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Check out our investor webinar from 30 November 2022. We talked about two of the biggest dogs on ASX this year and a cool graphite play!

December 14, 2022

Lendlease, LLCV, Nuix, NXL, Talga Group, TLG

Investor Webinar

In this investor webinar we talked about two of the biggest dogs on the ASX that may be showing signs of life again … Nuix (ASX:NXL) and Lendlease (ASX:LLC).

And we talk about a very promising graphite play: Talga Group (ASX:TLG).

See transcription below.


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Check out our investor webinar from 30 November 2022. We talked about two of the biggest dogs on ASX this year and a cool graphite play! 1





Marc: Good morning on the last day of November. Stuart, we’re getting close to Christmas. Almost there.

Stuart: Yeah. Looking forward to a break, but let’s try and make some investors some money before they go on holiday.

Marc: Yeah, let’s give that a try. The market is tough, I have to say. We’ve been looking for ideas. We always do. But it’s pretty tricky at the moment. Still in a sort of a bear market, I guess. But there’s a few stocks, well, maybe not, you know, ideas for right now, but stocks that you wanna talk about that could be great turnaround stories, potentially. So, the first one is Lendlease, Stuart. Tell us about that one.

Stuart: Right. So, I went down to the pound last week and dragged out three interesting dogs which I think we can get rid of the fleas on those dogs, and actually make them look pretty good in 2023. The first of those is Lendlease, ASX: LLC. It’s been a staple of investors now for decades. Top 100 company, obviously. Let’s talk about what’s to like about Lendlease right now. Who is Lendlease, for those who came in late? A globally integrated real estate group, headquartered in Sydney. And what they do is what I call develop iconic places.

So, here in Sydney, there’s a precinct down near the harbor called Barangaroo. Lendlease got hold of the whole block, put up three massive towers called the International Towers, as well as a whole lot of other smaller buildings roundabout, and turned it into a destination that people will actually go to. And you can realize a lot of value outta the property in there.

There’s $100 billion and more in the development pipeline that Lendlease is working on right round the world on projects like Barangaroo. Current CEO is Tony Lombardo. It’s probably best remembered for Dick Dusseldorp. Dick arrived here in the early ’50s from Marc’s native country, the Netherlands. So, Marc, any company founded by a Dutchman’s gotta be good, right?

Marc: It’s gotta be great, just like Pitt Street Research and “Stocks Down Under.” Gotta be great.

Stuart: Right, right, right, right. So, yeah, we wrote about it last September 2021. So, probably do an update on this one, but I’m getting pretty excited at what I see right now. Now, that chart looks terrible, I have to admit. This stock just keeps going lower and lower. It crossed back below its Corona crash lows some months ago, and has just kept going south. So, what’s going on? Let’s look at why the dogs are barking in this one.

I reckon it’s a combination of four factors. First of all, COVID-19. That was not good for the property sector. Buildings kept going up, but you kept on getting interrupted by lockdowns, whether you could actually have guys working on-site, other issues. Once we got through COVID, we went into a rising interest rate environment. It’s always bad for the property sector. So, I think people don’t want to get involved in anything property-focused, be it REITs or other stuff, until they know that there’s a bit of stability on interest rates.

When you look at the earnings, they weren’t great for FY22, a mere 4% return on equity. Now, don’t get freaked out by the number. It should be a bit higher than that, but not double digits, because we’re talking about a large amount of capital that sits within Lendlease, which represent the property funds they’ve got.

I’d also say the company’s gone a bit woke. And you know what they say, “Go woke, go broke.” But, it’s the first three factors that I’d really watch out for, and in particular, the interest rate one. Once you see that stabilizing, Lendlease has gone to ridiculously low prices right now, and can rerate from here, I think.

Marc: Right. Quick question, Stu. So, apart from your personal opinion about being woke, how does a company that gets a bit too woke perform worse than otherwise?

Stuart: Well, it’s more got to do with things like corporate governance than anything else. You insist on a certain number of directors being, you know, female, or some other minority group, that sort of thing. I have noticed that companies that start being a bit more vocal about their wokieness are often the ones where the stock is going backwards, as a general rule. So, look, I don’t wanna make this the hill to die on. After all, my next car is gonna be a Tesla. But I’m saying it’s always an indication that possibly the company’s taking its eye off the ball in terms of driving shareholder value.

So, let’s talk about what can go right for Lendlease. Look, the reason to like this one is just the scale at which they operate on. Anywhere in the world where there’s an iconic precinct being developed, Lendlease is in there. And they’ve got oodles of capital with which to create some really iconic destinations that can create shareholder value. Forty-four billion dollars in funds under management to deploy. Now, that’s got a long history. Dick Dusseldorp created the General Property Trust back in the ’60s in order to be able to more easily fund developments that he would do within the construction business that he and his colleagues had created. So, this is just an outgrowth of something that’s been going on for a long time. The company’s been working hard on actually getting its cost base down.

And I think we’re gonna see work in progress and global pipeline continue to improve. They actually came down a bit in the FY22 year. But we’re seeing, we actually saw that the second half of FY22 do reasonably well. Now, the giveaway is this. Five directors bought stock at the same time as soon as the window opens. That’s rare to see that sort of enthusiasm from the board level buying stock. And what’s the catalyst here? I think if we get to the first half FY23 result next February, and you’re showing a normalizing of return on investor capital, and maybe improvement on construction margins, that’s telling you that business is returning more or less to normal at Lendlease, in which case, here’s the opportunity that you can tap into.

We’ve got double-digit growth for the next couple of years on the earnings front. And yet single digit numbers on the EV/EBITDA multiple. So, I think it’s one of those stocks that traditionally investors have known how to value more or less correctly, but they’ve lost confidence in it through the last 12 months. And at the right time, this one can turn around, and really do some good for the shareholders coming in.

Marc: All right. Well, we’ll save the biggest dog for last, but I’d say the next one, Stuart, might not actually be a dog.

Stuart: This is no dog, no.

Marc: Talga.

Stuart: Talga. Talga Group is another one of those interesting battery minerals plays, which we’ve seen a lot on ASX. It’s clearly undervalued compared to the potential of the projects. But let’s just summarize what’s going on at Talga Group. This company’s foundation assets were a couple of natural graphite deposits in northern Sweden. Sweden’s a mining-friendly country. Natural graphite is graphite with a very, very high carbon content, which makes it very easy to turn into battery-grade graphite. So, what was the company’s genius move? They actually started to bolt on a couple of processing technologies. They could do things with that natural graphite. In a couple of years’ time, we’ll have Europe’s first-ever lithium-ion battery anode plant at a place called Lulea, which is up on the Gulf of Bothnia, in very northern part of Sweden.

And it’ll be supplying a market in Europe that is desperate to break away from the usual Chinese supply chains for lithium-ion battery components. It’s been about two years since we wrote about this one, so we’ll probably be doing an upgrade, but I kind of like the news flow for the next couple of years on this company from where it’s got to now. So, don’t have to tell you, this is the decade of the lithium-ion battery. Both graphite and lithium, the world’s gonna need about five times more of that stuff a decade from now than it is using at present, if current trends on investment in batteries goes the way a lot of experts are saying it’s gonna go.

Importantly, the smart money, and we’ve noticed this on several ASX-listed companies, is betting not just on the raw materials, but on processing technologies that can improve the batteries. The key is that you wanna improve energy density. More bang for the buck with every cubic inch of battery space. And you wanna be able to charge these things up faster, so that you’re not sitting around all night waiting for your car to recharge. Importantly, graphite’s gonna be an important part of the solution for electric vehicle and other rechargeable batteries. We’ll probably need less cobalt in the future, but we’re not necessarily gonna need less graphite. That’s here to stay.

So, what’s Talga got to offer? Three key technologies, and the first one of these is the most important, Talnode-C. They’ve got a way of coating the graphite onto the anode of a battery, to get much better energy density and faster charging. And that’s the key material that will come outta that plant in Northern Sweden two years from now. But there are other stuff on the boil as well, including something that will actually realize more value out of silicon. Silicon has traditionally been problematic in lithium-ion batteries, but if you can get it to work, you markedly improve the efficiency of a battery. And Talga believes that it’s got something there that can make an important difference.

So, path to potentially serious shareholder value. This is Sweden. So, you can get a lot of your power from renewable sources to run any industrial operation. The key deposit’s called Vittangi. And they’ll take the graphite from there, process it into coated anodes. And they’ll be producing about 19,500 tons of the stuff a year. The DFS that was completed last year put it at net present value, pre-tax, in excess of $1 billion on that, with maybe $3 billion in expansion options, should the capital and demand be lining up properly for Talga.

And the key thing, as I added before, it’s important because Sweden obviously sits within the EU, and the EU, like much of the Western world, is pretty keen not to be overly reliant on Chinese-dominant supply chains, which is the way we get most of our battery materials at the moment. So, you can expect a fair bit of public policy and support for this project as it gets closer to the, you know, the shovels going into the ground and to build the plant. Half a billion dollars in market cap at the moment, but there’s probably more where that came from at the, you know, once the new flow really starts to kick.

Marc: Right. So, half a million Aussie. Looking at the NPV, that’s over a billion U.S., so I’ll say $1.5 billion.

Stuart: Yeah, there’s, yeah, $1.5 billion worth of shareholder value if it works. Now, graphite technologies tend to blow hot and cold. If you’re buying one of these things when lithium and graphite are coming back in demand, and remember, graphite has been the laggard compared to lithium, then yeah, you can see this thing rerate potentially, you know, three or fourfold from where we are now.

Marc: Yeah. So, talking about graphite, Stu, just really quickly, there’s a few other stocks that we like in that space, right?

Stuart: Right. Black Rock Mining obviously have a very valuable project that’s got all the public policy support you need in Tanzania. They’re just completing their funding as we speak. And interesting, it’s been a good year for Syrah, with their Vidalia plant in Louisiana, getting some good offtake from that project. So, and even, there was some disorder in Mozambique, where the original mine was located, but they’ve managed to get through those hassles as well. So, anything graphite-based, that’s gotten fairly advanced in terms of the projects, is worth taking a look at.

Marc: All right. Yeah. And in the interest of full disclosure, we’ve got some Black Rock stock, personally, just so everyone knows.

Stuart: Right.

Marc: All right. So, yeah, we like graphite. All right, Stu, then, the dog of all dogs. Can I call it that, for 2022?

Stuart: Right. Right.

Marc: This one’s taken it on the chin, left and right, in the stomach, and it’s been really hammered down over the course of a year. Not more than that, right?

Stuart: Look, I am so glad that I’m happily married, because I would not like to be out on the single scene again. And my prospective dates ask me what stock you like, and I have to an answer, “Nuix, ASX: NXL.”

Marc: It would be only one date, then Stu?

Stuart: I think that would be it. It’d be an early night home after that. So, stick with me folks while I tell you about why Nuix is potentially worth taking a look at. So, yeah, as you can see there, the market seriously dislikes this company. This is a slippery dip, like the sort you can ride at Luna Park. Well, the good news is it seems to be bottoming out there at the right-hand side of the chart, but that’s about 80% or 90% down from the peak of early 2021, which isn’t all that long ago.

So, what is this company that everyone hates so much? Nuix is a Sydney-based developer of technologies to turn human-generated content into searchable, contextual information. A lot of stuff, data that humans generate is messy. Emails, blog posts, that sort of thing. To be able to put it into a way that someone can search and get information out of is quite a material achievement. Nuix’s technology is good enough to be used by the AFP, ASIC, a whole bunch of other spooks out there going looking for trouble, find this technology valuable. And it’s the basis of a $150 million-a-year business. And look at that, Marc. SaaS-based. Gross margins, 88%. There’s only one industry that it can rival those sorts of gross margins, and it’s the pharmaceutical industry. I dare say a lot of SaaS-based companies get pretty good margins, but I wonder if you’ve ever seen something that high?

Marc: Yeah, look, software is typically in that range, right? In the 90s. So, this is really good numbers.

Stuart: Right, right. So, underlying EBITDA at $22 million. So, in spite of everything that’s gone wrong, this company’s still making a buck. But you can get it at the moment for a mere $220 million market cap, and $46 million of that is net cash as of June 30. And as I noted before, stock is way down what it was January of last year.

They’ve got a new CEO. You would’ve seen…folks would’ve seen us talking about Infomedia, which was Jonathan Rubinsztein’s previous company. He left them last year, and he’s the new CEO at Nuix, trying to turn the fortunes of this beaten-up company around.

So, what went wrong? Couple of downgrades in April and May. And that was after a float that had been touted pretty strongly, when Macquarie took it public late 2020. CEO quit about a month after that second downgrade. Whenever you get these sort of disappointments, the financial end of the ambulance chasers show up in the form of the class actions. And the Victorian Supreme Court just consolidated two of those. So, potentially, this matter could end up in court. And ASIC are a little bit displeased as well. They’re alleging that the board misled investors. And so, this company’s walked into a few legal problems, although it’s probably more the board at the time, rather than the company itself.

What can go right? Well, new CEO gets to rebuild the credibility of this company. I’m seeing stable earnings for a start, and a beginning of return to growth. So, for a product suite as valuable as Nuix, where the stock’s been beaten down so badly, I guess because of a few missed numbers, that could be a valuable combination. So, very much worth watching for that reason.

Believe it or not, a good FY22. So, go look at the FY22 numbers. Annualized contract value didn’t come down all that much. There was less new business, but more upsell to the existing business. Now, this is remarkable. This company spends about 30% to 40% of its revenue, $57 million dollars in FY22, on R&D. So, they are seriously committed to getting the moat deeper so that they can have the most competitive position in the market they’re serving. That actually gives you some flexibility.

If you turn that down slightly, profitability looks a whole lot better. Although, you know, I always say, you know, companies should spend what they need to spend in order to make themselves competitive. No debt, $46.8 million in…well, a little bit of debt, but $46.8 million in cash. And you’ve got a new management that’s working on a turnaround. So, if you look over the FY22 earnings release, it wasn’t as bad as the beaten-up stock would suggest.

Now, what can turn this company around, truly? I’ve noticed that Jonathan Rubinsztein, on more than one occasion, has been a buyer of stock. He was in there in September buying it around 65 cents a share, which is roughly where the stock is now. But here’s the interesting part. They just had the annual general meeting. And they’re able to talk about annual contract revenue and net dollar retention going up. Now, the net dollar retention one’s interesting. It means that customers that were with the company last year are actually spending more this year, which is always a good sign.

Plus, the company’s actually signing up new customers. I think they’re beefing up their sales effort quite strongly, as well as working on next-generation products and services to go after in the next horizon of growth. Throw in the fact that the tech sector is bottoming, and Marc, take a look at those earnings numbers. If this is real, if statutory EBITDA jumps off the mere $12 million of FY22, and follows the kind of trajectory that consensus is suggesting, this company’s got some pretty good years ahead of it compared to the kind of multiple that the stock’s been placed on at the moment. EV/Revenue down close to one. Last time we saw anything that close, we were talking about zero a little while ago. This is getting close to that.

Marc: Definitely. Look, from a valuation perspective, and relate that to EBITDA growth, this one looks like a screaming buy, as you said. And so, I like these sorts of stocks, first of all. I’m just mindful that there is these legal issues hanging over the company, right? So, you’ve got two things. You’ve got the ASIC lawsuit, and you’ve got the class action, right? So, that’s really what you want to get a sense of, is what the damage could be from that, because that could, you know, put a dent in company’s earnings, right? So, if it’s $10, $20, $30 million, you know, look what happens to revenue…sorry, to the earnings. So, that’s the big unknown here, which…and it could be settled, right?

So there’s a lot of unknowns here that make me a bit cautious, and I’m always a bit mindful of not trying to catch, you know, falling knives. But yeah, looking at the chart, it seems to be bottoming. And so, the question is, are you willing to take the risk that these lawsuits are being settled at certain levels, or if they go to court, the company’s forced to pay even higher numbers? Or will the settlements be at relatively low numbers? And really, I think that’s the key for this one, because yeah, in terms of just the operations, it seems like things are going right.

Stuart: So, what I’d say to that is, inevitably, if anything’s gone wrong with the stock, there’s always a class action. And occasionally, ASIC gets involved in these things as well. We saw, for instance, in Austal, a while ago, ASB, ASIC was annoyed with something that had happened. The penalties ended up being mild for that one. It’s more reputational damage when ASIC has something to say. And for the class actions, these things really go to court. There’s some kind of settlement outta court, so that everyone makes money, the ambulance chasers, and ultimately the shareholders. They make for interesting news commentary every now and then, but they tend to be more noise than anything else, is what I would say. But not every investor will feel like that. As I say, this stock has a higher level than usual risk around it. And I think we’ve been priced accordingly, so…

Marc: Yeah. No, definitely. Look, in terms of risk-reward, you definitely, in terms of looking at the chart, let’s go back to that chart, because that looks interesting, right? It definitely looks like it’s been bottoming out. And if we let our technical analyst loose on this, he’d probably say that little jump that you see there towards the end, the green bar, it’s probably close to breakout levels.

Stuart: Right. Yeah.

Marc: So, you could argue, look, from a risk-reward point of view, there’s probably a bottom in the share price right now, but yeah, the question is how much, if, even if these class actions get settled, how much this company are they going to have to pay? So, look, that’s everyone’s own decision to make, right? It’s definitely very interesting technology to have. But yeah, it’s pretty risky at the moment.

Stuart: Right. And keep in mind as well, the tech sector in 2022 has not done anyone any favors. That’s probably bottoming as well. So, you might have some tailwinds behind you with a story like this one.

Marc: All right. Excellent. Well, Stu, thanks. So, we had two of the biggest ASX dogs, and one really cool graphite play today. Yeah. And so, I’d urge you to also have a look at the other graphite stocks we’ve written about, including Black Rock, because we’ve done quite a bit of research on that. And I think there’s an interview, Stuart, that we did with management, right? A little while ago.

Stuart: Yeah. Yeah. So, plenty of stuff to learn about graphite. 2022-’23 is the year of graphite.

Marc: And on that note, we’ll wrap it up here. Thanks, Stu.