Kick Back: The biggest stories you might have missed on Stockhead this week
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Welcome to the end of your week, and what an interesting colour it was this morning too:
There are lots of things we could blame for that, but really, the shakes are at least due in part to benchmark US 10-year Treasury bonds yielding as much as 1.5 per cent in Friday trade.
More importantly, England were utterly humiliated in the Third Test against India.
The first item’s a biggie, so as they say in the classics:
BNPL half-yearlies – go.
Zip Co (ASX:Z1P): “Our customers tripled in the first half but our losses more than quadrupled.”
Afterpay (ASX:APT): “Our customers nearly doubled in the first half, but our losses also more than doubled.”
The profit margins of the lesser players – the Humms, Sezzles, Splitits and Zebits – were a little healthier. In the green, at least. Afterpay and Zip are just two of 13 players in the ASX BNPL sector worth about $53.6 billion.
But APT and Zip account for about $45 billion of that, so is there any cause for alarm in their half-yearlies?
Zip shareholders were mildly put off, heading for the door early on the day of the announcement, but creeping back in later. Afterpay shareholders didn’t get a chance, because the undisputed champion of BNPL in Australia pulled the shutters down, and went into a trading halt to undergo a $1.25bn convertible note issue.
Until today, when trading opened again and…
What didn’t they like? UBS analysts reckon the “key news” was that convertible note offering. The end result of it will be APT increasing its ownership of its US subsidiary Afterpay Inc from 80pc to 93pc.
But wait… back in 2019, a spokesperson for the company told the AFR that when it comes to share payment plans, APT can’t drop below the 90pc level.
This, according to UBS, “implies a significantly lower nominal valuation for the US business than the current share price implies”.
But there’s more. A little bit.
According to the half-yearly, while Afterpay’s “Active Customers” grew by 80%, Net Transaction Loss grew by 115%.
Let’s rewind to November, and that otherwise toothless ASIC report into BNPL user behaviour:
Among the observations (largely positive, nothing to be alarmed about), were some notes about BNPL’s biggest user base, 18-34 year olds.
They noted one in five consumers had missed payments, 15 per cent had taken out additional loans to pay their BNPL debt, and some 70 per cent of those who had taken out another loan to make their BNPL payments on time had also missed a payment on that loan.
In 2018/19 missed payment fee revenue for the year totalled over $43 million – for the whole BNPL sector (not actually a sector, yet).
Fast-forward not too far to HYFY21, and Afterpay alone lists $46.8 million as a “Net Transaction Loss”. Up from $21.8 million in H1 FY20.
“Net Transaction Loss” is actually loss from non-payments by customers. You might know it as “bad credit”. Only APT won’t call it credit because that would signal them as a finance company.
They prefer to position themselves as a tech firm, to avoid being regulated by FSA or APRA.
Reuters describes it as being “in a supervisory blind spot”.
Okay, it’s not a huge loss for a $42 billion… $39 bill… $33 billion company. But there is a trend there – with more users comes more bad debt.
If only there were a BNPL that takes on customers with bad debt. Oh, wait.
Gah. Can someone please tell us if these are good companies or not? UBS certainly doesn’t think so – or at the very least, not until APT is back down to $36.
Best to check in with a professional. The Secret Broker’s been watching these kind of shenanigans for 35+ years. He’s calling the last two days of APT action an act of “masterly distraction”.
In his words:
“…there it was, sneaked into the end of the announcement – the fact the two founders were able to sell 450,000 shares each at that last price of A$134.36, “to help facilitate the Delta Placement
Bit of smoke, bit of twirling by the pretty assistant and in an instant they are able to sell A$121m worth of stock, which is just A$4m short of the original IPO valuation, whilst everyone was looking the other way.”
Here’s why that means the only thing the retail holders are really looking to hold is the belt that they were sure was holding their trousers up just 24 hours ago.
Bitcoin caused some chest pains early this week, which is always entertaining.
Tuesday: Plummets to near $US50,000 around the time new US Treasury secretary Janet Yellen says it’s “extremely inefficient” and possibly used for “illicit finance”. RETREAT:
Wednesday: RELIEF. After plummeting to a paltry $US45,000, BTC scrambles back to the $50K mark.
Thursday: Normal service resumes as BTC maintains its $US50K status. Of the top 100 crypto assets by market capitalisation, 45 post gains in the past 24 hours. And a new king of the 24-hour crypto jungle arise – what the heck is Fantom? (Up 13-fold in 30 days.)
If you thought a drug based on scorpion venom was cool, here’s one made out of sharks.
Really? Of course not – that would be silly, and unpopular. But AdAlta has found a way to “mimic the shape and stability of a unique and versatile antigen-binding domain” that’s found in sharks, and develop it as a human protein.
The drug candidate is called AD-124 and is currently in Phase 1 trials on the treatment of idiopathic pulmonary fibrosis, a condition where the lung tissue becomes scarred for an unknown reason.
The big news for AdAlta investors though, was the US FDA’s decision to grant the drug orphan status. If you want to know why orphan drug designation can be a big deal for small cap biotechs, this primer – “Orphan Drug Designation: Here’s why it’s a big deal for small cap biotechs” – fits the bill.
Or you can just follow the money – 1AD’s share price soared a tidy 25.7 per cent the morning it announced the news.
While you’re on that money trail, keep an eye out for fund managers and famous investors such as Geoff Wilson, Alex Waislitz and Tolga Kumova. You know they’re a solid bet because they have millions of dollars.
Waislitz, for example, just bought 11 per cent of satellite company Sky and Space for $1.5 million. Wilson Asset Management now holds more than 53 per cent of acquisition target amaysim. And Regal likes the look of comms tech stock Whispir.
Here’s your fortnightly update of the kind of people you can follow, and who may actually add some value to your life.
But when it comes to making piles of cash overnight, how good are multi-baggers? These mythical creatures are as rare as competitive English cricket teams, but we know they exist because we keep hearing about how great they are. For example, you could have bought Accent Resources for a single cent not that long ago, and enjoyed a 2677 per cent gain.
That’s like buying Bitcoin four years ago, which you also didn’t. Or, if you did, sold it as soon as it hit one-bagger status.
We’re talking about small cap explorers though, and if you do happen to pick one, the gains could come so fast you won’t even have time to sell out disastrously early.
Obviously, there is some research involved. Here’s a great start – Michael O’Keefe guided $7m market cap coal explorer Riversdale Resource to a Rio Tinto takeover. ONLY FOR $3.9 BILLION.
This is his latest project, and here is a comprehensive list of all the sub-$10m market cap explorers on the ASX right now.
Stockhead readers liked that multi-bagger explorers story so much, we dove in again just
for the clicks for their benefit – this time looking at health microcaps.
It’s a different science when it comes to health, though. The sector doesn’t attract as much investing activity, but there’s a simple reason for that, according to Dr Geoff Waring at Stoic Venture Capital – and he calls it a “blind spot”.
“You’ve got companies developing drugs, stem cell therapies; they have no revenues and so investors are a bit shy,” he says.
But just because it’s a simple reason, doesn’t mean it’s a good one. In the same way microcap explorers only need one good strike, microcap health companies are just one good Phase II clinical trial result away from becoming the next Rhythm Biosciences.
There’s more from Dr Waring on that here, and Nick Sundich has pulled together a cut-out-and-keep guide to all 18 health stocks on our list with a market cap under $15m here.
There are now 228 large-scale projects for a combined $US300 billion of proposed investment through to 2030. We know that, because the Hydrogen Council keeps an eye on these things.
And we know hydrogen is popular with investors, because three of our top 10 most popular stories are about hydrogen. That may have something to do with the way hydrogen stocks are popping lately. Or furniture assembly businesses that pivot into hydrogen are popping lately.
Anyway, if you thought Province’s 500-odd per cent price rise this month was impressive, here are:
Okay, so BNPL may be “25pc fundamentals, 75pc hype”. But Bitcoin is 100pc imagination and it’s still turning people into billionaires. This is 2021, where the only reality is perception, folks.
But in a mouldy corner there still remains some fintechs that aren’t BNPL. And because they are there, largely ignored as the Hype Train keeps flashing past, they’re building some attractive value cases.
Dean Fergie from Cyan Investment Management helped Sam Jacobs cut through the noise and find two small cap fintechs that just keep on winning due to their focus on olde worlde fundamentals.
One is among Fergie’s top picks for the year ahead which he gave us at Christmas, which hasn’t looked back since.
And just so you know he’s not anti-BNPL, the other has a new B2B BNPL product for debtor management that’s just gaining traction.
No, really. Among those figures:
– Copper demand to double to 60 million tonnes by 2050. That will require producers to double their annual production volume increase of the past decade.
– Zinc, see copper above.
– Nickel and cobalt demand? Pushing a near-quadruple rise in production required to service all the world’s battery needs by 2050.
The biggest problem with all of that, Glencore says, is finding the stuff. Or specifically, mining it in the increasingly difficult areas to get to where it is found.
And companies have to get projects in the pipeline, fast. Much faster than, say, copper producers have been slogging it out at over the past 15 years:
Here’s what Glencore thinks needs to be done.
Which brings us neatly to these six mine developers hoping to ride the copper ‘supercycle’ into record profits.
It’s true – not all lithium batteries are created equal. And believe it or not, lithium batteries are not the only energy storage technology that’s going to save us all from fiery ruin.
To do that, we need – according to the Paris Agreement – to increase our global EV battery capacity from 170 gigawatt hours per year to 3 terawatt hours by 2030.
So close enough to 18x. Your lithium portfolio is looking pretty sound.
But if you’re bored of banging on about it and want to impress your mates, have a look at vanadium redox flow batteries, or zinc-air fuel cells. Maybe even fluoride – it’s potentially eight times more efficient than lithium as an energy source.
And yes, there are Australian companies making genuine progress in the alternative-to-lithium space.
That’s quite enough for one week. Thanks for being a Stockhead.