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Hot stock: Ceramic Fuel Cells test fans for high-efficiency, low-emission power cells
The second coming of US tech stocks unleashed the bulls this year. The Nasdaq Composite Index cracked 3000 points – the first time in 12 years – and Apple shares in April had their biggest one-day gain in four years after another set of jaw-dropping earnings. Although the Nasdaq fell last month amid heavy falls in global equity markets, interest in US tech stocks remains high.
The float in May of social media giant Facebook, which valued it at $US104 billion, was the largest US internet stock offering yet and attracted huge global attention, not least for its early share-price weakness and controversy over the listing. Not to be outdone, photo-sharing app Instagram, which grew from nothing to 30 million users in 18 months, was bought by Facebook for $US1 billion.
The contrast between the US and Australian technology sectors could scarcely be different. Local tech companies are lucky to be heard in a mining investment boom and some are considering moving offshore. Many information technology and clean-tech stocks, and to a lesser extent life science companies, are badly out of favour with investors and are struggling to compete with speculative resource stocks for funds.
Even those with the most promising technology are fighting to attract attention. Nowhere is sentiment worse than the initial public offerings (IPOs) market, a crucial source of capital for emerging technology companies. Only a dozen life science, clean-tech and IT companies, out of more than 200 IPOs, have listed on the Australian Securities Exchange in the past three years.
Australia’s listed clean-technology sector has done even worse. The ACT Australian CleanTech Index, which weights more than 70 ASX-listed clean-tech stocks by market capitalisation, has slumped by more than two-thirds from its peak in mid-2007. These stocks collectively have lost more than $8 billion in market capitalisation since 2007, although are up slightly in the past six months.
The combined valuation of ASX-listed life science companies fell 8 per cent to $35 billion in the year to March 2012, the latest PriceWaterhouseCoopers quarterly BioForumreport shows. The Nasdaq Biotech index rose 23 per cent over that period.
The S&P/ASX 200 Information Technology index has dropped 23 per cent from its 2010 peak and underperformed the broader sharemarket for a decade.
Yet beneath this gloom are some stunning ASX-listed tech companies with world-class inventions. Do not judge them by their share price only: some emerging technology stocks have fallen sharply in since the global financial crisis in 2008, despite solid progress. Risk-averse investors have little interest in small or micro-cap companies that need years to develop and commercialise technology.
Contrarian investors who are comfortable with speculative stocks might see it differently: share price weakness in outstanding tech companies may offer excellent long-term opportunities and that the best time to buy is during sharemarket corrections.
With that in mind, BRW asked nine small-cap investment experts to nominate their top emerging company from the IT, life science or clean-tech sectors. Here are their selections:
MARKET CAPITALISATION: $447 million
3-YEAR AVERAGE ANNUAL TOTAL RETURN: 68 per cent
X FACTOR: Key product VivaGel substantially expands global market
The Melbourne-based company is leading a pack of promising biotechs either in, or approaching, phase III trials for US Food and Drug Administration approval. Starpharma’s lead product, VivaGel, is being developed to treat bacterial vaginosis, where the normal balance of bacteria in the vagina is disrupted by an overgrowth of certain bacteria. If approved, VivaGel, a prescription product, would be applied daily to treat bacteria vaginosis and stop it reoccurring.
Starpharma is targeting a huge market. About $US350 million is spent each year globally on topical treatments for bacterial vaginosis. The condition affected an estimated 29 per cent of American women aged 14-49 in 2001-2004 and spurred an estimated 2 million doctor visits in the US and created 4 million scripts. “There is potential that the product can ultimately grow into a billion dollar best-seller as awareness of bacterial vaginosis fuels uptake of the product,” Bell Potter analyst Stuart Roberts says.
The well-run Starpharma has begun two concurrent phase III trials for VivaGel, with completion likely by the end of 2012. Ansell’s VivaGel coated condom, expected to be on sale in the second half of this year, has strong commercial potential, Roberts says. His 12-month share price target for Starpharma, a Bell Potter house stock, is $2.30, 40 per cent higher than the current price. Starpharma’s big upside is turning its molecular research into a platform technology with multiple medical applications.
SECTOR: Life sciences
SHARE PRICE: $6
MARKET CAPITALISATION: $334 million
3-YEAR AVERAGE ANNUAL TOTAL RETURN: 28 per cent
X FACTOR:Rapid growth in US sales
Sirtex is developing world-class technology to treat inoperable liver cancer using novel small-particle technology. Sirtex’s lead product, SIR-spheres microspheres, administered through a catheter to the liver tumour, delivers a more concentrated dose of radiation therapy than conventional radiotherapy.
“One dose, administered by a radiologist in about an hour, is usually sufficient,” Intelligent Investor head of research Nathan Bell says. “Very occasionally the tumour will disappear but, more frequently, it prolongs life – though usually only for a matter of months.”
Unlike many biotechs, Sirtex has a fully commercialised product. The SIR-spheres microspheres received regulatory approval in Australia in 1997 and in the US and Europe in 2002. Radiologists delivered almost 5000 doses worldwide in 2011, up 19 per cent on a year earlier. The number of doses jumped 34 per cent in the third quarter of 2012 on strong growth in the US.
Bell says Sirtex’s technology is becoming “accepted by the notoriously conservative medical profession … With 600,000 new cases of primary liver cancer diagnosed worldwide each year, the market for Sirtex’s treatment is, somewhat unfortunately, very significant.”
SECTOR: Software and services
SHARE PRICE: $1.80
MARKET CAPITALISATION: $261 million
GAIN ON ISSUE PRICE: 80 per cent
X FACTOR: Substantial growth in data storage outsourcing
The emerging data centre owner has stood out since listing in late 2010 through a $40 million offer. NextDC’s $1 issued shares peaked at $2.36 in March as the market rated its strategy to build data centres in most capital cities and become Australia’s largest independent operator.
The Brisbane-based company is well positioned to capitalise on exponential growth in internet traffic and data storage over the next few years, driven by mobile devices and social media. Cisco Systems forecasts data centre internet traffic will have 33 per cent compound annual growth from 2010 to 2015.
Industry Funds Management’s executive director of listed equities, Neil Carter, describes NextDC as the next big thing in data centres. “NextDC has a classic first-mover advantage that will prove to be a long-term sustainable competitive advantage,” Carter says.
“In addition to the traditional data centre service, NextDC is offering its clients market-leading technology to access and control the information they store. Furthermore, NextDC has strong green credentials and is building Australia’s biggest commercial rooftop solar energy system in Melbourne.”
Carter says valuing NextDC is complicated because it will be loss-making until 2013-14. He believes its shares are worth at least $3 on discounted cash flow valuation and would be worth much more if valuation multiples applied to UK data centre companies are applied to NextDC. With more companies likely to outsource data storage, NextDC has potential for strong earnings growth.
SECTOR: Life sciences
SHARE PRICE: 40¢
MARKET CAPITALISATION: $40.4 million
GAIN ON ISSUE PRICE: 0%
X FACTOR: US approval for its lead product to reduce kidney damage
Osprey Medical listed in May in a terrible market for IPOs. Osprey, a US-based medical device company, has strong local connections; its core technology was developed at the Baker IDI Heart and Diabetes Institute in Melbourne and funded by Australian venture capital.
Osprey’s lead device treats contrast-induced nephropathy (CIN), a form of kidney injury caused by X-ray visible dye that cardiologists inject during heart procedures such as stenting and angioplasty. Its Cincor System captures a large amount of dye, which is toxic in some kidneys, before it reaches them.
Osprey estimates about 400,000 patients out of 2.2 million who undergo angioplasty and stenting procedures in the US and western Europe are at risk of CIN because of pre-existing kidney disease and says the global market for its device is worth as much as $US800 million.
It has European conformity (CE mark) approval and hopes to have US FDA approval by 2014 with break-even likely a few years later. Osprey’s long path to commercialisation and need to create a global market for its product may deter investors.
But good judges, such as Bioshares’ Mark Pachcaz, rate Osprey’s technology and its medium-term prospects. It may be one of the more promising medical device companies to float in recent years.
SECTOR: Clean technology
SHARE PRICE: 9¢
MARKET CAPITALISATION: $123 million
3-YEAR AVERAGE ANNUAL TOTAL RETURN: -16 PER CENT.
X FACTOR: Much faster commercialisation as consumes embrace its energy-saving technology
Strong gains in the life sciences sector have overshadowed progress in many emerging listed clean-tech companies. Ceramic Fuel Cells is an example. Eco Investor magazine editor Victor Bivell nominates Ceramic Fuels Cells as one of Australia’s most promising clean-tech companies.
Ceramic’s solid oxide fuel cell technology generates efficient, low-emission electricity from natural gas and renewable fuels. Bivell says Ceramic has developed “the most efficient fuel cell in the world that can extract 60 per cent of the energy in gas [for electricity] and up to 85 per cent when it used to produced hot water ... Coal-fired energy has a final efficiency of only 22-30 per cent and [Ceramic’s] fuel cell does it with low emissions.”
Bivell says Ceramic’s lead product sits in the home like a second small dishwasher and makes enough power for two homes. “The unit is simply installed and connected to the gas, which makes sense and is another way to use gas as a transition fuel,” he says.
The technology, in development since 1992, is only now creating first revenue. “It’s a great lesson in how long and hard it can be to commercialise technology,” says Bivell, who also nominates Dyesol, Carnegie Wave Energy, AnaeCo, Geodynamics and Algae.Tec as other promising emerging listed clean-tech companies.
The market is not recognising Ceramic’s potential, says Bivell. Like many small clean-techs, its shares have struggled since the GFC in 2008, even though it is on the cusp of faster commercialisation.
SECTOR: Software and services
SHARE PRICE: 22¢
MARKET CAPITALISATION: $43 million
3-YEAR AVERAGE ANNUAL TOTAL RETURN: 1 per cent
X FACTOR: Strong growth in money transfers using mobile devices, in emerging markets.
eServGlobal’s mobile payment technology, HomeSend, enables people to transfer money via their mobile phones, which is a huge potential market in emerging countries.
The editor of the popular small-cap stock newsletter Under The Radar Report, Richard Hemming, says there is a genuine need for the technology.
“In massive markets like India, where hundreds of millions of people don’t have access to banks, the trend is for people to use their phones for their banking needs,” he says.
He believe eServGlobal’s expertise in developing billing software for mobile phone companies and software for recharging of mobile credit, gives it a formidable network that taps into the expansion in pre-paid mobile phone usage, which represents about 75 per cent of total mobile phone users.
Hemming says eServeGlobal should earn about $35 million in revenue this financial year but it is still producing losses. Indonesian financial services company mCoin’s announcement in January that it would use eServeGlobal’s technology, is step in the right direction, he says.
The market has its doubters. eServeGlobal’s shares have fallen from 52¢ to 22¢ since November in a terrible market for small-tech companies.
“There are massive hurdles for the company to overcome, such as educating millions [of consumers] on how to use its technology,” Hemming says.
But share price weakness may be an opportunity for true believers.
A study by the industry body CGAP (Consultative Group to Assist the Poor) found international payment remittance was a significant form of money transfer in developing nations and has grown strongly over the past decade. “The hub model of HomeSend is one of the most intriguing innovations in the mobile international remittance market currently,” it says.
SHARE PRICE: 61¢
MARKET CAPITALISATION: $97 million
3-YEAR AVERAGE ANNUAL TOTAL RETURN: -19 per cent
X FACTOR: Universal gets take over by a global healthcare giant
Universal Biosensors is developing materials for point-of-care tests to monitor diabetes and other diseases. It wants to make more than a billion strips each year for blood-glucose meters that diabetics use to test their levels and has a distribution deal with LifeScan, a Johnson & Johnson company.
Bioshares’ Mark Pachacz believes Universal has developed the next generation of electronic diagnostic instruments and re-engineered how a conventional electrochemical cell works. “The outcome is a device that is more accurate and easier to use, and consumables that are considerably less expensive to manufacture,” he says.
Universal’s first product, a glucose diagnostic meter, is sold by Lifescan, and its second, a diagnostic meter, will be used to analyse the correct levels of Warfarin (used to treat blood clots) for patients. This product is still in development and is being partnered with Siemens Healthcare Diagnostics.
Universal is more like a manufacturer than a biotech researcher. Unlike most medical-device makers, its products are low-margin goods that can be mass produced.
Unversal’s technology is thought to give it an important cost advantage over rival manufacturers, which is a huge advantage in a commoditised market. Pachacz says Tissue Therapies is another emerging life science company to watch.
It wants to launch VitroGro, a novel wound-healing technology, in Europe in coming months.
The technology uses a combination of naturally occurring proteins to promote wound repair and was discovered at the Queensland University of Technology. “The approaches and products [of Tissue and Universal] could not be more different but they are two quality Australian biotechs commercialising leading global technologies,” Pachacz says.
SECTOR: Clean technology
SHARE PRICE: 13¢
MARKET CAPITALISATION: $26 million
3-YEAR AVERAGE ANNUAL TOTAL RETURN: -46 per cent
X FACTOR:Larger solar company takes over Dyesol for its valuable technology
Australian CleanTech managing director John O’Brien nominates solar dye researcher Dyesol as one of the country’s most promising emerging clean-tech companies.
“Dyesol has made good progress over the past few years but is yet to reach its potential,” he says.
Dyesol is commercialising dye solar cell (DSC) technology, which draws together concepts in nanotechnology and biomimicracy, which mimics the biological process of photosynthesis in plants to turn light into energy.
Dyesol’s dye, paste and electrolyte materials are used by companies for solar module roofing, glass, mobile phones and laptops, as well as defence force applications.
O’Brien says Dyesol is building integrated photovoltaic and portable power products that can replace disposable batteries.
Dyesol is also developing a roofing material product with India’s Tata Steel in Europe, has worked with Pilkington Glass on solar glass products and in March opened a solar glass project for the Seoul City Government in South Korea. Despite these milestones, Dyesol’s shares have fallen from 64¢ a year ago to 13¢ in an awful market for small clean-tech stocks.
Another clean-tech company O’Brien nominates, Bluglass, has also been thumped by investors in the past few years.
Bluglass is commercialising breakthrough technology to grow semiconductor materials, such as those that can be used as alternative material to silicon in devices such as light emitting diodes (LEDs).
“The technology has the potential to help semiconductor manufacturers reduce both pollution costs and toxic waste products,” O’Brien says.
Bluglass shares soared from 5¢ to 15¢ in March after a favourable tax ruling boosted its cash position and on significant operational progress but they are still well down on prices above 70¢ achieved in 2007.
SECTOR: Diversified financials
SHARE PRICE: 21¢
MARKET CAPITALISATION: $33 million
3-YEAR AVERAGE ANNUAL TOTAL RETURN:-23 per cent
X FACTOR: A larger financial services companies takes over ThinkSmart for its technology.
Shares in the finance technology and leasing company have slumped from a 52 week high of 70¢ to 21¢. ThinkSmart has exclusive agreements with major international retailing groups and processes high volumes of low value consumer and small business transactions.
News that its warranty services contract with Dick Smith and the Warranty Group will not be extended beyond April 2012, and a profit downgrade in late May, dampened already fragile sentiment towards ThinkSmart.
The contract’s non-renewal will wipe about $1.2 million from net profit this year. Fat Prophets chief executive Angus Geddes believes investors overreacted to the news and are undervaluing ThinkSmart’s innovative finance technology.
“ThinkSmart investors have endured a rocky road over the past year and it seems that sentiment towards the point-of-sale financier is so fragile that any whiff of negative news results in a sell-off,” he says.
Geddes says ThinkSmart has a genuine competitive edge and reasonable capital returns through investment in partnerships, distribution, and leading-edge technology here and overseas.
“The key risk is the retail and small-business environment but ThinkSmart is laying a platform for earnings growth when market conditions in Australia recover.”
Geddes believes ThinkSmart’s current price is too low, with the stock on a prospective price-earnings multiple of less than six times.