MoneyTalks: RaaS Group’s Finola Burke gets defensive as ScoMo splurges on tanks and subs
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Money Talks 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 RaaS Group managing director Finola Burke.
Companies with exposure to defence are on RaaS Group’s radar.
Defence budgets globally are on the rise with more than US$2 trillion allocated to the sector on a universal basis.
Burke says while Australia’s defence budget is relatively small in comparison to other countries, the 2021-22 budget lifted 15% to A$44.6b, putting it at 2.1% of GDP.
“Predictions by the government is that the landmark AUKUS agreement will push defence spending to 2.5% of GDP in future years,” she said.
“We see two key themes emerging – governments and defence primes seeking new sources of specialty metal alloys, materials and technology and a focus on the health, safety and well-being of armed forces and returning soldiers.”
The AUKUS is a trilateral security pact between Australia, the United Kingdom, and the United States which was announced on September 15, 2021.
Under the pact, the US and UK will help Australia acquire nuclear-powered submarines to replace its existing Collins submarine fleet as well as work together in the Indo-Pacific region, where the rise of China is perceived as a threat.
Burke has a few stocks picks with exposure to the defence sector – Amaero International (ASX:3DA), AML3D (ASX:AL3), and Total Brain (ASX:TTB), as well as one other, Pointerra (ASX:3DP), which is seeking to expand its platform into defence applications.
“We specifically sought 3DA and AL3 out as equity research clients due to their exposure to the aerospace and defence sectors, their additive manufacturing (3D printing) operations, and their push into developing special metal alloys for use in the defence, aerospace, and high-performance equipment markets,” she said.
Both companies are collaborating with Deakin University to develop stronger, lighter materials for use in their additive manufacturing processes.
Amaero and investment company PPK Group, together with Deakin University, have formed a strategic alloys JV to incorporate boron nitride nanotubes (BNNTs) into Amaero’s High Operating Temperature Aluminium Alloys (HOT Al).
3DA offers additional exposure to the defence sector through the development of a 150tpa titanium powder facility in Victoria to service demand from US defence and aerospace customers looking for alternative sources of supply of the metal to Russia and China.
“The facility is expected to be in production by Q3 CY2022 and forecasted by the company to generate ~$40.8m in revenue on an annualised basis,” Burke said.
“Amaero is also in the final stages of securing the right to build and manage a 3D Centre for Excellence in the Middle East which will be funded by a defence prime as part of its offsets program.
“Our base case valuation for Amaero is $0.92/share against a reference price of $0.31/share and incorporates forecasts for both these opportunities, while our base case valuation for AML3D is $0.475 per share against a current price of $0.14 per share.”
Total Brain, through its partnership with IBM, is delivering its neuroscience-based mental health monitoring and support platform to US veterans.
The program commenced late last calendar year and is being rolled out to 25,000 US veterans. It’s forecast by the company to deliver $0.6m on an annualised revenue basis.
Based on the success of Total Brain’s Mind Gym with the 1,400 US veterans who undertook the 2019 trial of the IBM Health & Wellness 360 platform, Burke explains that RAAS Group expects the program to be extended to all US veterans as well as to other population health opportunities in the US.
“Our base case valuation of $0.77/share includes $0.23 per share for the IBM affinity partnership (reference price is $0.12 per share).
“TTB is trading on 2.4x EV/Sales, based on our forecast for FY22 revenue.”
Burke says Pointerra has stated its aim to develop defence as one of its key target markets.
“We would hope to see some progress on this through the course of CY2022,” she said.
“Our base case valuation of $0.90/share (against a reference price of $0.37/share) is predicated on 3DP getting to Annual Recurring Revenue of US$50m by mid-FY25.”
Pointerra has developed patented cloud-deployed tech and AI-driven algorithms, which Burke says has benefits for on-ground defence forces.
Droneshield has recently announced its CY21 revenues, which were $10.5m or 94% on CY20 and follows the company’s first multi-year $3.8m contract with the Department of Defence.
Based on its current market capitalisation of $69m, DRO is trading on an EV/Revenue multiple of less than 7.0x, Burke said.
Similarly, cyber security-focused ArchTIS delivers exposure to both government and private defence clients and is currently trading on ~7x FY21 revenues.