of 159 end stage heart failure patients did not meet the primary endpoint of temporarily ‘weaning’ them off their implanted heart pumps.

Lest investors forget, the company played up the side benefits of reduced gastro-intestinal bleeding in a subset of patients, with a fewer rehospitalisations.

Three days later, Factor Therapeutics (FTT 0.02c) said its 157 patient, phase two trial to treat venous leg ulcers with a compound called VF001 “failed to meet all endpoints”. In essence, the wounds healed just as quickly (or slowly) relative to standard of care treatment (compression bandaging).

Factor chief Rosalind Wilson’s spin-free communication should set a template for all biotechs (and politicians): “Although the trial was well designed and executed, the outcome is that there is no clinical justification to progress further with the development of this asset for this indication.”

Over at respiratory diagnosis house Resapp (RAP, 10c), the white flag remains unfurled, with management forging ahead with its plans to develop a mobile phone app capable of diagnosing common respirator diseases with similar or superior reliability to a stethoscope.

After initial encouraging results, a study of 1,250 infants and children in August last year produced highly disappointing results, with accuracy rates for a positive diagnosis ranging between 36% and 89%.

At the time, the company blamed background noises including a second person’s cough in the recordings, as well as the clinicians treating the patients before the test contrary to instructions.

However in late October, the company issued follow-up results in relation to childhood respiratory disease

While mixed, the results missed the primary endpoint of diagnosing (or discounting) pneumonia. The shares tanked more than 50% on the day and CEO Tony Keating joined Mesoblast’s Silviu Itescu is lamenting the ignorance of the investing masses.

The question now is whether there’s any value in the affected stocks at beaten-down values.

Not surprisingly, Factor has halted all work on VF001 and will reduce costs “whenever possible.”

While Bionomics has ceased all trials involving BNC210, it says it will persevere with a trial for agitation in hospitalised elderly patients.

Bionomics also has a tie-up with Merck & Co, by which the drug giant funds is funding the development of a separate molecule as a cognition therapy for Alzheimer’s disease.

The deal generated an $US10m milestone payment last year and has a “potential” value of up to $US510m. “This is the jewel in the crown of Bionomics,” Rathjen told her swansong AGM in Bionomics home town of Adelaide.

Bionomics has $27m of cash and equivalents after a $9.9m placement to major shareholder BVF, which doubled its stake to 19.9% after subscribing to 60m shares at 16.4c apiece.

Bionomics is now subject to a corporate review by Greenhill & Co and if the numbers men recommend a change of direction, at least Bionomics has some handy cash to reinvent itself.

There has been no shortage of biotech chameleons in the past.

Backed by prominent US Republicans, Innate Immunotherapeutics last year bombed out with a closely-watched multiple sclerosis trial – and also candidly admitted to failure.

Now named Amplia Therapeutics (ATX, 23c), the company is trying to regain favour as a developer of two preclinical immune-oncology drugs.

Mesoblast is defiant about the heart trial, noting the US Food and Drug Administration sees reduced gastro intestinal bleeding and reduced hospitalisations as “a clinically meaningful outcome with a high unmet need that could meet requirements for an approvable regulatory endpoint”.

Mesoblast still has a raft of programs for other indications including chronic lower back pain, rheumatoid arthritis and diabetic nephropathy.

It also has an approved drug in Japan for graft versus host disease and European approval for a perinanal fistula treatment.

The company has also entered a cardiovascular partnership with China’s Tasly Pharmaceuticals, which has delivered a $US40m upfront payment.

Resapp is heartened enough by the childhood study to pursue US Food & Drug Administration approval for diagnosing lower and upper respiratory tract disease, as well as asthma.

Resapp also has a future in the burgeoning telehealth sector, especially in remote locations where stethoscope wielding docs are not available. 

Meanwhile, Factor expects to have cash of around $1.5m by December end –enough to reinvent itself as a cannabis or blockchain stock.

 Phosphagenics (POH) 0.2c

A developer of enhanced drug delivery devices, Phosphagenics' Waterloo moment came in the courtroom, rather than the clinic.

Many investors had been punting on the outcome of the company’s patent infringement claim against drug giant Mylan Laboratories, which had a ‘headline’ value of $US300m ($416m).

The dispute related to a research and licensing agreement to deliver daptomycin, the world’s most used injectable antibiotic.

 Given Phosphagenics’ circa $30m market cap at the time, investors assumed that an award of even 10% of the claimed amount would be highly material.

Instead the chosen adjudicator, the Singapore Court of Arbitration chucked out all of the Phosphagenics’ claims. What’s more, the company spent $5.6m on mounting the claim and now faces a yet unquantified order for Mylan’s costs, likely to run into the millions.

Under an ongoing licensing agreement, Mylan is still selling an injectable form of Phosphagenics’ tocopheryl phosphate mixture, used to treat skin and blood infections.

Phosphagenics is on the case for royalties, as well as Mylan demonstrating “commercially reasonable efforts” to commercialise the mixture (another requirement of the agreement).

Having lost 95% of its value, Phosphagenics is now worth less than its cash backing of $4m.

Some value might emerge from the wreckage, but the reality is management took a big punt on the quixotic legal system and lost. Not that the woes have stopped shareholder and former director Mark Gregory Kerr from boosting his stake on the company from 7.3% to 10.72%.

Given Phosphagenics in 2013 was almost terminally wounded by revelations of a $6m fraud -- carried out by then CEO Esra Ogru and others over nine years -- management had best avoid ladders and black cats for the time being. 

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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Winning customers from Telstra

Thursday, November 29, 2018

This recent junior telco listings has been shunned by investors but it highlights the opportunities in the post-NBN world.

Vonex (VN8) 10 cents

To Vonex chief Matt Fahey, the intensifying rollout of the national broadband network (NBN) rivals the deregulation of the telecommunications sector in the 1990s as an opportunity for smaller challengers to pinch market share from the incumbent Telstra.

It’s hard to remember that before deregulation, consumers had the choice of Telecom or Telecom and the then government-owned entity (now Telstra) made it clear it was a monopoly with its often abysmal service.

 “Deregulation was huge but the NBN opportunity is bigger again in my mind because it results in forced churn, not an opportunity to be invited to change provider,” Fahey says. “You have to be disconnected from the Telstra network and you have to make a conscious choice about how to connect to the internet.”

Vonex is targeting Telstra’s soft underbelly of small to mid-sized enterprises (SMEs), a sector that’s hard to serve because they require labour-intensive individualised services and offerings. 

Unlike households, SMEs can’t be offered a uniform product, but they also aren’t big enough to justify the tailored service. “We are watching Telstra shut down 75 percent of their business centres,” Fahey says. “That would suggest a white flag to me.”

Vonex’s strategy is similar to that of M2 Telecommunications, which built a thriving business from SME customers, in effect discarded by Telstra (the acquisitive M2 eventually merged with Vocus in what became an unhappy union).

M2 exploited the ‘churn’ at the time resulting from the switch from analogue to digital phone lines.

Vonex’s focus is on private branch exchange (PBX) connections, not the old fixed-line variety but cloud-hosted packages based on internet telephony.

So far, Vonex boasts about 2,500 customers, accounting for 24,400 ‘seats’ (employees). These include multi-site operations, such as the real estate agency Stockdale & Leggo, the Liberal Party, Deliveroo, Toyota Financial Services and the Australia Federal Police.

Almost all the customers have been winkled out of Telstra.

“There’s very little competition we fight against for the deals,” Fahey says. “In time, as the NBN sees major cutover, which is what’s happening, we will see competitors emerge.”

Telstra, he adds, will retain most of their SME clients, “but it doesn’t take a lot of leakage for customers like us to really capitalise on it.”

Vonex doesn’t deploy a sales force of its own but instead signs up ‘channel partners’, local IT companies involved in telco services, such as cabling and setting up networks. “They are our sales force and they are paid on results,” Fahey says.

Vonex also operates a wholesaling business, which ‘white labels’ its technology to other providers including the listed telco and IT provider Inabox and Spirit Telecom.

Combined, the direct and wholesale divisions posted revenue of $8.07m in the 2017-18 year, up 16% and generating $1.32m of earnings before interest and tax.

Vonex reported an unflattering bottom line loss of $14.7m, although $13.5m of this consisted of share-based payment expenses.

Vonex, meanwhile, has been beavering away on a conference calling app, Oper8tor.

To be launched in Europe next year, the app aims to link voice calls from users no matter, whether they use Skype, Whats App, WeChat, Viber, Google Hangouts or another social media platform.

Fahey says Vonex has targeted Europe not just because of its capacious audience of 780 million people, but because they are more likely than Americans to provide constructive feedback, rather than just deleting an app and moving on to the next shiny thing.

While Oper8tor will be free to download, Vonex hopes to make money from advertising, premium products (without the ads) and good old mobile call charges.

“The first milestone is to get 10 million people in the European Community on to that app,” Fahey says. “This has never been attempted before. It’s a complex product and it was all developed in house.”

Vonex eventually listed in mid June this year after a tortured history, including an attempted back-door listing with Aleator Energy in 2016.

The compliance aspects of the listing were botched, resulting in the $5m IPO proceed being refunded to investors.

Vonex then mulled listings on both the London bourse and the local National Stock Exchange before a surprise ASX listing opportunity emerged. The company raised $6m at 20c apiece.

The indifferent investor reaction post listing means the stock is valued at only $12m, or an $8m enterprise value, taking into account the $4m of cash as at the end of the September quarter. 

tim@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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Catch me if you can

Tuesday, November 27, 2018

Whitehawk (WHK) 6.9 cents

As the former deputy head of US naval intelligence, Terry Roberts has a lot of secrets to impart but she’d you have to shoot you if she were to spill the beans.

Now the CEO of cyber security minnow, Whitehawk, what Roberts can tell small to medium enterprises (SMEs) for free is that when it comes to online nasties, they’re doing the equivalent of leaving their windows and doors open to burglars.

“The traditional (scamming) methods are effective because the majority of SMEs haven’t put basic cyber security measures in place,” she says. “Ransom and phishing are still very effective. And when they’ve found a method that works, they can hit several thousand companies in 24 hours.”

Family offices, she says are especially vulnerable because (a) they have lots of money and (b) they tend to run charitable foundations without technical expertise. Folk working from home are also suspect to entreaties from Nigerian aristocrats with disturbing tales of impending dispossession.

While cyber security consultancies abound, Whitehawk’s core offering is a broking platform that matches SMEs in the US with appropriate cyber security products and services. The service is free to users, with Whitehawk taking a clip from the providers.

Whitehawk’s risk analysis tool 360 Cyber Risk Framework is pitched at the big end of the town and recently won its maiden deal from a top-ten US bank worth $US325,000 ($450,000).

Based in Washington DC, Whitehawk also consults to government and businesses, including the US Department of Homeland Security.

While acting as honest broker between enterprises and the array of cyber providers is a neat idea, Whitehawk faces the small-tech problem of growing its revenues to meaningful levels while preserving cash.  In the June half, the company generated revenue of $US240,526 (up from $US23,163 previously), but lost $1.63m.

As of September, the company’s cash balance was $1.5m, with potential inflows of $860,000, if the shortfall from an unpopular rights issue is placed.

Whitehawk listed on January 24 this year, having raised $7.85m at 25c apiece. The shares had been going remorselessly south but doubled on November 2 after the company announced a new contract to provide the 360 Cyber Risk Framework to the US Government.

In mid-November, Whitehawk signed a partnership with the Virginia-based insurance agent Clarke & Sampson to source cyber liability cover for SMEs.

Tim Boreham edits The New Criterion

tim@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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