Judo Bank, falling inflation and CEO interviews in our investor webinar of 14 June 2023

 

Judo Bank, inflation and CEO interviews!

This week in our Investor Webinar:

• Judo Bank (ASX:JDO) is one of our favourite picks at the moment!
• US inflation keeps coming down! Good for stocks 🙂
• Stuart has been talking to several very interesting companies this week…check ’em out!

Full transcription below.

 

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Transcription

 

Marc: Good morning. It’s the 14th of June, it’s time for our weekly investor webinar. Good morning, Stuart.

Stuart: Good morning.

Marc: Anything happening? Anything interesting you’ve seen over the last day, or so?

Stuart: Oh, we’ve got so much to talk about. Every week I get to meet interesting companies. My job never has its dull moments, unless it’s some of the more boring administrative stuff that you and I are forced to do, Marc.

Marc: I thought I always did that stuff, Stuart.

Stuart: Yeah. Yeah. I try to do much as you as possible.

Marc: All right. Okay. Good stuff. Yeah, like you said, we’ve got a lot to talk about. So, inflation overnight in the U.S., those numbers came out. So, let’s look at the implications of that. Judo Bank, which is one of our longtime favorites, we had a chat with the CEO. But Stuart, you’re diving a bit more into that one. And talking about video interviews, you’ve done a whole bunch of them, so you’ll talk about a few of those later on. But let’s start with Judo Bank, Stuart.

Stuart: So, Judo Bank is a pick of ours from 2022, which I’m really excited about. Judo Bank went public in late 2021. Judo Capital is the official name, but it’s the bank you probably heard of that does lending on a relationship banking basis to small and medium-sized enterprises. The stock went public in late 2021. 2022 was not a good year to be an emerging bank on ASX. So, the stock’s well down on the IPO price. We think there’s a heck of a lot of growth in this bank that’s not being priced into the current share price.

So, let’s summarize. Who is Judo Bank? Judo Bank is the “challenger” bank in Australia from small and medium-sized enterprises. Joseph Healy, who’s pictured there on the left, he started this bank with David Hornery. They were both working at the NAB in previous life before they started this thing. And what they wanted to do was bring back good old-fashioned relationship banking, where you had a bank manager who knew your business intimately, and worked with you to work out lending solutions to help you grow your business.

Marc, believe it or not, it’s actually possible to find a relationship banker now, rather than just some anonymous official who lend on the banker’s basis of the property you own. It’s hard to believe it’s true.

Marc: We bank with CBA, business-wise, and after a year, they still aren’t able to tell us who our business banker is. So, it’s horrible.

Stuart: I tried to call up and find out, and couldn’t get through to anyone. So, I told Joseph anytime we need to borrow some money, Yo, we’re coming with you. So, the IPO was $2.10 a share. The stock went as high as $2.48, but it’s now down at a buck 18. We wrote about it last year in the magazine on the 13th of September, so you can get some background there. Or you can look at the interview, which I recorded with Joseph Healy last week, which we’ll talk about in a moment.

Let’s talk about why we like Judo Bank so much. Great niche, SMEs are just crying out for a bank that cares about them, to the point where the customers are knocking over themselves to get a loan with Judo. Judo exercises a lot of discipline. It knocks back about twice as many loan applications as it receives. It knocks back half of those. The revenue growth for this bank is huge. It’s expecting it’ll double over the next two years. Was profitable in FY22, it made a cent a share. On consensus for FY24, it’ll be about nine. That price is at a very low P/E of only about 13, way below the consensus for the financials, and way below the kind of growth rate that we are looking for. FY22, they went great. I suspect FY23, they’ll also do reasonably well.

You’ve seen David Hornery and others buying the stock on market. So, the insiders really like what they’ve managed to build in Judo Bank. What to do with this one? So, we’ve got it as part of SDU concierge. But the stock is not doing anyone any favors. It’s about the same level as it was when I was looking at it September of last year. But what I wanna remind people is this bank got to profitability after only five years. For a bank to achieve that, that’s virtually unprecedented.

You’re seeing an interest rate tightening cycle at the moment, that’s scaring people away from banks. But what I tell people is that the net interest margin is consistently above 3% for this bank. It’ll probably rerate once the tightening cycle is over. And Marc, as you and I have talked before, that’s coming sooner rather than later.

Marc: Yeah, we’ll talk about that in the next presentation, but I think we’re very close to that.

Stuart: Right. Right. Reserve Bank figures, they continue to show business loan balances growing quite strongly. This is not a bank, this is a growth stock, and a pretty rapidly growing stock at the moment. The loan book is 8 billion. It’ll get to 15 to 20 billion by the middle of the decade, and then it’ll just keep growing because it’ll still be a fraction of the total amount of business banking in Australia.

So, as one Judo Bank official said to me when I asked him, “Why’d you join Judo Bank?” He said, “It’s a small bank now, but it’s going to be a big bank.” That’s telling you something. So, can I encourage people watch our interview with Joseph Healy. Joe talks about what it was like to get started. He actually had about 87 meetings before he got someone to say yes in terms of the initial capital which got Judo Bank started. It’s knocked the lights out since it started in 2017, and Joseph talks about that success, including the risk management, which means they’re not overlending.

He acknowledges what we already knew, that the current share price is not valuing the underlying growth of the loan book. And I asked Joseph what bank he admires globally, and you might be surprised by the answer. But he thinks that in terms of the stuff that he and his colleagues do, he thinks he’s unique. So, look, do yourself a favor. Marc, you paid me the great compliment, you said this is probably the best interview we’ve ever done, and I’ve done 30 of them in this year alone. So, either all those interviews were really bad, or this one’s particularly good.

Marc: Now look, I think the way he talked about the bank and the growth potential, that’s really good, so he can present. But even more importantly, I think he really is very eloquent in expressing what sort of growth we should be expecting, and also where the disconnect with the market is. Because as he said in that interview, the market is not paying for growth at the moment, in part because of the higher interest rates, but we think that will change sooner rather than later. And I think that was probably the moment where you want to get into stock like this, Stuart.

Stuart: Right. So, watch this one carefully, if you don’t already own it.

Marc: All right. Well, talking about interest rates and inflation, the U.S. inflation numbers came out overnight. And actually, they keep coming down, which is good news for stocks. So, if you look at what happened in May, the U.S. inflation dropped to 4%. The market was expecting 4.1, so it came in a bit below expectations. But it was still at 4.9% back in April, so we actually we’re witnessing a significant drop in inflation now. You can see it on the chart on the right there, the gray line, overall inflation’s come down there to 4%.

Core inflation, which is actually what the Fed looks at more closely than the overall inflation. That core inflation excludes food and energy prices that are very volatile usually, that came down to 5.3%. That was 5.5 in April, so that’s coming down as well. And if you look at one of the key contributors to inflation over the last 12 months, that was rent especially, that’s now down below 2% on a 12-month basis. So, that’s really important to watch as well. And what’s interesting, the Fed not too long ago came up with their new sort of, you know, toy, if I can call it that, supercore inflation, so…

Stuart: Never heard of supercore, what the heck is supercore?

Marc: Yeah, they keep coming up with new stuff to look at this sort of thing. Supercore inflation is basically you take core inflation, which is just a headline number, and you take out food and energy prices. But on top of that, you also take out the housing prices because that’s been massive, right? Rents over the last sort of 18 months in the U.S. but also in Australia, have been going up like crazy.

So, in the U.S. that’s coming down now a little bit, but what you end up with supercore inflation is basically services. And these get price increases of those mainly get driven by labor and labor costs. And those have been stubbornly high, although it’s coming down a little bit. But that’s really a focus on services, and that apparently is what the Fed is looking at more closely now. There’s not an official number, they don’t publicize that. But the estimates are that it’s around 4.1%. And the key worry for the Fed is that services inflation is still too high.

Although, it’s coming down slightly, but that’s something to keep an eye out for. If you ever come across the term supercore inflation, that’s what they’re talking about.

Stuart: Look, up in the sky, it’s a bird, it’s a plane. No, it’s supercore inflation.

Marc: It’s supercore inflation. Yeah, so, it’s a new one. Well, actually they introduced it back in November, but it’s getting more attention now because we see core inflation, and the overall inflation coming down. And now, they wanna look at supercore inflation. And there is a price for everyone that can come up with the best new term. So, what’s next after supercore inflation? If you got a good idea, send it through.

Anyway, what we’re expecting now, based on what we saw in May, we expect to pause in U.S. rate hikes. Because with this trend that’s coming down, you know, right now the federal funds rate is at 5% to 5.25%, so they’ve gotta range these days. So, I think that for now, the Fed will wanna see what happens in June and potentially July. But it wouldn’t surprise me actually if we have actually seen peak in interest rates in the U.S. And the thing to remember here is that, if you look at Central Banks around the world, including in Europe and some other countries, most Central Banks have one target, which is price stability, right?

So, low or no inflation, well, limited to say 2%, 3%. But the Fed has got another target as well, which is economic growth. Which has always been a bit curious because really, if you only have interest rates to play with, you can only have one target, is what the old economic theory says. Anyway, the Fed will want to try to avoid a recession if it sees inflation coming down as it is doing now, because of those dual targets. And so, I think we may potentially have seen peak in interest rates. And the market is looking at it in the same way apparently.

Remember Stuart, we flagged the bottom of the market more than six months ago, I think in October. The chart on the left there, we spoke about this last week at the NASDAQ.

Stuart: You’re a prophet because you were right on the money at the time.

Marc: Yeah. And it made sense at that time because you’d seen so much bad news sort of incorporated in the market already. And then yeah, as the market does look through all these rate hikes, yeah, you can see some light at the end of the tunnel. So, last week we said next target for NASDAQ is probably 14,100, around that level. And this week since our last webinar, the market has gone up further. But it’s not just technology, it’s also the broader market. So, the lower chart is the S&P 500. We’re seeing the same thing there, not as fast as what we’re seeing with the NASDAQ, but still, the broader market is going up as well. And the reason is that the market is looking through a potential, maybe another rate hike in July or August.

Although we think we may have seen peak interest rates, but it’s especially looking forward to the upcoming interest rate cuts. And we could see this in the U.S. as early as at the end of this year or early next year. And so, that’s really what the market is looking at now, and that explains why the market is going up. And so, let me repeat what we said last week, don’t let the doomsayers’ talk of recession scare you off. Because even though we may get a recession, I think it will be minimal in the sense that employment is still pretty good, that we haven’t seen crashes of the housing markets. In fact, they’re recovering now. So, I think the markets, in general, are in good shape.

Also, the real economy is in fairly good shape, and the recession is probably won’t be more than a technical recession or mild recession. And I think, again, you know markets looking through that. So, we’re actually pretty bullish on the market in general, Stuart. And if you look at that NASDAQ chart, one of our most recent concierge picks was an international stock for the first time listed on a NASDAQ, and in Europe, we won’t say which one because you’ll need to get a free trial to find out. But that one is doing quite well as well on the back of this expectation that we will likely see interest rates coming down in the U.S. probably in the next six to nine months.

Stuart: Yeah, take us back. It’s great.

Marc: All righty. Stu, last topic for today is the interviews you’ve been doing over the last, well, week actually. You’ve done three, talk us through what happened there.

Stuart: Yeah. So, I’m doing much more interviews now, and I love interviewing companies, particularly the ones that I don’t know so well. Because I always learn something, and we can come up with some really interesting opportunities that could potentially shoot the lights out in the next little while. Let me talk to you about three of them. A week ago, we talked to Wayne Heili of Peninsula Energy.

So, Wayne is based in Casper, Wyoming, in the southern part of that American state. And he runs the Lance Uranium Projects, three individual uranium deposits in the eastern part of Wyoming. He’s just about to start production in the next few weeks from Lance. The timing is perfect, uranium’s holding well up in the mid-50s a pound. And we talk in the interview about how Wayne thinks he can expand Lance to a much bigger operation sooner rather than later given the market demand. And he’s [inaudible 00:14:00.034] exposure to a rising uranium price, so launching at the perfect time.

What I learned from Wayne, and this was news to me, you do a poll now of a representative sample of U.S. citizens, and the vast majority, like, we’re talking more than 70%, now favor nuclear power. Because the one thing you get with nuclear power is just about no carbon in the footprint, and very cheap electricity once the industry can move down the learning curve. So, Wayne’s a true believer, he’s been in the uranium industry his entire working life. So, a great resource to understand uranium, but more importantly to look at Peninsula Energy in that interview. So, check it out at stocksdownunder.com/videos.

The next one is PolyNovo, recorded a few days ago, with David Williams, their chairman, great friend of our firm. David’s been with PolyNovo since it was a small company, it’s now a billion-dollar company, and growing very strongly with its NovoSorb products. The first NovoSorb product for burns, specifically was FDA approved in 2015. Second one for wound care, generally in 2022. Sales are now shooting the lights out, they just got their first $7 million month. And every month sales kick up a little bit more active clinical sites, more uses for the product, and David spends a lot of time talking about that, and in particular, growing outside the United States.

So, as part of this general tech rebound, I think PolyNovo ought to be on everyone’s radar screen. We’ve spelled it wrongly there, I’ve said PonoNovo. PolyNovo, PNV is the code.

Marc: I have to ask this Stuart, but is David potentially, does he have a side gig around Christmas time, or not?

Stuart: As a Santa Claus. Well, yeah, I think he’s gonna deliver a big Christmas present in the form of much high PolyNovo share price, I gotta tell you.

Marc: All right, well, then I’ll put PolyNovo on my wishlist.

Stuart: And finally, Azure Minerals. Take a look at the chart for Azure, Marc. This stock jumped 40% in the few days after we published this interview. I won’t allow Stocks Down Under necessarily to take credit for this, but you can find the background for that jump by looking at the interview I did with Tony Rovira, who’s their CEO.

Tony discovered Cosmos, the nickel deposit that was a company maker for Jubilee Mines, a long time ago. And this guy’s a discoverer. He and his team discovered the Andover nickel-copper-cobalt deposit in the west Pilbara. They got the original project from Mark Creasy, who if you’ve been around the resources sector, is a name well-known to everyone. Mark is a truly great discoverer of all sorts of mineral deposits.

Nothing that Mark likes better than kicking around in his Land Rover out in the field looking for minerals. So, turning into a pretty good deposit there for those metals. But they also started turning over the pegmatites, and what they’re discovering is they’re very rich in lithium. So, announcement related to that pump the share price up a lot. So, Tony was flagging in our interview that he expected good things from that work in the pegmatites, and that’s proving to be the case. So, encourage you to take a look at that.

So Marc, about more than 45 minutes’ worth of riveting viewing from my interviews, plus the Joseph Healy interview. I can give you four ideas in an hour just looking at the interviews that we’ve done at Stocks Down Under in the last week or so.

Marc: All right. Yeah, you’ve been a busy bee, Stuart. That’s good because, yeah, we learn a lot in these interviews. So, check them out at stocksdownunder.com/videos, there’s a whole lot of them, including this webinar, obviously. And with that, yeah, we’ll have to wrap it up. We won’t be here in the next two weeks, I’ll be away. So, the next webinar will be in three weeks, Stuart.

Stuart: Yes. So, enjoy your holiday, and we’ll come back very soon.

Marc: All right, see you then.

Stuart: See ya.