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.

Tapping the home automation boom

Thursday, May 23, 2019

Buddy Technologies (BUD) 5.4 cents

For a company that competes head on with Dutch multinational Philips and its Philips Hue bulb, home-grown smart globe maker, Lifi Labs (LIFX), has hidden its light under a bushel over its short seven-year life.

Now owned by the Adelaide based ‘cloud’ minnow, Buddy Technologies – until recently Buddy Platform — now’s the time for LIFX to shine in the publicly-listed limelight.

Buddy recently completed the acquisition of LIFX by paying its vendors $US26.5 million ($37 milion) cash, plus another $US24.5 million of Buddy shares. Buddy partly funded the cash component by raising $18 million in a placement, at 8 cents a share.

Given the LIFX products were developed in Melbourne, it’s a case of buying back the farm but sentimentality only goes so far: after a poorly received March quarter report that sent Buddy shares tumbling, subscribers to the raising are some 30% underwater.

Initially funded by crowd funding platform Kickstarter to the tune of $1.3 million, LIFX succumbed to the siren call (and venture capital dollars) of Silicon Valley. Most of the company’s development team remains in Melbourne.

Having sold two million bulbs to one million households in 100 countries, LIFX runs a close second to market leader Philips in an otherwise fragmented sector.

“In every market, LIFX punches well above its weight,” says Buddy CEO David McLauchlan.

“It’s a phenomenal company; it’s great to be bringing these guys back to Australia.”

LIFX certainly bulks up Buddy’s top line.

In the March quarter, Buddy generated revenue of $1.134 million, up 124% but proforma turnover would have been $8.75 million with the inclusion of LIFX.

In calendar 2018, LIFX generated $US38.5 million of revenue and lost $US3.4 million, but expects to be profitable in the current year.

Buddy’s quarterly statement pointed to calendar 2019 revenue growth of 70-100% – and first profits. But punters appeared less enamoured with the company’s cash burn of $3.24 million and expected current-quarter burn of $15.2 million.

The Trump administration’s decision to impose a 12% tariff on most of Buddy’s products also doesn’t help, although rivals are in the same boat.

Buddy also carries debt of $13.4 million via a line of credit, reduced by $9.12 million. The remainder will be repaid this year, after which the company enters in a $20 million working capital facility with the factoring house Scottish Pacific.

While Buddy has burnt shareholders in the past, there’s no doubt LIFX is surfing the growth of home voice devices such as Amazon’s Alexa and Google Assist (now in one out of every three US homes).

But for these gee-gaws to be of any use, households need the wi-fi connected globes.

Helpfully, light sockets globally are pretty similar.

Designed to last 22 years but guaranteed for two years, the LED globes sell for $20 to $30 for the basic units and more than $100 for the deluxe versions, which can include infrared lighting.

“Prices have come down and functionality has gone up,” McLauchlan says.

The acquisitions bring heavy-hitting investors Sequoia Corp, Qualcomm Ventures and Blackbird Ventures to the Buddy register, joining existing Buddy investor and McLauchlan’s erstwhile employer Microsoft Corp (whom we have vaguely heard of).

Post the issue of 337 million vendor shares, Buddy bears a $100 million market capitalisation with 1.8 billion shares on issue. But with the combined entities losing $12 million, the light bulb moment will come when the promised black ink materialises. 

Quantify Technology Holdings (QFY) 0.8 cents

With March quarter outflows of $1.57 million and cash of just over $1.2 million, the home automation copped one of those polite ASX queries as to whether the company has enough readies to continue.

While capital raisings aren’t simple a case of ‘Alexa – conjure up more funding’, management is confident of raising moolah in the current quarter.

Quantify at least has an ally in Harvey Norman, which has entered a deal to distribute Quantify’s products exclusively for three years. The deal includes an initial $500,000 order within the first six months.

Quantify’s lead products, the Q-device is an adaptable wi-fi connected wall switch that can be enabled remotely by app, or by wall function.

The gizmos can control lighting, heating and audio visual equipment or open and close curtains. Selling for around $150-250 each, the devices can be altered or upgraded by inserting a new smart chip without the need for them to be removed.

Quantify chief Brett Savill says that while only one quarter of Australian houses have any form of automation, adoption is growing at around 25% a year.

 “That will double in the next five years because Google and Amazon are fighting it out for the next growth market after the Iphone market,” he says.

“The growth is about 25% per annum.”

Having showcased the device at a new apartment development in the Sydney suburb of Rosebery, Harvey Norman plans to sell the units directly to developers.

“We haven’t published forecasts but what you will see is a growth in our sales now that Harvey Norman has started to commercialise it,” Savill says.

A key selling point is that a typical apartment can be wired up for around $5,000 to $8,000, a far cry from the $20,000 or a decade ago. The tech is also vastly improved.

 “By and large it is still a business-to-business sale, you need to have someone who knows what they are doing helping you through that process,” Savill says.

“It’s not taken off as a retail proposition because it is still a bit unknown and uncertain.”

In cahoots with the Curtin University of Technology, Quantify has also entered a head of agreement to install the product in a trial building at Knutsford, Fremantle.

In September last year, Copper Coast Development placed a $736,000 order for its Wallaroo Shores development. Quantify has also courted interest from aged-care facility providers and it is being trialled at St John of God’s new facility in the upmarket Melbourne suburb of Brighton.

A board revamp last year saw Peter Rossdeutscher, formerly managing director of the Fortune 500 company Gateway Asia, installed as chairman.

A former PricewaterhouseCoopers partner and CEO of Free TV, Savill was anointed as CEO in September last year, replacing founder Mark Lapins who became technical director.

Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.


One stop exposure to emerging Aussie innovators

Friday, May 10, 2019

The only pure-tech listed investment company on the ASX, Bailador Technology Investments (BTI) 93 cents, adheres to a simple charter of providing investors with a one-stop exposure to emerging local innovators with a decent chance of cracking a global market in the same vein as Afterpay, Atlassian or Wisetech Global.

But despite more than doubling the value of its investments since listing at $1 apiece in November 2014, Bailador shares are trading at a hefty 20% discount to their pre-tax net tangible asset (NTA) per share of $1.17.

Before a recent round of investors roadshow jawboning, the NTA gap was more like 36%, which suggests that investors would like to see the impressive portfolio appreciation translate into divestments and real cash gains.

Founded in 2012 by David Kirk and venture capitalist Paul Wilson, Bailador aims to address the dearth of local listed tech opportunities (or half decent ones anyway).

As well as captaining the All Blacks to World Cup glory, Kirk was CEO of the troubled Fairfax Media and equally troubled printer PMP (now Ovato). But at Fairfax at least he was behind the $700 million acquisition of Kiwi classified house Trade Me, a transaction that was derided at the time but proved to be on the money.

A mild-mannered former accountant turned venture capitalist, Wilson was a director of private equity firm Champ and insurer Metlife and also did deals with Lachlan Murdoch’s as an executive director of his private investment vehicle Illyria.

Wilson currently is a director of the IPL cricket franchise Rajasthan Royals, “which last made more money than any Australian sporting franchise combined.”

Kirk says that while the US market is dominated by big name tech houses, technology accounts for only 3% of the ASX.

“Technology has been a great place to invest in the last five years but it’s just not possible to access tech stocks as a significant of a portfolio,” he says.

Of course, there’s no shortage of raw start ups politely termed as ‘pre revenue’, but that’s not what Bailador is interested in. “You are going to get as many losers as winners and we don’t have any more ability to pick a winner as anyone else,” Wilson says.

Nor is the fund keen on the established techs bearing multi-billion valuations at odds with their actual earnings: “Altium and such are quality businesses but you have to ask how likely you are to get premium returns.”

Bailador thus aims for the Goldilocks sweet spot of companies that are still reasonably valued but have genuine global prospects. All the fund’s investments are internet related, mainly in the internet ‘cloud’ sector.

“Most people like to invest in brand names, but we prefer business-to-business and software-as-a-service business models,” Wilson says. “You don’t get the sizzle but I think we can produce consistent 30 per cent annual returns, year after year.”

In effect, a public private equity fund, Bailador has nine unlisted investments. The value of the tenth, the Auckland based Straker Translations, can be more easily validated as it listed on the  ASX in October last year (STG, $1.53).

Bailador’s initial $7.5 million investment in Straker – which combines algorithmic language translation with the human touch for more accurate transcripts – is now worth more than $11 million.

The fund likes to back founders who have been operating for two to six years, with revenue of $5-50 million.

The enterprises should be addressing global markets, with at least three natural prospective buyers waiting in the wings.

Bailador typically starts with a $3-5 million investment for a 10-40% stake and insists on a board seat to get direct intel on how the company is faring.

Management’s favourite child to date is Siteminder, a business-to-business platform to enable hotels to sell hotel rooms more efficiently across the consumer portals, such as and Expedia.

Dubbed “the best Australian tech company you’ve never heard of,” Siteminder claims global leadership with a base of 30,000 hotels that pay a $120 a month subscription fee.

Bailador’s initial $5 million investment seven years ago is now valued on the books at $56 million – an elevenfold increase and accounting for the lion’s share of Bailador’s $140 million portfolio.

In 2015-16, the fund invested $4.5 million into Instaclustr, a cloud based platform for complex big data applications .That investment is now valued at $14.6 million.

A $5.5 million investment in home loan platform Lendi has doubled, while a $5 million foray into document manager Docs Corp has increased by 84%.

And regrets? Bailador has had a few of them as well. A $26 million original investment in cloud-based video management platform Viostream has been whittled to $7.4 million, despite a promising $7 million Malaysian contract.

In 2017 the fund wrote off the entire $12.5 million of value ascribed to the Queensland-based Ipro, which verifies the credentials of on-site contractors. In its annual report of that year, Bailador rued the technology was not as advanced as thought and that it had been misled by management.

Meanwhile Bailador’s $3 million bet on online designer furniture store Brosa and a $7.4 million foray into big data aggregator Standard Media Index are merely treading water.

Management insists it uses conservative valuations validated by third-party transactions. To date, there have been 18 across the portfolio, all at a premium to what Bailador paid.

Still, the gaping NTA discount shows the market won’t be convinced until implies Bailador exits some of its investments for fruitful gains (the fund is preparing for three divestments, including an IPO of social media ‘influencer’ platform Stackla).

Putting his money where his mouth is, Wilson has availed of the “crazy” NTA discount to outlay $208,000 on another 260,000 Bailador shares, on top of the $11 million he and Kirk already have invested.

Fellow listed investment fund Washington H Soul Pattinson (SOL, $22.46) is on the register with a 19.9% stake and the desire – but not the ability – to buy more.

“We think we are providing something special in the Australian investment market,” Wilson says.

“But it takes time to prove it and it takes time for people to understand it.”

Disclaimer: Bailador is a client 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.


Should you trade in your Automotive Holdings shares?

Thursday, May 02, 2019

On opening its on-market offer last week for Perth-based car dealer chain Automotive Holdings Group (AHG) $2.40, AP Eagers (APE) $8.68 hoped for a swift endorsement of the union that would combine the industry’s biggest and second biggest players.

The 106-year old, Brisbane based Eagers is certainly in the driver’s seat on this one, winning acceptances of 22% as of Tuesday night. Given Eagers’ starting stake of 28.83%, it’s zoomed past the 50.1% control threshold like a well-tuned Ferrari.

But a key point about the institutional facility is that the big guys can reverse their pledges. Not so AHG’s retail holders, who have been advised by their board to do nothing for the time being.


With the offer subject to approval from the Australian Competition and Consumer Commission (ACCC) – a process that will take at least 90 days – there’s still scope for unexpected twists and turns.

Also, the attitude of the car makers towards the configuration and concentration of their dealerships could put a spanner in the works.

Given the geographic compatibility of the two groups, the merger certainly makes sense on paper.

To be called Eagers Automotive Holdings, the $750m engorged entity would have 229 outlets (plus 13 in NZ) as well as 68 truck and bus dealerships.

But value is another issue altogether, with AHG likely to argue that the Nick Politis-controlled Eagers simply isn’t offering an attractive enough ‘trade in’ deal to its holders.

We await AHG’s target statement due on May 9, which will include an independent expert valuation from KPMG.

AHG has certainly been navigating the odd pothole or two: it tried (and failed) to offload its refrigerated logistics division and has been severely affected by a regulatory crack down on dubious dealer insurance and finance products two years ago.

After running hot for years, new car sales have stalled like a Trabant on an incline: industry data for March shows a 5.8% decline on a rolling annual basis.

But Eagers is pleading the bigger picture, arguing the merged entity would be better placed to cope with longer-term structural changes in the industry that will influence the nature – and location – of dealerships.

“In our view the changes in our industry are not just cyclical: structural changes are already playing out and there will be more over the decade,” says Eagers CEO Martin Ward.

Just as Dodgy Dave’s car bazaar in Parramatta Road has become a threatened species, the glitzier main street outlets with capacious stock and servicing facilities also look like becoming a relic of the past.

According to a recent KPMG survey of car executives, half of them expect physical dealer outlets to shrink by 30-50% by 2025.

Eagers has been toying with Carzoos, a shopping mall based outlets featuring ipads rather than demo vehicles.

After agreeing on the used car and the price with the salesperson (sorry, “Carzoos Buddy”) the vehicle is delivered to the customer who has seven days to return the model if it doesn’t spark joy.

Carzoos will also throw in a 175,000 km warranty and a year’s free insurance. Drive away, no more to pay!

AHG has not been sitting idly on the bonnet either, with a used-car variation called easyautos 123 based on price guarantees and a ‘no haggling’ policy.

Customers in any of the five outlets can access vehicles held elsewhere and gain access to stock from the company’s Carlin’s auction business.

On paper the fit is a snug one because Eagers is strong in Queensland (where AHG generally isn’t), while AHG has an over the odds presence in WA and NSW, where Eagers is underrepresented.

Eagers is also strong in South Australia, Tasmania and the Northern Territory, where AHG has no presence.

But given the inevitable cross over and given the evolution of dealer outlets to smaller mall-based or multi-use facilities, dealer rationalisation looks inevitable.

Bell Potter notes AP Eagers land is valued at $340m, but could be worth much more on market. Eagers has just sold three properties at its Brisbane spiritual home at Newstead – to be vacated in favour of a new super site at Brisbane Airport - for $55m.

AP Eager’s scrip offer (of one of its own shares for every 3.8 AHG shares) comes after AHG was forced to cancel it half year dividend after reporting a $229m loss after a $234m asset write-down pertaining to the value of the cold logistics arm and the car dealerships.

The truckin’ division was meant to have buffered the company from cyclical car business. But it proved more of a management distraction as the boardroom discussion became more about the volume of mango shipments than Mazda sales.

AHG had lined up the sale of the business to China’s HNA International for $280m, but the buyer went as cold as the contents of the B Doubles (like Jon Snow, the sale process has been revived from the dead).

While the on-market offer is not subject to any minimum acceptance conditions, there’s no finality until the ACCC ponders its position. According to the AHG camp, the Newcastle and Brisbane markets could present problems.

The merger also needs the imprimatur of the 47 car makers involved, with some entitled to ‘change of control’ powers on the AHG side. We’re not sure how potent an obstacle this is, but the manufacturers need to be comfortable with Eagers’ ‘omni channel’ push and the dealer overlaps the union is likely to produce.

In the meantime, enough of the large frustrated AHG holders have spoken to give Eagers control of its quarry – provisionally at least.

But for the bulk of AHG’s holders it’s a case of manana manana: they won’t get their Eagers shares until the approvals are won and if they sign over their AHG shares now they can’t sell them on market at a potentially higher 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.


Is high purity alumina the next battery gold rush?

Friday, April 26, 2019

Cobalt? Passe. Lithium? So yesterday. Graphite? Get with the programme, please: high purity alumina is the vogue battery metal.

A key to ensuring that all those lithium-ion batteries in Bill Shorten’s electric vehicles don’t overheat and catch fire, high purity alumina (HPA) has emerged as the next battery metals ‘it’ sector.

If HPA were clothing, Anna Wintour would be wearing it.

While the strong demand is apparent – several battery mega facilities have already been built or are being built – the investor jury is out on which of the handful of listed plays have the magic formula to produce the stuff.

After recent weakness, market valuations range from around $6 million (Pure Alumina) to $77 million (Altech Chemicals).

HPA has various industrial uses, ranging from ceramics to sapphire glass to light emitting diodes (LEDs). But the focus of would-be producers is on the 99.99% purity stuff, also known as 4N, which is most suited to lithium ion batteries. Specifically, the material is an additive to ceramic separators, which lie between the anodes and cathodes in a battery.

Commodity analysts CRU estimate HPA demand will grow to 120,000t by 2025, almost entirely on the back of the battery market.

Currently, most HPA is synthesized from aluminium metal feedstock, with most of supply coming from Japan’s Sumitomo and South Africa’s Sasol.  Miners are also attempting to extract it via acid leaching from kaolin, an aluminium-bearing clay.

While a proven processes, synthesis is expensive because of all the effort and energy involved in turning the bauxite into alumina and then aluminium in the first place.

The kaolin route is less proven, but messy and also comes with a high cost. The history of kaolin mining in Australia hasn’t been great, but that’s because producers have targeted the paper market that demands high spec material but doesn’t want to pay accordingly.

Let’s look at 5 production companies:

1. Alpha HPA (A4N) 12 cents

Is there a better way? Alpha HPA is taking the KFC ‘secret herbs and spices’ approach with a solvent extraction technology that means HPA can be derived from widely-used aluminium chemicals.

“We haven’t identified the feedstock – it’s a trade secret – but the aluminium chemical industry sits alongside the aluminium industry globally,” CEO Rimas Kairaitis says. “Aluminium chemicals are used by almost every council for waste water treatment.”

Alpha has detailed plans for a processing plant at the Port of Newcastle, to be built on 10 hectares of yet to be acquired land. The pre-feasibility study envisages a 12,000 tonnes per annum facility at a cost of around $US6400/t, compared with the current market rate of around $US25,000/t.

Costed at $214 million, the facility would generate pre-tax cash flow of $247 million and would be economic at a per-tonne price as low as $US10,000.

Known until recently as Collerina Cobalt, Alpha HPA had planned to use Collerina’s eponymous cobalt-nickel project as a feedstock for an HPA plant, given the deposit also contains aluminum.

But having licensed the solvent extraction process from its Brisbane developer, plans for Collerina are on hold.

2. Andromeda Metals (AND) 0.5 cents

The former Adelaide Resources is also taking a different slant on the emerging HPA story by focusing on a variant of the feedstock ingredient called halloysite kaolin.

No – we hadn’t heard of that one either.

Halloysite shares the same metallurgy to kaolin, but occurs in tubular form. A rare derivative of kaolin, halloysite is highly desired in high-grade ceramics and the petrochemical industry (as a catalytic cracking agent).

Being an inert substance – it wouldn’t ‘ert a flea - halloysite also has applications as an anti diarrhea medicine and in animal feed.

Halloysite is a small market – around 26,000 tpa, with half the output supplied by a declining New Zealand mine, after China closed its facilities for environmental reasons.

The material commands about $US100-150/t, but more than $US500/t when processed.

While the old Adelaide Resources was gold and copper focused, Andromeda has turned its attention to the Poochera deposit in South Australia, near Streaky Bay and 130 km from Ceduna.

Andromeda’s entrée is by way of farm in deal with the current owner Minotaur Resources, which wants to focus on exploring for copper in the Cloncurry region.

With a 24 million tonne official resource, Poochera is one of the world’s biggest untapped repositories of the material.  “We are different to the other ASX companies because the halloysite is valuable in its own right,” says CEO James Marsh.

 Given that, Andromeda plans a simple quarrying operation to remove the material and truck it to one of several nearby ports and into the hands of eager Chinese ceramics producers. Four potential offtake partners are currently trialling the material in view of an offtake material for at least 200,000 tonnes a year.

In the longer term, Andromeda intends to become a low-cost producer of top-shelf HPA for lithium-ion batteries. “We have something we can sell in the short term and make some nice money out of.”

Under the farm-in terms, in April last year it struck a farm-in deal with Minotaur, in which Andromeda invests $3m to earn 51%. After a decision to mine, Andromeda can spend $3 million more for a 75% stake.

3. Altech Chemicals (ATC) 14 cents

Altech is taking the kaolin mining approach to HPA, with an eye on the synthetic sapphire market for unbreakable mobile and laptop screens.

As with diamonds, sapphires can be grown artificially and HPA – and intense heat — is a key input.

HPA’s plans revolve around shipping ore from its Meckering kaolin mine in WA to an $US280 million, 4,500 tonnes per annum processing plant that’s being built in the Malaysian state of Jahor.

If management is at all fazed by Wesfarmers takeover target Lynas’s woes in Malaysia, it’s not letting on.

Altech last year received a non-binding term sheet for $US90 million from a global investment bank.

Anchored by German investors, the company has just raised $18 million in a placement struck at 10.85 cents a share, a 16.5% discount.

A bankable feasibility study costed the entire project at $US298 million, with a net present value of $US505 million and generating$US76 million of ebitda a year for a payback period of 3.7 years.

4. FYI Resources (FYI) 6.2 cents

While Altech looks to the most advanced of the HPA hopefuls, FYI is expected to press the green button on its Cadoux kaolin project 220km northeast of Perth.

FYI has outlined an 8000 tonnes a year operation over a 50 year-plus mine life, producing $128 million of ebitda with a net present value of $US506 million. The produce would be beneficiated at the mine and then shipped to Kwinana for processing.

FYI says: “with sufficient funding in place and with a number of key permitting milestones already achieved, the bankable feasible study is scheduled to be completed by mid 2019 (with) construction planned to commence in the December quarter of 2019.”

5. Pure Alumina (PUA) 2.9 cents

Until recently known as Hill End Gold, Pure Alumina has renounced its gold activities in favour of developing its Yendon kaolin project near Ballarat in Victoria.

The company reports a definitive feasibility study is “progressing well”, with a focus on reducing the costs outlined in the preliminary study. The envisaged size of the plant is also under review, with the company likely to opt for a smaller facility of around 1000 tonnes per annum, but starting ahead of the envisaged 2022 commissioning date.

In the meantime, the Hill End gold assets in central NSW are for sale to the highest bidder.

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.


3 industrial small-cap stocks that represent value

Thursday, April 18, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Punters had been warned.

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

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

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

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

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

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

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

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

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


3 ASX water stocks tackling the emerging world shortage of drinkable H2O

Friday, April 05, 2019

Fluence Corporation (FLC) 56c

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Phoslock Environmental Technologies (PET) 39c

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

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

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

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

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

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

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

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

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

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


Debt consolidation sector booms

Thursday, March 28, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Credit Intelligence (CI1) 1.4c

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

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

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

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

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

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

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

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

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

 Credit Intelligence listed here in May last year.

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

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

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

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

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

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

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

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


Milk, cheese, and baby formula – mooing for more

Friday, March 22, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Judgment on this one is due in April.

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

Australian Nutrition and Sports (AN1) not yet listed

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

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

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

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

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

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

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

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


Not so fertile ground for IVF leader

Thursday, March 14, 2019

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

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

Think of Jetstar versus Qantas.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

Memphasys (MEM) 2.2c

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

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

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

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

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

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

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

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


The dilemma for another ASX-listed pot stocks

Tuesday, March 12, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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Investing in a listed valuation company

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A taste of honey

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Is cannabis a good investment?

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The New Criterion: Finding light in the financial sector

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The New Criterion: Molopo Energy

The New Criterion: Leaf and Bio-gene

The New Criterion: The gold play

The New Criterion: Global Masters Fund and Altech Chemicals

The New Criterion: Universal Coal and OBJ

The new criterion: MGM Wireless and HUB24

The New Criterion: Stargroup

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

The New Criterion: Testing investor appetite for cobalt

The New Criterion: Stocks exposed to the military machine

The New Criterion: All things that glisten are not silver

The New Criterion: technology stocks

The New Criterion: drug development and computer viruses

The New Criterion: Syrah Resources

The New Criterion: Two stocks to watch

The New Criterion: Oliver's Real Food and Eagle Health

The New Criterion: Pot stocks come down from high

The New Criterion: Two undervalued stocks