under the radar report

ISSUE 267
SMALL CAPS 09 NOVEMBER 2017

MED TECH the

SPECIAL REPORT issue
PART 1 HEALTH AND BIOTECH

We show you which stocks we cover and

02

This is a sector that offers you massive bang we run through the three principles we
for your buck, albeit obviously at greater risk. use to invest in medical technology and
Under the Radars average return on the 13 stocks health stocks more generally.

we cover in health and medical technology has HEALTH AND BIOTECH 04

been 112%.
Pharmaxis (PXS)
In this issue we discuss how we pick the stocks, and over the next few weeks we
Nanosonics (NAN)
start running through some outstanding opportunities.
Medical Developments (MVP)
There are several stocks that are running hard right now. One of those is definitely
Medical Developments International (MVP), which at the moment can do no wrong. RESEARCH TIP UPDATE 07
The UK authorities authorised MVPs Green Whistle Penthrox pain relief device
Panoramic Resources (PAN)
for use in every ambulance service in the UK, and the company has also achieved
clearance in Mexico for use in moderate to severe pain trauma cases and surgical PROFESSIONAL INVESTOR 08
procedures requiring analgesia. The surgical application is relatively new to MVP.
When one of the best performing duos
We first bought the stock at $1.18 back in May 2014 when it had a market cap of in the Small Cap world Chris Prunty
under $70m. Fast-forward three and a half years and the company has issued no and Tony Waters go out on their own,
more shares and its stock price is $6.40, giving it a valuation of $378m. its a good thing to find out what they
think of the market, and which stocks
This company has low regulatory risk, its got proven products, its producing positive theyre buying.
cash flow, and its covered in this weeks issue.
BEST MONEY MAKING IDEAS 10
Weve had some good feedback from last weeks Battery Powered Report on lithium
stocks. This could be because the ones we rated spec buy, Pilbara Minerals (PLS),
Mineral Resources (MIN) and Kidman Resources (KDR) are up an average of 11%
at the time of writing. As you will read in this report the nickel miner Panoramic
Resources (PAN) is also a beneficiary of battery power. n Small Talk
The big factor in a med-
tech companys favour is its
potential. Although it faces
big regulatory hurdles and
funding issues, what you get
is the opportunity to seize a
slice of a global market. Once
Richard Hemming it gets that domain expertise,
Editor the skys the limit.
UNDER THE RADAR REPORT

99% of all financial news relates t o the 40 to 50 biggest

companies. So what about the rest? Theyre Under the Radar.
Published by Under the Radar Report Pty Ltd Editor Richard Hemming Publisher Caroline Mark
45 Evans Street, Balmain NSW 2041 ABN: 65147404662. AFSL: 409518.
Telephone +61 2 9106 2167 Email radar@undertheradarreport.com.au
www.undertheradarreport.com.au
under the radar report
SPECIAL REPORT 09 NOVEMBER 2017

HEALTH AND BIOTECH

This is a sector that offers you massive bang for your
buck, albeit obviously at greater risk. Under the Radars
average return on the 13 stocks we cover in health and
medical technology has been 110%. We first discuss how
we pick the stocks, then we start running through some
outstanding opportunities.

UNDER THE RADAR REPORTS

HEALTH & BIOTECH STOCKS
INDUSTRY COMPANY ASX CODE MARKET CAP TIP PRICE LATEST RETURN (%)
($M) ($) PRICE ($) INCL DIVS

1 Biotech PHARMAXIS PXS 83.1 0.1 0.26 79.3

2 Medical services CAPITOL HEALTH CAJ 219.0 0.2 0.27 66.7

3 Medical technology CLOVER CORP CLV 94.1 0.3 0.57 104.3

4 Medical technology ELLEX MEDICAL LASERS ELX 124.7 0.4 1.03 157.5

5 Medical technology IMPEDIMED IPD 290.8 0.2 0.78 287.5

6 Medical technology LBT INNOVATIONS LBT 38.3 0.3 0.27 3.8

7 Medical technology NANOSONICS NAN 866.3 2.4 2.91 23.3

8 Medical technology OSPREY MEDICAL OSP 142.5 0.4 0.42 2.4

9 Medical technology SIRTEX MEDICAL SRX 780.4 6.3 13.96 140.7

10 Medical technology SOMNOMED SOM 209.8 2.1 3.63 73.7

11 Medical technology UNIVERSAL BIOSENSORS UBI 59.0 0.4 0.34 -22.1

12 Pharmaceuticals MAYNE PHARMA MYX 954.4 0.3 0.64 92.4

13 Pharmaceuticals MEDICAL DEVELOPMENTS MVP 377.6 1.2 6.40 449.2

AVERAGE RETURN 112

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SPECIAL REPORT 09 NOVEMBER 2017

THREE Its often said that the biotech sector is akin to playing molecular roulette, and indeed some
of the performances of high profile bear testament to this. There have been no big casualties
PRINCIPLES in recent times, but if you look in the past 5 or so years youll see names like Prana, QRX,
Prima Biomed, which have either lost investors 80% or are no longer in existence.
TO INVESTING But this sector does offer massive bang for your buck, albeit obviously at great risk. The big
IN MEDICAL factor in these companies favour is their potential and although they face big regulatory
hurdles and funding issues, what you get is the opportunity to seize a slice of a global
TECHNOLOGY market. Once they get that domain expertise, the skys the limit.
The biggest winner in the sector is the blood products specialist Commonwealth Serum
Laboratories, now simply called CSL (CSL), which was listed in 1994, generating just under
$300m for the Commonwealth government. It now has a market capitalisation of $64.7bn.
The sleep apnoea developer ResMed (RMD) has a market capitalisation of $15.5bn, and
hearing treatment specialist Cochlear (COH) has a market cap of is $10.4bn.

PRINCIPLE 1 PRINCIPLE 2 PRINCIPLE 3

DIVERSIFICATION
If you had unlimited resources, an approach
to investing in the sector is to spread
your risk. In our experience at the high
risk research and development end of the
spectrum, for every five that it purchases,
four will go bust and the one that wins goes
up five times. If you can do better than this,
you should make money.
We realise that your biotech purchase will be
part of a portfolio that is diversified outside
of biotech. Although it can be very exciting
when a well timed stock purchase starts
heading sharply higher as a result of an
unanticipated development in the efficacy of
a particular compound, it is very important
not to lose sight of general investment
principles.
It is more important to stay out of trouble.
Whether it is a biotech, a mining minnow,
or a technology hopeful, it is important
not to mistake a bull market for your own
investment genius! So dont be afraid to
take at least some profits when you have
made your initial money back.
CASH IS KING
Even if you are lucky enough to pick an
exciting biotech stock, many subscribers
will have smaller portfolios where it is
harder to rely on the diversification of a
large number of biotech stocks. This is
one of the reasons we are particularly
interested in companies which have high
levels of net cash, which is preferably cash
which they have earned from previous
activities in the sector, and companies in
this are category might include Phamaxis
(PXS).
JUST REMEMBER, THE MORE A COMPANYS
PROSPECTS ARE BASED ON A SUCCESSFUL
APPROVAL FROM A HEALTH REGULATOR,
THE BIGGER THE RISK. THE LONG-RUN
SUCCESS RATE OF A NEW DRUG GOING
INTO THE CLINIC IS ONE IN 20.
SEXY SCIENCE DOESNT OFTEN
EQUATE TO BIG PROFITS
There is a great deal of hype surrounding
areas of medical technology such as
biologic or immunotherapy, which involves
utilising a humans immune system to fight
a disease. This branch of medical research
is also called personalised medicine and
is incredibly powerful from a scientific and
medical point of view, but it is extremely
high risk (to say the least).
Alternatively, we are looking for companies
which are already making sales from a
relatively low tech solutions, and companies
like this might include Clover (CLV) and
Medical Developments (MVP). We are
interested in devices or products where
companies have made proven sales that
reduced their customers costs and/or
improve patient outcomes.

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SPECIAL REPORT 09 NOVEMBER 2017

MED TECH UPDATES

Below are the first three of the dozen health and med-
tech companies Under the Radar Report covers.
Were still excited about Pharmaxis, but investors definitely need patience and an understanding of the risks
involved in converting a portfolio of compounds into marketable drugs. Meanwhile, were taking some risk off
the table in Nanosonics after our exchange rate thesis has paid off handsomely; and lastly, were holding on to
our strong gains in Medical Developments.

PHARMAXIS
Drug developer
RATING SPEC BUY
Pharmaxis has been range bound since we covered it more than a year ago, which ASX CODE PXS
isnt disappointing, but its not exactly what you want from the biotechnology deal
maker. Fear not! Weve run the ruler over Pharmaxis and there is still some significant CURRENT PRICE $0.26
reasons to be hopeful, and this includes the $50m or so in cash it should have by the
end of the 2017 calendar year (up from its current $38.6m). MARKET CAP $83M
Certainly, the boring share price does disguise a great deal that has been going on NET CASH $38.6M
below the surface, and there is a chance that this company could strike a deal for two
of its early stage compounds under development by mid-next year. This could initially TIP DATE 30 MAR 2016
be worth in the region of $50m to $75m in cash upfront.
The group famously disappointed some 5 years ago when its flagship cystic
TIP PRICE $0.245
fibrosis treatment Bronchitol failed to gain approval because it wasnt proven to PXS - Share Price
$
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be effective among children. Since then it has re-invented itself as a research and
developer of a number of early stage drugs where the goal is to partner up with a big
0.300
pharmaceutical, which then takes on bulk of the risk, until the treatment is approved
(or not). 0.280

Fast forward to today and the Italian group Chiesi is taking on most of the risk for 0.260

SOURCE: ASX
Bronchitol and its partner compound Aridol as the group remains hopeful of US FDA 0.240
approval some time next year. This product is not crucial to Pharmaxiss long-term
success, which is underlined by disappointing sales where it has been approved,
namely in Europe.
The big news for Pharmaxis under its new strategy is milestone payments. The
minnow has impressed with a significant deal with the giant German pharma
Boehringer Ingelheim, which has so far generated some $67m since the deal was
signed in 2015 for its compounds in indications where there is literally huge demand,
namely NASH and diabetic reinopathy. The former is estimated to be a US$35bn
market in 2025.
The big hope in the near term are the two compounds it is developing with a small UK
company Synairgen. The early stage studies for these are due in June 2018. Clearly
the company is hoping for a deal similar to that achieved with Boehinger Ingelheim,
which would mean upfront payments sometime next year of $50m to $75m.
If the drugs get approved there is huge money to be made some $600m in the case
of the initial compounds with BI. This is a tremendous if though and the company
has a cash burn rate of about $17m to $20m a year.
If there is short-term success, there is the probable chance that the company will
get bought. n

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SPECIAL REPORT 09 NOVEMBER 2017

RADAR RATING: The business going to plan and PXS has banked much of
the cash. Investors have got to trust management that its spending $17m a
year sensibly with decent prospects of return. As speculative investments
go, given the downside is currently covered by cash, its a good one. PXS
is reliant on deal making and there might be some lulls in that respect. We
are taking it off our Best Ideas because subscribers have had time to gain
meaningful positions and it remains a SPEC BUY.

NANOSONICS
Sterilisation devices
RATING TAKE $$$
Weve ridden the exchange rate effect on this one! Since we first covered the device ASX CODE NAN
sterilisation specialist about 3 months ago the US dollar has climbed 4.5% against the
Australian dollar and Nanosonics shares have risen 25%. CURRENT PRICE $2.91
Trading on 10 times sales, in our view the short-term exchange rate isnt material in MARKET CAP $866M
the long-term. After all, what the exchange rate will be when the sales come through
is anyones guess. But in the short-term it is important for sentiment which is one NET CASH $63M
reason its shares have bounced back.
Close to 90% of Nanosonics revenues are in US dollars while a high percentage of its
TIP DATE 27 JUL 2017
costs are in Australian dollars, which means its profits are leveraged to an improving
Greenback. The company is also benefiting from improving cash flow (helped by a
TIP PRICE $2.36
$12.3m tax benefit) and a growing market for its product as the Trophons EPR unit NAN - Share Price
$
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meet a clinical need, which is hospital acquired infections.
Just to remind you, last year Nanosonics turned over $67.5m to produce an adjusted 3.250
net profit after tax of $13.9m. The company has cash of $63m and an installed base 3.000
of 14,100 Trophons, which is 40% up on FY16. 2.750

The company is not expected to deliver the same profitability in the current year, 2.500
SOURCE: ASX
2.250
however. It should produce sales of $75m and a net profit of about $8m. The big
2.000
factors in the forecast profit decline of about 40% are: a slowing rate of US Trophon
take-up, based on slowing sales in the back half of FY17; higher expense guidance
from management; the move to sell machines under a managed equipment service
model, which generates lower initial profits but an annuity income stream; and last
there is the uncertainty gripping the US healthcare market in relation to reforms.
Despite these concerns, Nanosonics gave relatively bullish guidance at its AGM saying
that it expected the installed base to increase by a similar number in the first half of
FY18 as it did in the second half of FY17. n

RADAR RATING: While the AGM comments are encouraging, this company is
extremely expensive and we think that because our exchange rate thesis
has paid off, we should take some risk off the table. TAKE PROFITS.

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SPECIAL REPORT 09 NOVEMBER 2017

MEDICAL DEVELOPMENTS INTERNATIONAL

Medical Technology
RATING HOLD
MVP is a stock that at the moment can do no wrong. We upgraded our ASX CODE MVP
recommendation to Speculative Buy at about the right time a few months ago in July,
before the full year results, and subscribers have been rewarded by a rise of almost CURRENT PRICE $6.42
25% since. We continue to think that the stock remains a strong hold even though we
are downgrading because of the price movement. MARKET CAP $379M
The founder and chairman selling 4.35m shares did not stop the stocks rise, and NET CASH $1.3M
his sale was explained as a measure to increase liquidity for institutions. We even
stretched our usual preference for value stocks, and bought a second tranche of MVP TIP DATE 14 MAY 2014
at $5.75 for the Under the Radar Report portfolio in early October.
What matters are the fundamentals, and these are still intact. The UK authorities
TIP PRICE $1.18
authorised MVPs Green Whistle Penthrox pain relief device for use in every MVP - Share Price
$
ambulance service in the UK, and the company has also achieved clearance in Mexico

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for use in moderate to severe pain trauma cases and surgical procedures requiring
analgesia. The surgical application is relatively new to MVP. 6.500

6.000
Our speculation about the interest of the US Food and Drug Administration (FDA) in 5.500
a non-opioid solution for pain relief was borne out by the chief executives comments 5.000

SOURCE: ASX
at the AGM about the companys meeting in May of this year with the FDA in 4.500

Washington. The US authorisation process may take up to three years, but we think 4.000

that this could be accelerated.

As we keep pointing out earnings and sales growth are likely to be lumpy, so
managements forecast of flat first half sales and earnings should not be too
surprising. But with a rich valuation, the group expects sharper sales growth towards
the end of FY18.
The company has identified potential use cases for Penthrox for acute pain, acute
anxiety, breakthrough pain and home use. Even though the IP in its underlying
compound is unprotected, the manufacturing process of the Green Whistle and the
delivery mechanism are patented, and Penthrox has over a decade of experience.
Management expect to make Penthrox available in more than 50 countries over the
next 18 months.
Away from the Penthrox business, as well as its space chamber devices for asthma,
management have also partnered with CSIRO to use its manufacturing skills to
build an important new third party business. Management is enthusiastic about the
prospects for third party manufacturing, so subscribers should expect to hear more
about this initiative in the next few months. n

RADAR RATING: The inherent risks in all biomedical and medical device
markets mean that you should exercise caution, but MVP remains a
standout company with great prospects, and deserves to be valued highly.
We hope another opportunity to upgrade will arise. HOLD.

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under the radar report
RESEARCH TIP UPDATES 09 NOVEMBER 2017

PANORAMIC RESOURCES
Nickel, copper and cobalt developer
RATING SPEC BUY
Following on from the lithium theme of Battery Powered Stocks in last weeks Under ASX CODE PAN
the Radar, we look at Panoramic Resources, which offers exposure to fellow battery
metals, cobalt and nickel. Panoramic closed its Savannah mine, located in the East CURRENT PRICE $0.45
Kimberley region of WA, in May 2016 due to low nickel prices. With the recovery in
prices and an updated Feasibility Study, the company is ready to reopen the project, MARKET CAP $194M
although a final decision is still awaited. Financing activities are on-going.
NET CASH $7.5M
Initially, the remaining ore reserve at Savannah will be mined whilst developing across
to the Savannah North deposit. Full production from Savannah North is expected 15 TIP DATE 14 JULY 2016
months after commencement of the access development. Average annual production
over a mine life of 8.3 years would be 10,800 tonnes nickel, 6,100 tonnes copper TIP PRICE $0.24
and 800 tonnes cobalt in concentrate. The sustaining cash cost is projected to be
PAN - Share Price
competitive at US$3.50 a pound nickel after copper and cobalt by-product credits. $

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The current spot price of nickel is US$5.73.
One research house expects Electric Vehicle demand to push the cobalt market 0.450
0.400
into a sustained and widening shortage. It is forecasting cobalt prices to increase 0.350
from current levels of US$28 a pound to US$41/lb in 2022. Cobalt 27 Capital Corp, 0.300

a speciality cobalt investment company, forecasts cobalt demand in lithium-ion 0.250

SOURCE: ASX
batteries to grow at 11.7% a year to 2022. Global production of cobalt is very 0.200
0.150
concentrated with approximately 65% of cobalt supplied by the Democratic Republic
of the Congo, where there are concerns regarding workforce exploitation, including
child labour. There is strong demand for cobalt from non-DRC sources.
The consensus view is for nickel demand to climb by between 10% and 40% to
2025, which means its price is forecast to climb from its current US$5.78 a pound to
US$7.50. Electric Vehicle demand underpins these assumptions, as well as a cathode
chemistry shift towards nickel.
Using financial base case prices in the Feasibility Study, Savannahs annual revenue is
projected to be A$180m on an annual basis with nickel, copper and cobalt accounting
for 59%, 19% and 22% respectively. The current cobalt price is US$28 a pound and for
every US$5 a pound change in its price, we estimate that there is a A$7m change in
revenue. The cobalt price has almost doubled from US$15 a pound this time last year. n

RADAR RATING: There are a number of exploration focussed companies that

are looking for cobalt deposits, with no certainty of success. Panoramic
is different it is already a proven cobalt producer. Its Savannah project,
where cobalt would account for some 22% of revenue, is expected to
be reopened in the near future, although understandably there is great
uncertainty for investors. SPEC BUY.

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PROFESSIONAL INVESTOR 09 NOVEMBER 2017

Chris Prunty, Portfolio Manager
Tony Waters, Portfolio Manager
QVG CAPITAL
Chris Prunty and Tony Waters
When one of the best performing duos in
the Small Cap world go out on their own,
its a good thing to find out what they
think of the market, and which stocks
theyre buying.
TWO SMALL CAP INVESTORS WORTH LISTENING TO
After all, we started covering Chris Prunty and Tony Waters just after they kicked off the
Ausbil Micro Cap fund in early 2010, and subscribers who followed some of their tips
made a lot of money stocks like Altium (ALU), Blackmores (BKL), Webjet (WEB), Maca
(MLD), Sirtex Medical (SRX) and many more have done well over a long period of time.
Of course, today is different from yesterday and their portfolio doesnt have too many
names of the past, which is what makes their new fund interesting. But what has remained
impressive is their strict adherence to a formula, which relies upon stocks generating
momentum in earnings revisions, but also their ability to get out of sticky situations!
As Prunty says to us now: What was true back then is still true now: earnings revisions
drive share prices. They set prices in the long-term and move stocks in the short-term.
In order to execute that strategy, nothing has changed. Were looking for high returns on
capital and strong balance sheets, which means that they can reinvest at those higher
incremental returns. It goes without saying that were more interested in cash than
accrual earnings.

WHAT A SMALL CAP MOMENTUM STRATEGY MEANS

Because the duo invest in companies whose earnings keep climbing, it is very important
that there is enough liquidity, or buyers and sellers, in order that they can get out. For
this reason the stocks they tend to follow are no longer the micro-caps and often look
expensive at first glance.
To combat this, the pair do a great deal of analysis on what the earnings profiles look
like into the future. One stock that comes to mind is the Altium (ALU) which designs and

WHAT WAS manufactures software used in electronic keyboards. Altium has been one of the great
performers on the ASX, having climbed from about $3 five years ago to current levels of
just over $11, which gives it a market cap of $1.4bn not so small!
TRUE BACK THEN
FINDING THE NEXT ALTIUM
IS STILL TRUE
Significantly, QVG hasnt bought Altium, but when we spoke to them in March 2015,
NOW: EARNINGS they were buyers and the share price then was $3. Even back then it looked expensive,
REVISIONS DRIVE trading on a PE of 30 times or more, but it was their biggest holding. Prunty commented
SHARE PRICES. on the groups valuation philosophy back then in relation to their investment in Altium:
THEY SET PRICES We look at the cash EBIT (earnings before interest and tax) its going to make in 12
months time and compare that to its current enterprise valuation (market capitalisation
IN THE LONG-
plus net debt or minus net cash). We then compare that multiple of forward pre-tax
TERM AND MOVE earnings to other companies in its sector.
STOCKS IN THE Technology One (TNE) and IRESS (IRE) trade on close to 20 times, whereas Altium, even
SHORT-TERM. after its recent run, trades on 9 times. Its the cheapest, its got the best balance sheet,
the highest growth and the largest addressable market.

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under the radar report
PROFESSIONAL INVESTOR
GOOD IDEAS BUT LITTLE QUALITY IN
TODAYS MARKET
It is also interesting that these days the pair arent seeing as
many quality companies or businesses that they like the price of.
Consequently their cash holding is relatively high at 15% of their
funds under management. Although it must be said that the pair
arent idle; the cash level was 30% a couple of weeks ago.
To compensate they are holding relatively small portions of a large
number of companies some 40 when we spoke. A large number of
these companies are involved in cyclical businesses, whose profits
ebb and flow according to supply and demand factors. You have
to be very alert on the timing front and take profits faster than you
would if the business was profitable in any types of conditions (like
an Altium). As we stated above, it also means that the pair need to
invest in companies which they can get out of quickly, if their thesis
proves wrong (meaning at the bigger market cap end of the Small
Cap spectrum).
As Prunty says: What were exploiting now are some good ideas
but theyre not the quality of business that would lead us to own
sizeable weights.
THEMATIC INVESTING
Having said that, there are a number of interesting themes that the
pair are exploiting, which well list below:
Niche commodities leveraged to electric vehicles
Electric vehicles will be an increasing proportion of the global fleet,
and batteries need commodities like graphite; lithium and rare
earth. Prunty says: Mineral Resources (MIN) is the stock that best
expresses that theme in our portfolio. Its now the worlds largest
lithium producer by volume. What we like even more is that the
group is extremely good capital allocators over time.
Mining services benefiting from the resource recovery
The pair like NRW (NWH) which is a contract coal miner in
Queensland and also does civil work in WA. Its had a big run, more
than doubling in price from 60c to just over $1.20 in the past few
months after an acquisition it made has started to deliver. Even after
the price rise, Prunty still likes it: The benefits of the acquisition are
only now coming through and with better sales and marketing we
think earnings can keep growing.
Global fund managers
QVG owns the fund platforms Platinum Asset Management (PTM)
and Pinnacle Investment Management (PNI) which have both been
performing extremely well. The former, in particular, is once again
delivering strong returns and is the vehicle of Kerr Neilson, a well-
known player in local markets.
As Prunty says Kerr is back! You can see from public statements
that hes more engaged on the marketing and distribution side,
which coincides with a phenomenal 12-month trailing performance.
09 NOVEMBER 2017
QVGS TOP 5 HOLDINGS
@ 31 OCTOBER 2017
1. A
 FTERPAY TOUCH (APT)
LAY-BY PAYMENTS SERVICE
2.MOTORCYCLE HOLDINGS (MTO)
AUS MOTORCYCLE DEALERSHIP OPERATOR
3. S
 MART GROUP (SIQ)
SALARY PACKAGING FOR THE PUBLIC SERVICE
4. L OVISA (LOV)
JEWELERY MANUFACTURER AND RETAILER
5. M
 NF GROUP (MNF)
TELECOMMUNICATIONS AND SOFTWARE
Platinums performance has occurred when the other big domestic
player in active funds management, the Hamish Douglass run
Magellan Financial Group (MFG) is struggling by its lofty standards.
Prunty says: There is increasing scepticism around Magellans
desire to grow (funds under management) at all costs.
Consumer finance
This area is growing because the big banks are not focussing on
profitable niche areas. Says Prunty: We like the management
team of Credit Corp (CCP) in particular because the people there are
honest and capable, plus theyre incentivised, owning 5% of
the company.
The fund also owns Afterpay Touch (APT) after its merger with
Touchcorp. The group has been growing fast, but its shares have
been climbing faster! It looks extremely expensive but if it can grow
anywhere near historical rates it wont look expensive.
QUALITY VALUE GROWTH
(WITH A DOSE OF HUMILITY)
QVG stands for Quality Value Growth and the Chris Prunty and
Tony Waters have been around for long enough to know that they
wont get every investment right and that humility means a great
deal when it comes to investing. As they say: Our focus is on the
hunt for the next good idea and maintaining the discipline and
humility to admit our mistakes quickly and cut the losers
Were looking for companies with proven business models
relatively early in their lifecycles. n
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BEST IDEAS 09 NOVEMBER 2017

BEST MONEY MAKING IDEAS

AS AT 08 NOVEMBER 2017
*Return includes dividends and is after brokerage

THIS LIST IS IN ALPHA ORDER.

PLEASE GO ONLINE TO CHECK OUR FULL COMPANY RESEARCH.

COMPANY ASX INDUSTRY MARKET DIVIDEND LAST RETURN WHY WE

CODE CAP YIELD PRICE % LIKE IT
$M (%) $

CABCHARGE CAB Financial 197.5 12.2 1.64 -32.3 The taxi payment and operators shares have breached the $2
services level and trade at historic lows, despite the reasonable full-
year results unveiled on August 29. While theres no doubting
Cabcharges uber-sized challenge the group is fighting back
against payments rivals and improving customer satisfaction.
Cabcharges operating cash flow remains strong and the stock
yields 10%, fully franked.

COOPER COE Oil & Gas 521.0 - 0.33 -44.9 With forecasts of a dire east coast gas shortage dominating
ENERGY the headlines, Cooper Energy is in pole position to tap firming
prices with its planned $355m Sole project in offshore
Gippsland. Funded by debt and a completed $135m rights
raising, Sole will radically transform Cooper Energy by
boosting its output and reserves four fold. While there are
attendant risks with such big projects, we believe Cooper will
have no trouble signing up hungry gas users for its output.

GALE PACIFIC GAP Manufact. 108.5 5.5 0.37 70.4 The shade cloth manufacturer produced a solid first (June)
half result, one highlight being sizeable debt reduction. Gale
has a global view, selling in markets including the US and
the Middle East. If anything, revenue performance has been
a bit weak, with record operating cash flow attributed to
tight inventory control. If top-line sales pick up, Gale has
the leverage to generate big profit growth.

INGENIA INA Property 553.3 3.8 2.66 5.8 Because of its use of new technology and an innovative
COMMUNITIES funding scheme for retirees, the retirement community
specialist is a value proposition that is almost without peer.
The trust continues to be good value because its weakness
reflects the markets view that its expansion is limited. We
beg to differ. This group is in a sweet spot and trading on
a PE of 12 times and on a dividend yield of 4.5% and it
continues to justify a place on our Best Ideas.

MAYNE MYX Pharma- 954.4 - 0.64 92.4 This is a well run company which expanded quickly at the
PHARMA ceuticals top of the cycle. The shares have more than halved, which is
why we see value. The group's balance sheet is not stretched
because of capital raisings but it does have some 1.5bn
shares on issue. We think it's speculative but very cheap.

MILLENIUM MIL Services 75.5 4.8 1.65 4.1 The contract cleaning group is delivering strong earnings
SERVICES growth based on its shopping centre clients. The next stage
of evolution is a concerted push into security services, either
stand alone or through integrated (security and cleaning)
contracts. The company does not seem to have suffered from
Junes abrupt management change that saw the departure of
managing director Mark Baldwin. Millennium trades on a low
earnings multiple and is a strong dividend performer, while
the services on offer are resilient to a downturn.

10
under the radar report
BEST IDEAS 09 NOVEMBER 2017

THIS LIST IS IN ALPHA ORDER.

COMPANY PLEASE GO ONLINE TO CHECK
ASX INDUSTRY MARKET DIVIDEND OURRETURN
LAST FULL COMPANY
WHY WE RESEARCH.
CODE CAP YIELD PRICE % LIKE IT
$M (%) $

MONEY3 MNY Financial 255.5 3.4 1.65 14.2 Once well known as a payday lender, Money3 has been
services through a painful process of transforming its business to a
predominantly secured lender, focused on financing used
cars by purchasers with blemished credit histories. Money3
trades at a deep discount to the financial sector, a legacy
of past issues that have largely been resolved. We see no
reason why the group should not continue to generate strong
auto earnings, either from its direct business or brokered
operation. The stock looks cheap on a multiple of eight times
and a yield of 3.7%, fully franked.

RURALCO RHL Rural 301.0 3.5 2.88 -6.4 This is a well-diversified Australian agriculture play as a rural
Services merchandiser, orchardist, property agent and water rights
holder and trader. Despite dry conditions in WA and SA cropping
areas, management expects a similar second half result to
the first half when it reports in November. Given earnings are
normally biased to the first half, this is positive. Meanwhile,
recent share weakness means the stock is trading on an
earnings multiple of ten times and yield approaching 5%.

TOX FREE TOX Waste 499.7 3.7 2.57 16.1 From a big-picture viewpoint the waste manager is in
Services a high growth sector given population grown inevitably
means more detritus. At a corporate level the WA-based
Tox has successfully grown and diversified via a string of
acquisitions, most recently the $186m purchase of Daniels
Health. We like the stock for its mid-term prospects,
although it carries significant debt. Managements intention
to focus on its existing purchases and organic growth is
also welcome.

VILLAGE VRL Tourism & 619.2 - 3.96 -3.5 The theme park and cinema owner has been through a
ROADSHOW Leisure tough period where attendances have fallen and profits have
declined even further. Cyclone Debbie in North Queensland,
the tragedy at Dream World on the Gold Coast and poor
weather in Western Sydney have hit the bottom line hard. The
proposed sale and leaseback of Gold Coast land is under way
for about $100m to meaningfully reduce debt, which is high
relative to depressed earnings in all three main divisions. But
with FY17 operating cash flow of $130m, the earnings power
of the operating assets remains intact. Most of its businesses
should be able to return to growth in FY18, although there
are always likely to be cyclical roadbumps in any consumer
facing operations. Once the operations have been stabilised,
the stock should (literally) pay dividends again.

* We have removed Pharmaxis for Best Ideas but it remains a Spec Buy - see note on page 4.

11
under the radar report

SMALL CAPS

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companies. So what about the rest? Theyre Under the Radar.
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