Ask a Fund Manager

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In Part 1 of this edition, Katana Asset Management’s co-founder Romano Sala Tenna reveals 10 key criteria ASX shares must meet before investing in them.

Katana Asset Management snapshot

The Katana Australian Equity Fund (KAEF) invests in ASX shares from small-cap to large-cap, across the full range of sectors. The fund is actively managed and long-only.

Since its inception in December 2005, the fund has out-performed the All Ordinaries Index (ASX: XAO) by 7.23% per annum, net of fees.

Over the past 12 months, as of 30 April, the fund gained 43.90%. That compares to a gain of 33.89% posted by the ASX All Ordinaries Accumulation Index (ASX: XAOA), which includes reinvested dividends.

Now, on to Part One of The Motley Fool’s interview with Katana Asset Management’s co-founder, Romano Sala Tenna:

What boxes does an ASX share need to tick before your fund will consider investing in it? In other words, what triggers a buy signal?

There are 10 key criteria that every investment decision must be able to sign off on before it will make it into the portfolio. We have a total of 154 criteria, at last count, that we can optionally look at to assist in the process. Those additional criteria are more about making sure we haven’t missed something.

Management

If we look at the 10 criteria in rough order of importance, the number 1 is management and organisational culture. That’s the most difficult to assess because there’s no objective quantitative measure. It really is just experience and the record you build up with companies over the years to understand where they sit.

Competitive advantage

Number 2, we look for a robust business model and sustainable competitive advantage… like what are the barriers to entry? Really, it’s about understanding what gives this company an advantage above others. Again, this is very subjective and qualitative as opposed to quantitative.

You expect that to some degree, as share investing is part science and part art.

Earnings growth

Number 3 to look for is the PEG [price/earnings to growth] ratio.

We’re looking for a low price to earnings growth ratio. PER [price to earnings ratio] gives you a starting point, but you really want to be looking at what your earnings growth is versus the price.

A share can be cheap, but it can have zero earnings growth. We don’t mind paying for things that have a higher P/E. It might be a P/E of 20-times and earnings growth of 15% as opposed to, say, a P/E of 10-times and earnings growth of 0%.

We look at quality, value, fundamentals, and even a technical overlay as well. We’re not just a value investor or a growth investor, or a momentum investor. We’re style agnostic. And the PEG ratio does bring some of those components together.

The big picture

The 4th thing we look for is a positive macro-outlook with tailwinds. Big thematics that can drive the whole sector.

A good example is if you were invested in iron ore in 2005-06 as you saw the Chinese thematic emerging, then it didn’t matter which iron ore share you were invested in. You made between 400% to 4,000%.

We’re seeing the same thing right now, where the biggest thematic is the decarbonisation and electrification of the grid and transportation. We’re past the tipping point on that, going mainstream on decarbonisation… For Australian investors, copper shares are a very solid way of playing the electrification thematic.

The right price

The 5th thing we look for is appropriate price action. Ideally, we want to resist the urge to purchase a stock until the price turns our way.

A great example right now we think is Origin [Origin Energy Ltd (ASX: ORG)]. ORG is a good buy. In terms of fundamentals, we think the LNG price… has a solid outlook. But investor sentiment is still very negative.

We’re ready to take a position in Origin. Now we’re waiting for the technicals to turn our way, for the general market to decide that this is a good investment as well. This may not occur for some time. For example, until the wholesale electricity price turns.

We’ve often seen cheap stocks becoming cheaper, and that’s what we’re seeing here again. We want that turn in sentiment as dictated by our technicals.

Strong balance sheet

The 6th thing we look for is a strong balance sheet. This indicates 2 things for us.

First, it gives us a strong insight into management’s personality and the risks they’re prepared to take. If they’re being reckless with the balance sheet, then the assumption is they’re not great custodians of the business on a more general level.

That’s one of the more quantitative things we can look at to see how management views the business. Are they just trying for growth to maximise their own KPIs, or are they genuinely looking at how the business is being structured for the longer term?

The second thing the balance sheet tells us is around capital flexibility. If you have a strong balance sheet, you’ve got options for M&A, you’ve got options for organic growth, you’ve got options for increasing dividends or paying specials, and you’ve got options for capital management along the lines of buybacks and other returns.

Earnings quality

The 7th thing we look for before taking a position in a company is quality of earnings.

We’re looking for consistency and certainty of earnings. We’re looking for client concentration, a large number of small clients, not a small number of large clients. We’re looking at what percentage of earnings are recurring. And we’re looking at whether the determinants are inside or outside of management control.

The iron ore price is a great example. It doesn’t matter how good the management of FMG [Fortescue Metals Group Ltd (ASX: FMG)] are, the major determinant on their share price will be the iron ore price.

Don’t get me wrong, we’re in FMG for a trade at the moment. But ideally, we want shares which have that structural growth element to them.

Free cash flow

Number 8, we look for higher operating cash flow and a high free cash flow.

Ideally, we’re looking for free cash flow – once you’ve taken out all your sustaining capex and all the things management say are one-offs and non-recurring but tend to not be one-offs and tend to be recurring.

Return on equity… and gearing levels

We then [at number 9] look for return on equity, or ROE, and also return on assets.

In this market with record low interest rates… you might have a 2-3% return on the assets, but if you gear up 300-400%, you get a return of 7-8% on your equity.

You really need to understand your actual return on the underlying assets and whether it’s leverage that’s giving you that return at a more modest level.

Liquidity

Finally, the 10th most important thing we look for in every investment we have in the portfolio is liquidity. We absolutely respect liquidity and size in terms of what that brings to the table.

It’s not to say we won’t invest in smaller companies, we certainly do. But we need a much higher safety buffer; we need a much higher potential return on capital. We’ll take smaller position sizes, and then we generally average up as opposed to average down.

Whereas we might buy the banks for a 10-15% return, for a small-cap company, it would have to be something like a 50-75% return minimum for us to be engaged in doing the hard work. These shares are like lobster pots. They’re very easy to get into and very hard to get out of.

You invest in promising ASX shares without constraint on size. Is there a minimum market cap you won’t go below?

In theory, ‘no’. 

One of the things we’re very focused on is removing what we term as artificial constraints. Artificial constraints are things that are put in place simply so we can tick a box, and people will feel happy about our portfolio.

But we might have the best company in the world that comes to market with a $35 million market cap. We can do an enormous amount of work on it, meet management numerous times and think this is a fantastic business that can grow for the next 10 years. But, if you put in place an arbitrary market capitalisation, you could get filtered out early in the process.

So, the reality is there’s no minimum limit. But it is very rare for us to invest in a company that has a market capitalisation of less than $150 million. It does happen, but it is a rarity.

How important are dividends in your investment decision?

Dividends come under our third most important investment criteria, the low PEG ratio. That criteria also reads a low PE [price to earnings] with a high sustainable dividend yield.

Really you can go down 2 paths.

You can go down the growth path, which is where you have a business that’s growing at a good clip, and it has good return on investor capital. In that case, you don’t want it paying out dividends. You want them to reinvest that money because it will compound more rapidly over time.

The flip side is that if we see something we believe has a very much above average sustainable dividend yield, say 7-9%, and preferably a little scope for growth, and we have a high level of comfort with that, then that may present an opportunity for us.

But I think more people have lost money on value traps than any other form of investing. There’s often a reason why companies have a high dividend yield. They’re either ex-growth or trying to con investors into taking a position.

There comes a point where the dividend level is too high, and rather than being attractive, it acts as a red flag.

But you can do really well buying companies with good dividend yields and perhaps a little growth to come.  Remember, 4.5% of the 10.8% that shares have returned per annum [accumulated] since records began are the result of dividends.

Tomorrow in Part 2 of our interview, Romano reveals 4 shares every ASX investor should consider adding to their portfolio.

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The Caravel Minerals Ltd (ASX: CVV) share price is moving higher in morning trade, up 1.4%.

Below we take a look at the ASX copper shares latest drill results.

What drill results did Caravel report?

Caravel’s share price is moving higher after the company reported “significantly better” assay results from its reverse circulation (RC) percussion drilling campaign than previously seen at its Dasher Deposit and nearby prospect areas.

All of the holes were drilled within the company’s Caravel Copper Project, a greenfield copper mining and processing project located in Western Australia.

Caravel reported it had completed 16 drill holes, totalling 2,634 metres of percussion drilling. It said the results showed “broad zones of mineralisation at good grade”.

According to the release, results from Dasher South indicate potential for extension of resource:

• 21CARC030 – 192-248m, 56m @ 0.34% Cu
• 21CARC031 – 54-60m, 6m @ 0.46% Cu and 66-76m, 10m @ 0.35% Cu
• 21CARC032 – 100-132m, 32m @ 0.38% Cu and 138-142, 4m @ 0.40% Cu

More drilling is expected to define the full extent of this mineralisation, with the company stating that, “Follow-up drilling is planned to investigate the extension of mineralisation further along strike to the south from the Dasher South Prospect.”

The company plans to incorporate the latest results into an updated resource estimate. This will be used to help determine the next stage for the Dasher Deposit within the current pre-feasibility study for the wider Caravel Copper Project.

Caravel share price snapshot

Caravel shareholders will have little to complain about over the past 12 months, with shares up 1,116% since this time last year. By comparison, the All Ordinaries Index (ASX: XAO) is up 27% in that same time.

Caravel and other ASX copper shares have enjoyed a welcome tailwind from soaring copper prices. Copper is currently trading for US$9,882 per tonne, up from US$5,260 per tonne at the end of May 2020.

Year-to-date the Caravel share price has continued to outperform, up 52% so far in 2021.

More reading

• Here’s why the Caravel (ASX:CVV) share price is backtracking today

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Many investors are considering adding cryptocurrency to their investment portfolios if they haven’t already. But investors shouldn’t conflate holding cryptocurrency with holding a stock. The two asset classes are very different and behave very differently.

The differences between cryptocurrency and stocks are actually a good thing. It’ll make your portfolio truly diversified. But it’s important to understand what you’re buying and how it might affect your portfolio’s risk profile and returns.

What is a stock?

A stock represents equity in a company. When you buy a share of Apple stock, for example, you’re essentially buying a tiny fraction of the company’s operations and assets. 

You are an owner of the company. You don’t have control over the operations, but you get to vote on key aspects of the company like who sits on the board of directors and how much executives get paid. You’re entitled to a portion of the assets of the company. And anytime someone buys a new iPhone or Mac, you technically earn a few fractions of a penny.

A corporation will sell stock and give up some control of the company in order to raise funds to grow the business. Early employees may receive shares of the company as compensation instead of cash because start-ups may be devoting all of their cash to growing the business. A company may make a public stock offering to raise more funds or list its stock directly on an exchange to allow early investors to sell some of their shares and cash out.

What is cryptocurrency?

Cryptocurrency is a term used for various digital currencies that rely on blockchain technology to provide a secure payment network and eliminate double-spending. Instead of relying on a central bank, cryptocurrencies use a network of computers to confirm transactions.

A cryptocurrency is issued directly by the blockchain it uses. For example, the Bitcoin (CRYPTO: BTC) blockchain will issue a certain number of coins for the network node that confirms the next block in the blockchain. Cryptocurrencies are also used to pay the fees to process transactions on the blockchain.

Similarly, Ether (CRYPTO: ETH) is the cryptocurrency associated with the Ethereum blockchain. But many crypto tokens use the Ethereum blockchain to run decentralized finance applications. A project like Uniswap (CRYPTO: UNI) uses the Ethereum blockchain to run its exchange, which means Uniswap users need to use Ether to perform transactions. So, buying Ether is a bet that the Ethereum blockchain will continue to expand in functionality as more decentralized applications gain adoption.

You could also buy tokens directly. Tokens for DeFi projects like Uniswap may be utility tokens or governance tokens.

Utility tokens like Binance Coin (CRYPTO: BNB) enable people to use a decentralized finance app. Binance, for example, uses Binance Coin to pay for transaction fees on its exchange. Users can also use Binance Coin to buy new tokens launched on its platform. Users can hold the token to get better rewards for using its debit card. And they have to use Binance Coin to pay for games and applications that run on the Binance blockchain.

Governance tokens are similar to utility tokens but add the ability to vote on the future of a blockchain project. (Uniswap is a governance token.)

Owning a utility token like Binance Coin imparts zero ownership interest of the underlying company. So, when Binance earned about $750 million in profits in the first quarter of 2021, that all went to the owners. (There are mechanisms allowing owners to share profits with token holders, but that’s at their discretion.) Governance tokens and many corporate stocks both offer voting rights, but that’s about where the similarities end.

The most important factor for diversification

Understanding what you’re buying when you buy shares of a stock or a few cryptocurrency coins or tokens is important. If you’re buying cryptocurrency to diversify your portfolio, you need to know if the investments behave similarly.

Historically, Bitcoin and the S&P 500 Index (SNPINDEX: ^GSPC) have practically no correlation. That means the direction of their value changes aren’t related. That’s good for diversification, but negative correlation — where one asset appreciates in value while the other declines in value — is usually better for managing risk.

It’s also important to note cryptocurrencies are historically much more volatile than stocks. So, when they go up in price, they go way up, and when they go down, they go way down. And since there’s no correlation between cryptocurrency prices and stock prices, that means adding cryptocurrency to your portfolio alongside stocks will increase the risk profile of your portfolio.

Owning cryptocurrency is definitively not the same as owning stock. The crypto asset class may be attractive to investors looking to take on additional risk in exchange for greater potential returns. But crypto investors should understand what they’re buying and the role it plays in their portfolio.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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• Forget bitcoin, why it might be time for gold to shine

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Allegiance Coal Ltd (ASX: AHQ) share price is shooting up in early trade today. That’s after the company announced production has started at one of its mines, with sales already in the bag.

At the time of writing, shares in the coal miner are trading for 60 cents each – up 8.18%.

Let’s take a closer look at today’s announcement and what it might mean for the Allegiance Coal share price.

Allegiance Coal’s latest update

In a statement to the ASX, Allegiance Coal advised that production has started at the Blue Seam in the New Elk coal mine in Colorado, United States.

Operations were scheduled to start 3 weeks ago but were delayed due to issues obtaining regulatory approval. The company stressed the delays were a result of COVID impacts on the regulator’s office in Colorado and not due to any material issues with the mine.

During this delay, the company was able to secure the sale of 4x 70,000 tonnes of cargo from the site to steel mills in Asia.

Allegiance did not disclose the sale price but did state it was “at fixed price levels providing a margin above free-on-board (FOB) cash costs for New Elk.

The company also said it was in discussions to sell another between 10,000-20,000 tonnes of coal to a steel mill in Europe. These sales may pique the interest of investors and affect the Allegiance share price.

Finally, Allegiance also announced Mike Madden — a longtime executive at Warrior Met Coal — would join its staff as a sales in expert in the global and US coal markets.

Allegiance share price snapshot

Over the past 12 months, the Allegiance share price has increased 54.9%. At the same time, the price of coal is at its highest price in 2 years, trading for US $102.5 a tonne. However, its share price is still 29% lower than the first trading day of 2020, before the onset of the COVID-19 pandemic.

Allegiance Coal has a market capitalisation of $153.4 million.

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• What’s with the AFT Pharmaceuticals (ASX:AFP) share price today?

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The Hotel Property Investments Ltd (ASX: HPI) share price is slightly lower this morning despite the company’s announcement regarding new pub acquisitions.

The real estate investment company is trading 0.63% lower at $3.16 after the announcement it has expanded its property portfolio.

Investments update

Hotel Property Investments shares are on the slide today despite the company’s latest update.

In a statement to the ASX this morning, Hotel Property Investments advised it has acquired six Queensland assets.

The purchase price for the properties totals $32.7 million, and comprises the following:

• Surf Air Hotel – $10.45 million – Settled May 2021;
• Commonwealth Hotel, Clermont – $3.06 million – Contracted to settle June 2021;
• Grand Hotel, Clermont – $2.78 million – Contracted to settle June 2021;
• Capella Hotel, Capella – $3.34 million – Contracted to settle June 2021;
• Commonwealth Hotel, Roma – $9.78 million – Contracted to settle June 2021; and
• White Bull Tavern, Roma – $3.25 million – Contracted to settle June 2021.

The company tapped into its existing debt facilities to fund the acquisitions.

Hotel Property Investments also stated the weighted average yield of the new acquisitions is 7.75%. The properties have been leased to hospitality and venue management group Australian Venue Company.

The lease agreement has an initial term of 20 years from the acquisition date.

Hotel Property Investment CEO Don Smith touched on the procurement, saying:

The acquisition of these assets demonstrates HPI’s strong relationship with AVC and our ability to transact efficiently to the benefit of all parties.

Hotel Property Investments share price snapshot

Over the last 12 months, Hotel Property Investment shares have travelled in circles. The company’s share price is posting a yearly gain of around 18% but is down almost 3% on year-to-date performance.

On today’s price, Hotel Property Investments commands a market capitalisation of roughly $555 million, with approximately 174 million shares outstanding.

More reading

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• Allegiance (ASX:AHQ) share price shoots 8% higher after new mine opens
• Why the AnteoTech (ASX:ADO) share price is racing higher
• The top reason Novavax could still be a huge winner in the COVID-19 vaccine market
• What’s with the AFT Pharmaceuticals (ASX:AFP) share price today?

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The Anteotech Ltd (ASX: ADO) share price is pushing higher on Monday morning.

At the time of writing, the surface chemistry company’s shares are 6% to 36.5 cents.

Why is the AnteoTech share price racing higher?

The catalyst for the rise in the AnteoTech share price on Monday has been an announcement relating to its EuGeni platform. This technology provides rapid screening and identification of COVID-19 with a simple lateral flow method using a nasal sample.

According to the release, AnteoTech plans to commence in-house manufacturing in Brisbane to enable the production capability of an additional 12 million test strips per annum. This brings it total test strip production capability now to 32 million per annum.

The company is now progressing discussions with Axxin to increase production of the EuGeni reader and is also reviewing other reader options. This is to enable rapid testing for different market segments.

Discussions with potential partners have begun, with AnteoTech expecting to provide additional updates in the near term.

AnteoTech’s CEO, Derek Thomson, commented: “Our manufacturing strategy will enable AnteoTech to produce tests inexpensively and efficiently. Implementation of lateral flow test strip manufacture inhouse will enable us to produce new products and get them into the market without lengthy technical transfer processes to third parties.This will increase our speed to market and ensure quality.”

“Our current lateral flow test strip capacity from Operon is 20 million lateral flow strips per year. Our initial investment in Brisbane will increase that capacity by an estimated 12 million lateral flow strips per year. We will increase this capability as required as EuGeni test demand across the entire range of tests we produce grows.”

“We are also excited about the prospect of leveraging new cassette assembly and packaging capability around the globe. We are moving swiftly to harness this opportunity to align with the expected increase in demand for EuGeni tests in the future,” hr concluded.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Investors absolutely, positively hate delays. But a delay is exactly what Novavax (NASDAQ: NVAX) gave them in its first-quarter update earlier this month.

Novavax originally expected to file for Emergency Use Authorization (EUA) for its COVID-19 vaccine candidate NVX-CoV2373 in the second quarter of 2021. However, it now anticipates EUA filings in the U.K., U.S., and European Union in the third quarter.

The biotech stock sank nearly 25% on the news. While Novavax’s shares have bounced back somewhat, they’re still not at their previous levels prior to the Q1 update. It’s way too early to count Novavax out, though. Here’s the top reason that the company could still be a huge winner in the COVID-19 vaccine market.

Doubling down

Novavax didn’t just report its first-quarter results on May 10. The company also announced positive data from a preclinical study evaluating a combination of NVX-CoV2373 with its experimental influenza vaccine NanoFlu.

In this preclinical study, ferrets and hamsters were given the NanoFlu/NVX-CoV2373 combo. Researchers observed influenza and COVID-19 antibody levels that were elevated two weeks after a single dose of the combo vaccine. These levels rose two weeks after a second shot.

It was a similar story with the hamsters that received the combo vaccine. The animals had elevated levels of COVID-19 antibodies that were comparable to those observed in other animals receiving the NVX-CoV2373 vaccine alone. The hamsters also had influenza antibody levels comparable to other hamsters receiving NanoFlu alone.

Some hamsters were also directly challenged with the novel coronavirus that causes COVID-19. The animals that received the NanoFlu/NVX-CoV2373 combo vaccine retained their body weight similar to both non-infected animals and those given NVX-CoV2373 alone. Researchers found little or no virus in the upper and lower respiratory tracts of the animals four days after being challenged.

A post-pandemic possibility

Sure, these results were only from a preclinical study. However, there’s a good reason to be optimistic that the combination of the two vaccines could be effective at immunizing against both flu and COVID-19.

It’s quite possible, if not probable, that annual vaccinations will be required for COVID-19. This likelihood is even greater with the emergence of multiple coronavirus variants. The scenario could be similar to what we already have with flu vaccines, which are recommended annually.

From a pragmatic viewpoint, combining flu and COVID-19 vaccines could be just the ticket for increasing vaccination rates. In the 2019-2020 flu season, 48% of American adults were vaccinated. That figure rose to 55% in the 2020-2021 flu season. However, that’s still a relatively low number. Americans would probably be even less likely to be vaccinated if they were asked to receive two different shots.

A combo flu/COVID-19 vaccine would be an answer to healthcare experts’ prayers. And Novavax could be in a good position to provide such a vaccine, one that’s both safe and effective — potentially even more effective than current flu vaccines.

Most likely to succeed?

Moderna announced plans to explore a combination flu/COVID-19 vaccine. Small biotech Vaxess Technologies partnered with Taiwan-based drugmaker Medigen Vaccine Biologics to develop a combined flu/COVID-19 vaccine that’s delivered via a patch.

Pfizer is working with partner BioNTech to develop a messenger RNA (mRNA) flu vaccine. It wouldn’t be surprising if the companies also look to combine their COVID-19 vaccine with their flu vaccine candidate.

Still, at this point, there’s a pretty good argument to be made that Novavax is the most likely to succeed in the race to develop a combo flu/COVID-19 vaccine. Both NanoFlu and NVX-CoV2373 have fared well in late-stage testing. None of the other contenders has promising flu and COVID-19 vaccines as far along in the clinical process as Novavax.

Novavax plans to advance its NanoFlu/NVX-CoV2373 combo vaccine into clinical testing later this year. If the testing goes as well as the efforts with the individual vaccines have, the biotech could be on its way to becoming a huge long-term winner.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The AFT Pharmaceuticals Ltd (ASX: AFP) share price is unmoved in early trading this morning after the company released its latest financial results.

AFT Pharmaceuticals shares finished yesterday’s trading up 1.65% to $4.30 per share.

The pharmaceutical drug manufacturer’s share price has fallen more than 3% over the past 12 months, so let’s take a closer look at the company’s trading results for the FY21 period to 31 March.

AFT Pharmaceuticals report

The Australian pharmaceuticals giant released a positive report overall on the company’s FY21 performance, despite noting several challenges it has faced this financial year.

The company’s highlight was its revenue, which reached a new record of $113.1 million for the 12-month period up to 31 March, up 7% from the $105.6 million in the prior corresponding period.

AFT Pharmaceuticals’ profit after tax was down nearly $4 million, decreasing to $7.8 million down from $12.7 million in the prior year, which the company says “benefited from a one-off gain” of $9.8 million related to the orphan drug
Pascomer.

Its Asian market revenue was also weaker, which the company blamed on the region transitioning towards purchasing higher-margin pharmaceutical products. Meanwhile, the company’s gross profit grew by 1% to $48.8 million from $48.3 million and its total assets jumped by nearly 20%, as the company sought to protect inventory amounts.

AFT Pharmaceuticals is now targeting an operating profit range of $18 million to $23 million for FY22.

AFT Pharmaceuticals management comments

AFT Pharmaceuticals chair David Flacks said there was a sense of deserved optimism around the company:

The 2021 financial year has been one of the more challenging in AFT’s history as business conditions tightened around the world in the wake of the pandemic.

Nevertheless, as we report another year of record revenue and a more than doubling in underlying earnings, we can look back on the year with a sense of achievement.

AFT Pharmaceuticals share price snapshot

Despite its slight losses this past year, the AFT Pharmaceuticals share price remains very close to its 5-year highs, and more than $1 higher than in January 2020.

AFT Pharmaceuticals shares have rocketed by 16% over the past month since the company signed a major US supply deal, but that’s against losses of 15% since 2021 began, as well as its broader 12-month decline.

More reading

• Why the AFT Pharmaceuticals (ASX:AFP) share price is in focus

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The Zip Co Ltd (ASX: Z1P) share price has started the week very strongly.

In early trade, the buy now pay later (BNPL) provider’s shares are up a sizeable 5% to $7.41.

Why is the Zip share price charging higher?

Investors have been buying Zip’s shares this morning following the release of an expansion update.

According to the release, the company plans to enter the European and Middle East markets after acquiring the remaining shares of European BNPL provider Twisto Payments and UAE-based BNPL provider Spotii. Zip had previously bought stakes in both companies.

Management notes that the transactions align with Zip’s global expansion plans and the rapidly accelerating global BNPL opportunity.

It also notes that, as demonstrated through the acquisition of QuadPay, Zip is building its playbook in successfully identifying, completing, and integrating strategic acquisitions. It believes that Twisto and Spotii are now well-positioned to leverage the benefits of this competency and the synergies of a truly global payments organisation.

In addition, Twisto and Spotii are already integrated into Zip’s global Single Merchant Interface (SMI), which provides merchants instant access to 11 countries across five continents.

Twisto Payments

Zip will purchase the remaining shares in Twisto that it does not already own for an amount of ~89 million euros (~$140 million). The completion of the acquisition is expected to occur in the fourth quarter of calendar year 2021.

The acquisition gives Zip access to 27 European Union (EU) countries. Given that the EU is the world’s second-largest ecommerce market with $1.1 trillion annual volume, this is a lucrative market to operate in.

The release explains that over 1 million customers have transacted on the Twisto platform, with an annual run-rate of $12 million revenue and $230 million total transaction value (TTV), and 14,000 merchants.

Flagship merchants in the region include Delivery Hero, Pizza Hut, Gap, New Balance, Yves Rocher and Under Armour. It also has a robust pipeline of sizable merchants thanks to a regional partnership with global fintech leader PayU.

Zip Co-founder and Chief Executive Officer Larry Diamond said: “The acquisition of Twisto shows our commitment to global growth and follows our ‘Coalition of Founders’ model, where we back strong founders with a shared vision and deep cultural alignment in our quest for global payments coverage. We are very much looking forward to adding this strategic geography to our growing footprint and fulfilling global merchant demand. We have been impressed by the Twisto team, their deep customer focus and product set and look forward to working closely with them to deliver on the opportunities we jointly have in front of us.”

Spotii

Zip will purchase the remaining shares in Spotii that it does not already own for US$16 million (~$21 million), implying an enterprise value of ~US$20 million (~$26 million). The completion of the acquisition is expected to occur in third quarter of 2021.

Management notes that the Middle East is one of the fastest-growing ecommerce regions globally, with online spend increasing at 25% annually.

Spotii was only founded in 2020 but has shown early traction with 650 merchants already integrated into the platform. This includes flagship regional brands such as Jashanmal and Danube Home. Total transaction volume has grown at an average of 90%+ month-on-month since inception.

Mr Diamond commented: “The Spotii acquisition is an important step in Zip’s global expansion and international strategy, with Ecommerce in the Middle East on a significant upward trajectory. We have been working with Spotii since our initial investment in December 2020 to broaden our understanding of the BNPL opportunity in the region and have a number of exciting global merchants we are looking forward to activating in the coming months. We also believe there is a large untapped opportunity to bring BNPL to emerging markets where cash on delivery remains a significant merchant challenge, and where the digitisation of retail accelerates.”

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The AGL Energy Limited (ASX: AGL) share price could be stuck at 17-year lows for a while on speculation that it needs to desperately raise cash to complete its much-touted demerger.

The separation of its power generation and retailing businesses is a key plank of the embattled group’s turnaround strategy.

But alas, many experts aren’t convinced management can execute without a large capital injection.

Painful capital raise for the sagging AGL share price

The ideal way to get the extra cash is to do a capital raise, but such a move is unappetising after the AGL share price lost around half its value in the past year. It lost another 0.2% this morning as it traded at $8.31 – close to it’s lowest since 2004.

What’s worse is that UBS estimated AGL will need around $600 million in new cash, reported the Australian Financial Review.

That’s no small raise as the amount would represent around 12% of AGL’s current market cap.

Why AGL needs cash

AGL will need the cash for two primary reasons, according to the experts. The first is to maintain its investment-grade credit rating for both the spin-off and parent entity.

The ability for the group to hold on to its valued credit rating, which gives it access to relatively cheaper debt, is in doubt as UBS cut its wholesale power price forecasts.

This will also affect the Origin Energy Ltd (ASX: ORG) share price, but at least Origin has exposure to rising oil prices through its LNG project.

Demergers and spin-offs are an expensive business

MST Marquee analyst Mark Samter also warned that investors are overlooking balance sheet risks for the separated AGL entities, according to the AFR.

He noted that demergers are an expensive business. The Woolworths Group Ltd (ASX: WOW) split with its alcoholic drinks division Endeavour cost it $280 million. The divorce between BHP Group Ltd (ASX: BHP) and South32 Ltd (ASX: S32) was even more expensive at US$738 million.

“Now, I am sure that their adviser is absolutely chomping at the bit to raise equity for them, and if you raise at a big enough discount with a placement, maybe you can get the institutional shareholders that are so notable by their absence on their register back,” the AFR quoted Samter.

“But as always I struggle to see how these things aren’t mutually exclusive with a valuation anywhere close to the current share price.”

Uncertainty to cap the AGL share price

What’s interesting is that Samter is willing to put his money where is mouth is. He promised to take a half-page ad to apologise if AGL successfully demerged without raising capital and the combined value of the businesses exceeded AGL’s current market cap of $5.2 billion in 12 months.

AGL is expected to provide details on the structure and timing of the demerger by June 30.

In the meantime, it’s hard to see the AGL share price making any meaningful recovery with this cloud over its head.

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