Friday Beers with Marc & Stuart: The one with 2 Contrarians

Friday Beers with Marc & Stuart this week:

0.28 Name that Stock
4.12 Conan the Contrarian on Appen (ASX:APX)
8.04 Good Cop, Bad Cop on Perenti Global (ASX:PRN)
13.10 Heavy Metal beer

 

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Transcription

 

Stuart: It’s Friday afternoon in Sydney, and that means it’s time for “Friday Beers with Marc & Stuart.” I’m Stuart Roberts.

Marc: Marc Kennis.

Stuart: And we’re the founders of that great investor publication, “Stocks Down Under,” and its sister publication, “Pitt Street Research.” And Marc, it’s time for Name That Stock. Okay, Marc, last week it’s fair to say your performance wasn’t spectacular in stock.

Marc: Well, it was a tie, right? But you pulled a trick on me. And you were only asking about top 200 companies.

Stuart: Top 200 companies, right.

Marc: That’s unfair.

Stuart: Okay, so I’ve left the top 200 off the list this year.

Marc: Good.

Stuart: Yeah, and I stay away from the resources sector.

Marc: All right, even better.

Stuart: So these are two picks from small-caps and emerging stocks down under that you would have encountered in our troubles.

Marc: Hope so.

Stuart: Okay, so name that stock.

Marc: Hit me.

Stuart: A $1.4 billion company. And my foundation business was plus-sized clothing.

Marc: Plus-size, yeah, for big girls.

Stuart: Right.

Marc: Or big guys.

Stuart: Right.

Marc: Or both.

Stuart: Big girls, mainly.

Marc: Right.

Stuart: And there are three words in my name.

Marc: I know which company it is, just the name just escapes me. I know what it is. So yeah, just spit it out.

Stuart: It’s City Chic Collective, CCX. We like that one. That’s a take on fashion that’s going to kill David Jones and Myra any day of the week, I think.

Marc: It’s an aha question. I knew it. Anyway, but I have got one for you then.

Stuart: [vocalization].

Marc: And this is easy. You’ll get this one straight away.

Stuart: Okay, okay.

Marc: As far as I know, this is the only company on the ASX with a Dutch CEO. Who am I?

Stuart: You’re Damstra, DTC.

Marc: No. Do they have a Dutch CEO?

Stuart: Oh, Damstra’s a Dutch name, right?

Marc: Yeah. But that’s not the question.

Stuart: Okay, MAAS Group, the MAAS family. MAAS must be it, M-A-A-S, that must be a Dutch name as well. Look, you guys [crosstalk 00:02:13.410].

Marc: Yeah, that’s a river in the Netherlands, but do they have a Dutch CEO?

Stuart: I’m pretty sure he’s from here. Like there’s the Dutch, Dutch and then there’s this.

Marc: Again, that’s not the question I asked. The question wasn’t, you know, which companies on the ASX have the Dutch-sounding name? That wasn’t the question.

Stuart: Right. The answer is BrainChip.

Marc: Yeah.

Stuart: Yay. Tell us about the definite role of BrainChip

Marc: Yeah, so Peter van der Made, he actually founded the business a long time ago that he sold to IBM a long time ago. But yeah, he set up BrainChip, basically developing a revolutionary AI technology. So we’ll hear a lot more from that company.

Stuart: And we like that company, right?

Marc: Yeah, we do. It’s on our watchlist, not yet on our topics list, but on our watchlist. So it’s actually had quite a good run recently.

Stuart: Okay.

Marc: All right, so it’s 1-0.

Stuart: Okay. Who am I? My market cap’s $1.1 billion. And I am a world leader in mapping technology. So anytime’s a…

Marc: Is it Nearmap?

Stuart: It’s Nearmap, yeah.

Marc: Woo, all right.

Stuart: We like Nearmap. Stock had a bit of a sell-off recently but it just recovered.

Marc: Yeah. All right. So, last question. So it’s 1-1, but you’ve got a…

Stuart: Here you go, sir.

Marc: Cheers. You’ve got one question to go.

Stuart: Okay.

Marc: So this company runs two of the best-known quick-serve restaurants in the world. Who am I?

Stuart: You are Collins Foods.

Marc: There you go. Ting, ting, ting

Stuart: [inaudible 00:03:52] okay, if C-franchise is in a very strong business. We like Collins Foods

Marc: Taco Bell as well. So yeah, good stuff. And again, that one is on our watch list. So, crap, I lost this week, 2 to 1.

Stuart: Drain your sorrows, have a beer.

Marc: Good job.

Stuart: All right.

Marc: All right, and now it’s time for…

Stuart: Appen has done no one any favors in the last little while, APX. World leader in training datasets for…sorry, not training datasets, but the datasets that help train artificial intelligence systems. This is half a billion-dollar-a-year business for Appen. The stock was $45 roughly in August of 2020. It’s since been as low as $8 in October. So it’s been a long slide down. It’s on Marc & Stuart’s Top Picks. So we like it a lot.

Jim: I like it a lot.

Marc: It’s been on there twice, actually. First time…

Stuart: And in each case, it’s lost a fifth of value on that big slot.

Marc: Yeah, but right now it’s sort of almost recovered to the level where we include it in our Top Picks list for the second time. So $12 and a little bit.

Stuart: Okay, so, it’s fair to say that a lot of investors out there still hate Appen because it’s gone a long way down between August 2020 and the present. Now here’s why it’s so low. I think we all know that artificial intelligence is a huge growth business and expenditure on artificial intelligence grows at about 20% or 30% a year. The downside is that the kind of projects that the world leaders in artificial intelligence will pursue changes over time. So, late 2020, Appen announced that it was…

Marc: You call that a nut?

Stuart: It’s a few other things in there as well.

Marc: Yeah, it’s been there for a while, but it looks good. All right, anyway, Appen. Keep going.

Stuart: There are some dates in there as well, I think, and some chocolate. So it’s…yeah. So, this company’s skated through the early stages of the coronavirus panic unscathed. But it discovered late in 2020 that a lot of its old projects with Facebook, and Google, and others weren’t going ahead as before. So they still had plenty of business, but they’ve been drop-offs. So they had to adjust the guidance for the calendar of 2021. They were going to grow EBITDA, depending on how you measure it, somewhere between 18% and 28% in the calendar of 2021, which is nothing to be sneezed at in anyone’s books.

Come to the half-year results, the slide continued because EBITDA was actually down. So the assumption was that the company would have to downgrade. They haven’t actually downgraded. And I think the reason is they’ve got their mojo back. They’ve changed their business. They’ve gotten a whole lot of projects they’re now working on. It used to be, the lion’s share of the business came from tagging language datasets. They’ve now diversified beyond that basic approach to being able to tag all sorts of data available for training.

Marc: Plus, they’ve always said that the second half of ’21 is where you should see an uptick in the order book as well. So hopefully, that’s coming through.

Stuart: So, we think that’s starting to happen. They’ll get through the end of calendar 2021 in one apiece. Now, from that time on, you go back to the usual, well, at least high double-digit growth that Appen is characterized with. At which point the P/E of the stock is way below that, or at least the EV-to-EBITDA multiple is below that. So we’re thinking get back to $12 without trying too hard.

Marc: Yeah, and hopefully, beyond that.

Stuart: Right. Well, all the way back to $40, potentially. We’re talking…there are not many companies that are like Appen.

Marc: No. Although I think $40 is a bit of a stretch. But yeah, even if it got back to say, as $18 to $20, I think that’s sort of where we hope it might go. And it’s fair to say we both like Appen quite a lot. So yeah, it’s one of our Top Picks list. So that’s absolutely something that the market isn’t too bullish on right now. Although it seems to be sort of based built in here. So hopefully, yeah, we can get that up [crosstalk 00:07:48.188]

Stuart: I mean, the moral is very…if a company disappoints unexpectedly at the wrong time of the year, it can kind of get punished for a long time and that’s what’s happened to Appen.

Marc: All right, good stuff. All right, Stu, so there’s a company out there that we have different opinions on.

Stuart: You mean you’re wrong.

Marc: Well, time will tell. I might be wrong. God knows I’ve been wrong before on certain stocks. But this one is one that you feel quite strongly about and I still have my reservations, and that is Perenti.

Stuart: Perenti Global, ASX: PRN.

Marc: So, you do the good cop thing on this one.

Stuart: All right, all right. So what’s Perenti doing? They’re mining services. They do both open-pit and underground mining across a range of sectors. It’s a $2 billion a year company. EBITDA of close to about $400 million. So they’re pretty significant. Now, the mining industry is on a tear. Most commodities are doing quite well. And Perenti has been doing great at signing up new projects.

They had a problem though. Recently, they flagged that the FY22 year would be weak in terms of earnings. And the issues were currency was too high, they have a labor shortage in the state of Western Australia. And that slowed them down, so they’re only going to grow an EBITDA of about 3% or 4% in the current year. You get back to pretty strong growth after that. We’re talking on consensus 13.5% growth for FY23. And that’s what makes me think, when you can get this thing on an EV-to-EBITDA multiple of just three, that’s got to be good. There was some heavy insider buying after that profit warning. So the insiders, as in the directors, are optimistic about their company’s future. And the clients are generally pretty happy with Perenti. So they get a lot of repeat business. I think this one is headed way higher than what it is right now.

Marc: All right. You want me to do the bad cop thing?

Stuart: What don’t you like about Perenti, Marc, you unenlightened person?

Marc: There’s three things I don’t like about Perenti. One is the currency effect, and then we’ll see, you know, the currency just can go suddenly either way. So we’ll see how that plays out. But that’s one.

Stuart: Okay, and it’s fair to say the Australian dollar has been recently strong lately, right?

Marc: Yeah, it came off a little bit this week with the RBA decision to move away from, you know, trying to steer the two-year, I think it was two-year modules, but anyway. So that’s one. The other thing is labor shortages with our friend, Mr. McGowan.

Stuart: Right, Comrade McGowan from Western Australia.

Marc: Yeah, Chairrman McGowan. So he is probably going to keep that state locked up for at least, you know, through a big part of the first quarter next year. So maybe February, if they’re lucky to get out. It might be a bit longer. It depends a little bit on the lobby that Qantas is basically set up to get WA to open up as well. But as you know the recent history has shown that this guy is sort of not, you know, open to…not prone to, you know, subject themselves to that sort of thing.

Stuart: And the only way to get in Western Australia at the moment is to walk across the desert, and even then, someone’s going to get you before you get to civilization.

Marc: Yeah. So the problem is WA has got great issues right now with labor, labor shortages all over, labor costs have gone up tremendously. Even if WA opens up say, February or March, it will take at least one or two months at the very minimum to get all those people in. And that’s just from within Australia. So let alone sort of outside. Obviously, these immigrants willing to work in WA. So I think first part of calendar ’22 is from that point of view is sort of wasted time. So they’ll still struggle with that, that’s one.

The other thing is they do a lot of business in Africa, right? And while we have COVID under control, more or less in Australia, in Europe, although it’s sort of spiking left and right, the U.S., so the developed world is based on the vaccine roll-out, it’s sort of under control. Africa is a big mess still. And with these mines shutting down left and right in Africa still, I suspect that Perenti will have issues through the whole of 2022 with that sort of stuff. And that’s not going to be good for the cost base, for revenues, and all of this stuff. So, nutshell, long story short, my expectation is that Perenti might have some sort of disappointment come through in the next six months while we unlock here that the rest of the business might still struggle with some of these issues I just mentioned. So that’s my take on it.

Stuart: All right, right. So effort is about half the business, you’re right. It doesn’t necessarily mean every single mine in Africa is shut. Open-pit mines have been able to, open-pit mining operations have generally been able to go ahead without too much trouble. So I actually don’t think that’s too much of an issue. The other thing is you’re talking about no unknowns. We know there’s a currency issue and we know there’s a labor shortage. I mean, you can fix that quickly just by opening the borders, if McGowan’s smart. Now, this really revolves around the intelligence of the…

Marc: Well, that’s a key thing right there, if he’s smart. Well, I think we can conclude that that’s not the case.

Stuart: Right. Okay, all right. So I won’t say you win, but…

Marc: No, we’ll see what happens.

Stuart: But, Mark McGowan, if you’re a holder of Perenti stock, you need to open the borders if you go to state right now.

Marc: Yeah. So we’re around a dollar, I think.

Stuart: It’s just under a dollar, 96 cents, at the moment.

Marc: Right. So let’s check three months from now and see where we are. All right, so what are we drinking, Stu?

Stuart: Okay, so this is a craft beer most of you probably haven’t seen. It’s called Status Quo from the Mountain Culture Brewery in Katoomba, West of Sydney. So I got this because original New South Wales has just unlocked. So Sydney-siders can travel to Katoomba and other places and go sample some of the great beers outside the metropolitan area. This is a New England Pale Ale, pretty heavy on the hops. And the alcohol is not bad, it’s 5.6%. Frankly, they could have worked a bit harder on the hops.

Marc: It’s a lot of things as well.

Stuart: It’s… What didn’t you like?

Marc: Well, when you take a sip it feels like you’re getting your sort of daily iron intake or more than that. Has a bit of a metallic taste.

Stuart: Right, okay.

Marc: That’s just the first sort of impression I get. I probably wouldn’t order this if I saw this in a bar.

Stuart: The trouble is that you can’t tell what the hop is. Like ordinarily hops have an…

Marc: Have you looked up what the hop is?

to

Stuart: No, well, no, but, you know, if it’s a piney flavor, or if it’s a fruit-ish kind of flavor, or, you know, there are grassy tones it. You can generally…

Marc: That’s a laugh, every time you talk about hops. Fruity, grassy, piney, you sound like a vegan.

Stuart: You’ll be amused by this, there’s been some dry hopping in this one as well.

Marc: Dry hopping?

Stuart: That’s a thing, dry hopping. It’s where you put the hops and lighten the process.

Marc: I’ve heard about it, yeah.

Stuart: You’ve never tried dry hopping yourself?

Marc: No.

Stuart: Anyway, in spite of all that, you don’t get any particular signature overtone on this one. So it’s beer, and it’s drinkable. You know, if I had a nice day in Katoomba, I think I’d enjoy it nicely at the end of the day.

Marc: Yeah, just do as the locals do, I think. But let’s say, you know, when I’m back in Manly, I wouldn’t order it. It’s not bad, but it tastes a bit metallic.

Stuart: All right, all right. So, Mountain, what do you call it again? The Mountain Culture Brewery in Katoomba needs to do a bit of work on that one.

Marc: Yeah, they’ve got a bit of work to do.

Stuart: All right, right. And that’s all we have time for this week at “Stocks Down Under.” Happy investing, and if you’re not a subscriber to “Stocks Down Under,” do yourself a favor, and more importantly do your portfolio a favor and subscribe to “Stocks Down Under.”