MoneyTalks: 3 ‘below-the-radar’ ASX stocks to watch in the second half of 2022
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MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from Equitable Investors director Martin Pretty.
Pretty says we are in an environment where there has been a rush to the most liquid investments – or to the exit, which has made capital scarce.
“You can see that clearly in the IPO market, where capital raised from IPOs in Australasia is down 88% so far in calendar 2022, relative to the same point in time in 2021, based on Dealogic data.
“Globally the decline is 74%.
“In the unlisted world the issue is visible when stories bubble to the surface such as would-be unicorn Metigy being placed in administration and neobank Volt being forced to wind down after failing to raise capital,” he says.
“Last quarter we counted 374 ASX-listed ‘cash burners’, excluding those in the mining and energy sector, that had reported negative operating cash flow.
“Nearly half of them had one year or less worth of cash remaining based on their “burn rate” in that quarter,” Pretty adds.
“We also counted another 180-odd indebted ‘zombie’ companies that were not covering their interest expense with EBITDA.”
Pretty’s thesis is that the second half of calendar 2022 will be rich with opportunities to apply capital at attractive prices and help below-the-radar listed companies’ de-risk their financial position and improve their strategic positioning.
“Already we have seen a number of these opportunities and expect them to continue to flow,” he explains.
The MedTech that connects pharmacists and pharmaceutical companies with consumers launched a $14.6m equity raising in July on the back of a deal to buy out its one significant competitor in the Australian market, GuildLink, and take on the Pharmacy Guild as a strategic shareholder with about 13%.
“The acquisition was paid for in shares issued to the Guild at a premium to the price of the entitlement offer (the retail offer is currently open and Equitable Investors is among the sub-underwriters).
“It brings to an end years of competition between MDR and GuildLink and positions MDR’s Australian business with pro-forma revenue of $21.2m for positive EBITDA – and a network of over 5,000 pharmacies and 2.9m digitally connected patients.
“That’s on top-of the $53.6m revenue MDR generated in the US in FY22.”
Pretty adds the capital raising was material compared to its pre-deal market cap of ~$55m.
“While it wasn’t required to fund the GuildLink acquisition, it takes funding off the table as a key short-term risk that has clouded MDR, which has $4.2m to pay in an earn-out for its US acquisition.”
LER has a process for extracting rosin and terpenes from pine with an off-take agreement with a major chemicals company, Japan’s Yasuhara, the company has secured pine feedstock and a processing plant which was under construction with 8,000 tonnes annual capacity.
Rosin and terpene are essential ingredients in everyday products such as sticky tape, paint, disinfectants, and chewing gum, with the direct market for pine chemicals estimated at US$10bn.
“Having executed on a 4,000 tpa pilot plant, moved to construct the 8,000 tpa plant and made its first delivery to Yasuhara in the June quarter of 2021, LER’s plant was struck by lightning, resulting in an explosion and injuries,” Pretty says.
“This led to the suspension of trade in LER shares on the ASX through to July 2022.
“LER has now re-emerged with insurance providing coverage for $4.6m and investors in July providing $5.1m in new equity, with a further $3.4m subject to shareholder approval, and $1.5m in convertible notes.
“Yashuhara’s offtake agreement was reaffirmed and LEr is now installing plant with double the previous capacity at 16,000 tpa.
“Doubling the capacity of the initial site, along with significant price increases in rosins and terpenes, means LER is now looking at potential revenue of $68m instead of the earlier $25m target.
“LER now has to prove it can produce at scale – prior to the lightning strike it had been working through plant optimisation and hadn’t yet ramped up.”
Data centre operator DXN has been facing up to a situation where its share price had declined dramatically over three years and it had a $4m debt facility to service against $1.9m cash at June 30, while producing negative operating cash flow in FY22, Pretty explains.
“Its market cap entering the current month was less than $9m but it has taken action and resolved to sell its business assets for $26m in cash to an industry player.
“The result, DXC expects, is that $0.011 to $0.013 a share in cash will be distributed to shareholders, compared to its share price of $0.006 at the end of July.
“But DXN still had to raise $2.125m in new equity at $0.085 a share to fund its working capital up until the completion of the sale, which is expected by November 30.”
Its debt funder, Pure Asset Management, committed to subscribe to at least two thirds of the placement and Equitable Investors also participated.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
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