Tag: Motley Fool

ASX shares might benefit from the United States President Joe Biden’s plan to source metals for its electric vehicle (EV) industry from nations including Australia, Canada, and Brazil.

According to reporting by Reuters, Biden is turning to the US’ allied nations to source metals used in EV manufacturing, which he plans to increase during his presidency.

2 US administration officials also told Reuters the US has allocated $174 billion to EV manufacturing.

The Australian Financial Review reported that the move would help the US move away from relying on Chinese metals for its EV industry.

Deputy White House national climate adviser Ali Zaidi was reported by Reuters to have said that the US is looking to invest in supply chains that include recycling.

Let’s take a look at 3 ASX shares that could benefit from the US’ international sourcing of EV metals.

ASX electric vehicle-focused shares

Ecograf Ltd (ASX: EGR)

Ecograf is an Australian battery anode material producer. It already focuses on selling its products to EV and lithium-ion battery manufactures.

Ecograf claims its Western Australian facility is the worlds first to process purified spherical graphite outside of China.

Spherical graphite is a key component of lithium-ion batteries, which are used in EVs.

Additionally, Ecograf sources its graphite from its Epanko Graphite Project, located in Tanzania.

Ecograf is focused on making the production of spherical graphite more eco-friendly. It also works to recycle disused lithium-ion batteries.

Galaxy Resources Limited (ASX: GXY)

Galaxy Resources is an Australian lithium producer.

The company operates the Mt Cattlin Spodumene Project in Western Australia. Mt Cattlin’s products are also qualified to be used in the global lithium-ion battery chain.

Currently, most of the products of Mt Cattlin are exported to Asia.

Galaxy also has a lithium project in Canada, named James Bay. James Bay is still in development, but Galaxy already plans for its products to be used in the North American EV industry.  

Lynas Rare Earths Ltd (ASX: LYC)

Finally, Lynas Rare Earths may also benefit from the US’ spin towards internationally sourced metals.

According to Lynas, it’s the largest producer of separated rare earths outside of China. Additionally, its rare earths can already be used in EV manufacturing.

Its Mt Weld Central Lanthanide Deposit is located in Western Australia.

Currently, Lynas sends its products from Mt Weld to Malaysia to be processed. Though it’s in the process of building a new processing plant in Kalgoorlie.

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The REA Group Limited (ASX: REA) share price was a positive performer on Wednesday.

At one stage, the property listings company’s shares rose 3.5% to a record high of $165.37.

The REA Group share price ultimately ended the day 3% higher at $164.40.

Why did the REA Group push higher today?

The REA Group share price was given a boost in afternoon trade from news that the Foreign Investment Review Board (FIRB) has given the tick of approval to its acquisition of mortgage broker Mortgage Choice Limited (ASX: MOC).

According to the release, REA has received written correspondence from FIRB that the Commonwealth has no objections under the Foreign Acquisitions and Takeovers Act 1975 to the proposed acquisition of Mortgage Choice by way of a scheme of arrangement.

Though, the takeover remains subject to a number of outstanding conditions. These include approval by the Mortgage Choice shareholders at a scheme meeting scheduled for 10 June. However, this appears to be a mere formality, with the company’s directors unanimously recommending that shareholders vote in favour of the scheme.

Why is REA Group acquiring Mortgage Choice?

REA Group believes the $244 million acquisition of Mortgage Choice aligns with its financial services strategy. It notes that it will leverage REA Group’s digital expertise, high intent property seeker audience and unique data insights across a larger network.

Furthermore, management believes it provides a compelling opportunity to establish a leading mortgage broking business with increased scale. This will complement the existing Smartline broker footprint, resulting in greater national broker coverage.

Another positive is that the transaction is expected to be immediately earnings per share accretive for REA Group, with potential for future cost and revenue synergies.

REA Group’s Chief Executive Officer, Owen Wilson, commented: “The acquisition of Mortgage Choice represents an exciting opportunity for REA to create a leading broking business. It builds on our success to date, accelerating our financial services strategy while leveraging our existing strengths and capabilities.”

With the REA Group share price at a record high, the market appears to agree with Mr Wilson.

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The Future Fund is normally an institution that Australians look to for comfort and stability. After all, the $179 billion sovereign wealth fund technically belongs to all of us. 

So it might raise some alarm bells that the future fund is reportedly worried about future inflation. According to a report in the Australian Financial Review (AFR), that’s what the Future fund’s chief executive Raphael Arndt has flagged in a Senate hearing today. The Fund is reportedly hiring more than 150 extra staff to “prepare for fundamentally changed market conditions”.

Here’s some of what Mr Arndt said on this matter:

The ability to generate strong returns into the future is more complex and challenging than ever before given the low level of interest rates around the world…

Policy settings continue to support markets for the time being. But this is priced into assets and unwinding these measures will be a complicated exercise… Equally, a failure to reduce the stimulus at the appropriate time could fuel a significant increase in inflation, a risk markets are already starting to focus on.

Future Fund warns of future inflation

Inflation matters enormously in the investing world. That’s due to its potential effects on asset prices. Inflation usually brings higher interest rates with it too. This is what seems to have Mr Arndt concerned.

Higher interest rates usually result in falls in asset prices. That’s because ‘risk-free’ alternatives like government bonds pay higher interest as a result. Most investors would understandably rather have a government bond paying a 4% interest rate than an ASX share which offers a 4% dividend yield.

Since interest rates have been at near-zero levels, investors have been jumping into other asset classes in the hunt for yield. But that could (and probably will) change if rates start rising. And this represents a fundamental risk to a fund like the Future Fund, which is already close to fully invested. 

According to the AFR, the Future Fund has returned an average of 9.1% per annum over the past decade. That’s an easy beat on its 6.1% per annum target. But clearly, Mr Arndt is worried this might not continue for the next decade without some extra (and skilful) hands on deck:

To continue to be successful and to continue to be able to meet what is an increasing challenging investment mandate with interest rates at zero around the world, we needed more staff.

All ASX investors might benefit from taking these comments to heart. If interest rates start to rise, it could well provoke some substantial volatility in all financial markets. Perhaps something we should all be ready for.

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Some mid-cap ASX shares are very promising and might be good ideas to own for the long-term.

These businesses are smaller than some of the ASX’s blue chips and have growth plans.

Here are two to keep an eye on:

BWX Ltd (ASX: BWX)

BWX is Australia’s leading natural beauty business. It has a number of different brands including Sukin, Mineral Fusion, Andalou Naturals, Nourished Life and now Flora and Fauna.

Flora and Fauna is a leading online retailer that is focused on vegan, ethical and sustainable products. In FY20 that business generated $12 million of net sales and forecast to be in the range of between $16.4 million to $17.1 million for FY21. It made $10 million of net sales in FY19.

BWX plans to combine Flora and Fauna with Nourished Life to form a new direct to consumer business unit within BWX.

The mid-cap ASX share explained:

The new business unit will provide an online retail powerhouse focused on a multi-category portfolio of better-for-you, healthy and sustainable products, 80% of which are not available in mainstream retail.

A couple of months ago BWX signed a strategic partnership with Chemist Warehouse Group. It was a 5-year equity-linked deal between the two businesses. It will see the entire range of BWX products available on the Chemist Warehouse online store. It will also have an increased presence in-store for Mineral Fusion and Andalou Naturals.

BWX is expecting to grow its revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) by at least 10% in FY21.

According to Commsec, the BWX share price is valued at 29x FY22’s estimated earnings.

Dicker Data Ltd (ASX: DDR)

Dicker Data is a technology hardware, software and cloud distributor. The business says it prides itself on developing strong long-term relationships with our customers, and helping them grow.

The business distributes a wide portfolio of products from the world’s leading technology vendors, including Cisco, Citrix, Dell Technologies, Hewlett Packard Enterprise, HP, Lenovo and Microsoft.

Dicker Data was able to grow through the difficult COVID-19 FY20 year with net operating profit before tax growth of 27.7% to $81.8 million. It was able to adapt to help with remote working conditions. The company says that IT hardware, software and the internet will continue to be business critical services for today’s remote and digital workforce.

After just completing a new distribution centre, the mid-cap ASX share already has plans for an additional 18,620m2 second stage expansion for future growth. This will lead to substantial inventory growth and technology portfolio diversification to meet emerging and evolving needs of the Australian market.

Profit growth has continued into the first quarter of 2021. Revenue fell 3.5% to $447.7 million, but profit before tax rose 5.7% to $19.4 million. As a result of supply constraints and sustained demand, the gross profit margin increased to 10%, up from 9.7%.

It managed to achieve that profit growth despite a record first quarter in 2020 driven by the remote work movement as a result of COVID-19.

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The Pepper Money Ltd (ASX: PPM) share price has struggled to give the kick its investors might be looking for after a flat debut on the ASX.

Its shares opened at $2.61 on Tuesday, its first day of listing and below its initial public offering price of $2.89. Its shares have failed to push higher on Wednesday, sliding 3.26% to $2.53 at the time of writing.

What does Pepper Money do?

Pepper Money is a little bit different to your atypical big four bank. The company isn’t licensed to accept deposits, but offers a broad range of loan and credit products.

Within the highly competitive lending landscape, Pepper Money targets underserved customer segments such as non-conforming borrowers that are unable to satisfy the criteria of the Major Australia Banks. Its prospectus highlights that the non-conforming market represents approximately 12% of the existing Australian residential home loan market as at December 2020.

The company currently offers three broad categories of products. This includes mortgages predominantly for residential home loans, asset finances primarily for used cars and, loan servicing for residential mortgages and personal loans.

The prospectus revealed that Pepper Money had a market share of ~0.5% of the $2,160 billion Australian and New Zealand mortgage market, and a market share of ~5.1% of the $52 billion Australian motor vehicle and equipment finance market.

The company has a solid track recovery of growth with a respective compound annual growth rate (CAGR) for asset under management, total operating income and net profit after tax of 10%, 35% and 82% respectively, between CY2018 and CY2020.

In CY2020, the company delivered a net interest income of $352.2 million with net profit from continuing operations sitting at $106.3 million. The prospectus forecasts a flat CY21 net interest income of $356.3 million and a 13.5% increase in net profits to $120.7 million.

The Pepper Money share price falls flat

Despite Pepper Money’s unique take on growing its business and solid track record, its shares have struggled to make headway in its first two days on the ASX.

The Pepper Money share price isn’t the only recent finance IPO to fall flat, with Latitude Financial Services Group Ltd (ASX: LFS) also sliding from $2.70 on its first day of listing on 20 April to $2.41 at the time of writing.

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• Why the VEEM (ASX:VEE) share price just shot 15% to an all-time high

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If you’re wanting to invest in the small side of the Australian share market, then the three small caps listed below could be worth a closer look.

While there is certainly still a lot of work to be done, they could have very bright futures ahead of them. Here’s why they could be worth adding to your watchlist:

PlaySide Studios Limited (ASX: PLY)

PlaySide Studios is a Port Melbourne-based video game developer. It has a portfolio of 55 games across a range of categories, including self-published games based on original intellectual property and games developed in collaboration with Hollywood studios. The latter comprises titles relating to Jumanji, The Walking Dead, and Disney Pixar’s Cars. The company has also just signed a deal with Paramount for the Godfather franchise. Management estimates that PlaySide has a global market opportunity worth a total of $77.2 billion per annum.

Serko Ltd (ASX: SKO)

Another small cap share to watch is Serko. It is an online travel booking and expense management provider behind the Zeno Travel and Zeno Expense platforms. The former provides AI-powered end-to-end travel itineraries, cost control and travel policy compliance to corporate customers. Whereas the latter allows users to automate and streamline the expense administration function, identify out-of-policy expense claims, and prevent fraud. While the COVID-19 pandemic has hit the company hard, it has a very strong balance sheet and equally bright long term growth potential. This is thanks to the growing popularity of its platforms and its game-changing deal with travel giant Booking.com.

Volpara Health Technologies Ltd (ASX: VHT)

A final small cap to watch is Volpara. It is a healthcare technology company that uses artificial intelligence to assist with the early detection of breast cancer. The company achieves this by allowing users to analyse mammograms and associated patient data. They can then use this software to provide clinical decision support and practice management tools in a cost-effective way. Volpara is currently generating ~US$18.6 million (~NZ$27.9 million) in annual recurring revenues (ARR), but estimates that it has a US$750 million ARR opportunity in breast cancer screening. This gives it a significant runway for growth.

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It certainly has been an eventful year for the Nearmap Ltd (ASX: NEA) share price.

The aerial imagery technology and location data company’s shares have had a number of ups and downs.

Unfortunately, though, the downs have been dominating in recent weeks, leading to its shares trading 21% lower year to date.

Is this a buying opportunity for investors?

According to a note out of Morgan Stanley this morning, its analysts believe the recent weakness in the Nearmap share price is a buying opportunity.

The note reveals that its analysts have retained their overweight rating and $3.20 price target on the company’s shares.

Based on the current Nearmap share price of $1.81, this implies potential upside of approximately 77% over the next 12 months.

Why is Morgan Stanley remaining bullish?

Morgan Stanley notes that Nearmap’s management is confident it can deliver positive jaws in FY 2022. It is expecting to grow annual contract value (ACV), revenue, and cash receipts all quicker than its costs during the year.

This is a big positive given the company’s history of increasing costs and cash burn.

In addition to this, the broker was pleased with the extra clarity the company has provided in relation to its legal issues.

It notes that Eagleview’s patent infringement claim relates to roof-management techniques and not all elements of its product. Positively, this part of its offering accounts for less than a quarter of its US business.

Another positive that Morgan Stanley has highlighted is that the company has not experienced any material sales impacts because of the claim. This was a concern that many analysts had when the legal action was first announced.

Is anyone else positive on the Nearmap share price?

Morgan Stanley isn’t the only broker that believes the Nearmap share price can go higher from here.

While analysts at Citi currently only have a neutral rating on its shares, their price target of $2.00 implies potential upside of 10.5%.

Citi explained its view: “While Nearmap is confident that it can successfully defend against Eagleview’s allegations of patent infringement and in our view, Nearmap can still be successful in the US even if it were to lose the lawsuit, we downgrade to Neutral/High Risk as we expect the legal proceedings will likely have a negative impact on demand in the US and this uncertainty could weigh on the share price. New target price is $2.00 (-37%).”

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ASX investors have been keeping a wary eye on inflation indicators.

And for good reason.

If inflation remains at or below the Reserve Bank of Australia’s (RBA) target range of 2–3% on average, then investors can expect the official cash rate to remain at the current record low of 0.10% until 2024. Or perhaps longer.

Moreover, if inflation begins to run hot on the back of massive government spending and central bank quantitative easing (QE) programs intended to lift economies from their COVID slowdowns, then official interest rates may rise sooner.

Inflation expectations differ

Precisely when inflation and interest rates are expected to move higher depends on who you ask.

Central banks the world over are largely united in proclaiming that any sustained increase in inflation is unlikely before 2024.

The price increases we are seeing today and likely to see over the coming months, they say, are transitory. Essentially that means price rises are being driven by temporary bottlenecks in labour and materials caused by the pandemic just as demand begins to surge.

These bottlenecks can remain in place for months after economies start opening back up…temporarily driving up prices until they’re cleared.

The Australian government’s budget forecasts that the consumer price index (CPI) will come in around 2.25% by mid-2023. That figure is well within the RBA’s target range.

The RBA has a similar view, writing, “Despite the stronger outlook for output and the labour market, inflation and wages growth are expected to remain low, picking up only gradually.”

Industry commentary

Gareth Aird, head of Australian Economics at Commonwealth Bank of Australia (ASX: CBA) doesn’t believe wages growth is going to be quite that gradual.

According to Aird (quoted by Bloomberg):

If you’re trying to achieve higher wages and higher inflation, what you need is things like capacity utilisation at elevated levels, you need lots of skills shortages so that you’ve got a better chance of wages coming through. Everything looks like it’s moving in the right direction on that front.

Aird said “the forward-looking indicators of labour demand are as strong as we’ve seen them in a long, long time”. Hence, CBA’s expectations for wags and inflation “is running ahead of what the RBA is saying”.

Speaking of skills shortages in Australia, a labour crunch appears to be popping up. It is observable from the ski slopes to the beachfront coffee shops to the outback mines.

This excerpt from Bloomberg helps explain why:

Australians each year spend about A$20 billion… more abroad than international tourists do Down Under – money that’s now being spent locally as the border remains shut to keep out Covid-19. Also locked out are the around 15% of the labor supply in hospitality and food trades that are usually drawn from overseas workers.

Which ASX shares have the most to fear from higher rates?

The inflation and interest rate question really comes down to a matter of degree.

If inflation is within the RBA’s target range or even slightly above, any interest rate rises will likely remain subdued. Furthermore, this would occur without majorly impacting ASX shares.

But what if inflation begins to run hot following the past year’s unprecedented fiscal and monetary largesse? Then we could be in for some larger rate rises which will impact the ASX.

Though not all shares will feel the pain equally.

According to Wentworth Williamson fund manager James Williamson (quoted by the Australian Financial Review):

The higher-priced companies have dropped recently because you’re heading towards a world of interest rates heading off the lows. If you’re looking at a world where the cost of capital is rising, it’s terrible for these very high priced companies that don’t make a lot of money.

ASX banks shares are often pointed to as likely to do better in a world of rising rates. While ASX tech shares, more heavily dependent on future earnings, are generally expected to struggle. In particular if they are faced with a higher present cost of money.

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The Goodman Group (ASX: GMG) share price is out of form on Wednesday.

In afternoon trade, the integrated property company’s shares are down 1% to $19.32.

Why is the Goodman share price dropping?

Today’s weakness in the Goodman share price may have been driven by a broker note out of Goldman Sachs this morning.

According to the note, the broker has retained its sell rating but lifted its price target slightly to $13.31.

Based on the current Goodman share price, this implies potential downside of 31% for its shares over the next 12 months.

Why is Goldman bearish?

Goldman has been looking at the company’s valuation and particularly its Funds Management operations.

It commented: “We estimate that GMG’s current pricing values its Funds Management operations at 26% of its Mar-21 external AUM balance or 32x FY22E Management EBITDA. This compares to an average of 8% (or 20x FY22E fee-related EBITDA) for US-listed Alternative Asset Managers covered by GS. Relative to traditional fund managers and transactional evidence, GMG’s valuation premium is even more pronounced.”

And while the broker acknowledges that Logistics asset valuations remain strong, it still isn’t enough for Goldman.

“Pricing of Logistics assets remains strong (as demonstrated by recent transactions in the Australian market in particular). However, we estimate that the weighted average cap rate of both GMG’s AUM and its co-investments would need to tighten to just 2.5% (vs. 4.7% at Dec-20) in order for GMG’s current pricing (as a % of AUM) to be in line with the average price paid for Australian RE Fund Management groups in M&A transactions since 2010,” the broker said.

In light of this, it sees no reason to change its recommendations or valuation and has held firm with its sell rating.

Though, Goldman does admit that there is upside risk to its target price.

It explained: “Key upside risks to our TP and rating include: stronger investor demand for GMG-managed products than we allow for (impacting overall AUM growth rates); a more benign valuation decline than we assumed for Logistics assets globally; and stronger tenant demand for GMG’s development book than we allow for (impacting development margins, the rate of AUM growth, and overall NOI growth rates).”

Is anyone bullish?

Goldman Sachs may be bearish on the Goodman share price, but not everybody is.

Earlier this month, analysts at Citi put a buy rating and $22.10 price target on the company’s shares.

Based on the current Goodman share price, this implies potential upside of 14% over the next 12 months.

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The VEEM Ltd (ASX: VEE) share price has broken an all-time record today. At the time of writing, shares in the marine technology manufacturer are trading at $1.32 – up an incredible 14.78%.

The rise comes after the company announced the federal government has placed an order with it for $9 million worth of submarine refurbishments.

Let’s take a closer look at today’s news.

What’s affecting the VEEM share price?

In a statement to the ASX, VEEM says it has already received $3 million, and expects another $6 million, from government enterprise ASC Pty Ltd “in relation to the next full cycle docking for the Collins Class [submarine] maintenance program.”

VEEM says the contract is based on a “sophisticated scheduling approach” that takes into account uncertainties from COVID-19 and future metals prices.

The company claims this will provide more certainty to ASC and allow VEEM to better forward plan. Work will begin within the next financial year with the first deliverables due by July 2022.

The order is similar to one ASC placed with the company in March 2020 – also for $9 million. The VEEM share price increased 5.4% on that day.

Management commentary

VEEM managing director Mark Miocevich said of today’s news:

The new order from ASC is further demonstration of our reputation for precision engineering to the exacting defence standards of the Royal Australian Navy. This order will provide certainty to our planning and positively impact our profitability in the 2022 and 2023 financial years.

VEEM share price snapshot

Over the past 12 months, the VEEM share price has risen by around 217%. Unlike many other ASX companies, VEEM did not experience significant financial shock relating to the pandemic. So arguably, the increase in its share price could be attributed to genuine business growth rather than a rebound from the COVID-driven market sell-off.

While servicing the defence industry is an important segment of VEEM’s business, it is not the only one. The company’s value shot up by around 7% in March after it announced partnerships with Italian superyacht builders.

VEEM has a market capitalisation of around $168 million.

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