ASX Weekly Wrap 25/09 - 29/09

Last week was as stale and boring as they come on local markets. The XJO was void of any major company and economic data both here and abroad. This lead to a directionless market which ended up basically where it started. The XJO finished the week down 0.5 points or 0.01%. Our high was 5,710.40 on Monday and our low was 5,649.10 on Wednesday.

As you may have already guessed from the above commentary there is very little for me to be writing to you about this week. Hence I will cover off on the XJO technical, sector performance and commodities before jumping into a little tech stock I am fond of.

Sector movement basically reflects the overall market with most sectors not gaining or losing much ground. Best performers where property trusts and utilities as the market sought more defensive style investments. Health care continues to gain ground as expected. A lower AUD will drive more investors into health care as half of the sectors revenues come from overseas. The worst performers were again telecommunications, mainly due to TLS and the market’s reaction to the TPM earnings. The gold sector continues to struggle as bond yields climb and the commodity price dips.

It’s been a while since I have covered gold at length or even charted it. It’s the one asset class I cannot seem to get right the majority of the time. Maybe that’s because the dynamics behind demand and supply for it are not tangible, as in it has no real industrial use and is often used as a store of value and sought for safety in volatile markets.

As we can see above gold has come off hard of late. I put this down to the rise in 10 year US Treasury bills which have gone from 2.02% to 2.35% in the same time. Technically it looks as if gold will target the recent established up trend (green line) which coincidentally coincides with the 200dma. This target is around $1260oz. If it cannot hold that then I dare say it will test the down ward trend it broke (red line) back in July at $1,230oz. If would then need to bounce off that and reclaim the 200dma and uptrend if it wants to continue to push higher. There is a possibility it breaks all those and heads towards $1,200 and the longer term up trend (orange line). I feel it all depends on how bond yields act in the coming weeks.

Other commodities have struggled to keep their head above water for the last week with the exception of oil. Oil continues to hold the $51 barrel mark as inventories continue to get drawn down. Iron ore continued to get sold off last week but should see some relief this week as Chinese markets are closed all week. Copper looks as if it is building support around the 2.95lb level before its next move higher.

The XJO continues to grind down with lower highs and I feel it’s only a matter of time before we fall below the 5,650 level of support. To the downside 5,450 remains my target before an explosive move back towards 6,000. October is traditionally a bad month for the XJO as earnings season is digested and dividends are taken out of the market. There is also a psychological impact due to the 1987 crash occurring in October. During this time defensive sectors such as health care, utilities and property trusts should outperform. The banks usually have a decent run up in October leading into their earnings early in November.

Well that’s it for the official wrap portion of the week; short and sweet. As I mentioned earlier I have a micro-cap IT Company I wish to talk about. Remember everything concerning the below, and anything in these emails/blogs, are of a General Advice nature. They do not take into account your personal needs, goals & objectives and you should be consulting me before you look to invest.

Company: Connected IO Limited (ASX: CIO)

Last price: $0.032

Share on Issue: 527,669,352

Market Cap: $30,173,313 (fully Diluted)

Industry: Tech Hardware & Equipment

Debt: $1.5mill (convertible note)

Cash: $3.0mill (approx)

Risk: High

Investment Timeframe: 2-3 years

The Story: Connected IO Limited (ASX: CIO) and its assets were back doored into a listed gold company in December 2016. CIO is an ‘Internet of Things’ (IoT) company that creates wireless products for machine to machine (M2M) communication and connectivity (i.e. modems & routers). Their advantage are their products use the mobile network to communicate with each other and the cloud services CIO offers. They are highly customisable to the consumer and a lot cheaper than competitor’s products. Their products are suitable and can be used for drones, vending machines, smart cars, point of sale, security surveillance and digital signage amongst other things. Revenues have been growing at 50% quarter on quarter since listing (see graph below). As of 22/9 CIO announced they had grown revenues to $2mill for the third quarter in 2017, which is 135% growth on the previous quarter. They recently raised $3mill in a heavily oversubscribed raising in order to fund materials to produce their hardware. Analysts predict they will be cash flow positive as soon as Q1 2018. It is also forecast CIO will have revenues in excess of $11mill in 2018 and $27mill in 2019.

CIO have plenty of blue chip clients on board with ongoing contracts with Verizon and AT&T mobile carriers in the US. They have also done work for Burger King, Telstra, Vodafone, Coca-Cola, Sonos, Cisco etc. At the moment revenue is mostly one off upfront payments for their hardware/software products, but by introducing a cloud service, white labelling and APIs CIO will be able to build a subscription service to increase stable and recurring revenues.

An example of a CIO product/service is one of their devices gets installed into a coke vending machine. It can then track how much money the machine is making and levels of product in the machine, or if it needs to be repaired. This data can then be accessed remotely via the cloud and coke can then send out one of its contractors to fix or refill the machine on needs basis. Coke do not then have to send out someone on a regular basis to check on the machine. This cuts coke’s costs and also will help machines become more profitable. If a vending machine isn’t performing in a particular location it can then be moved in order to improve as data of sales etc are tracked and can be compared to other machines. Finally if it needs to be repaired it can be attended to as soon as coke is alerted to it rather than having to wait for one of its contractors to attend it, or for the fault to be reported. This saves lost revenue on days the machine would be out of operation. This is a very basic real life example of one of CIO’s products and services.

Share Price Catalysts:

- Increased revenue

- Becoming cash flow positive

- Higher % of recurring revenue

- New contracts

- New products

- Sale of gold assets (valued at approx $5mill)

- Institutional investment

Investment Case: To me the investment case is obvious here. With such strong blue chip clients and ongoing contracts as a foundation it seems as if CIO is building real momentum. CIO are continuously securing new orders and increasing quarterly revenue. Their product range is becoming widely acknowledged industry wide as an affordable, efficient and secure solution for M2M connectivity. Working side by side with mobile network providers helps give CIO an edge ahead of its competition. They also reside in an industry that is expected to have $US1.4trill of expenditure in it by organisations by 2021. Eventually the market will see the continued growth in revenues for CIO and it will be reflected in the share price. I feel there is a lot of value to be had in CIO at these levels.

Well that’s it for another week. I do apologise for how late the wrap has been delivered this week, but given how quiet news is and the fact we had a public holiday on Monday I didn’t feel the need to rush it. This week we have some economic data to look forward to. Australia has its retail sales and trade balance figures out for August this Thursday and the US has it employment data out Friday night.

Obviously my weekend was spent mourning the Crows grand final loss. It was not a great performance by us, but that should take nothing away from the Tigers who were simply fantastic and deserved the win. The great thing about footy is there is always next year. I then spent my Sunday moving five ton of river pebbles around the front and back yard. I am still sore today. It seems as if the warmer weather is here to stay so will be a lot more opportunity to get out and about now. It’s a bit sad footy is now over but we have an ashes series to look forward to in a little over a month. I am sure my wife will be thrilled. Hope you all have a wonderful week and stay safe. I will speak to you all soon. 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.