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: Gaming IPO's serious business

Friday, March 16, 2018

In league with a leading South African telco, an upcoming IPO is targeting the world’s two-billion plus gamers.  For those who prefer sunshine over dark rooms, PowerAsia presents an alternative IPO theme

Emerge Gaming (EM1) (not yet listed)

Unless you’re a joystick jockey yourself, gaming looks like an esoteric pastime of the misspent youth. But with 2.1 billion players globally devoting hours to improving their League of Legends or Dota2 scores, the lure of the console can’t be denied.

For a cohort of professional players, it’s also highly lucrative.

“Think rock star status athletes competing in front of sell-out arenas, being streamed to millions around the globe competing for millions of dollars,” Emerge Gaming says.

The sector is already big business, worth an estimated $US500m globally in 2016, with this spend forecast to grow to $US1.48bn by 2020.

Plenty of companies are awake to the opportunity to make a dollar, whether though advertising other goods to the youthful crowd or through direct involvement.

But it’s still unclear what monetisation model will work best.

Emerge Gaming is stepping up to the console with a planned ASX listing, having gathered $5m in an oversubscribed raising at 2c apiece, via the shell of the once venerable Arrowhead Resources (AR1).

Emerge organises online video games competition. Its operating business, Gaming Battle Ground (GBG) so far has hosted over 10,000 free-to-play competitions across nine of the most popular games.

GBG operates mainly in South Africa and Croatia (of all places) and claims 30,000 registrants, 14,000 active in the last six months.

The company says that as the professional platforms grow, so too will the market for amateur games organised around a central hub.

Emerge Gaming, we stress, is not without its rivals such as World Gaming Butterfly, pwnwin and Toornament. “Some are offering pay to play and may be more advanced,” the prospectus notes.

Emerge Gaming is also emulating Esports Mogul Asia Pacific (ESH), which backdoor listed in late 2016 after raising $7m at 2c apiece.

Esports also provides a  tournament platform, as well as “exclusive Esports content” and even an Esports learning academy.

Judging from the half-year accounts, Esports Mogul’s path to prosperity has been a slow grind and the stock trades well under its 2c listing price.

Esports reported December half year loss of $8.5m on humble revenue of $76,128, albeit 680 per cent higher.

Just as serious gamers need a secret manoeuvre, Emerge has the advantage of a deal with South African telco MTN to access its base of 30m phone subscribers.

The idea is that MTN charges a daily fee for customers to access the GBG platform, with 40 per cent of “shareable revenue’’ remitted to GBG.

A $26 billion company listed on the Johannesburg exchange, MTN will also provide marketing support and may also chip in for prizes and sponsorships.

Emerge is also negotiating with other parties elsewhere to strike similar deals.

Emerge was to have listed in February, but the pernickety regulators required a supplementary prospectus. Arrowhead holders had approved the deal last year, but need to vote again given the subsequent MTN deal. Then it’s game on.

Power Asia (P88) not yet listed

For those who prefer sunshine to dark and dank rooms, this upcoming but similarly delayed IPO is targeting an overlooked sector of the renewables market: mid sized projects between 10 to 50 megawatts.

These projects are overlooked by the institutions that otherwise are hungry for such infrastructure.

“The small and large segments of the industry are well known but this space is quite empty,” says PowerAsia head of acquisitions Tishan David.

PowerAsia has a pipeline of eight to ten projects locally and in South Australia.

As a starting point, Power Asia is developing the 10MW Sabha Khola hydro project in Nepal and the rights to acquire and develop the 20MW Paget solar plant near Mackay in Queensland.

Costed at $26m, the Nepal project is subject to a memorandum of understanding. The Paget development is estimated to cost $38m.

In essence, PowerAsia is a roll up of three ventures: the retail solar installer Standard Solar, the commercial installer and fabricator Linked Energy and Enpro (project procurement and management).

Standard Solar has installed more than 20,000 solar systems, while the Mackay-based Linked Energy boasts numerous blue-chip clients with a focus on the resources sector.

Solar gets a bad rap in this country but the company notes that 1.5m solar systems are in place, equivalent to 18 per cent of households. Australia also has the highest installations on a per-capita basis and in 2014 was the eight-biggest in terms of new capacity.

A key to the IPO is the involvement of three Chinese alliance partners can elect to participate in the projects on a JV basis. But PowerAsia expects to fund the smaller projects itself, using equity and debt.

Super funds are also likely to be involved, attracted by the reliable yields underpinned by long-term contracts.

The nearest ASX exemplars are Windlab (WND), which is developing wind projects here and aboard based on CSIRO atmospheric modelling and wind energy assessment technology.

The $100m market cap Windlab is solidly profitable, having generated $8.9m of earnings in calendar 2017, on revenue of $23.2m.

Valued at a tad over $90m, the ‘pre revenue’ Genex Power (GNX) is developing a stored hydro and solar plant based on the old Kidston gold mine in northern Queensland.

Carnegie Clean Energy (CCE) has strayed from wave energy to other renewable and among other projects and is negotiating to build a 10MW solar and battery facility near Bunbury.

PowerAsia last week was confident it had raised its targeted $9m at 20c apiece, following a last-minute flood of applications from Hong Kong investors.

A key risk is that the company’s efforts to source projects for its alliance partners “may yield little or no return if the partners decide not to proceed with these projects.”

To date PowerAsia’s earnings have flowed from its established Australian business and this should imbue investor confidence post the listing which is now scheduled for later this month.

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: Blockchain’s ASX winners and losers

Monday, March 12, 2018

According to someone more boned up on the topic than your columnist, self-executing digital contracts have been around since at least 1994 - when Paul Keating still ruled the land with his colourful invective.

It’s just that these days they’re known as blockchain contracts.

As we opined recently, blockchain – the underlying platform for cryptocurrencies – looks to be more useful than the ‘cryptos’ themselves.

The premise of a blockchain contract is that if a prescribed event occurs, then a certain action is taken.

Unlike a standard paper contract that is enforceable by law, such smart contracts are enforced by cryptographic code and are executed in line with predetermined, programmable rules.

One example is estate planning: a will could be programmed as a smart contract, which on the demise of the subject would takes action immediately to transfer assets to the prescribed beneficiaries.

That’s one way to prevent squabbles among long-lost relatives.

In this case, the family benefits from reduced processing fees, the elimination of lawyers and trustees from the process and increased transparency and reduced human error.

This means smart contracts can disrupt existing services that have speed bottlenecks (such as international monetary transfer), or act as intermediaries in complex situations involving regulation and numerous parties (such as an advertising buying agency).

Blockchain is also relevant for trusted intermediaries, such as trustees and public sector services.

It’s not so relevant for companies with bespoke offerings, or labour-intensive ones such as mining and construction contractors.

Still, it’s a dead cert that much like the internet did, smart contracts will improve service quality and change the way that services are provided.

Although predicting the future remains the domain of clairvoyants, we do our best to identify the winners and losers over the medium term.

For the banking sector, the banks are likely to be on the winner’s list as well as customers and bank regulators.

Blockchain means there’s room to explore efficiencies on the funding side, with the Commonwealth Bank of Australia (CBA) already completing tests with the Queensland Treasury Corporation.

For banking customers, the speed to settlement is a major drawcard of smart contracts. Aligning loan approval with drawdown access will be of great benefit in a variety of consumer use cases.

The government’s ‘open banking’ data initiative – requiring banks to share customer information with accredited rivals – promises to put the power of data into consumer’s hands.

 A likely scenario is that consumers will hold smart contracts containing their personal data, along with encryption keys to share that data with other providers.

Another benefit is that credit checks would be verified through a decentralised ledger and consumers with a stronger credit history (that is, about half the population) would receive more competitive offerings.

Companies that are dominant in their market have an incumbency advantage over new entrants when it comes to developing smart contract technology.

The obvious winner is the blockchain zealot ASX Limited (ASX), which is replacing its CHESS settlement system with smart contracts.

This will reduce trading costs and settlement time, while accentuating barriers to entry for aspiring rivals.

In the digital classified sector REA (REA), Domain (DHG) and (CAR) have the opportunity to use smart contracts to become a trusted marketplace for direct transactions between buyers and vendors.

Property owners will be able to connect directly with   prospective tenants and verify their identity, rental history and financial means.

Similarly, car buyers can verify a car’s service history, odometer reading and even cloud-based data such as fuel consumption and emission rates.

Companies such as (FLN) can become a more trusted supplier of outsourced work services. That’s because the freelancers could offer a verifiable work history, eliminating spam and fake reviews and making the overall hiring process smoother and more trustworthy for employers.

Other winners are those who build IT and telco networks, given the need for more computer power and data transfer. Think of NEXTDC (NXT), Superloop (SLC), and Vocus (VOC).

So too will the need for advancement in semiconductor technology be a boon for 4DS Memory Limited (4DS).

IT consultants such as DigitalX (DCC), Data#3 (DTL), DWS Limited (DWS) and the challenged RXP Services (RXP) are likely to benefit from increased technology budgets.

On the flipside, likely losers are service companies that are a conduit between customer and supplier. This is especially the case when the intermediary is providing a high-volume service with a focus on compliance and/or trust.

Another one to watch is Property Exchange Australia (PEXA), an online property settlements company backed by Macquarie Group (MQG) and Link Administration (LNK).

PEXA, which plans to list this year, has done a good job in disrupting an archaic property transfer market. But it may face headwinds if legal software house InfoTrack decides to invest in an electronic property settlement platform, based on smart contract technology.

The share registries Computershare (CPU) and Link Administration face clear and present pain if private ledgers become the norm.

Both companies have taken steps to try to weather the oncoming smart contract storm, but it remains to be seen what role a third-party ledger administrator would play between market participants and exchange operators.

Through standardised technology approved by the regulator, companies may be able issue smart contract shares directly to shareholders.

Each smart contract would correspond to one share and would have the same existing shareholder rights written into its code (such as voting, dividends and transfers).

Intellectual property companies had better watch their backs too, because the recurring fees charged over the life of a trademark and patent could vanish.

That’s because smart contracts could reduce complex filing procedures with a transparent global IP register, simplified registration and automated compliance.

Thus IPH Limited (IPH), Xenith IP Group (XIP) and QANTM Intellectual Property Ltd (QIP) may find the complexity of their operations -- and their ability to charge –will diminish.

Of course revolutions usually don’t pan out as expected. But there’s a strong sense we’ll still be hearing about blockchain long after everyone’s stopped punting on bitcoin.

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: 2 biotech stocks to watch

Friday, March 02, 2018

The animal spirits are back in the biotech sector after the recent takeovers of two ASX-listed companies. You won't want to be ignoring these two stocks.

Viralytics (VLA) $1.69

Viralytics chief Malcolm McColl recently told a biotech forum that after a quiet 2017 for global takeover activity in the pharmaceutical sector, Trump’s tax cuts would fire up activity this year.

That’s because corporates will have more money in their tills to play with, while the tax reforms also make it easier to repatriate cash to the US.

“The animal spirits are back out there again,” he said. “Everyone is talking about opportunities and immuno-oncology is where it will happen.”

As it happened, he was dead right about the animal spirits, with big pharma Merck this month lobbing a $500 million offer for Viralytics. At $1.75 per share, the cash offer represents a stunning 160% premium on Viralytics’ one month weighted average share price.

Merck owns the skin cancer immunology drug Keytruda. Given Merck already had a tie up with Viralytics – which also focuses on melanoma – it was the obvious suitor. With the benefit of hindsight, of course.

Not surprisingly the Viralytics board has endorsed the offer and its biggest holder – China’s Lepu Medical which accounts for 13 percent of the register – has said it will accept.

Lepu recently injected $29m into Viralytics, making it well funded to go alone with a program of no fewer than six clinical trials for its lead drug Cavatak, initially focused on melanoma but also targeting lung and bladder cancer.

Immuno-oncology – selectively killing bad cells and persuading the body’s own defences to fight back against cancer – has its sceptics. A cheap industrial dye, rose bengal, is meant to do just as well.

But Merck’s offer highlights the global interest in the field, given the limited efficacy of chemotherapy and radiotherapy.

In the past five years the US regulator approved the checkpoint inhibitors Keytruda and Yervoy, which are antibodies that stimulate the immune system.

Viralytics hopes that by combining them with Cavatak, these checkpoint inhibitors can be made to work better and Merck has the same idea.

Cavatak is derived from the coxsackievirus, which in its more malevolent guise is responsible for the common cold. Cavatak binds to receptor protein expressed on cancer cells and then zaps hem while encouraging and ongoing immune response to keep killing them.

In “preliminary but encouraging” melanoma results, Cavatak increased the “overall response rate” in patients treated with Cavatak and Keytruda, relative to 33 per cent for those treated with Keytruda alone.

In the case of the Cavatak-Yervoy combo, the response rate was 57 per cent compared with 11 per cent for those treated with Yervoy alone.

Viralytics is progressing these trials to “pivotal” stage and is recruiting up to 250 patients. In clinical trial terms that’s getting to the pointy end of things and is a precursor to applying for FDA approval.

The company has also started early stage trials for lung and bladder cancer and this quarter plans three new trials for head and neck cancer, uveal melanoma (eye cancer) and colorectal cancer.

Under the Merck tie up, Merck provided the Keytruda for the combination trial, which at $150,000 per patient was no small contribution.

Thanks to the efforts of businessman and melanoma sufferer Ron Walker who died in January, Yervoy and Keytruda are subsidised under the Pharmaceutical Benefits Scheme.

According to the drug analytic house IMS Health, immuno-oncology will treat half of all cancers by 2020, with the overall cancer drug market worth $US150bn.

The 160% premium is made somewhat more flattering by the fact that Viralytics shares had been trading near record lows at 61.5c, having traded as high as $1.21 in December 2016.

The Lepu placement in early January was done at 82c a share, a 27 per cent premium on the prevailing price. Lepu was treating its stake as a pure investment – and as it turned a very profitable one.

The Merck offer comes after targeted radiation oncology house Sirtex Medical was subject to a $1.5 billion cash offer from Varian Medical Systems, at a 60 per cent one-month premium.

Almost every Aussie biotech professes to be an acquisitive target for a deep-pocketed global pharma company. With the latest outbreak of animal spirits, evidence is mounting that they’re not just dreaming after all.

AdAlta (1AD) 32c

With the debate about the merits of a shark cull simmering away in WA, this biotech is providing much needed positive PR for the maligned predators of the sea.

Unique to sharks, AdAlta’s protein-based therapeutic antibody AD-114 has a long binding loop that allows it to bind to a diverse range of targets.

Not that AdAlta itself is slaughtering great whites for the coveted ingredient: AD-114 is a manufactured derivative of the shark antibodies, rather like Aspirin being a derivative of willow bark.

AdAlta is targeting difficult to treat fibrotic diseases, starting with the lung condition idiopathic pulmonary fibrosis (IPF).

IPF inflicts 300,000 people globally, 5000 in Australia. Globally, about 40,000 sufferers die annually, about the same as breast cancer but with no Pink Ribbon days to fund research.

The company estimates fibrosis is prevalent in 40-50 percent of all diseases, other examples being the skin ailment scleroderma, cardiac and renal fibrosis, cirrhosis and wet aged-related macular degeneration.

“The pipeline is less developed than for other therapeutic areas,” says CEO Sam Cobb.

IPF inflicts 300,000 sufferers globally, 5000 in Australia. Globally, about 40,000 sufferers die annually, about the same as breast cancer but with no Pink Ribbon days to fund research.

The FDA has approved AD-114 as an “orphan” drug, which means it can treat conditions for which there is no other treatment. The key benefits of orphan drug status are enhanced research and development credit, assistance with clinical trials, waived fees on an eventual new drug application (normally $US2 million) and seven-year marketing exclusivity.

To date, AdAlta’s work on IPF has been pre-clinical – read in vitro lab work and mice trials. An early phase-one on healthy volunteers is due to start in the second half of calendar 2018, funded by AdAlta’s $5m of cash.

AdAlta shares are just below record highs, having been boosted by a recent AdAlta sponsored confab of global fibrosis experts (but not marine biologists).

Cobb says the company plans to seek a deep-pocketed partner after phase one, which is really about establishing the drug is safe more than anything.

There’s an encouraging precedent M&A wise: in January French pharma Sanofi bought Ablynx of Belgium for $US4.8bn.

An advanced clinical phase company, Ablynx has developed a class of antibody fragments (scaffolds) derived from camel antibodies.

In 2015 Roche acquired fibrosis play Adheron Therapeutics for $US105m (plus $US475m of potential milestone payments) in September 2015.

In November 2014 Bristol Myers Squibb bought Danish IPF specialist Galecto Biotech for $US444m. Both Adheron and Galecto were phase-one developers.

Ultimately AdAlta’s fate will be determined by the Perth venture capital firm Yuuwa Capital, which owns 53 percent of AdAlta and accounts for two of the six board seats.

Bit with a mere $30m market cap, AdAlta sure looks like shark food for a bigger predator.

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: Commodities stocks

Thursday, February 22, 2018

There are more ways to gain exposure to commodities than buying the miners themselves. Here are two alternatives.

Zenith Group (ZEN) 77c

Investors convinced of a sustained resources recovery (and that appears to be the case) face an internal dilemma. Should they ride the cycle with an exposure to the actual producers, or invest in the handmaidens that help the miners get the stuff out of the ground?

After all, the real smarties during the 1880s gold rushes were the ones who invested in pots and pans and built a sustainable business.

In the case of remote mines – in other words, most Australian ones – power is a key input cost and there’s an unhealthy reliance on inefficient diesel generators.

Zenith, which listed in May last year, supplies or operates gas, solar or diesel hybrid plants for a clutch of mining’s famous names.

This month Zenith won a contract from Newmont Australia to build own and operate (BOO) a 62 megawatt power station at the gold miner’s Tanami project in the NT. That deal took Zenith’s BOO capacity from 125 megawatts to 185 megawatts and its total installed capacity to 380MW across more than 30 projects.

Other contracts are with Newcrest Mining’s OK Tedi mine, Independence Gold’s Nova nickel project and Incitec Pivot’s Phosphate Hill.

But Zenith’s biggest customer is with Northern Star Resources, covering the gold producer’s Plutonic, Jundee and Kundana mines.

Zenith also uses a manage operate and maintain (MOM) model. But BOO accounts for 65 per cent of revenue and is the preferred arrangement because Zenith is protected by ‘take or pay’ arrangements, not to mention a wider involvement in the process.

A key advantage of remote generation is that once the client has installed the plant it’s unlikely to change supplier.

 “The business has never lost a client and we don’t intend losing them now,” chairman Doug Walker says.

Zenith was founded in 2006 by Walker and director Gavin Great, Zenith initially with a contract to power Chevron’s Barrow Island base.

Walker has form in the remote power game, having founded StateWest Power before selling it to Wesfarmers in 2001. Wesfarmers then renamed the business Engen and sold it to Energy Developments, which in turn was acquired by the utility DUET.

In a key test of strength, Zenith endured the fallout of the global financial crisis on the resources sector and its shares are now well above their listing price of 50c a share.

“The GFC was a test of our resolve and our strength,’’ says managing director Hamish Moffat. “But at least it focused our clients on the real cost of energy.”

On that front, nothing much has changed given the relentless emissions debate and concerns about blackouts and gas shortages. While the recent-ish Finkel report focused on utility scale generation, off-grid users such as miners are not immune from emission target reductions as per the Paris Agreement.

We’re still bound by that accord, which requires us reducing emissions by 26-28 per cent (relative to 2005 levels) by 2030.

Zenith, which reports its half-year results next week, has flagged a full year net profit of $9.5-11m and ebitda of $12-14m, on revenue of $33m.

That’s quite a step up from the 2016-17 full year profit of $3.1m and ebitda of $9.84m, on revenue of $30.9m. But investors hankering for a dividend should look elsewhere.

Zenith accounts for about 12 per cent of the remote generation market, competing with the DUET-owned Energy Developments as well as bigger fellow ASX listee Pacific Energy (PEA).

K2Fly (K2F) 28c

Is that the time?

Partygoers tend to suddenly remember the babysitter or an early morning appointment when the conversation turns to consulting systems integration for infrastructure and asset-heavy industries.

But for K2fly investors sitting on a 300 per cent plus gain over the last two months, these topics are even more riveting than house prices and whether Bernard Tomic is simply a twat or a lost soul deserving of sympathy.

With its dominant client base of miners, K2fly can be seen as an exposure to the recovering resources sector, yet one not dependent on the commodities cycle. A bullish December update- which sent the stock (K2) flying, vindicates the board’s decision to buy the private Infoscope in July last year.

The purchase price --$625,000 and $275,000 of K2fly scrip – represented a stingy ebit multiple of 1.56 times.

Infoscope’s software enables miners to manage land issues such as tenement tracking, cultural heritage and ground disturbance in a seamless manner. Clients include Fortescue Metals, iron-ore mine operator API Management, Metals X,  Westgold Resources and The National Trust (via The Keeping Place, funded by Fortescue, BHP Billiton and Fortescue).

But what’s spiked the punch bowl is Infoscope’s recent tie-up with the German based enterprise software provider SAP, which globally has 770 mining clients (including most of the majors).

This raises the prospect of K2Fly receiving monthly licensing fees from SAP off a much wider customer base, as SAP moves its clients to ‘cloud’ computing..

K2Fly exec chairman Brian Miller says that with a market cap of $10m, K2Fly would not normally be big enough to get a seat at the SAP table.

Proving the adage that it’s not what you know but who you know, Miller leveraged his previous history as an SAP executive.

 “SAP is especially important in relation to moving customers from on-premises software to the cloud,” he says.

“Because we have leveraged our previous relationship with SAP we have been able to be the first cab off the rank.”

The Infoscope platform is currently being “ported to the SAP cloud and its s4 Hana environment”. This is geek speak for saying that when someone plugs in the right cable, Infoscope and SAP will run seamless together.

When this happens by the end of the current quarter, SAP’s salespeople will be able to sell K2Fly products to its own client base, generating recurring monthly licensing revenue for K2fly.

“SAP has very aggressive targets in terms of how they will move their client base. In the mining sector we should play very well in the space,” says Miller, who believes that most clients would be good for annual fees of at least $500,000.

Otherwise, K2Fly has reseller deals with other IT industry leaders including OBI Partners and Kony of the US, Sweden’s ABB and Capita PLC of the UK.

K2F re-sells Capita’s Fieldreach, a mobile based management tool for blue-collar workers on physical assets. In November K2Fly struck a deal to supply Fieldreach to Arc Infrastructure, which operates WA’s 5500 kilometre freight network.

K2fly also consults to the water, electricity, rail and power sectors.

As always, K2Fly doesn’t exactly have the field to itself. In the tenement management sector it competes with the private C2 Land and Land Assist, or miners who build their own system using Indian programmers.

But there’s no doubting the revenue momentum. In the December half just announced, K2Fly chalked up $937,396 of revenue for a loss of $2.68m, compared with $798,066 of turnover and a $1.3m deficit last time around.

The company has also submitted for seven proposals and tenders, “some of which are for the multi-year provision of software and services.”

On Feb 5 K2Fly announced a contract with a “tier one utility company” that would be material to 2017-18 revenue.

The company then went on trading halt, after which the company clarified that it would be a WA-based electricity company and involve revenue of $250,000-300,000.

Spark up the party!

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: Jumbo Interactive and OtherLevels

Thursday, February 15, 2018

Lottery ticket reseller Jumbo took the right decision to align itself with traditional partner Tatts Group rather than aggressive challenger Lottoland. Meanwhile, digital promotions house OtherLevels believes that a clamp on wagering advertising will be good for business. Here's a rundown on both.

Jumbo Interactive (JIN) $3.43

Sometimes adversaries can do an unintended favour, which in the case of the online lottery ticket seller has meant a closer relationship with traditional partner Tatts Group.

Tatts – now part of Tabcorp – owns a 15% stake in Jumbo after a placement of 6.6m shares at $2.37 in June last year.

Crucially, Tatts also extended its reselling arrangement with Jumbo out to 2022.

The adversary in question is the Gibraltar-based rival Lottoland – dubbed by some as the Uber of the wagering world because of its disruptive tendencies.

In the unlikely event that no-one has noticed, Lottoland has been aggressively marketing its derivative lottery product in the face of newsagent-led calls for tighter regulation or even an outright ban.

The newsagents are peeved that Lottoland is taking away their business, although Lottoland only promotes overseas lotteries.  State governments are even more annoyed at missing out on lottery taxes.

With a claimed local customer base of 650,000 and 6.5m globally, Lottoland last year offered newsagents a 10% cut of the price when punters nominated a particular outlet.

The derivative nature of Lottoland’s offering means punters don’t participate in the actual lottery, but the outcome of a draw. Last weekend it offered a $1 billion “Super Bowl” themed lottery, reduced by 38% as per “terms and conditions”.

In April last year Lottoland paid $7.6m for a 7% stake in Jumbo, clearly in view of winning over Jumbo to distribute its product over Tatts. But in late June Lottoland conceded defeat and sold its stake at a slight loss.

Despite being distracted by its own merger with Tabcorp, the Lottoland threat girded Tatts into deepening its relationship with Jumbo, which has been selling Tatts tickets on its OzLotteries site since 2000.

Jumbo chief Mike Veverka admits he’s not a fan of Lottoland.

“We weren’t keen on doing anything with them at all,’’ he says. “But they did help push things along (with Tatts).”

The new Tatts-Jumbo tie-up helps allay long-standing investor fears that Tatts would opt to go it alone. (apart from Tatts itself, no-one else can sell Tatts tickets online other than Jumbo).

Veverka argues that as Tatts still gets the ticket and Jumbo has proved an efficient intermediary, it makes no sense to cut  Jumbo adrift.

The Keno business aside, Tabcorp did not have a lottery business but appears willing to learn, having already sounded out Jumbo for advice.

“They are good managers. It won’t take them long for them to get their head around lotteries,” Veverka says. “The last thing they would want is to see the lottery business shrinking.”

In the meantime, Jumbo’s has jumbo-sized its performance, thanks to a string of jackpots (defined as anything over $15m).

In an update on Jan 8, Jumbo pointed to half (December) year earnings of $5m, 43% higher than previously and outstripping December’s guidance of $4.3-4.5m.

Jackpots increased by 20% to 18.

Total transaction value – the face value of the tickets sold – should rise about 20% to $89m.

Jackpots are far more popular with punters, who overlook the reality that the monster payout is more likely to be split among multiple winners.

But that’s not the case with the unclaimed ticket for a $50m Powerball prize purchased at your columnist’s local newsagent – and he remains ready and able to relieve Tatts of the loot if that makes things any easier.

Jumbo shares have spurted 150% over the last 12 months, for a market valuation of $200m.

Also debt free and sitting on a bash balance of $45m. Given the company’s strong franking balance, that raises the prospects of a special dividend.

Jumbo’s fortunes were reflected in the last Thursday’s half-year results for Tabcorp, which reported a 6.2% increase in lotteries revenue for the Tatt’s division, to $1081.2bn. The Tatt’s numbers were certainly better than Tabcorp’s core wagering results.

Digital lottery sales now account for 14.9% of Tatts lottery total sales, up from 14.3% previously.

OtherLevels (OLV) 4c

OtherLevels CEO and founder Brendan O’Kane believes a looming crackdown on gambling promotion will help his heavily wagering exposed digital promotions business, which sounds counterintuitive.

But he reasons if the corporate bookies can’t saturate sports coverage from tennis to tiddlywinks with their special introductory odds, they will need to do more to nurture their existing customer base.

The federal government last year said it would ban betting ads from live sport before 8.30 pm - a measure not yet enacted.

But agitants such as the Nick Xenophon camp are pushing for much more, amid perceptions the industry has way over reached with its blanket-bombing approach to advertising.

The UK-domiciled William Hill has already sniffed the breeze and is odds on to exit the Aussie market, citing regulatory pressures and increased state taxes.

“In Australia there has been a strong focus on brand building and acquisition which has raised questions in the public eye about whether this is what we want to see on TV at 7 pm,” O’Kane says.

The bottom line is that if you’re a punter already on the books, don’t be surprised to be texted live odds pertaining to an event the clever algorithms know you’re interested in.

The in-play aspect is crucial: according to Bet365, 72% of sports betting is carried out after the opening siren (or whistle), with 80 per cent of tennis bets places after the match has started.

OtherLevels gambling-heavy client book includes Ladbrokes, Bwin, the National Lottery, Matchbook, Topbetta and Golden Nugget. “Tattscorp” is also a client.

The company also does work for Flight Centre – another mover in digital reach – and various outposts of Coles.

However, OtherLevels’ key relationships are with the bookies’ British parents – and for good reason. “The UK has been more cautious compared to Australia,” he says. It’s a bigger market with mote maturity and visibility of risks.”

OtherLevels client contracts are typically for 12 months, with an upfront licensing fee and a per-text or per-email fee.

OtherLevels listed in March 2015 after raising $7.5m at 20c apiece. But the company struck early trouble by burning too much cash and making an ill-fated foray into the US.

“We dug ourselves a very deep hole and spent the last 18 months digging ourselves out of that hole,” O'Kane said.

OtherLevels preponderance of wagering clients is not surprising, given the sector was one of the first to embrace digital marketing. But OtherLevels December (second) quarter update showed $2.066m of cash inflows, well up on $1.353m achieved for the September quarter and $1.132m for the previous December quarter.

More importantly, the company turned a $676,000 deficit into a $41,000 surplus for the first time.

OtherLevels market cap of $8.5m implies little upside, which could be construed as an opportunity.

There’s a clump of investors who can be relied on to hang around: O’Kane and the board account for 35% of the register, with Queensland Chief Entrepreneur (yes there is such a thing) and Shark Tank judge Steve Baxter holding a further 20%.

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: Nickel Stocks

Friday, February 09, 2018

Some argue that nickel is a more important component in electric vehicle batteries than lithium or graphite. It's a controversial debate but here are two stocks worth looking at.

Panoramic Resources (PAN) 42c

Barring a fresh commodities meltdown, the WA nickel stalwart is poised to press the button to restart its dormant mainstay mine after investors flocked to its recent capital raising.

The mine, Savannah in the east Kimberley, was placed on care and maintenance in mid 2016 after becoming victim to the plunging price for the stainless steel ingredient.

At the time nickel traded at $US3.50 ($4.30) a pound, but optimism about nickel’s role in electric vehicles has pushed the metal to a spot price of $US6.05/lb.

While the metal has retracted from its recent high of $US6.30/lb, it’s gained 28% over the last 12 months. Nickel has thus outperformed the in-favour copper as well as zinc, lead and aluminium, but the gains come after eight years of dismal prices.

At the current spot price ($US6.15/lb) at the time of writing), nickel is comfortably above the ‘sustainable’ minimum of $5.50/lb needed to resume production at Savannah, which was mined for 12 years and produced 1.2 million tonnes of concentrate material over that time.

“It feels a lot better than 18 months ago when we shut the mine,” CEO Peter Harold says. “But we have a bit of stuff to do first.”

 The Savannah feasibility study costs the re-start at $36m, assuming an ‘all in’ production cost of $US3.50 ($4.30) a pound. With the potential to be expanded, the mine boasts reserves of 112,600 tonnes, grading a handy 1.65% nickel.

This time around, the economics are boosted by the presence of copper and cobalt, two other EV-related ingredients that have been on the fly.

The feasibility study assumes annual output of 10,800 tonnes of nickel, 6100 tonnes of copper and 800 tonnes of cobalt. The latter two metals will play a key role in the mine economics: copper and cobalt credits are expected to account for 40% of the mine’s revenue, compared with only 20% last time around.

Apart from hawkishly watching the nickel price, Harold is working on an offtake agreement to secure a buyer beyond 2020, when a current deal with Jinchuan Sino Nickel expires.

 While it’s possible the Chinese conglomerate might extend the deal – it’s done so twice already – other nickel hungry parties are beating a path to Panoramic’s Hay Street HQ as well.

 “One of the issues is whether we split the concentrate 50:50 as a risk mitigation strategy, or just go with one supplier,” Harold says.

Then there’s the always-pertinent question of financing the project. But having just raised a net $19.8m in the underwritten rights offer, Panoramic needs to raise only modest debt that should be covered by one bank, rather than the syndicate.

As for the nickel price, it’s a case of ‘anyone’s guess’ but expert forecasts hover around $US6.75/lb. 

“I have been in the nickel game for more than two decades and have seen the price at $1.90 and as high as $20 (as pound),’’Harold says. “There’s no way anyone makes money at $3.50, but at $US6-8/lb things get really interesting.”

The case for the nickel bulls is supported by both the projected demand for the electric vehicle battery market and surprisingly robust output of stainless steel, which is what nickel is still mainly used for. On the supply side, there’s a dearth of big new projects.

There’s cause for wariness too because the metal remains in oversupply: the London Metals Exchange inventory stands at 380,000t, a chunky stockpile in the context of global supply of around two million tonnes.

In January, key nickel supplier Indonesia eased a ban on raw ore exports and the effect of this is yet to be seen.

Some party poopers also contend that electric vehicle demand has been exaggerated, or in any event is factored into the price already.

On Macquarie estimates, lithium ion batteries accounted for only 10-15,000t of nickel production in 2016, although this number probably doubled in 2017.

Others argue that with lithium-ion batteries needing ten times more nickel than lithium, punters have been getting excited about the wrong material.

Still, it’s almost certain the Panoramic board will press the green button on Savannah, which has a net present value of $210m to $380m.

If the unexpected happens – as its wont to do with commodities – Panoramic's $200m valuation will melt like a Paddle Pop on Cottesloe beach in summer.

At least the company has a little known sideline: renting out a 200-person accommodation camp at its Lanfranchi site near Kalgoorlie (also mothballed) to another miner.

“We are a hospitality mining company now,’’ Harold says. “That asset is a real sleeper.”

Mincor Resources (MCR) 34c

Fellow quiescent nickel miner Mincor is feeling the love as well, having also been forced to curtail its two Kambalda mines after 15 years of continuous operation that delivered $133m in dividends.

Mincor has just raised $10m in an oversubscribed share placement and share purchase plan to fund more work at its Kambalda prospects, in view of re-starting production in the short term.

The company also refers to “forecast growth in the nickel market over the next few years” – and punters obviously agree.

Unusually, retail investors flocked to the SPP – so much so that the offer was increased from $3m to $4m. The now cashed-up company is kicking off a drilling campaign at its Cassini project in early February.

Mincor has extensive ground in the nickel-rich territory and is underpinned by resource of 99,000t (28,000t proven).

But it’s gold, not nickel that is likely to provide Mincor’s short term cash flow via its Widgiemooltha gold project.

Last year’s feasibility study supports the project as a short-term (19 month) operation across ten shallow pits, with a modest start up cost of $2.8m.

The Widgiemooltha project has a net present value of $25.7m, based on recovering 65,800 ounces of the lustrous stuff. But it’s nickel that has driven Mincor shares up 35% over the last 12 months, for a market valuation of $84m.

For impatient investors craving here and now exposure to the nickel, Western Areas (WSA, $3.04) is the only pure-play nickel miner of substance. The WA miner produced 5970t in the December quarter, which was within expectations.

Western Areas expects to produce 21,500-22,500t for the full year, at a comfortable cash cost of $2.40-2.65/lb

Independence Group (IGO, $4.53) has also started producing from its Nova mine, with 4500t of output.

Independence owns one of Australia’s biggest gold mine, Tropicana but s dramatically expanded into nickel with the $1.5bn purchase of Nova owner Sirius Resources in 2015.

The market currently values Independence at $2.66bn and Western Areas at $830m, with the ‘bondcano’ taking some of the gloss of their worth. We’ll leave it to the bulls and bears to argue whether these numbers still factor in the upside of the nickel boom-ette.

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: From bitcoin to blockchain

Thursday, February 01, 2018

Just as the listed bitcoin sector emerged from the depths of the cyber haze in 2017, 2018 is shaping up as the year of the blockchain – the underlying technology supporting crypto currencies.

As with bitcoins et al, few investors outside of the rarefied tech head world really understand how blockchain – a.k.a distributed ledger technology – works. Not that that will deter them.

Suffice to say, blockchain a method of recording transactions securely not just in the one repository, but across the whole transaction chain.

As such, it has myriad uses unrelated to crypto currencies which currently have little utility other than supporting criminal money movements.

Either that, or we’re all being subject to the same sort of con job the IT brigade inflicted on the world with the Y2K virus.

While down-and-out minnows continue to discover a sudden interest in bitcoins, blockchain fever is starting to engulf bourses here and elsewhere.

In the US, shares in unprofitable soft drink maker Long Island Iced Tea almost tripled after the company re-named itself Long Blockchain. In its new guise, the company said it would seek to partner with companies developing blockchain ledgers.

If that’s not enough Croe Inc was developing innovative sports bras, before acquiring a blockchain company for extra share price ‘support’.

ASX stocks in need of an extra bounce have also been quick to sniff the breeze. Last December, the HR play Reffind (RFN, 3.8c) bought a stake in loyalty scheme manager, which seeks to use blockchain for business process improvement.

Reffind’s change of tack is supported by the listed investment company Chapmans (CHP, 1.6c), which invested $1m in Reffind’s recent placement (thus making Chapmans Reffind’s biggest holder with a 9% stake).

Insofar as it serves a use rather than being a speculative vehicle, investing in blockchain looks to be a more sustainable strategy than the go-for-broke punt on bitcoin.

Plenty of fortunes have been made on bitcoin’s spectacular appreciation, but the currency (or it commodity) looks to have peaked.

Also bear in mind that there are hundreds of other crypto currencies, so the supposed rarity of bitcoin can’t be equated with the rarity of gold.

In your columnist’s view, the more sensible plays are those that are adopting blockchain as an adjunct to their existing activities rather than as an unrelated sideline.

Take the logistics group Yojee (YOJ, 29c), which has developed cloud software to automate and streamline the movement of goods.

For Yojee, the appeal of blockchain is that it creates an indisputable record of existence of a transaction and where the goods are in transit. This means payments can be made more quickly.

To date’s Yojee’s revenues ($62,000 in the September quarter) aren’t exactly commensurate with the company’s $180m market valuation.

But blockchain or not, Yojee is gained momentum with a number of recent overseas contracts. These include deliveries for Scharff (which services Peru and Bolivia for FedEx) and a preferred software status for the Indonesian Logistics and Freight Forwarders Association.

Elsewhere, the US centric payments house Change Financial (CCA, $1.05, formerly known as ChimpChange) already uses a blockchain ledger for its core consumer banking business.

(As we’ve covered previously, Change provides a mobile-phone based transaction service for under banked millennials).

Now, Change is investing $US100, 000 as seed capital in a venture called the Ivy Project, which seeks to develop a blockchain based cryptocurrency for transactions worth more than $US10, 000.

“Involvement in the Ivy Project is a natural investment for our company as blockchain and cryptocurrencies are rapidly evolving as an innovative solution in storing data, moving money and conducting transactions,” CEO Ash Shilkin says.

“We have grown to service 130,000 banking customers in the US and this investment will extend our reach to business to consumer and business to business banking.”

Meanwhile, the obscure Ookami (OOK, 7.1c) is investing a tad under $1m for an 18 per cent stake in the private blockchain company Brontech, founded by blockchain guru Emma Poposka.

Described as a data marketplace and digital identification platform, Brontech is all about capturing financial data directly from users, thus allowing customers to capture the monetary value of their personal information.

Such data is the core of Experian’s business model, Brontech can be genuinely described as a disruptor. Ookami’s investment also comes ahead of the introduction of open banking, which will force banks to share customer data with third-party providers potentially offering a better deal to these clients.

Once again, the technical aspects of blockchain’s role are hard to master, especially for investors shaking off holiday cobwebs.

But the Brontech deal, unveiled on December 11, was enough to send Ookami’s shares from 3.6c to a peak of 14c.

A comforting aspect of blockchain is that the $10.6bn market cap ASX Ltd (ASX, $54.60) is adopting the technology to replace the ageing Chess settlement system.

The decision came after two and a half years of testing and deliberation and we’ll presume the bourse’s blue chip-board hasn’t been hijacked by the technology boffins.

Even The Perth Mint – which is no friend of cryptocurrencies – is mulling blockchain technology to improve the security and traceability of that traditional speculative commodity, gold.

As for the minnows, it will be months (or years) before it becomes clear who the blockchain winners are – and which ones are simply pulling the chain with investors.

It’s also possible that bitcoin and blockchain investors alike are ignoring the safest ‘crypto’ exposure. A recent global report from Morgan Stanley claims that bitcoin mining – the process of creating the ‘coins’ – is likely to guzzle 125 terawatts of electricity this year. Put in context, this enigmatic activity will use more power than the predicted demand for electricity vehicles in 2025.

Given that, energy utilities such as Origin Energy (ORG, $9.29) and AGL (AGL, $23.74) are shaping up as the real ‘crypto’ winners.

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: Titomic (TTT) 1.67c

Monday, January 22, 2018

While last year’s speculative gaze was squarely on the bitcoin plays interspersed with Pilbara ‘watermelon’ nuggets, the proliferating listed 3D sector proved a quieter winner.

Indeed, robotics of any ilk remains a sexy investment theme. As Aurora Labs chief David Budge puts it: “my philosophy is that 3D printing is and will be at the forefront of the new industrial revolution and will transform manufacturing.”

Titomic has led the way, with its shares surging more than 800 per cent since listing in mid September after a $6.5m raising.

Along the way, Titomic has fed the market with a steady diet of announcements, thus avoiding the flat spot that afflicts so many ASX debutantes.

We’re not talking about the gong for Best Marine Innovation at a shipping expo in November, although such trophies are always nice for the corporate pool room.

Developed by the CSIRO, Titomic’s technology play has pioneered a form of cold fusion, but sadly it won’t do anything to abate the energy crisis.

It’s all about kinetic fusion, which involves spraying titanium alloy on to a lattice to produce a load-bearing structure.

The process expands 3D printing technology to bigger items such as aircraft parts and ballistic coatings on military vessels and vehicles.

To date, titanium coating has been limited by the need to melt the metal in a vacuum chamber.

“It’s like glorified welding,” says Titomic chief CEO Jeff Lang. “One problem is that the heat distorts the parts.”

With Titomic’s cold-spray process, the coating at supersonic speed bombards the underlying material.

While focused on titanium, Titomic’s process can meld dissimilar materials together, such as blend of titanium and ceramics.

 “In aerospace the strut in a wing can be made from two materials with attendant weight savings,” Lang says.

In December, Titomic shares surged further after the company announced a tie-up with the Perth-based engineering firm Callidus, to produce parts for the latter’s oil and gas clients.

It’s expected that Callidus will purchase a Titomic manufacturing system after successful completion of the initial work, to be carried out at Titomic’s new Melbourne facility.

Paradoxically, Titomic’s greater fortunes might lie with the age old vehicle of the masses: bicycles.

A $50bn a year sector globally, making bike frames involves intricate work, especially with the cashed up lycra set demanding the best of titanium/carbon/scandium alloy technology.

In late December Titomic appointed Peter Teschner to head the bike division. We don’t normally mention mid-management hires, but apparently Teschner is dubbed the Master Craftsman among the pedal pushers and he even designed a mount for Tour de France winner Cadel Evans.

Titomic has also teamed with a “well known” North American bike maker to develop a high performance titanium bike.

Meanwhile the Melbourne facility is on schedule to start production trials in the June quarter. The factory is capable of producing parts for industries including aerospace, automotive, sporting goods, marine and medical and mobility equipment.

Aurora Labs (A3D) 97c

Aurora investors buckled in for a wild ride after the 3D play listed at 20c in August 2016, after a $2.85m raising.

The shares shot up to $4 in February last year, prompting management to raise another $7m at $2.50 apiece. By October the shares had slumped to 50c, but in November jumped 75 per cent after news of a tie-up with engineer Worley Parsons.

Strictly speaking the news of a binding term sheet with the engineering group was ‘olds”, given a non-binding version was announced last January.

Aurora is developing 3D metal printers, powders and parts, including a medium-format machine capable of replicating some large-scale metal manufacturing at rapid speeds.

In the 2016-17 year Aurora chalked up first sales of a small format printer. But Budge says the real opportunity lies with large and medium format printers, given the higher prices and more lucrative markets.

Aurora’ s large format unit is capable of printing one tonne of material in 24 hours which, the company claims, no rival product is capable of doing.

“We are now in the process of developing a prototype of the medium format printer and will aim to get an operational pre production large-format printer to print complex parts at rapid speeds during 2018,” Budge says.

 Robo 3D (RBO) 5.3c

While Aussie retailers quiver at the mere mention of Amazon, the online behemoth is a friend to the Californian-based producer of desktop 3D printers.

Thanks to Amazon’s distribution reach, Robo 3D recorded better than expected sales of a newly-launched entry-level unit that sells for a sharp $US499 ($620).

The units, called R1+, generated $750,000 of sales in the December quarter. Robo also has a $US799 model that targets the education model and a deluxe $US1499 version for professionals and ‘prosumers’.

Robo was founded by a clutch of San Diego University students in 2012 and the company has been selling printers since 2013. Robo back-door listed on the ASX in December 2016, having raised $4m at 10c apiece.

Last December management tapped the well for a further $3.1m, at 4.5c apiece.

With its shares trading well below par, Robo is the laggard of the sector but at least it’s getting money through the door: the company expects to report $4m of revenue for the first (December) half, exceeding the $3.1m achieved for the entire 2016-17 year.

333D (T3D) 0.6c

Meanwhile, 333D has cornered the market in ‘bobblehead’ cricketer figurines, after inking a deal with the Australian Cricket Board in early December.

The deal came just in time for the Ashes hero keepsakes to be sold at the Boxing Day test, although we doubt the Barmy Army was an enthusiastic client.

In another case of brilliant timing, 333 gained the rights to produce Dustin Martin figurines in early September – just before the grand final that elevated the tattooed hero to patron saint of the yellow and black hordes.

A separate deal with the AFL covers lesser footy mortals.

Sadly the Martin magic is yet to rub off on 333D’s sub 1c share price.  The company generate d$150,000 of sales in the September quarter and we await the December numbers with interest to see how many Dusty figurines sold for $149 a pop.

The market currently values Titomic at $40m, Aurora at $25m, Robo3D at $16m and 333D at $4m.

Tim Boreham edits the New Criterion


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.



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