Something For Nothing

This story features UNIVERSAL BIOSENSORS INC, and other companies. For more info SHARE ANALYSIS: UBI

It is indeed possible to get something from nothing. Four small-caps appear to be defying the norms of capitalism.

By Tim Boreham

These companies are trading at close to cash backing, but are the discounts justified?

“Something for nothing” is a powerful notion, implying free provision of valuable goods and services in contravention of the natural rules of capitalism.

But in small-cap land it is indeed possible to get something for nothing – or almost nothing – in the guise of companies that are trading at or close to their net cash backing.

Another capitalist lore is that if an asset is cheap, it is cheap for a reason. The aforementioned four companies have had various problems and have tested shareholder patience for years.

But when investor ennui sets in, unpopular stocks become mispriced and that’s when it’s time for the smart money to pounce.

In late March device company Universal Biosensors ((UBI)) was valued at around $25m with a cash balance of $38m; now the stock’s worth close to $80m with a $31m cash kitty.

Could these stocks be the next Universal Biosensors?

Thorn Group ((TGA))

The consumer lender and custodian of the once esteemed Radio Rentals name has been in a world of woe in recent years and has been notably affected by the pandemic.

In December 2019 the company settled a $25m class action in relation to an allegedly dubious rent-buy scheme. The company did not admit liability.

Having shut its 62 retail outlets and converted to an online model, Thorn is in an interesting position valuation wise – as evidenced by the presence of Forager Funds, Investors Mutual and global fundie ICM on the register.

Having dispensed a 7.5c special dividend last month, Thorn still has $50m of free cash compared with a market valuation of around $70m.

As of September half balance date the company had net assets of $106m, allowing for $265m of debt, mainly warehouse funding on an outstanding $290m receivables book (after bad debt provisioning).

Thorn’s collections on its written contracts are improving, while there’s further upside if new lending reverts to a more traditional run-rate.

Thorn shares have recovered strongly from their March nadir of a rock bottom 3c, but are still more than 20% off the pace for the year.

Cash Converters ((CCV))

As with Thorn Group, the pawnbroker and short term consumer lender have settled a class action, paying out $42.5m to customers disadvantaged by allegedly shoddy lending practices (the company also did not admit liability).

But Cash Converters has performed creditably during the pandemic, even if the crisis did not result in a flood of new lending applications.

CEO Sam Budiselik says lending flows are now “normalising”, but does not expect pre-pandemic levels to return for about 18 months.

The company generated a much improved net profit of $19.6m for the year to June 30 and management is “cautiously optimistic” about the current stanza.

There’s even mention of a return to dividend payments!

The market values Cash Converters at $135m, less than its net asset backing that includes $106m of cash.

Yowie ((YOW))

Trading at less than its cash backing, the US-oriented confectionery maker is in the midst of a prolonged boardroom battle which last month saw legendary (or infamous) corporate raider Nicholas Bolton elected to the board.

Bolton represents Keybridge Capital, which accounts for 25% of the register.

As at the end of September Yowie still had cash of US$7.03m, despite a US$6.1m return of capital.

At last glance, the company was valued at $9.5m.

Yowie’s sales for the quarter of US$3.26m represented a covid-affected decline of -28% year on year, but were 67% better than the June quarter as orders from retail clients flowed again despite the ongoing US pandemic.

An habitual loss maker, Yowie also recorded “encouraging” cash inflows for the quarter of US$1.37m.

The revival of Yowie – a revered Aussie brand in the 1980s based on mythical bush creatures– has been problematic to say the least. But Akubras off to the company for winning shelf space at retail giants including Walmart.

Yowie’s fate ultimately could be determined by a complex tussle for control of ownership of Keybridge Capital, spearheaded by veteran fund manager Geoff Wilson who holds 17% of the listed investment vehicle.

Pharmaxis ((PXS))

Focused on inflammatory conditions, the drug development house had several irons in the fire, but these metaphorical superheated utensils diminished with Teutonic big pharma partner Boehringer Ingelheim passing up on Pharmaxis’ diabetic retinopathy program in September.

The previous December the Germans had said ‘nein’ to Pharmaxis’s NASH (liver disease) program, so the rebuff should have been expected.

The programs entailed up to US$600m in milestones and other payments, but not to worry. That’s because in early November Pharmaxis won long-awaited US Food & Drug Administration approval for its cystic fibrosis drug Bronchitol.

Dispensed as an inhaled dry powder to improve pulmonary function, Bronchitol is already approved in Europe, Russia and here.

The decision opens the way for US distributor Chiesi to pay Pharmaxis an upfront US$7m to Pharmaxis, with a further $US3m on first commercial shipment in the first quarter of 2021.

As of June Pharmaxis had $20m of cash, so add another US$10m and that gets very close to the company’s $35m market cap.

In the meantime, Pharmaxis is deploying the funds on a phase-2 program for the difficult to treat bone marrow cancer, myelofibrosis. Above all else, the company’s fortunes hinge on the success of this trial.

While cash outflows will continue as the trial progresses, the Bronchitol business is expected to become cash flow positive from next year.

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