Tru Datt: When safe havens fail, head on down to the niche corners of the ASX

Welcome to Tru Datt, a Stockhead exclusive featuring the insights and opportunities as per Emanuel Datt – founder and chief investment officer at Datt Capital, a Melbourne-based investment manager focused on identifying growth and special situation investments.

Uncertain FY2025 outlook means investors must look for niche opportunities

Based on the current trajectory of slowing quarterly growth, there’s a real possibility Australia may experience a recession in financial year 2025, according to Emanuel Datt, chief investment officer of Datt Capital.

“The household savings rate – a good barometer of the true state of the economy – is at lows not seen since March 2008, even though the current conditions are very different to what they were at that time and during the GFC,” he said.

According to CBA’s Belinda Allen, the average Aussie household kitty remains higher than 2019 levels, although there’s some evidence that a proportion of these excess savings have been utilised over the past year.

Emanuel told Stockhead this bodes badly for fans of lower rates. The implication being, any further hiking could tip the economy into recession.

“Present conditions are not conducive to interest rate adjustments, which means the RBA is likely to hold rates steady in the short term and cuts may not be on the agenda.”

Also problematic for the usual go to havens on times of weakness is the veil of strength the local economy dresses itself in.

“For example, while net migration is at all-time highs, and potentially holding up the Australian economy, investors need to know that traditional safe-haven investments are unlikely to provide the same level of certainty they have in the past.

“In these kinds of environments, investors need to look outside of the large cap universe and focus on stronger smaller companies with good growth potential and idiosyncratic drivers of returns. Small caps also currently have modest valuations which makes them doubly attractive.”

More Tru Datt: Three ASX Small Caps to keep in your back pocket for ’24

Large cap shares are set to have a flatter return profile over the next 12 months but may provide investors with a reasonable income return profile.

At a sector level, Datt Capital expects technology, financial services and niche commodities to be the outliers over the next 12 months. Real estate, infrastructure and bulk commodities are expected to struggle.

“Our focus is on strategically valuable, scarce assets with global appeal with multiple avenues of value realisation.”

Three ASX small caps to watch

Clarity Pharmaceuticals (ASX:CU6)

“CU6 ticks a lot of boxes for us in terms of defining a potential future champion,” says Datt.

“The team are ambitious, aligned and growth orientated. The product pipeline is relatively deep and they hold intellectual property that is highly innovative. The business has matured over a number of years to focus on attempting to treat health conditions of real need (e.g. prostate cancer) and with a large global addressable market.”

And as noted by our Eddy Sunarto last month, radiopharmaceutical has emerged as arguably the hottest space in biotech right now.

Over the last six months, three global blockbuster deals have taken place in this space – AstraZeneca acquiring Fusion for US$2.4b, Eli Lilly buying out Point Biopharma for US$1.4b, and Bristol Myers Squibb’s purchase of Rayze Bio for US$4.1b.

The deals highlight the strong strategic interests in radiopharmaceutical assets, with these big pharma moves fuelling huge interest among investors.

The $760m market capped CU6 is a radiopharmaceutical-focused biotech which has developed a unique proprietary program involving the use of copper isotopes in prostate cancer diagnosis and therapy.

“Clarity still holds significant risk given they are still performing clinical trials and will be subject to the standard commercialisation risks usual in pharmaceutical development.”

Jupiter Mines (ASX:JMS)

“Jupiter owns a 49% interest in a high quality South African mine, Tshipi, which sits within the lowest quartile of the global manganese cost curve with a 100+ year mine life. It has a history of reliable, low-cost production,” Datt says.

The manganese markets have been disrupted since South32’s (ASX:S32) GEMCO mine, which supplies ~15% of global manganese supply, ceased exports due to Cyclone Megan.

As well as the flagship manganese project in the Tshipi, JMS has x 2 iron ore development projects in the Yilgarn region of Western Australia.

Tshipi is reliable, cheap to run – in the lowest quartile of the global manganese cost curve – and this makes it resilient during times of weaker market prices.

According to Datt’s head of research Tony Gu, manganese has been dislocated since Cyclone Megan.

“It is believed that port infrastructure will take some months to be reinstated, which is significant given these operations provided around 12% of global manganese supply or over 25% of global high grade manganese ore supply,” Gu told Stockhead’s Jessica Cummins.

“Chinese port stocks have since declined with manganese prices rising off a multi-year low and we anticipate that JMS may materially benefit from an improvement in manganese prices from here, along with the other corporate initiatives it has been progressing including potential battery material operation studies.”

“JMS is modestly valued at circa AUD$500 million, a very low EV/EBITDA multiple. The positive short-term industry dynamics, the high quality of the asset and anticipated shrinking of long-term manganese supply are a compelling confluence of drivers for Jupiter that we believe are presently underappreciated by the market.”

WA1 Resources (ASX:WA1)

WA1 have defined a world-class niobium deposit in Western Australia, ‘the world’s best and highest valued mining jurisdiction,’ (said someone from WA). The stunningly high-grades of niobium culminated in a maiden resource of 200Mt at 1% Nb2O5 for its Luni discovery – making it the largest niobium find on the planet for the last 70 years.

The niobium discovery at Luni has been somewhat… transformative.

From a bit over 10 cents around the end of 2022, WA1 peaked at more than $23 in May.

WA1 boasts a market cap of more than $1 billion, but there’s a mere 61.34 million shares on issue. It’s a darling with the brokers too.

“The company have recently released compelling metallurgical results and their maiden mineral resource estimate, which indicates the potential for a mine life in excess of 100 years,” Datt says.

“Niobium is an extremely scarce and valuable metal that is integral in high quality steels and has emerging uses in battery technology.

“We expect WA1 to progress rapidly through the commercialisation process in the coming years.”

Emanuel Datt is the founder and chief investment officer at Datt Capital.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.