Market Update & Important Indicators
U.S. stocks drifted higher in quiet trading Monday, ahead of a busy week of data. The Dow added 30 points, or 0.2%, to 18,040, while the broader S&P 500 gained 4 points, or 0.2%, to 2,112. Trading in recent weeks has been mostly driven by concerns about the economy's health and uncertainty over when the Federal Reserve will start to raise interest rates. On Friday stocks fell, closing out a quiet trading month that featured several record highs but little volatility or investor enthusiasm. Earlier Monday the Commerce Department said the personal consumption expenditures price index rose 0.1% in April from a year earlier. The index is the Federal Reserve's preferred inflation gauge, and the rise was far from the Fed's 2% target for U.S. inflation. In other data, the Institute for Supply Management's monthly survey showed U.S. manufacturing expanded in May. The ISM's manufacturing purchasing managers index increased to a five-month high last month and the report also showed job growth in the factory sector, which bodes well for Friday's jobs report.
European stocks rose marginally Monday after manufacturing data and Greece concerns dented an earlier rally led by pharmaceutical shares. The Stoxx Europe 600 ended the session just under 0.2% higher. London's FTSE 100 shed a little more than 0.4%, while Germany's DAX and France's CAC added 0.2% and 0.4%, respectively. Mixed manufacturing data from across the eurozone, however, kept the market on edge. Activity in the sector expanded in May, helped by a stronger-than-expected performance from Spain and Italy, but the overall pace of growth was reduced slightly from an earlier estimate. This week, Greece is expected to remain in sharp focus again ahead of a EUR300 million (US$329 million) debt repayment due to the International Monetary Fund on Friday. Greece is scheduled to repay a total of EUR1.6 billion to the IMF between June 5 and June 19.
Stocks in Shanghai surged Monday to recover much of last week's sudden losses after Beijing policy makers stoked investors' hopes for more stimulus to bolster the sluggish economy, while in Japan the Nikkei Stock Average eked out a slight gain to extend its winning streak to 12 days. Most of the attention was on the Shanghai Composite Index, which finished up 4.7%. That lifted its year-to-date gain to over 40%, among 2015's best performances world-wide. Monday's gain marked a sharp recovery from Thursday's 6.5% plunge. The Hang Seng Index finished up 0.6% at 27,597, with investors there also turning to the latest reading on China's economy.
Copper finished up 0.2% on the LME overnight, although other base metals showed mixed performances. Gold was flat at $1,189/oz, while Brent crude climbed 1.2% to $63.88/bbl.
Thought for the day
WA Industrials – unique opportunities …… an update
Early this year we identified four WA-based industrial stocks that had unique international opportunities (see “WA Industrials – Unique international opportunities”). All had US$ exposure, boasted impressive key clients, and had distinctive technologies and IP. Four months later we provide an update and add a fifth business to the list.
Adding Orbital (OEC) to the list
Orbital Corporation (OEC) | Market Cap (fully diluted) $39m | SPEC BUY
Orbital (OEC), based in Perth, is a global developer of innovative technical solutions. The Company’s pedigree is engine and fuel management systems, with the recent acquisition of a majority stake in REMSAFE adding technical expertise in remote electrical isolation systems.
Why do we like OEC?
Boeing a likely major client: Boeing subsidiary Insitu has recently named OEC as the preferred supplier of engines and propulsion systems for the ScanEagle UAV (Unmanned Arial Vehicle) programme. A commercial Production Contract is being negotiated, which is expected to result in initial engine production from OEC’s Perth facilities, pending the establishment of new, higher volume facilities in the U.S.
REMSAFE potential unbounded: We have good reason to be optimistic about the recently acquired REMSAFE business. Its high voltage remote isolation system improves safety and reduces costs – topics dear to the hearts of iron ore miners in the Pilbara. It is early days, but recent system sales to the three iron ore majors endorses the technology. In our view though, the potential extends well beyond the Pilbara and mining.
Synerject helps underpin current market value: We believe OEC’s fully diluted market cap (currently $39m) is largely underpinned by a 30% stake with Continental AG in Synerject (which delivered US$3.0m profit to OEC in FY14), implying that little value is being ascribed to the growth opportunities discussed above.
Ticks the boxes: It ticks the boxes we highlighted for the first four businesses on the list. A significant portion of earnings is likely to be generated in US$, Boeing subsidiary Insitu is an attractive client for the UAV business, and OEC has impressive IP and numerous patents protecting its engine and fuel technology.
How have the four original companies on the list performed?
With one exception, these companies have had a good year to date. TFS Corporation (TFC) and Austal (ASB) are both up almost 20%, while Alexium (AJX), which was up 60% at one point, has fallen back to be currently up 16% so far this year. OBJ Limited (OBJ) has been the worst performer, dropping 44% year to date. OBJ (which gained nearly 200% in 2014) has steadily improving prospects and we maintain a positive view.
In comparison the All Ordinaries and Small Industrials have climbed less than 10% so far this year. WA-based resource services businesses of course, have continued to languish, with most having fallen during the course of the year.
Alexium (AJX) | Market Cap $148m | SPEC BUY: The Company continues to gain traction with the U.S. DoD, having been selected to move to the second phase of the development process for Natick’s Green Initiative, a programme to develop an eco-friendly, durable flame retardant (FR) 50/50 nylon-cotton fabric for military uniforms. However, the greatest potential lies in the commercial FR market, where AJX has made good progress in the transportation, home furnishings and outdoor fabrics markets in recent months. AJX has identified 2015 revenue potential of >US$10m from these markets, with significantly higher potential in 2016. A US$6.7m capital raise (mainly from U.S. investors) in early May will help fund the Company’s ongoing development on a number of fronts.
Austal (ASB) | Market Cap $621m | BUY: In April, it was announced that an additional two Littoral Combat Ships (LCS) had been funded by the U.S. Navy, adding US$691m to ASB’s order book and extending U.S. revenue visibility to 2020. The recent revenue guidance increase from $1.20b to $1.35b shows the benefits of having exposure to the US$. However, a comment that schedule delays on LCS-6 will hurt near-term margins has taken some wind out of ASB’s sails. In our view, the lessons learnt on the first couple of ships in the LCS programme will be put to good use, and we expect improved margins in the medium term, particularly with support work added to the mix.
OBJ Limited (OBJ) | Market Cap $89m | SPEC BUY: Proctor & Gamble (P&G) successfully launched the SK-II Eye Care product last year in South Korea, Hong Kong and Taiwan, and has since extended launches into Japan and China. OBJ has a number of ongoing work plans under the Product Development Agreement (PDA) with P&G. More recently, a clinical trial of OBJ’s Bodyguard product (over which P&G has an exclusive Evaluation & Option Agreement) recently commenced at the University of Queensland. Meanwhile, work continues with two other global brands in Coty and GlaxoSmithKline and OBJ has noted approaches by new potential partners. These global companies’ interest provides a strong endorsement of OBJ’s technology, which has numerous potential global applications.
TFS Limited (TFC) | Market Cap $607m | BUY: Last calendar year was pivotal. First trees were harvested, first oil was produced, and TFC signed the important agreement with Galderma. The subsequent launch of the new Benzac product range for acne treatment opens up a very large potential pharma market for Indian Sandalwood oil in addition to traditional markets. The momentum has been maintained in recent months, with the improved visibility flowing through to demand for the plantation investment product and to the Company’s debt. This should be true for TFC’s equity as well, particularly as an exposure to an appreciating US$ is an added bonus.
In This Issue
Paladin Energy (PDN) | SPEC BUY
Paladin Energy (PDN) has signed a binding Heads of Agreement with Energia Minerals (EMX) to acquire the Carley Bore uranium project in the Carnarvon Basin of Western Australia. This move is a consolidation of tenements around the the Company’s In Situ Recovery (ISR) Manyingee development project which is slated for production later this decade (uranium price depending). Consideration for the sale will be A$1.6m cash and 45m PDN shares, for a total value of A$15.8m based on PDN’s closing price of $0.315.
Recent Contacts & Presentations
Orbital (OEC), Site Group (SIT), Saracen (SAR), Kibaran (KNL), Sino Gas & Energy (SEH), Rewardle (RXH), Alexium (AJX), Ausdrill (ASL), Tox Free (TOX), OBJ Limited (OBJ), Dacian (DCN), Saracen (SAR), Fertoz (FTZ), Atrum (ATU), Doray (DRM), Buru Energy (BRU), Carnarvon Energy (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), Pura Vida Energy NL (PVD), MZI Resources (MZI), High Peak Royalties (HPR), Spookfish (SFI)
Alexium (AJX) – Argonaut participated in the placement in January 2015 and received fees commensurate with this service.
TFS Corporation (TFC) – Argonaut acts as Corporate Adviser to TFC and may receive fees commensurate with this service. Argonaut was engaged on normal commercial terms to assist TFC in relation to its Beyond Carbon business.