ASX Weekly Wrap 13/03 - 17/03

It was another dull week for the XJO where we failed to gain any real momentum. We finished the week up 24 points or 0.42%. Our high was 5,815 today and our low was 5,727.7 on Wednesday. In a week where the market had little direction in terms of economic and company news I suppose it was bullish we were able to finish close to our highs.

Much like last week there is very little to talk to you about from a company perspective, however we do have a few macro data points to discuss. The most obvious event of the week was the Fed meeting in the US. As was expected, and priced in, the Fed decided to lift their official cash rate by 25bps to 1.00%. For most negatively correlated assets such as bonds and gold it was a case of sell the rumour buy the fact. Bond yields dropped and Gold bounced. For most of the proceeding two weeks yields had rallied and gold had fallen. This may have been because Janet Yellen stated they expected to increase rates 3 times this year and 3 in 2018. She had previously signaled 3-4 times for 2017, so obviously the market was adjusting for that. Regardless the 10 year bond yields now sit at 2.52% and do look as if they will breakout to 3.00% by the end of the year.

Domestically we had the NAB raise their variable home loan rate by 25bps just a few days after finally get on board with the rest of the market and stating they didn’t expect any more rate cuts this year by the RBA. This is why I had been bullish the banks since mid way through last year. Even though we have not had a rate increase domestically the US is forcing internationally credit pricing up. This is putting more pressure on the banks domestically as they only source about 30% of credit from Australia; the rest is sourced overseas. This puts pressure on their margins and hence NAB blinked first and increased their rate independent of the RBA. This will help increase their margins, revenue and earnings. Will be interesting to see if any of the other banks follow.

China had their usual monthly data dump yesterday with Retail, Industrial production and Fixed Asset Investment numbers released. Overall they were bullish with Industrial Output increasing 6.3% vs 6.2% forecast, Fixed Asset Investment increasing 8.9% vs 8.2% and Retail grew 9.5% vs 10.9% expected. Obviously the retail figure was disappointing, but believe is a result on tighter restrictions on property investment and less government spending on cars. However naturally their numbers as a percentage will continue to get smaller as China’s economy grows and these sectors increase. It’s a lot easier to post an increase of 10% on $100billion than it is on $1trillion. This is similar to their GDP. It’s a lot easier to grow a $3trillion economy at 10-12% as it did during the mid 2000s than it is a $11trillion economy which they stand at now, hence we see a growth rate of 6.5%. Its deceiving because the economy is actually adding more value than it was before but its just a smaller percentage. At $3trillion and 12% the economy is adding $360bill value but at $11trill and 6.5% its adding $715bill. The Chinese economy still looks in a very healthy state based on those figures and still supports the notion that growth is accelerating again.

Domestically the only significant news to see come out of the market was our jobs figures for February and they did disappoint. The headline figure saw the unemployment rate jump to 5.9%, from 5.7%, as we lost 6,400 jobs overall, missing the +16,500 increase expected. Full time jobs added 27,100 whilst part time lost 33,500, which I suppose is slightly positive. The participation rate stayed steady at 64.6%. The jobs figures are slightly concerning and are really the only economic figure that disappointing us locally. Obviously companies have not yet got the confidence to dive back into the jobs market and expand business’ even though the economy is improving. It may take longer than expected for the slack in the labor market to be soaked up. As expected wages grew at the slowest rate on record only increasing 1.87% on an annual basis. Without pressure on the labor market wages wont rise as cheaper labor can be found. As we are seeing in the US they are almost at full employment, hence this is allowing wages to rise at a more rapid rate.

That’s it for economic data here and abroad for the week. I just wanted to quickly chat about the situation with ANZ Share Investing (the old E*TRADE) and what has developed there over the last week or so. Most of you have an account, through me, with ANZ Share Investing and its been revealed that the ANZ has sold, or will sell, this business to CMC Markets by April 2018. What does this mean for you and your accounts? At this point nothing, its business as usual. I have been advised nothing will change in the immediate future. I don’t think ANZ/CMC actually know themselves as they are still structuring how it will work. We do know it should remain ANZ branded and that CMC will take over the back office and most probably the platform. Eventually I can see you, as clients, having to sign some paperwork to agree to CMC’s terms and conditions and to establish an account with them. Overall it will probably be a beneficial move as ANZ’s platform has been deteriorating for some time and they were not willing to spend money on it knowing it will be eventually sold. CMC’s platform itself is very good and I know several advisers who use it. It should mean an improvement on the website that most of you use to log in and check portfolio’s and also more services such as International shares. At this point that’s all I really know and I will inform you all more when I am made aware of the exact changes.

Commodities have had a positive week with most rising. Iron Ore in particular bounced off those $85 lows and jumped back above $92. This was on the back of steel prices hitting 3 year highs in China. Oil also found some support and jumped back to the high $48s from the low $47s and even Gold jumped from the recent low of $1,197 to roughly trade around $1,226. Finally copper bounced from lows of $2.56 to finish the week around $2.67 per pound. Most of this was on the back of a lower USD and more optimism out of China. As I have stated before I am very bullish on copper moving forward and will continue to search the market for value in this area.

Technically the market is still searching and trying to close above that 5,800 level, but has not found the legs to do so as of yet. It gave it a red hot crack today but fell a mere point shy of closing above it. Resources did most of the lifting this week as BHP, RIO and FMG all climbed off their lows. Banks put a drag on the market, whilst the Industrials and Retail sectors performed better. The range for the week was quiet tight and its almost if the market is waiting for something. I thought it was the Fed move and we would be released higher after that but thus far its yet to be seen. The charts remain bullsih for the XJO as we remain in an up trend defined by that green line. We also may have a mini breakout on our hands as the market has broken out of that ascending triangle defined by the blue line. A close above 5,833 (black line) will signal a larger trend breakout and a strong move to 6,000. Looks as if we will have to wait another few days for this at least.

Cannabis stocks continued their recent run with some spectacular results. AC8 +208%, BOT +36%, CPH +213%, ESE +37%, MDC +23%, MMJ +66%, MXC +123%, QBL +243%, RGI +113% and ZLD +163% have all put on massive gains this week. You will get these kind of euphoric moves when new industries are established and there could be more legs in them yet, however do not chase these stocks. These types of runs do often end in tears as some digestion is needed before more mature moves can be made. At this stage I don’t think any of them are bringing in any revenue and most are still trialing their products. It’s a very high risk speculative area so one must be very cautious. I do not own any of these stock personally and don’t plan to in the near future. I will let them settle and for the charts to tell me when to jump in. There is a new Cannabis IPO due to list in April called ‘The Hydroponics Company’ or THC. This is probably the best looking Cannabis stock I have seen as its looking at $5mill in revenue in 2017 and $15mill in 2018 with a lot of operations based in North America. However the IPO was multiple times oversubscribed and extremely hard to get a hold of. It’s a 20c IPO but I’d expect it to list on the market at 2-3 times that. Subscribers should do very well for themselves.

Thus far in the speculative end we have seen some great moves this year in Lithium, Cobalt and Cannabis. This is common as speculative money moves from one hot sector to the next. It’s a matter of being able to catch on at the start of the run and recognise the trend in order to benefit from it. Predicting the next big run is near impossible. I do believe there could be some legs in the Vanadium sector in the near future. I am seeing a lot more chatter surrounding it and positivity. Vanadium, like Lithium and Cobalt, is a new age metal but at this stage mainly used in steel production. However a Vanadium Redox Battery (VRB) was developed and is starting to gain traction. It seems there are many benefits to a VRB battery vs Lithium (see table below), but I doubt it will gain any real commercial traction as most of the big money is being used to produce and improve lithium. There isn’t much Vanadium exposure on the ASX but I am keeping a close eye on it as there could be some solid moves there.

Well its been a while but this week I’d like to discuss a ‘stock in focus’ and one I haven’t really spoken to many of you about, but could have great potential.

Company: Adherium Limited (ASX: ADR)

Last price: $0.185

Share on Issue: 136,740, 313

Market Cap: $33,027,349 (fully Diluted)

Industry: Healthcare Equipment & Services

Debt: Nil

Cash: $29.5mill

Risk: High

Investment Time Frame: 2-3 years

The Story: ADR develops, manufactures and supplies digital health technologies which address sub-optimal medication use and improve health outcomes in chronic disease. Their flagship is a SmartInhaler for patients with chronic respiratory disease (ie asthma), which they have been developing for 15 years. This inhaler tracks its use, reminds patients to take the medication, it can be monitored via an app, collects medication use data and physicians can access this information remotely. The inhaler already has market approvals in US (FDA), Europe (CE), Canada, China and Australia. The inhaler, through clinical trials, has proven to reduce morbidity rate by 67%, a five-fold reduction in asthma-related hospitalisation, 61% reduction in steroid use and 45% reduction in reliever medication use. The respiratory inhaler market globally is estimated to be worth $50bill.

As you can see from the above that ADR has a very attractive and much sought after device that has applications in a very large market. They have just started sales of the device in the last two quarters and have thus far $1.6mill in revenue. They have an agreement with one of the world largest pharmaceutical companies in AstraZeneca ($78bill+ market cap) to distribute the inhaler along with AstraZeneca’s respiratory drug which is the third largest in the world and brings them in $4.4bill in revenue. This agreement was established back in July 2015 and is for a term of 10 years. It is also non-exclusive which means ADR is free to supply its products to other companies.

ADR aims to increase its revenue by obviously selling more of these inhalers, but it can then also on sell the data it collects from these inhalers to other companies, trials, research clinics etc. Hence their revenue stream can be multi pronged. The inhalers are not only limited to asthma use but other chronic diseases. ADR will target asthma ($3.6bill market in US) use first and then expand in the near future.

Management are very experienced and driven. The founder and group CEO, Garth Sutherland, started the company because of his own asthma problems. Prior to ADR he spent 20 years in tech development and commercialisation at Microsoft. The rest of the board have vast experience at a large array of multi-billion dollar pharma companies. The top 6 hold 44% of the company which include management and some large funds. The top 20 hold 83% of the company leaving only just over 23.2mill free floating stock to be traded.

So why has the stock performed so poorly? ADR listed in August 2015 at 50c and went to a high of 72c soon after. When a large amount of investor shares were released from escrow (August 2016) the owner decided to sell on market pushing the price down. There is an obvious decline in the share price that corresponds to this. Then when they had finally had finished a large substantial holder who had 8mill+ shares decided to sell down on market as well. This is what has pushed the stock price to sub 20c, but it is believed both sellers are finished. Obviously there has been some poorer sentiment towards to speculative end of the biotech/healthcare sector in the last 12 months contributing to this as well. It could also be the case investors expected sales a lot sooner than ADR have achieved.

Share Price Catalysts: The obvious one is continuing to increase sales and distribution of its inhaler, but also the company is in talks with three large pharmaceutical companies in regards to further distribution agreements to expand ADR’s reach. They also have 70 registered devices, 10 patents and 22 pending. This means if they are able to develop another device to bring to market it will further enhance earnings potential.

Investment Case: One thing should be glaringly obvious to you that makes ADR so attractive. They are basically trading at their cash backing. If you only include listed shares they are trading below that with a market cap of $25mill and cash of $29.5mill. They are likely to burn through that money over the next few years but still the next quarterly outflows are only expected to be $5.3mill. Thus this means you are almost paying nothing for the underlying business or their intellectual property.

Their revenues should continue to grow and once the market see this, and gains confidence in the company again, their share price should react. ADR have a practical and highly useful device that sits in a very large market space. It has teamed up with one of the worlds largest and most respected pharmaceutical company's to help get its product out there. The stock is not for the faint of heart as it is a high risk speculative investment. I believe it is a unique opportunity where the company is clearly being undervalued by the market.

If you thought the last few weeks were quiet wait until you see next week. Absolutely nothing of note on the economic data front. Janet Yellen is speaking on Thursday night but that’s about it. PMV and TPM release earnings and a few smaller stocks go ex-div.

It is, of course, St Patricks Day today so I dare say there will be a few pints downed tonight and over the weekend. I’ve never been one to celebrate it at any great length. I do have some Irish in me somewhere down the line though. Other than that I bought myself a new line trimmer during week that im keen to test out. The lawn edges are getting a bit out of control and need trimming. Its one of the lithium ion battery kind. Should do the job nicely. Whatever you are doing this weekend enjoy yourself and please keep safe. Will speak to you all next week. Go Crows!

heath@hlminvestments.com.au

0413 799 315

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog