It’s time for another list of four stocks under $1, which means it’s also time to look at how the last list from May 2020, performed.
The May stocks were:
- Atomos (AMS): has moved from 64 cents to 45 cents, –29.7%
- MotorCycle Holdings (MTO): has moved from 82 cents to $1.60, +95.1%
- Resolute Mining (RSG): has moved from 95 cents to $1.155, up 21.6%
- Starpharma (SPL): has moved from 96.5 cents to $1.095, up 13.5%
With 3 out of 4 stocks well ahead, and MotorCycle Holdings’ outstanding performance powering an average gain of 25.1%, I’m in an optimistic mood over this next group of stocks – once again from a highly diverse set of businesses, which shows how fascinating the non-mainstream depths of the ASX can be.
1. Straker Translations (STG, 89 cents)
Market capitalisation: $47 million
Three-year total return: n/a
FY21 estimated yield: n/a
Analysts’ consensus target price: $1.458 (Thomson Reuters)
New Zealand company Straker Translations provides translation services to customers in the Asia-Pacific region, Europe, the Middle East, Africa, and North America. The company’s services are built around its proprietary cloud-based artificial intelligence (AI)-powered RAY translation platform, which uses a combination of machine learning-based automated translation and a crowd-sourced pool of about 13,000 freelance translators around the world.
With this combination RAY is built to enable advanced hybrid human and machine translations: Straker’s model involves automating big volumes of translations while still using what it calls a “human overlay” – for example, a complex or specialist topic such as an aeronautical engineering manual will require an expert human to refine the translation. The platform is backed by about 13,000 freelance translators.
Straker enables the translation of documents, technical manuals, websites and e-commerce platforms for both large and small businesses across a range of industries. It also has a growing media business working on movies and TV.
The RAY platform provides STG with a unique competitive advantage in the US$50 billion – but hugely fragmented – global translation market. The company’s plan is to leverage its scalable platform and position firstly through the enterprise (large business) market. It has been focusing its growth plan on this sector and currently supports 56 enterprise customers and 2,650 business customers, including some of the world’s leading companies and brands.
Straker is currently a loss-maker. For the year ended 31 March, Straker grew revenue by 13% to NZ$27.7 million but reported a net loss of NZ$2.5 million. Analysts don’t expect it to turn a profit until FY22. However, good signs in FY20 were that 86% of its revenue was recurring – Straker’s customers prove very sticky once they’re onboard. Also, revenue in the media market grew by 55%. Straker has identified the combined theatrical and home entertainment markets worldwide as a US$97 billion market that will be a big source of growth.
Straker floated on the ASX in October 2018 at $1.51 a share and reached a peak of $2.10 in July 2019, but slid all the way to as low as 63 cents in the COVID Crash. Since then it has recovered to 89 cents – given the progress the company is making in big global markets, that still represents a huge bargain compared to what was asked in the float.
2. Mader Group (MAD, 80 cents)
Market capitalisation: $160 million
Three-year total return: n/a
FY21 estimated yield: n/a
Analysts’ consensus target price: $1.18 (Thomson Reuters)
Mader Group is a great Australian business story. The company was founded by former WesTrac diesel mechanic Luke Mader in the Kimberley region of Western Australia in 2005, when he was working on some of the huge pieces of mobile equipment – trucks and excavators – used in the mining industry. From that beginning Mader has built a global business servicing and maintaining heavy mobile equipment in the mining and civil engineering industries, carrying out maintenance on mining equipment and fixed plant and railways and rolling stock, in Australia, Africa, Asia and the Americas, for a range of top-tier clients, including BHP, Rio Tinto, Fortescue, Barrick and Newmont.
Mader is now a leading global provider of tradespeople for the maintenance of mobile mining equipment. Its appetite for expansion is shown by the fact that in its first year of operating in the US, Mader began servicing 30 US mine-sites.
The company has taken a hit from COVID – in April it closed its International (non-USA) division, withdrawing its expatriate workforce from operations in Africa and Asia. Subsequently it revised its net profit guidance for FY20 down from an expected $19.3 million to a range of $17.5 million–$18 million, saying it would restart those operations as soon as it is safe and practical to do so. But given that the international division accounts for just 6.5% of revenue, the company’s swelling work book in Australia – including recent contract extensions with BHP Iron Ore, BHP Olympic Dam, Nickel West and Fortescue Metals Group. Third-quarter revenue growth of 31% – to $72 million – flowed through to a full-year revenue guidance forecast of $270 million–$275 million – not far short of the $279.1 million forecast in the IPO prospectus.
Mader is in a sweet spot at the moment, with several underlying trends going in the right direction for it:
- Ongoing expected production growth in the company’s main commodity areas – gold, iron ore, coking (steelmaking) coal and thermal (electricity) coal;
- Increasing forecast spending on the maintenance of mining equipment – there is a growing industry trend for equipment to be used longer before replacement; and
- The ageing of mining equipment that was bought during the period of peak capital investment in the industry, in 2011 and 2012.
Mader Group was floated in September 2019 at $1 a share, edging its way to $1.12 before the COVID-crash, which plunged the stock as low as 65 cents. Like Straker, investors now have the chance to buy a stronger company at less than the IPO price. There is strong ownership alignment with investors’ interests – Luke Mader and his wife Amy retain about 58% of the company.
Mader is a dividend-paying stock – it paid 1.5 cents, fully franked, for the first half of FY20, and broker Bell Potter predicts a total of 3.3 cents for FY20, which at 80 cents implies a fully franked yield of 4.12%, or 5.9% grossed-up.
3. Shaver Shop (SSG, 66 cents)
Market capitalisation: $83 million
Three-year total return: 10.2% a year
FY21 estimated yield: 7.7%, 80% franked (grossed-up, 10.4%)
Analysts’ consensus valuation: 91 cents (Thomson Reuters)
Personal grooming retailer Shaver Shop initially was hammered by the COVID pandemic. The company is built around a physical store-plus-online strategy, with 122 stores across Australia and New Zealand, and prior to COVID that was delivering total sales growth of 12.3% in the first half of FY20, with like-for-like sales up 9.3%, driven by 61% growth in online sales to $20.3 million, or 18.9% of sales.
Shaver Shop temporarily closed 11 of its Australian stores in late March and closed all seven NZ stores in accordance with government directives. On March 24 also withdrew its FY20 earnings guidance – for earnings before interest, tax, depreciation and amortisation (EBITDA) of $14.25 million– $15.75 million, compared to $13.5 million in FY19 – and took back its already announced interim dividend of 2.1 cents a share, 80% franked, given what it said was “the need to preserve cash over this period.”
With SSG shares already sliding like other retailers – down from 79 cents before the Crash – reneging on the dividend was the last thing that shareholders wanted to see. It caused a further 23% deterioration in the share price, to 23 cents.
But SSG has rebounded spectacularly, with online sales more than quadrupling in the first six weeks of the June quarter, driving a 32% increase in total sales; and the strong trend continued well into June, with total sales for the second half (as at 14 June) up 22.3%, with online sales up 164%. That enabled the company to reinstate the dividend – actually, it announced a special dividend equivalent to the dividend previously announced and cancelled, being 2.1 cents per share, 80% franked, and said it also expected to pay a second-half dividend.
With the company in a net cash position, Shaver Shop is travelling fairly well – and analysts see further scope for price recovery.
4. Palla Pharma (PAL, 87.5 cents)
Market capitalisation: $110 million
FY20 (December) estimated yield: n/a
Analysts’ consensus valuation: $1.215 (Thomson Reuters)
I nominated Palla Pharma as a potential “export star” back in January – at $1.04 – and given the share price has come back under $1, PAL is a natural fit for a group of sub-$1 stocks.
Palla Pharma is a unique business. A fully-integrated supplier of opiate-based pain relief medicines, from harvesting the poppy straw in the paddock in Tasmania, to manufacturing the medicines. It is one of three licensed poppy processors in Australia – the only Australian-owned company of the three – and one of only six licensed opiate producers globally. Palla exports some of its production to itself: it has production facilities in Melbourne and Norway.
Palla either supplies Narcotic Raw Material (NRM) – the source of morphine, codeine, thebaine and oripavine – to external customers, or takes the NRM and manufactures opiate-based Active Pharmaceutical Ingredient (API), and converts it to Finished Dosage Formulation (FDF) stage through:
- Marketing Authorisations (MAs), direct to wholesale distributors
- Contract manufacturing (CMO) of tablets
- Sales to external customers
The basis of the business is being the world’s lowest-cost producer of NRM, which is the highest-cost input for API and Finished Dosage Formulation (FDF) products. The process value-adds along the way, but Palla Pharma captures the most value if the API goes supplying FDF products into its own MAs. Similar to New Drug Applications in the US, MDAs allow a European company to market its medicinal products across European Union member states. That is the direction of the company’s strategy. The manufacturing facility in Norway manufacturing facility is being assessed for approval to produce drugs covered by the company’s MAs. Palla currently has seven of its own MAs. To support the application, Palla Pharma has begun producing co-codamol caplets, a stronger type of painkiller, at the plant.
Last week, Palla signed an $8 million contract extension to supply a total of 270 million codeine phosphate tablets across 2020 and 2021 to a major UK-based multinational customer, for sale in the UK market. The contract extension equates to a minimum of eight tonnes of codeine phosphate equivalent and represents about four months of PAL’s annual FDF packaging capacity.
This contract extension, coupled with PAL’s validation of its own MAs later in 2020, will see Palla fully utilising its main packaging line capability in 2021, with a targeted supply of 24 tonnes of codeine phosphate in tableted form. By the end of 2021, PAL plans to invest $4 million to expand its packaging capacity to more than 70 tonnes of codeine phosphate.
The tailwind behind Palla Pharma is the huge unmet demand for pain relief products in developing countries, with 92% of global supply consumed by just 15% of the global population. Palla believes that strong population growth demographics in developing countries with lack of access to pain medication will open up new markets, and underwrite growth in its markets.
As a producer of narcotic products, Palla Pharma knows very well that the opioid addiction crisis in the United States is a blight on the industry – although it has never supplied into the US. In fact, it makes naloxone, an opiate-derived antidote that can temporarily reverse opioid overdose, and is thus a big opportunity. The company aims to get first samples into the US market by 2021.
On Thomson Reuters’ collation of forecasts, analysts expect PAL to break through to profitability this year (Palla uses the calendar year as its financial year) with earnings per share (EPS) of 1.5 cents in 2020, spiking to 6 cents in 2021 – however, dividends are not expected over that period. With the tip back below $1 on the back of the COVID–Crash, this looks like another case of good-value buying in a unique and world-class business that is moving to capture all the value it can from its integrated supply chain, of an essential product.
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