Microcap magic: From iron ore to edtech (and IPOs) with Annapurna’s Stephen Scott
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After one of the most unique investment years on record, fund manager Stephen Scott reckons the Australian market will present more opportunities in 2021.
As a principal at the Annapurna Microcap Fund (AMF), Scott has been deploying capital in Q4, after AMF targeted a $50m cap raise at its October launch.
Speaking with Stockhead, Scott flagged a number of stock-specific allocations within the broader economic outlook, which he said is shaping up as broadly positive for stocks in the year ahead.
Annapurna’s early investments span across a number of sectors, from resources and recycling to edtech and biotech.
Scott highlighted three of the fund’s early positions, with the investment rationale for each one.
Despite the prevalence of iron ore in Aussie resources, it’s a space largely dominated by the big players with only a handful of listed small cap explorers.
But the barnstorming rally in iron ore prices this year has brought some juniors back into the fold – and Scott thinks FEX can rally further from here.
“They’re a small cap but they’re also a producer, which is unusual because it’s typically explorers at this end of the market,” Scott says.
Fenix produces high-grade iron ore from its Iron Ridge project. Its transport costs are higher than the big players because it has to truck the iron ore to port (train transport is preferable).
“But iron ore at these prices is obviously a huge benefit, and it’s accumulating enough at port to fill up a ship,” Scott said.
“Our shipping estimate is 40,000 tonnes. And based on their recent announcement, cash input costs are $77 per tonne. So at current prices gross margins very high, and their market cap is only $105m.”
“The next key step for them is to get enough iron ore into a ship and get paid, then they can really get the ‘flywheel’ going.”
The second Annapurna position Scott highlighted is Probiotec, the pharma stock which packages and distributes over-the-counter (OTC) pharmacy medicines.
Scott said he backs PBP’s growth-by-acquisition strategy, where the company has been busy on the M&A trail for a number of years.
“Their approach is generally to buy out a business in its entirety. And they’re now a pretty formidable player in what is a very fragmented industry,” Scott said.
PBP shares jumped sharply in early November, after the company announced the acquisition of Multipack-LJM in a $52.5m deal.
Probiotec used its balance sheet to fund the transaction almost entirely via debt – a notable strategy in the small cap landscape where deals are often financed by equity placements.
“We think it makes sense for them to continue targeting new acquisitions,” Scott said. “They’ve built a business with scale and they also have the benefit of being a ‘Brand Australia’ manufacturing play in the pharma space, which we think is favourable.”
The sustainable packaging company forms part of Annapurna’s strategy to invest in companies that are positioned to benefit from positive macro tailwinds.
“The manufacture packaging products made from a biodegradable plastic which have a range of use cases,” Scott says.
As an industry, biodegradables have been around for some time, “but we think it’s moving from a niche solution to more prime time”.
Scott said the transition from single-use to recycled plastic will be a long-term trend over “many years”, but there are signs it is accelerating.
“Major chains like Woolworths have indicated they’re going to move in this direction,” he said.
“We’re also no longer exporting plastic out of Australia and we need a circular loop for these sorts of products.”
“So I think what Secos have is a value-for-money solution to solve that waste problem. And it fits within the growing trend behind social responsible business practices.”
Scott said Annapurna has also allocated smaller amounts of capital to new IPOs as a flood of new companies hit the ASX boards before Christmas.
With an average of more than one IPO a day in December, the fund has been “selective” in its approach.
“We have participated in some of them but we’ve been careful to go through the detail,” he said.
The combined group rebadged to Ansarada and started trading on December 9.
“Their specialty is in information security and management. It’s early days but we think it has good prospects amid the demand for corporate due diligence, document discovery and (oddly enough) even IPO activity itself,” Scott said.
Annapurna has also invested a small stake in edtech platform Cluey Ltd (ASX:CLU), which provides online tutorials for school students.
“They’re another company at an earlier stage, they’re still not making much cash but they have raised sufficient resources with this IPO,” Scott said.
“I think there’ll be increased demand for tutorials for kids in that mixed COVID-19 environment into next year, where students still have to adjust to that disruption.”
And lastly, Annapurna took a stake in assistive technology Control Bionics (ASX:CBL), which listed on December 7 and almost doubled on debut.
Founded as a research firm in 2002, CBL has patented Intellectual Property in Australia, the USA, Canada and China.
The company made an FY20 loss of $1.5m, although annual revenues rose almost 300 per cent to $3.1m.
Scott described CBL as a “tech platform that helps people with disabilities to use computers”.
“It measures the electrical pulse of your nerves to help drive the machinery, where traditionally people used eye-movement devices in this space.”
“We think it’s a new tech that’s really interesting, and solves some major health and life problems for people with severe disabilities.”
Correction: The input cost amount for Fenix Resources’ iron ore production was initially reported as $37 per tonne. That has been corrected to $77 per tonne.