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.

The New Criterion: HearMeOut

Monday, January 15, 2018

Your crusty columnist really must widen his social circle from his ageing acquaintances, as he had never heard of US rap artist Danielle Bregoli or Indian actor and singer Chinmayi Sripaada.

Bregoli – a.k.a. Bhad Bhabie – and Sripaada are listed as key social media influencers on Hear Me Out, a social media channel dubbed the voice version of Twitter.

Bregoli has chalked up 100,000 followers on HMO, while Sripaada is not far off on 79,000. But they face stiff competition from former US talk show host and inveterate social media user Larry King, who has agreed to post original content on HMO in return for 150,000 HMO options at a strike price of 20c.

As its name implies, the Israel-based HMO seeks to replace (or complement) the Facebooks and Twitters with a platform for 42-second video musings: anything from news commentary to jokes and sharing music clips.

The reasoning goes that one’s voice is more authentic than written posts, which have become subverted by trolls, disguised advertising and the fake news syndrome. “We feel the voice is an authentic signature and that’s what we want to bring back,” says CEO Moran Chamsi.

The 42 second rule isn’t a reference to Douglas Adam’s famous answer to the meaning of life, but a scientifically calibrated limit to allow users to post something profound without losing the attention of the audience.

It’s just as well, because as with Twitter (which recently doubled its allowable word length) there are plenty of folk in love with the sound of their own voice.

Speaking of such, HMO plugs into the growing acceptance of voice activated instructions, with 20 per cent of mobile queries now done with the vocal cords (OK, Google?)

HMO’s key prospects lie with the automotive sector and the ‘connected car’. Just as radio survived because folk can listed to their favourite jocks during their clogged morning commute, drivers can use the platform in a way they can’t avail of Facebook or Twitter (not legally, anyway).

One Sydney broker uses HMO to dictate a market report to 1800 clients.

In partnership with the Nasdaq-listed wireless chipset mob DSPG Group, HMO this month launched its in-car prototype called HOOP at the CES in Las Vegas, one of the world’s biggest consumer electronics fairs. HOOP, which does not require a ‘connected car’ to work, enables drivers to use their device while their hands are where they should be – on the wheel. 

In 2016, HMO partnered with Ford to implement its technology for the car maker’s Applink Synch platform. After a pilot in Ireland and the UK, Ford approved HMO for the US market.

Now that sounds promising.

As with so many app-based plays, HMO’s monetisation path is less clear and certainly can’t be explained in 42 seconds.

Suffice to say, it includes  personalised advertising, charging for premium profiles and licensing and white label deals with car makers.

HMO shares have sagged since listing in December 2016 at 20c apiece, after an oversubscribed $5.6m IPO. But at least the technology has been built already and the company doesn’t appear desperate to raise more funds.

“The tech is built so there’s not a big ongoing spending commitment,” Chamsi says.

As of November, the HMO app had been downloaded from the Google Play store 500,000 times. 

Connexion Media (CXZ) 0.09c (trading halt)

Now here’s a cautionary tale about another well supported, automotive-related ‘internet of things’ play that drove down the wrong road.

Backed by heavy hitters including General Motors and former Toyota Australia chief John Conomos, Connexion was to have revolutionised the morning commute with miRoamer, an internet radio capable of picking up stations anywhere in the world.

GM Connexion also developed a fleet management tool called Flex. In mid 2016 partner GM launched the product, known as Commercial Link to its US vehicle customers and last year expanded availability to Canada and Mexico.

What could go wrong?

While the subscription-based Commercial Link earns modest revenue, GM says sales have fallen short of its internal expectations. But at least the car giant is willing to invest more money to improve the take-up rate.

As for Miroamer, it looks like it will be a while until motorists can enjoy the Beeb or the Voice of Russia while negotiating the Harbour Bridge snarl or the Tulla merge.

After 12 months of management turmoil marked by two CEO departures (including founder George Parthimos) and the exit of chairman Conomos, Connexion has changed direction by buying a private I.T mob called Security Shift.

The deal involves Connexion investing in $1.8m of new Security Shift shares and Security Shift’s vendors receiving $1.19m of new Connexion shares.

On Dec 8 Connexion launched a one for six rights issue at 1c apiece, to raise a princely $1.2m. In June last year the company raised $5m in convertible notes (since redeemed).

In the September quarter, Connexion recorded $220,000 of cash receipts but burnt $440,000 for an end of quarter cash balance of $367,000 (the company subsequently pocketed a $1.5m research and development refund).

The company says the quarter marked a “significant turnaround in business trajectory and financial performance”.

As with so many other tech minnows  it’s hard to pinpoint what went wrong at Connexion, but as a rule of thumb investors should  assume that any product will take twice as long to develop than management claims -- and cost three times as much.

The profitable Security Shift deals in cyber security and IT governance risk and compliance. Sadly there’s no mention of Bitcoins and blockchains – the sure-fire way to put a rocket up a share price.

Tim Boreham edits The New Criterion

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.


The New Criterion: Two stocks to watch

Thursday, December 21, 2017


By Tim Boreham

The global asthma market is huge, but developing asthma prevention and management devices has hardly been a wheeze for the listed Adherium and Respiri. It doesn’t help when some patients adopt a novel approach to usage.

Adherium (ADR) 7.5c

Judging from a yarn told by Adherium CEO Arik Anderson, the respiratory medicine monitoring house has more consumer education to do despite moving 100,000 units of its Smartinhaler asthma devices to date.

The story goes that a doctor was puzzled by erratic readings from one of the company’s Smartinhalers that encase a standard Ventolin puffer canister.

Asked to demonstrate usage, the patient pushed the device against her chest and released the medicine. “She said it made her feel better,” Anderson says.

As Anderson reasons, if it weren’t for the Smartinhaler, the physician would have been none the wiser about the patient’s unconventional application technique. “The doc could get to the root of the problem because he had the data. Otherwise she would have kept doing the same thing.”

As medical devices, the Smartinhalers aren’t exactly rocket science -- which is probably why they’re being commercialised with manufacturing partner AstraZeneca.

But we have say that not everyone’s gasping with elation. In a classic case of founder’s syndrome, founder and former CEO Garth Sutherland recently departed the board and the shares are trading below their cash backing.

Anderson dubs Adherium as “not an inhaler company, but an adherence company with the world’s biggest data set for respiratory medicine usage.”

Approved for sale in the geographies that count, the devices monitor how well asthma (and chronic obstructive pulmonary disease) patients are complying with medication regimens.

The data is sent wirelessly to the patient’s (or carer’s) mobile phone app.

Adherium exists because adherence rates are so poor: typically patients take between one third and one-half of the dose they’re meant to.

Clinical studies showed the Smartinhalers improving compliance by 59% in adults and 180% in children.

Before listing in August 2015, the New Zealand based Adherium had spent two decades perfecting the devices. The company was able to list (and raise $35m) on the strength of the ten-year deal to supply AstraZeneca with product.

AstraZeneca makes the Symbicort aerosol inhaler that’s used by six million asthmatics globally.

In September the Food & Drug Administration approved Adherium’s next gen device called SmartTouch, specifically designed to be used with the Symbicort puffers.

This SmartTouches record the time and date of inhalation and transmits and also stores medication patterns.  

While Adherium has been deemed a technical and clinical success, the board realised that clipping the ticket on AstraZeneca sales isn’t going to provide exponential revenue growth.

Hence the company’s new push into the direct-consumer market supported – hopefully – by reimbursement from insurers.

This strategy was a key reason for hiring Anderson, a Wisconsin whose last role was as president of Terumo Cardiovascular Systems ’s perfusion and surgical devices division.

Anderson is charged with building the company’s sales and marketing function, which currently does not exist. “We have been inadequate in making a noise about ourselves,” he rues.

The company has launched a trial digital-based marketing campaign in NZ, aimed at signing up 1300 customers. The target audiences are 5-18 year olds living at home and the geriatric population (more in relation to chronic obsessive pulmonary disease, or COPD).

The clean and green isles renounced by Barnaby were not chosen for their over-the-odds asthma rates, but because everyone tends to know each other and thus word travels more quickly through clinical and asthma support networks.

The findings will support a planned launch in the US in the second half of 2017-18.

As with so many consumer medical devices, the issue is how many patients will pay – and how much.

Management hopes the trials will support a decision by health insurers to include the device on its reimbursement schedules. The company is also targeting large organisation such as Apple and Google that self-fund their insurance.

“We can save them $1500 per patient on average, just for asthma,” Anderson says. “With COPD the opportunity for savings is dramatically heightened but they tend to be slow moving (in their decision making)”

Adherium recorded $2.3m of revenue in the 2016-17 year, but lost $12.8m. In the September (first) quarter of the current financial year, Adherium lost a further $4m on receipts of $622,000

At Adherium’s recent AGM, management said it was targeting sales of a minimum 25,000 devices in the current year, with revenue of $5.7-7m, maximum cash burn of $12m and an-end-of-year cash balance of $10m.

The company says $2m of revenue in the December quarter is as good as in the bank, with $2.6m expected in the June (second) half.

Meanwhile, Adherium shares remain well adrift of their 50c listing price and the $13m market valuation is worth less than the $18m of cash on hand.

Anderson believes that after the IPO some investors made “certain assumptions” about the devices penetrating Simbicorp’s six million customers and were disappointed.

Respiri (RSH) 3.7c

Listed life hasn’t exactly been a wheeze for Respiri either, with the developer of a mobile-phone based asthma diagnostic facing a revolt against the re-election of star chairman Leon L’Huillier.

At Thursday’s AGM, a posse of investors accounting for more than the requisite 5% had sought to replace the former head of Victoria’s Transport Accident Commission with their own candidate, citing remuneration concerns.

The agitators also would have had the cudgels out for director Timothy Oldham, who did not seek re-election.

But L’Huillier’s bacon was saved thanks to the support of 16% shareholder, pokies baron Bruce Mathieson (L’Huillier also sits on the board of the Mathieson’s  Australian Leisure and Hospitality Group).

With 70% of holders endorsing the re-appointment, Mathieosn had plenty of other friends on the register as well. 

When it was known as Isonea the company developed the first iteration of the AirSonea device, which uses an app to diagnose the patient’s breath.

Current management contends the prototype was rushed to market in 2013, with poor engineering and lack of IT support for users.

Whatever the case, the device bombed.

Pending regulatory approval, Respiri plans to launch an improved version which is easier to grip and to place on the neck. The wheezes are then analysed by a Bluetooth connected algorithm.

AirSonea has been approved for use by US, European and local regulators, but commercialisation still looks like being a few months away.

In the meantime the company is scouring for distribution partnerships and L’Huillier reports expressions of interest from more than 20 parties globally.

Ultimately, success depends on the willingness of parents with asthmatic kids to fork out a couple of hundred bucks for the device – or else trust their own instincts.

Tim Boreham authors The New Criterion.

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.


The New Criterion: P2P vs Cabcharge

Friday, December 15, 2017

By Tim Boreham

An ASX  newcomer is offering an exposure to both the taxi and ride share sectors at a time when listed stalwart Cabcharge is fighting back.  

P2P Transport (P2P) $1.34

Cabcharge’s former monopoly on non-cash fares might have been smashed some time ago, but when it comes to a listed taxi industry exposure local investors have only had the choice of Cabcharge or Cabcharge.

As for the burgeoning ride share sector, Uber is privately owned and there’s no way of hitching a ride on the ASX.

All this changed on Wednesday, with fleet manager P2P (as in point-to-point transport) listing at a modest premium after raising $30m in an oversubscribed IPO.

The “platform agnostic” P2P manages a fleet of 720 vehicles, mainly for taxi drivers but also for full-time ride-share drivers who don’t want to run their private vehicles into the ground.

Pitched as a roll-up play, P2P aims to grow by acquisition in a fragmented sector populated by family businesses owning a handful of taxis each.

P2P co-founder and CEO Tom Varga says P2P has the advantage of being vertically integrated: it not only acquires the vehicles but fits them out as taxis and services and maintains them.

It also sources drivers, but does not aspire to emulate Cabcharge (and many others) in the crowded payments game.

“We do everything required to keep the steel on the road,” says the former BlueScope and Macquarie Group exec. 

“There’s no margin paid to someone else in the channel.”

Given its economies of scale, P2P claims to be able to source a car for 15-20% cheaper than the retail sticker price, with a 20% saving on insurance costs and 25% on insurance.

For ride-share drivers, leasing a popular Toyota Camry hybrid from P2P costs between $249 to $299 a week to rent, with only petrol and tolls to pay over and above that.

The economics preclude part time or weekend drivers, but are more attractive for the 25% or so who drive for 40 hours a week or more.

Interestingly cabbies will pay much more to rent a taxi -- $850 to $1500 – which reflects the still-superior earnings power of cabs because of rank privileges and their ability to accept passengers off the street.

Of course it’s hard to earn a decent living via either channel.

A diplomatic Varga says that with taxis still accounting for 93% of the passenger market, Uber’s 6% share has often been overstated. 

Uber also gave the taxi industry a much needed kick up the bum (our words). “It’s easy to say Uber has been bad for the (taxi) industry but  ...  Uber has resulted in a lot of changes that have benefited everyone,” Varga says.

Well, almost everyone. At the stoke of a legislative pen, the value of a Victorian licence – which at the peak of the market changed hands for more than $500,000 -- to a mere $53 a year licensing fee.

But with the regulatory ground rules for both taxis and ride shares now becoming clearer – and with taxi industry innovation such as set fares in Queensland – Varga expects both sectors to burgeon.

As for the IPO, P2P forecasts $6.4m of earnings on $50.4m of revenue in 2017-18, based on its fleet growing to 1084 by June next year

This compares with earnings of a mere $92,000 and revenue of 2016-17 (based on a 514-strong fleet).

At $1.32 a share, the offer was pitched on a current year earnings multiple of 16 times and a yield of 2.5-3.7%.

Investors should be aware that the three key founders have used the listing as a chance to lighten up their holdings to the tune of $6m.

But the founders will still control 36.5% of the company with 27.8m shares (escrowed for two years).

We guess they’re still more ‘in’ than ‘out’. 

Strictly speaking, P2P’s nearest exemplars are Singapore’s Comfortdelgro (Cabcharge's erstwhile JV partner), Indonesia’s BlueBird (as in the ubiquitous Balinese cabs).

Cabcharge (CAB) $2

While P2P is priced for growth, Cabcharge’s valuation assumes a continuation of the decline that has seen its earnings erode by almost 25% over the last five years.

As Cabcharge shares trade close to record lows, there are signs of stabilisation as revamped management devotes more resources to a ‘back to basics’ approach to customer service and deploying technology such as booking apps.

At Cabcharge’s recent AGM, CEO Andrew Skelton highlighted measures such as new handheld terminals to counter the offerings of payment rivals such as Ingogo and GM Cabs.

Last year, Cabcharge pocketed $184m after disposing of its 49 per stake in a local bus operating J.V – a business that increasingly looked a distraction rather than a sensible diversification.

“We are encouraged by the early signs that our strategy is working and we are excited by the ... opportunity available in the expanding market for personal transport,” he said.

A more fundamental reason for optimism is that Cabcharge had been battling the headwinds of a Reserve Bank dictate that cut the allowable surcharge on credit card transactions from 10% to 5%.

But this has now worked its way through the numbers, which means the drag on 2017-18 earnings should not be so severe.

No-one would argue that Cabcharge is a growth stock, but the moot point is how much the trashed share price factors in further declines.

Cabcharge reported net earnings of $21.3m from continuing operations in 2016-17, with current expectations ranging from a slight decline to as low as $17m. 

Cabcharge reported earnings per share of 17.7c in 2016-17, with current year expectations ranging from 16c to a healthy 24c. This means the company is trading on an earnings multiple of anywhere between 7.5 times and 11 times.

At the AGM, management made positive noises but did not proffer any earnings guidance, so it’s a guessing game as to how strongly the overdue reforms will trickle to the bottom line.

Our sense is that conditions have at least stabilised, but investors may have to wait for longer to enjoy the rewards.

With net cash of $25m, Cabcharge at least has the balance strength to last a journey which – like many of its cabbies – remains directionally challenged.


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.


The New Criterion: 2 mine developers to watch

Friday, December 01, 2017

By Tim Boreham

Pioneer Resources (PIO)

The Perth-based stalwart’s main prize remains lithium but its shorter term revenues lie with an industrial metal few outside of the oil and gas industry have heard of: caesium.

Most of the world’s caesium is turned into a derivative called caesium formate, used to lubricate high-pressure oil wells (mainly in the North Sea).

In radioactive form caesium is a by product of nuclear power production, but we’re assured the mineral version wouldn’t hurt a gnat.

About 75% of output is used in drilling and the remaining 25% for caesium chemicals.

The material is so rare that about 85% of caesium formate used is recovered for re-use.

So much so that the near-monopoly supplier, the Canadian miner Cabot, leases the stuff rather than selling it outright.

“Cabot’s business model is so unusual that academics have written whole economic papers on it,” says Pioneer chief David Crook. “In the meantime, 99.9% of people haven’t even heard of caesium.”

Currently, there are only two commercial caesium mines globally: Cabot’s Tanco (in Canada) and Bikita in the Robert Mugabe’s former fiefdom of Zimbabwe.

In a case of caesium-ing the day, Pioneer plans to develop the third at its Pioneer Dome deposit between Kalgoorlie and Geraldton in WA. Envisaged as a short life, low cost open cut operation, the mine would be done and dusted within six months.

The company received a mining permit last month and hopes to start extracting by the first quarter of 2018.

Pioneer has a measured resource of 10,500 tonnes of the pollucite host material, of which perhaps 7500 tonnes can be extracted.

For those into geo-porn, pollucite is a caesium-bearing zeolite that forms in lithium-caesium-tantalum pegmatite structures.

According to the US Geological Survey, global caesium reserves stood at 210,000 tonnes in 2014, with output of 17,300t of pollucite material.

The pricing dynamics of caesium are hazy because it is not openly traded. But Pioneer’s project is predicated on generating free cash flow of $12 million for an investment of around $5 million (possibly stumped up by offtake partners).

While that makes for a handy return that mine is hardly a company maker: the funds will be ploughed into drilling for spodumene-based lithium targets at the project.

A farm in deal with Lepidico (ASX:LPD) covers lithium in lepidolite form, also present in the mineralisation.

Lithium is harder to extract from lepidolite, but Lepidico may have the answer with its patented L-Max process that produces the desired lithium carbonate directly from the material.

Pioneer also has a cobalt project near Kalgoorlie (Blair Dome, which it has just started drilling) and an option to earn an 80% interest in two Canadian projects.

And did we mention the company has acquired some Pilbara gold tenements? No watermelon seed nuggets have been found as yet, but a team of geologists is leaving no rock unturned.

American Pacific Borate & Lithium (ABR)

As with Pioneer, this one is turning the lithium story on its head with a proposal to develop one of the few borate mines outside of Turkey.

According to ABR CEO Anthony Hall, most lithium projects contain borates and most borates contain lithium, but metallurgy issues can make the lithium hard to extract.

The borates are usually a by-product of lithium, but in this case the popular industrial ingredient (in the form of boric acid) is driving the economics of ABR’s fully-owned Fort Cady project in California’s Mojave desert.

Boric acid has not fewer than 300 industrial uses, including heat resistant glass, fibreglass insulation, ceramics and fire retardants.

The current global market of four million tonnes, 55-60% of output is controlled by Turkish state-owned monopoly Eti Mine Works.

Rio Tinto operates the Borax mine near Fort Cady. It’s barely a line item in the global giant’s accounts but is profitable and accounts for a further 20-25% of global output.

The former head of Spanish potash hopeful Highfield Resources, Hall formed ABR to acquire Fort Cady from mining veteran Roy Shipes, now ABR’s chairman. As well as being a former US Air Force captain, Shipes has held senior roles at Ok Tedi Mining, Southern Peru Copper and Phelps Dodge.

ABR raised $15 million in an IPO and listed in July this year.

ABR is testing the age-old theory that it takes the third owner of a mine to make even money: Fort Cady has had two previous owners who sunk $US50 million into developing the mine and ABR will leverage this handiwork.

Fort Cady already has mining and environmental permits, but is waiting the re-granting of environmental approvals bestowed on the second owner (who ran out of money, as you do).

Investors are awaiting a scoping study on Fort Cady and an official maiden resource by the end of the calendar year.

ABR already points to an initial 90,000 tonnes per annum operation with an up-front cost of $US80-90 million and an ongoing EBITDA margin of $US500 a tonne on the current boric acid price of around $US1000 a tonne.

Fort Cady’s historical resource suggests 115 million tonnes of borates translating to around 13mt of boric acid, enough for a mine life of around 100 years.

“We have good visibility around those numbers and we are happy,’’ Hall says.

Eventually ABR plans to triple output to 270,000 tonnes of boric acid, as well as producing the desirable fertiliser potassium sulphate (SOP).

As for the lithium, it’s a case of suck it and see. But as it’s a waste material, any lithium production would be an added extra.

Hall reckons half of the lithium borate material is attached to clay (which makes extracting the lithium problematic). But the remaining half is contained in salt based brines – an easier proposition.

Initial heap leach testing of material showed “excellent” boron recoveries of 98.5% and lithium recoveries of 48.3%.

Historical measurement puts the lithium resource at 80mt of lithium at an average 313 parts per million. A confirmatory drill hole this month reported better than expected lithium grades of up to 545 parts per million (ppm).

In comparison, the ASX listed Reedy Lagoon Corp (RLC) is creating excitement with grades of 90-120ppm at three lithium brines projects in neighbouring Nevada.

ABR shares have more than doubled since listing at 20c apiece, but Hall reckons the market is overlooking the “free option” on the lithium.

Happily, the environmental permitting process in Trumpland is more straightforward than in Spain, where Highfield’s Muga project has been waiting – and waiting – for the government to sign the paperwork.

ABR shares have more than doubled since listing at 20c apiece, but Hall reckons the market is overlooking the “free option” on the lithium.

Tim Boreham edits The New Criterion

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.


The New Criterion: Molopo Energy

Friday, November 24, 2017

By Tim Boreham

Molopo Energy (MPO) 14c (trading suspended)

“And what for? A little bit of money” despaired Fargo’s original heroine cop Margie Gunderson after witnessing some truly gruesome work involving a woodchipper.

In the case of the Molopo saga, there’s been enough blood and gore of a corporate variety to do a Coen Brothers script proud. In this case the prize for the squabbling parties is rather a lot of money: $55 million of cash worth 22c a share.

For months Molopo has been under siege from Aurora Funds Management and Keybridge Capital, which are linked with banned director Nicholas Bolton and Perth corporate raider Farooq Khan.

Having declared unacceptable circumstances, the Takeovers Panel in mid June ordered Aurora and Keybridge to sell most of their Molopo shares because in effect the parties involved were acting in concert without telling the market.

Undeterred, Aurora in July offered 18c a share, at least 88% by way of units in Aurora’s absolute return fund.

In September this offer was reduced to 13c a share, to reflect the “value dilutive” effect of Molopo’s $8.5 million purchase of a half-stake in a Florida oil and gas explorer, Orient FRC.

Then Keybridge forced a second meeting to install its nominee William Johnson and ditch Molopo chairman and CEO Alexandre Gabovich.

At the initial meeting in June, holders rejected Keybridge’s attempt to appoint three new directors, including Johnson and former ASIC chairman Tony Hartnell.

Curiously, at the second meeting held on November 10, holders again rejected a motion to appoint Johnson. But out of frustration at Molopo’s lack of direction they also voted to turf the France-based, board-endorsed Gabovich from the board.

Now prominent fundie Geoff Wilson’s Wilson Asset Management has donned his white knight cape and flagged a 13.5c a share off market cash offer for Molopo, conditional on 50.1% acceptance and a court hearing initiated by Keybridge being resolved.  (Keybridge in part is seeking access to Molopo documents pertaining to the Orient FRC purchase).

Normally, an offer pitched at a 40% discount to the intrinsic worth of a share (that is, WAM’s) would be one for the circular file.

But in this case, at least WAM’s offer is solid cash and gives holders an escape route given Molopo shares have been in suspended animation since late July.

That said, Molopo’s 3900 shareholders have seen it all before and may be happy to hang on for the next comical episode.

Wizened investors will recall that in 2011 a shareholder group backed by Max property developer Max Beck, pokies king Bruce Mathieson and ex Woolworths chief Roger Corbett ousted the original board.

But by late 2014 the reconstituted board (including Beck) were also on their way, citing lack of support for their so-called Three Pillars turnaround plan.

Given Wilson doesn’t resile from a fight and neither does the Bolton/Khan camp, the Molopo saga is far from over.

Tim Boreham edits The New Criterion

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.


The New Criterion: Leaf and Bio-gene

Friday, November 17, 2017

By Tim Boreham

Leaf Resources (LER)

The paradox around one of the greenest of ASX listed stocks is that its planned biomass operation will rely on waste feedstock from Malaysian palm oil -- not the most politically correct of industries.

But Leaf’s noble charter is to provide industrial sugars that eventually may replace many forms of plastic packaging.

So should Leaf pass the ethical funds’ screening process? It’s one for the fundies to ponder over their morning latte before mistakenly tossing the disposable plastic-lined cups (which Leaf will also help eliminate) in the recycling bin.

Currently the global biodegradable packaging market is worth $US5 billion ($6.5 billion) – a fraction of the total packaging sector – but is forecast to grow to $US22 billion by 2022. Consumer multinationals such as Coca-Cola and Procter & Gamble have pledged to phase out petroleum products in their packaging.

Leaf back-door listed from a disastrous aquaculture play a decade ago but is only just gaining traction with its patented Glycell process, which was invented in house.

Glycell breaks down waste plant material to produce the fermentable sugars used as feedstock for renewable chemicals.

Leaf plans to build a 100,000 tonnes a year processing plant in the Malaysian state of Johor which has an active program of tax and other incentives.

The other key reason for choosing Malaysia is the availability of the plant material: palm oil plantations produce a fibrous waste from annual harvesting, which is otherwise burnt (contributing to the smoke hazes that so irritates neighbouring Singapore).

“The material is plentiful and cheap and the process works well with it,” says chief Leaf Ken Richards.

Richards says the country’s Industrial Collaboration Program is a promising source of equity funding for the plant, costed at circa $US120 million.

Similar to programs elsewhere, in effect the ICP taxes foreign suppliers to the public sector, to fund projects that fulfil the country’s “national objectives”.

One of these is the National Biomass Strategy 2020, which aims to reduce Malaysia’s carbon emissions by 12% and create $8 billion of new investments.

With a $14 billion kitty, the ICP is not short of funds.

Richards says a likely funding structure could involve equity from the ICP as well as separate debt, with ICP’s returns capped. “Think debt return for equity participation,” he says.

There’s nothing new about turning sugars into chemicals, given the Sumatrans dabbled with a substance called beer around 5000 BC.

The secret sauce of the Glycell process is that it’s done at a much lower temperature than the current method of high pressure and acids. It is more energy efficient and produces 25% more sugars than rival processes.

The process uses glycerol as a catalyst, but what seals the deal economically is that Glycell recovers this material – a waste product of biodiesel but widely used in cosmetics, animal feeds and lubricants – in purer form.

Along with the sugars and the glycerol the process would produces the rigid fibrous material lignin, a natural polymer used to produce steam and renewable energy.

With further processing lignin can create a biodegradable and waterproof lining, to replace wax-coated cardboard and those billions of plastic-lined coffee cups.

It’s all too late for the displaced orangutans, but Richards argues that Leaf is merely deploying the waste from an established industry rather than encouraging land clearing for more plantations.

“We are just utilising what’s there.”

On paper, the $20 million market cap Leaf stands to make vast returns on the vaunted project: house broker Lodge Partners estimates a $570 million net present value for the project, based on current prices for both the input and output materials.

Of course with such projects there’s many a slip between the eco-friendly cup and the lip, especially in Malaysia.

With $1.5 million of cash on hand, Leaf will need to raise capital and until it does investors will hesitate.

Bio-gene Technology (not yet listed)

Former long-serving Nufarm chief Doug Rathbone has been a busy chap since leaving the listed agrichemicals giant in early 2015.

While not engaged in winemaking he’s a director of Leaf Resources (see above) and medical pot play Cann Group. He’s also an adviser to (and director-in-waiting of) alternative pesticides play Bio-gene.

Bio-gene is slated to list on November 30, having raised $7 million in an oversubscribed issue at 20c apiece.

The company’s premise is that pests such as cattle mites, mosquitoes and grain weevils have become resistant to the standard treatments that have been around for decades.

In a household context, look no further than those pesky blowflies that resurrect themselves despite being sprayed with half a can of Mortein.

Or else the treatments are so toxic they destroy ‘innocent’ species such as bees.

Bio-gene’s products, Flavocide and Qcide are based on a naturally occurring chemistry called beta triketones, first identified in eucalyptus oil in 2001.

The company is coy about the exact mechanism of action but says it differs to that of the 30 or so existing classes of insecticides (mainly neuro-toxins).

Bio-gene’s testing was promising enough to attract French ag-chem house Virbac as a partner, in view of developing treatments for ruminant animals such as cows, sheep and pigs.

Virbac is funding its own trials on cattle ticks and buffalo flies and if all goes well the tie-up could lead to a more full-blow arrangement with royalties and milestones and the like.

Management expects to strike deals with other global pesticide majors, with Bio-gen’s magic molecules likely to be used in combination with existing treatments.

Bio-gene executive director Robert Klupacs says any one of the targeted pests are markets in themselves.

Insects destroy an estimated 18-26% of crops, with 586 species resistant to at least one class of insecticide.

In the case of grain, about 5% of Australian and US crops are wasted in the silo and in India the figure can be as high as 30%.

In the case of cattle ticks, northern Australian growers are limited to stocking the hardy Brahman variety rather than higher-yielding breeds such as Wagyu.

Bio-gene has raised $4.3 million in pre-IPO funding over three raisings. While some of these holders are escrowed, there’s a danger of them taking profits post listing and subduing the price.

As well as availing of Rathbone’s contacts and know-how, Bio-gene has hired a former Monsanto heavy hitter, Richard Jagger, as CEO.

Kluvacs concedes that the creepy crawlies eventually will become inured to Bio-gene’s product as well. But as that won’t happen for decades, Bio-gene will have a head start on the next generation of bug busters.
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.


The New Criterion: The gold play

Friday, November 10, 2017

By Tim Boreham

Impact Minerals (IPT)

Like any self-respecting miner, Mike Jones experienced his Pilbara gold epiphany at the front bar of Kalgoorlie’s Palace Hotel late one night during August’s Diggers & Dealers bash.

The Impact managing director had been shown photos of the Pilbara nuggets unearthed by the Canadian-listed Novo Resources and the ASX-listed Artemis Resources (ARV), the parties credited with starting the fossicking craze in the district better known for iron ore.

“I phoned the office and said take any available ground,” he says.

Impact thus can claim to be a leader among the dozens of explorers now expressing sudden interest in the district.

“We were able to peg 1300 square kilometres of ground in the East Pilbara probably two months before the big rush started,” Jones says.

First mover benefit aside, Impact’s other advantage is that Jones has closely studied South Africa’s Witwatersrand, the mammoth formation that has produced half the world’s gold (and to which the Pilbara discoveries have been compared).

In the early 1990s Jones – Dr Jones, actually --completed a PhD on gold formation in an age-equivalent sandstone basin adjoining the Witwatersrand.

The conundrum with the Pilbara is that while the distinctive ‘watermelon seed’ nuggets has been equated with the nearly three billion year old Witwatersrand, a formation similar to the 7km thick South African basin is yet to be found.

Jones says the Pilbara explorers so far have found numerous nuggets transported as fragments from somewhere else.  “But from where and from how far? That’s the question no-one has yet has an answer to.”

Some spoilsports claim that with the Pilbara’s gold endowment much less than that of the Kalgoorlie region, there’s unlikely to be enough source material to emulate a Witwatersrand.

Jones contends the Pilbara nuggets weren’t exactly nuggets in the first place, having been chemically leached from a source vein and turned into nuggets by complex geological forces.

The gold could have been transported into the basin by hot geothermal fluids and dumped into algal ‘mats’, where they were re-worked as nuggets.  This theory was also a driver for Novo’s president and leading explorer Quinton Hennigh.

The significance is that with Mother Nature dispersing the gold far and wide in fluids, the nuggets don’t necessarily have to have come from older veins and this obviates the reliance on a source rock.

“Some may have come from algal mats only a few kilometres away in the basin itself and have been re-worked by complex forces of geology,” Jones says.

 “I have to say I am quite amused by some of the uninformed opinions I have seen on the web concerning the source of the nuggets and the limitations this places on the exploration potential.”

While viable deposits based on dispersed gold are quite possible, it still would be jolly nice to find another Witwatersrand.  Novo and Artemis continue to drill Purdy’s Reward, the nuggety El Dorado that kicked off the excitement.

It is hoped that deposit will turn into a Witwatersrand clone at depth, bearing mind the South African deposit has produced grades of more than 1000 grams per tonne towards the core.

Nova and Artemis have scraped off 932g of nuggets from the top metre of the conglomerate style structure – a feat beamed live and theatrically to the Denver Gold Forum in late September.

The trouble is, nuggets make for great pics but they make it had to determine how much gold is actually there for the purpose of determining a resource.

“It’s actually called the Nugget Effect,’’ Jones says. “The bigger the nugget, the worse the effect.”

Not wanting to waste an opportunity, Impact this week completed a $2.5 million placement at 2c, an 11% premium.

This takes Impact’s cash balance to $5 million, to be used in the Pilbara as well as further drilling on the Commonwealth gold, silver and base metals project near Orange in NSW.

Jones says the latter will remain Impact’s number one priority, although hyperventilating subscribers to the oversubscribed raising may think otherwise.

Gold rush form guide

When it comes to counting the number of Pilbara gold aspirants, your columnist is running out of fingers and toes.

At least 20 ASX-listed explorers claim to have Witwatersrand-style ground in the vicinity, some with existing tenements and some with hastily-acquired ground.

With newcomers announcing their plans almost by the day, it won’t be long before we get to a Melbourne Cup sized field, but expect some scratchings as funding costs mount.

Aside from Artemis, De Grey Mining (DEG) is at the front of the field because it had existing Pilbara ground, with management waking up to the potential when Novo and Artemis pegged nearby.

De Grey unearthed 91 impressive ‘watermelon seed’ nuggets at its Loudens Patch project, which hopefully points to a conglomerate hosted gold mineralisation.

De Grey is backed by de $US2.7 billion ($3.5 billion) market cap Canadian miner Kirkland Gold, which subscribed for $5 million in a recent share issue.

De Grey also has an existing resource of 1.2 million ounces, grading an average 1.6 grams a tonne gold.

In a similar vein – and excuse the pun – Calidus Resources (CAI) has a separate JV with Novo, which is earning into a number of its projects.  Calidus also has an existing resource, 410,000oz grading 2.2 g/t.

Calidus is also linked with Haoma Mining (HAO), the plaything of pollster Gary Morgan that has seven existing tenements covering 650 hectares.

Calidus is exploring Haoma’s Warrawoona and Klondyke leases and has the option to purchase them. The Pilbara gold rush is rare good news for Haoma, which bats on courtesy of a $39 million loan from Morgan’s Roy Morgan Research Centre.

Coziron Resources (CZR) was hunting for magnetite but it duly has dusted off old soil samples for traces of gold.

But with Coziron professing its main focus to remain on iron ore, don’t expect a name change to Cozgold in a hurry.

Venturex Resources (VXR) remains committed to its Sulphur Springs copper-zinc project, but its Whim Creek tenements have the fortune to be wedged between Novo/Artemis and De Gray ground.

Not surprisingly, soil samples have been despatched to the lab.

In no particular order, other Pilbara participants include Kalamazoo Resources (KZR), Chalice Gold Mines (CHN), DGO Gold (DGO), Marindi Metals (MZN) and Southern Hemisphere Mining (SUH) and Kairos Minerals (KAI).

(Kairos Minerals, Venturex Resources and Marindi Minerals are covered by IIR)

Kairos also has Canuck backing, in the guise of billionaire precious metals guru Eric Sprott’s Sprott Capital Partners, which subscribed for $5 million of a recent $7 million raising. The fund also owns 9% of Novo.

As with the crowded listed cannabis sector, it will take some time for the genuine stayers and the rank opportunists to emerge.

Like the listed dope plays, a degree of pot luck is also involved.
Tim Boreham edits The New Criterion

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.


The New Criterion: Global Masters Fund and Altech Chemicals

Monday, November 06, 2017

By Tim Boreham
Global Masters Fund (GFL)

Value conscious investment legend Warren Buffett would be proud of the listed investment company’s rationale for not charging any base or performance management fees.
With two-thirds of Global Masters’ circa $18 million of investments tied up in Buffett’s investment vehicle Berkshire Hathaway, the LIC serves as a local conduit for investors who can’t afford to shell out $US284,000 ($366,000) for a single Berkshire share.

“There is no logical reason why we should be charging a management fee if we are not managing anything,” Global managing director Manny Pohl says.

“When you have two passive investments it’s not right to be charging a management fee. Mr Buffett does that for us.”

The second investment refers to Global’s allocation of 8.5% of its funds to the London Stock Exchange listed Athelney Trust, which invests in undervalued UK stocks with a market cap of less than 300 million quid.
To keep the lights on absent those management fees, Global Masters has also invested 12% of its portfolio in another Pohl-linked LIC, Flagship Investments.

Unlike Berkshire Hathaway, Flagship pays dividends from its portfolio of Australian shares and these flows defray the incremental costs of running Global (such as listing fees).

Global Masters has just completed a $4.28 million capital raising, offering 2.14 million shares in a one-for-four rights offer at $2 apiece.

The funds won’t be ploughed into more Berkshire shares and may be used for more active investments -in which case the fund may eventually introduce a management fee.
Pohl hasn’t exactly lost faith in Berkshire shares, which have gained 32% over the last year and 123% over five years. (The stock also zoomed 7.9%in the September quarter on the back of a buoyant US market).

But he gently notes that at the age of 87, Buffett is no spring chicken while his vice chair Charlie Munger is 93. He’s not implying the sprightly duo aren’t up to the task, but such are market perceptions that when they fall off their perches there’s likely to be pressure on Berkshire shares.

Global Masters net tangible asset (nta) value rose 18% in the 12 months to September 30, to $2.06 (pre-tax obligations on the sale of assets).

Unusually for a small LIC, Global shares are trading at a 5% premium to nta.

Despite their fee-free ride, Global investors last year vented their ire at the level of director salaries, voting down the remuneration report under the ‘three strikes’ rule.

A perplexed Pohl argues that at an average $42,000 across three directors, these stipends were not exactly excessive. In any event, the board did not incur a ‘second strike’ at this year’s AGM held last Friday.

As for the famed Buffett annual jamboree, Pohl has attended two and found them to be “illuminating and interesting”. This year’s meet, held in front of 40,000 in Buffett’s home town of Nebraska in May, lasted for eight hours. But the AGM – dubbed the Woodstock for investors –is also in danger of becoming a sideshow of quips and bon mots for Middle America.
Pohl says the Munger chaired Westco Financial offered a more concise and useful AGM when it was 80% owned by Berkshire. Sadly, the AGMs were abolished after Berkshire took full control in 2011.
Altech Chemicals (ATC)
Just as diamonds are compacted carbon, sapphires are derived from alumina subject to immense heat and like diamonds they can also be grown artificially.
The blue tinge of the sapphires – the part that makes them so alluring –is the result of impurities. “Just buy your wife Altech shares instead,” counsels Altech chief Iggy Tan.

We’ll avoid that advice in the interest of domestic harmony, but Tan may well have a superior notion of value as Altech seeks to become a leading provider of the key ingredient for synthetic sapphires: alumina of 99.99 per cent purity.

The market allure of high purity alumina (HPA) lies notwith the content of jewellers’ windows, but in the emerging market for unscratcheable and unbreakable mobile and watch sapphire screens.

To hammer the point home – literally - Tan’s presentation to the recent Australian Microcap Investment Conference was accompanied by vision of an Apple Watch screen being attacked with sandpaper, a mallet and then a drill. (The screen emerged intact, but don’t try this one at home folks).

Sapphires are also used as substrates in LED lighting and to replace the plastic separators in lithium ion batteries that are prone to catch fire (as with the Samsung devices banned by airlines).
Altech owns the Meckering kaolin (clay) deposit in WA, a source of alumina feedstock leached of all impurities (such a sodium) over millions of years.

Altech plans to build a 4500 tonnes per annum processing plant in the Malaysian state of Jahor to convert the material, shipped from Fremantle, to high purity alumina.

Making sapphires involves heating the metal to 2000 degrees Celsius and growing the crystals over 21 days.

A bankable feasibility study (which is due to be updated) costs the project at $80 million, with a 3.7 year payback period and producing annual ebitda of $55 million.
Tan contends the process is half the cost of conventional producers such as Nippon and Sumitomo, who have to buy the aluminium metal derived from molten bauxite in an energy-intensive process.

On his rough equation, a product that costs $US9000 per tonne to make currently sells for $US27, 000/t. The current global market is not big – 25,000 tonnes – but is forecast to grow at 17% per annum.

Put another way, the world will need four of Altech’s proposed plants to satisfy just the battery demand by 2026.

Altech has the support of Mitsubishi, which has signed a ten-year off take agreement for all output. Tan, we add, founded and ran the lithium developer Galaxy Resources so is no virgin to development projects.
The really hairy bit is raising $70 million of debt, but the company hopes to secure the support of German export credit finance house KFW Finance (a Teutonic supplier will build some of the plant).

Expect a capital raising as well. And what if the loan is not forthcoming? After all, Malaysia has been a scary place for the likes of rare earths producer Lynas, which ran into near fatal problems at its Kuantan processing plant.

“There is no plan B,” says Tan.

Disclosure: Global Masters is covered by Independent Investment Research

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


The New Criterion: Universal Coal and OBJ

Friday, October 27, 2017

By Tim Boreham

Universal Coal (UNV)

With a powerful September quarter performance, the ASX-listed South African coal miner is defying both the investor gloom pervading the sector and fears that its home country is too risky a place to do business.

With its two mines now running sweetly, Universal has achieved unicorn status as a pure-play small cap coal miner paying a dividend.

“We are in the best position than we have ever been,” says CEO Tony Weber.

Universal owns 70 per cent of the greenfields, open pit Kangala mine and 49 per cent of the recently restarted New Clydesdale Colliery. It operates both.

Both pits are underpinned by a long-term take or pay contract with the state-owned electricity generator Eskom.

In the quarter, the mines churned out 1.25 million tonnes of saleable coal (782,400 tonnes attributable to Universal).

The company recorded attributable earnings before income tax and amortisation (EBITDA)  of $8.8 million and has guided to $28 million for the full year.

While off take contracts (mainly Eskom’s) accounts for 4mt of output a year, Universal ships about 20 per cent of its output and thus benefits from recovering export prices.

In late September, the board declared a maiden one cent a share dividend. In a report commissioned by the company, APP Securities Analyst Mike Harrowell says that Universal could comfortably manage a full-year payout of at least 2c a share.

He forecasts Universal’s current year EBITDA at $41.4 million – much higher than the company’s formal guidance. The latter is deemed as overly conservative because management assumes an export coal price of $US65 a tonne, compared with the healthy prevailing spot rate of $US90/t.

Universal has other growth gambits, too: it plans to double the size of Kangala (having acquired adjacent ground) and has a third project called Brakfontein that is approved but is awaiting the signing of off take agreements.

After years of being studiously ignored by local investors, the low-liquidity Universal stock has surged 150 per cent over the last six months.

But Universal’s $100 million market valuation still looks light on given it has close to $20 million of cash and net debt of only $6.5 million

They’re now trading a shade higher than the levels of late 2015, when the company was subject to an agreed 16c a share offer from 30 per cent Ichor Coal (and then a 25c share scrip offer from Coal of Africa).

Both offers were abortive, which is probably just as well given current analyst valuations north of 30c per share.

However Universal remains light on for institutional support, which probably reflects fears the country’s old political and racial problems may re-emerge.

 “Now that we are paying dividends we expect to attract a different sort of shareholder,” Weber says. That, presumably, refers to those yield chasing retirees who normally would not touch a dirty coal stock.

An imploding South Africa aside, a key risk is for Universal is whether the recent coal price improvement is sustainable or whether Old King Coal indeed is in structural decline.


While dirty coal enjoys a rehabilitation of sorts, here’s one for the body beautiful brigade that could do with a valuation boost.

The biotech outfit has developed the world’s first transdermal delivery system that improves the performance of products (such as cosmetics) delivered through the skin.

The key to OBJ’s know-how is the use of physical science (magnetics) rather than chemistry to achieve this aim.

The science – “complex 3D magnetic fields produced by low-cost microarrays or powered magnetic inductors” – baffles your columnist and, we suspect, most investors.

But all punters really need to know is that Procter & Gamble, the world’s biggest maker of skin cosmetics, already uses OBJ’s technology in its Olay and SK-II brands.

P&G launched a magnetic eye wand in Japan, China and other South East Asian markets in March. The key claim that the wand will deliver “younger more beautiful” is a tad difficult to prove clinically, even by the Ponds Institute.

But we guess it can’t be disproved either and the real point is the wands walked off the shelves.

P&G has since launched a whole-of-face variant called the SK-II Magnetic Booster and an overnight face cream called Magnemask.

While anything to do with maintaining ageless beauty implies chirping cash registers, OBJ’s greater fortunes could lie with a product called Bodyguard that is in clinical programs.

A wearable patch delivering non-drug pain relief directly to an injury, Bodyguard is touted as being more effective than orally delivered drugs.

Meanwhile, OBJ shares languish at close to four-year lows. The company earned royalties of $2 million but lost $5.5 million, so no doubt investors are looking for evidence of a prettier bottom line.
Tim Boreham authors The New Criterion

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.


The new criterion: MGM Wireless and HUB24

Monday, October 23, 2017

By Tim Boreham

MGM Wireless (MWR)

With a mere 9.5 million shares on issue, the schools communication specialist can’t be accused of recklessly diluting investors with serial capital raisings.

Given that, we’ll excuse the Adelaide-based minnow for passing the hat around for $380,000 in its first raising in a decade.

The one-for-eight rights offer will fund marketing of MGM’s new-age product: a phone watch for primary aged kids called Spacetalk.

The watches, which run off Telstra’s 3G network, allow calls and messaging between the child and 20 trusted contacts. While they require a Sim card, they don’t require a separate mobile phone.

Unusually, the software and hardware was developed in-house by the Adelaide-based MGM, at a cost of a mere $800,000. “A lot of people don’t believe me,” says MGM CEO Mark Fortunatow.

The ‘wearable’ is a logical extension of MGM’s existing suite of SMS school attendance management tools to monitor absenteeism and locate the miscreants before they have too good a time.

Criterion’s initial take on the Spacetalks is that no-one will buy the $349 devices because kids already have a communication device called a smart phone.

As it happens, MGM is targeting the 4-12 year old cohort – 2.1 million urchins in all -- whose parents have yet to succumb to pestering about how every other kid has an iPhone 8 (or whatever version we’re up to).

Fortunatow is circumspect about how many Spacetalks MGM is likely to sell, but its scenarios are based on an annual market of 10,000 to 20,000 watches.

Selling 15,000 – let’s take the midpoint -- would boost MGM’s revenue by $5.2 million and we’re talking about a company that turned over $2.5 million in 2016-17.

“There is a market for these devices but no-one knows how big it is or how quickly it will grow,” Fortunatow says.

Unapproved Chinese and South Korean devices are available on the grey market, but are useless outside of city areas.

After a long quiescence, MGM shares have burst into life on the back of this month’s Spacetalk launch, as well as last month’s disclosure that its absentee management product will be used in all 850 Western Australian government schools.

MGM already services about 400 WA schools and 1061 overall in Australia and NZ.

 “We have been under a rock for two years from an investor relations perspective,’’ Fortunatow says. “We were working on Spacetalk and weren’t in a position to disclose the extent of our activity.”

Normally profitable, MGM lost $530,000 last year, mainly the result of Spacetalk development costs and an $187,000 bad debt provision.

This year’s profit depends on how many Spacetalks are sold, the company is expected to return to the black.

With a sub $5 million market capitalisation, $1 million of cash on hand and no debt, MGM’s valuation would make even a penny-dreadful explorer blush.

Despite the hype around Spacetalk, chary investors subscribed for only $170,000 of shares. The partial underwriter, interests associated with Fortunatow, acquired a further $122,000.

Given the raising was struck at 35c, retail punters (who generally eschew rights offers) have done themselves in the eye.


The news that ANZ Bank will divest most of its wealth management arm to IOOF is sweet music to HUB24 chief Andrew Alcock, because it reflects how the banks are distracted in the all-important ‘platform’ sector.

“HUB is competing with major institutions dealing with massive structural change and that’s where we are winning and excelling,’’ Alcock told this year’s Australian Microcap Investment Conference in Melbourne.

HUB provides an independent wrap platform for financial advisers, accountants and advisers, so that they can easily handle client investments across different asset classes and legal structures.

Overall, the platform is used by 108 financial service licensees.

Alcock brandished industry data showing that HUB is the fastest growing platform relative to its size and the fifth fastest in dollar terms.

HUB recorded $2 billion of new inflows in 2016-17, taking funds under advice (FUA) to $6.2 billion (as of September 30).

Management is targeting $12 billion of FUA within the next three years. Given the flows have grown at a compound annual rate of 95 per cent, this isn’t exactly a pipe dream.

While HUB accounts for 0.6 per cent of funds under advice, it’s grabbing 10.4 per cent of inflows.

“We are achieving higher net flows than ANZ or AMP,’’ Alcock says.

Netwealth, another independent provider is also doing well on funds flow ahead of a planned listing next month that will value the group at around $800 million.

 “The independent platforms are winning in a space where banks are questioning their presence in wealth,” Alcock says.

In January HUB acquired Agility Applications, which provides tools to stockbrokers that are also undergoing structural change as they transform from research and broking to financial advice.

One feature is the ability to buy shares listed on 15 foreign exchanges in the same way they would trade local shares.

In the 2016-17 year HUB24 delivered a maiden profit to patient investors:  an underlying net profit of $3.9 million compared with a $1.5 million loss previously.

While 45 per cent higher, HUB’s revenue of $62 million in 2016-17 was still modest, reflecting the tight margins in the sector.

Alcock, however, believes it will be harder for new entrants to gain a foothold, given it’s taken HUB a decade to build its technology.

“You need to have jumped aboard a few years ago after FOFO (the Future of Financial Advice) reforms and other changes in the market place,” he says.

Now with a market cap of $520 million, HUB24 has graduated from microcap territory and trades on an earnings multiple of 45 times.

Arguably that accounts for the likely upside in the short term as those almost guaranteed funds from compulsory super roll in.

Broker Ord Minnett asserts that based on HUB’s current funds inflow trajectory it would account for $42-69 billion of FUA by 2025 (in a sector worth $1.4 trillion, mind you).

If HUB’s valuation seems heady, the Netwealth IPO is being pitched on a multiple of 27 to 32 times.

HUB investors including Thorney Investments and Acorn Capital can thank the financial gods the board didn’t engage with IOOF which offered $2.75 a share two years ago.

Tim Boreham edits The New Criterion

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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