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What have our portfolio companies been doing? (Part 2)

Published 11-NOV-2021 12:00 P.M.


15 minute read

Yesterday we provided a quick "report card" on how our portfolio companies performed in the last quarter (1st July to 30th September), with green energy and battery materials investments ( PRL, VUL, FYI, EMN, EMH, and AOU ). Here is the link in case you missed it.

Today we are providing a similar update on our investments in other sectors ( EXR, WHK, FOD, BOD and IRD )

At Wise-Owl we provide regular commentary on early stage ASX growth stocks that we are invested in.

We aim for 1,000% plus returns over time and are comfortable to hold a position for 4 to 7 years, providing sufficient timeframe for the management teams to execute on the vision that they’ve presented to the market.

Whilst 3 months within a 7 year timeframe is relatively short, we still want to see progress on how our investments are executing their plans across each quarter.

For our quarterly report cards, we cover three areas for each investment, namely:

  1. What the company has delivered
  2. How we think they’re going
  3. What we expect to happen next

Since May 2020 we have taken positions in 11 carefully researched small cap ASX stocks.

New portfolio addition coming soon: Evolution Energy Minerals (ASX: EV1)

As we pointed out yesterday, we participated in the Evolution Energy Minerals (ASX: EV1) IPO and will be adding it to the Wise-Owl portfolio.

The IPO is now closed and we expect it to list on Tuesday 16th November - we will provide our full commentary on why we invested in EV1 when it lists.

Our model is to carefully research and select what we think are the best quality companies and management teams, we share our opinions and commentary as each company delivers on its progress.

Here’s a recap of key events that have happened with our portfolio stocks since the new financial year began.

We have structured the information in the following way for each company:

📋 Description of the company

🌏 Macro Investment Theme

Achievements in the last quarter

💬 Our commentary on the last quarter and what to expect next

💰Cash balance at the end of the quarter

So, how did our stocks go? Let’s take a look.

WhiteHawk (ASX:WHK)

📋 About: USA based cybersecurity company, providing cyber risk products, services and solutions. It is specifically targeting large public sector organisations, especially the defense industry.

🌏 Macro Theme: Following the Colonial Pipeline and SolarWinds hacks, cybersecurity is now a top priority for the US government. The global cyber security market is projected to exceed US$330 Billion by 2027.

U.S. Federal Cyber Risk Radar Contract Renewed: Contract for US$608k, for year 1 of 4. We think this is important for WHK from a revenue traction perspective, and demonstrates they are beginning to penetrate their target market

WhiteHawk and Dun & Bradstreet Enter Into Co-Sell Agreement: Dun & Bradstreet will work with WHK to sell Cyber Risk and Vulnerability Reporting products. Dun & Bradstreet has deep reach in the public sector in the US so we want to see revenue come from this.

🔄 Fortune 500 Corporate Deal 1: 60-day Cyber Risk Radar Proof of Concept (POC) with Global Social Media Company for US$100k. WHK says that based on client feedback, they will tailor a program to commence December 2021. We believe this could be the beginning of a string of deals for WHK.

💬 Our commentary

  • WHK strengthened the Board with Brian Hibbeln who has deep experience in government roles. He joined as a Non-Executive Director and brings to the board a wealth of contacts via his role as Director of the US Department of Defense (DoD), Remote Sensing Center. He is also an advisor to Blackstone’s $32 Billion-dollar Tactical Opportunities Private Equity Fund. Suffice to say, Brian brings serious nous to the WHK Board.
  • Good signs from WHK quarterly with improving revenue traction - US$880,000 in receipts from customers, as well as the fact it invoiced US$1.964M YTD in 2021 up 8% over the same period in 2020. Most of this came via invoicing US$1.2M in the third quarter of 2021
  • Kicked off a Cyber Risk Radar Proof of Concept (POC) with a Global Social Media Company
  • Even though the share price for WHK is slipping down the charts a bit, we really like WHK because it's in the right sector at the right time with the right leadership and works in the right country
  • Share Price Commentary: We really like WHK, but they do take ages to deliver new contracts and spend a long time in quiet periods, which sees their share price slowly track down as impatient holders jump to other stories. While WHK does take a while to announce new deals, when they do the contracts are big and with blue chip clients, so we are looking forward to them emerging from the current quiet news phase and see the share price back up again soon.

What we want to see next: WHK is actively pursuing a number of big opportunities utilising their contacts within government via Dun & Bradstreet - so revenue from this co-sell arrangement would be a win for us. We also want to see what comes from the Proof of Concept (POC) project with a ‘Global Social Media Company,’ in our opinion, a big contract win or the outcome of the POC project are crucial for WHK’s prospects in the immediate future

💰 Cash Balance at the end of the Quarter: $2.51M

Elixir Energy (ASX:EXR)

📋 About: EXR is exploring for natural gas on the Mongolia-China border to replace burning of coal for energy in China. EXR also has hydrogen production aspirations, with the ultimate aim of becoming a Renewable Energy Hub on the Mongolia-China Border.

🌏 Macro Theme: China’s new 5 year plan demands reduction of burning dirty coal for energy and aims to reduce reliance on foreign powers for energy supply by firming up local supply routes.

Hydrogen MOU signed with Mongolian Government : MOU signed & initial drafting of Mongolian Hydrogen focussed policy commenced.

SODAR equipment mobilised: Bankable quality renewable resource data being gathered, following up on K1 Capital’s report on estimated utilisation rates for wind/solar power in the area.

3rd Drill Rig mobilised: 3rd Drill rig procured towards the end of the quarter to advance the natural gas drilling program.

44% of the 2021 2D Seismic Acquisition Completed. ~132km of the targeted 300km in 2D Seismic acquisition completed.

[Post End of Quarter] Lab Results from the Nomgon-6 Well. Encouraging results received from Lab testing of the drill results from the Nomgon-6 Well. Positive results returning ~84m of Coal seams showing gas flows to surface.

💬 Our commentary

  • We originally invested in EXR for its natural gas exploration exposure on the Mongolian-China border but are now also looking forward to any developments being made with respect to Hydrogen opportunities it is pursuing in partnership with the Mongolian Government.
  • The K1 Capital report which was received during the quarter estimated a 79% cumulative utilisation rate for Wind/Solar energy generation over EXR’s proposed project area. With EXR bringing in SODAR equipment and actively gathering Bankable quality renewable resource data we think EXR are building a case for the Nomgon PSC being home to a fully-integrated renewable energy hub in southern Mongolia, bordering China.
  • EXR has also been completing a 300km 2D seismic acquisition program. At the end of October the program was ~44% completed. We expect this to be nearing completion by the end of the year with additional drilling targets highlighted & ready to be followed up.
  • Subsequent to the quarter ending EXR put out the results from lab testing for the Nomgon-6 Well which was a key target of the 2021 drilling Programme. The well was drilled down to a depth of 501m and returned 84m of coal of which 63m was in the primary target "100 Series" Coal. Drill-Cores confirmed similar gas content/composition from prior wells drilled in the area which is telling us that the targeted resource area is growing.
  • Share Price Commentary: Since EXR’s capital raise at 36¢ earlier in the year, its share price has been up and down. EXR hit a low point in the quarter of 20¢ before rallying back up to 32¢ on the macro news of global natural gas shortages. This volatility can be frustrating as traders enter and exit the stock, but as long term investors we focus on the long term sustained share price appreciation as the company executes on EXR business plan.

What we want to see next: With regards to the natural gas project, we expect the 2D Seismic Acquisition program to be completed next quarter and new drill targets identified for exploration. We are anticipating the results of the Bag-1S exploration well, which could expand the size of the gas deposit. We are also watching closely for any news regarding a pilot production testing program which is slated for 2022 - which will evaluate the flow rates of the gas deposit. It is still early stages on the hydrogen front, so any news this quarter about the project will be a bonus.

💰Cash Balance at the end of the Quarter: $30.9M

Food Revolution Group (ASX: FOD)

📋 About: FOD is a beverage manufacturing company that specialises in premium fruit juices and probiotic wellness shots. It owns established beverage brands ‘Juice Labs’ and ‘Original Black Label’ and its products are available in major supermarkets generating revenue for the company.

🌏 Macro Theme: Australian consumers beverage preferences are moving from artificially created products to products that are all natural and locally sourced.

✅ Wellness Shots now in 1,000+ stores: Sales for FOD’s Wellness Shots outperformed expectation in the quarter, this led to Coles expand distribution to over 1000 stores (up from 477). We think this will open more revenue as more consumers have access to the product.

Apple Juice Launched: FOD launched their new apple juice product in Coles and Woolworths, expanding the Original Black Label brand. Apple juice is a popular product amongst Australian consumers - given that the Apple Juice market is relatively mature, we think this will provide a reliable revenue source for the company.

Carbonated Juices launched in Coles: FOD’s Carbonated Juice product launched in Coles this quarter, a new product in a growing market segment. We are awaiting initial sales figures for the Carbonated Juices and hoping for increased distribution on the back of a successful launch.

📅 Quarterly Revenues Steady: $10M in revenue for the quarter (up 4% year on year)

💬 Our commentary

  • It was a big quarter for FOD with the launch of their Apple Juice range and the Carbonated Juices and the increased distribution of the Wellness Shots. We were happy with the milestones achieved this quarter, and it showcased new CEO Steven Cail’s under promise and over deliver ethos.
  • From a financial perspective, the first quarter of the new financial year was always set to be steadier - with sales figures expected to ramp up in the Summer months as the weather improves.
  • Shareprice Comments: FOD’s share-price hit its lowest point since we initially invested this quarter at 2.4¢, before rallying back to 2.7¢ after the major product launch announcement. What we think will take FOD’s share-price to the next level is institutional interest in the stock, which we think will emerge after a number of strong quarters of financial results.

What we want to see next: It’s all about revenues and product growth for FOD at this stage. What we are looking out for next is the first sales figures from the Carbonated Juices and a strong quarter of accelerated revenue growth in the lead up to Christmas. We are also hoping that FOD will be cash-flow positive in the next quarter as the majority of its fruit inventory is purchased during the winter months.

Oh, and we tried the cans - they were delicious, you can go down to your local Coles and pick one up if you like.

💰 Cash Balance at the end of the Quarter: $2M

Iron Road (ASX:IRD)

📋 About: IRD is progressing one of Australia’s most advanced, significant magnetite (iron ore) projects today, in parallel developing a multi-commodity port facility in South Australia

🌏 Macro Themes: With stimulus spending accelerating across globe post-pandemic, iron ore is part of a basket of commodities that we expect to experience strong demand going forward as a key component in steel for large scale infrastructure projects. The iron ore price has experience some weakness in the last few months, but we still believe in the long term thematic.

Land banking: Purchase of additional land at Cape Hardy Port site, providing more leverage to future export options.

Directors buying up: Executive director Glen Chipman continued to increase his holding with on market buying of 200,000 shares.

💬 Our commentary

  • Slow progress with the flagship magnetite asset, which is development ready now - next step would be a strategic partnership, offtake arrangements and/or project financing.
  • IRD spent $1M to further build their land package by 24 hectares at their Cape Hardy Port precinct. We note that EPCBH (the co-op investigating a grain-focussed port at Cape Hardy) recently added a further 162 hectares adjacent to the port site, as too Macquarie-backed Viridis Ag adding another 2,200 hectares adjacent to the northwest boundary and a total of ~4,300 hectares in close proximity to Cape Hardy.
  • We suspect that the land grab ties in with the proposed South Australian Hydrogen Export hub, as the Cape Hardy Port site appears to be a natural logistical channel.
  • Share Price Commentary: IRD’s share price has trended downwards since June which coincides with the market for iron ore - effectively halving during the quarter (from circa US$210/t to US$100/t spot price). The iron ore price has been impacted by Chinese-imposed steel restrictions and the Evergrande debt crisis rippling through the Chinese economy. We think that IRD is well positioned for a positive re-rate once more clarity regarding commercialising its flagship asset is unveiled, alongside a return to positive sector sentiment.

What we want to see next: We are keeping an eye out for news about the proposed South Australian Hydrogen Export hub, especially post COP26 (the recent UN backed climate change conference in Glasgow), as green hydrogen certainly appears to have a prominent future in Australia. Also we’d like to see progress with the Central Eyre Iron Project - with international borders re-opening, we suspect that interested parties will be able to visit on site soon.

💰 Cash Balance at the end of the Quarter: $3.18M

Bod Australia (ASX: BOD)

📋 About: Australian medicinal cannabis, Cannabidiol (CBD) and hemp healthcare company delivering premium, proven and trusted products for both the consumer and medicinal markets.

🌏 Macro Theme: Regulatory shifts globally regarding cannabis classification, both recreationally and medically paving the way for new markets and opportunities. In Australia, the Therapeutic Goods Administration announced a decision to down schedule CBD products to Schedule 3 (Pharmacist Only) medicines.

Record revenue achieved during FY2021: - $5M+ Annual Revenue, up 25% from previous year, up 20% for the quarter

Commenced Schedule 3 clinical trial of new CBD product: Potential to be the first to market with an effective CBD treatment to symptoms associated with insomnia, not requiring a prescription

New board appointments: Mr Hanno Cappon as Non-executive Director (formerly with Bayer and Danone, now as Health & Happiness Group’s representative) and Mr Adrian Sturrock as Chief Financial Officer (formerly with Blackmores and ANZ)

10,000 Annual MediCabilisTM Prescriptions: Up 212% from previous year

💬 Our commentary

  • BOD (note the ASX code changed from BDA during the quarter) keeps on humming along growing sales, advancing new products...etc which can be boring, but for a long-term investment, we like that it continues to track upwards across key financial metrics.
  • On those financial metrics, BOD delivered a record breaking 25% revenue growth from the previous FY, concurrently driving down costs, and improving EBITDA. The strong revenue growth was driven by a 40% rise in medicinal cannabis sales for the year.
  • Whilst yet to deliver its maiden profit, we anticipate BOD arriving at this milestone in the year ahead.
  • Another unheralded advantage BOD has over many of its peers is its active R&D division. This quarter, the company announced the commencement of a Schedule 3 (i.e. can be purchased without prescription at local pharmacies) study to treat symptoms associated with insomnia, and secured patent protection for a novel family of proteins in human cells that provide antioxidant protective effects when applied to skin cells.
  • Share Price Comments: Despite the good revenue growth, the BOD share price has been trending downwards since the year began. We suspect this is more to do with poor market sentiment (just about every cannabinoid stock we track has taken a hefty haircut), than BOD’s operational performance. We believe that when sentiment changes, it will be the cannabinoid companies that are cashed up, with strong revenues and near-term profitability that will lead the charge.

What we want to see next: We want to see continual revenue growth in the current quarter, expansion into new markets, and progress with the Insomnia Study (Schedule 3 CBD product) starting with Ethics approval, details of further purchase orders in international markets.

💰 Cash Balance at the end of the Quarter: $6.2M

General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

Conflicts of Interest Notice

S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

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The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.

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