How we generated a massive 125% from the fall and rise of 4DS Memory

June 2, 2022

4DS, 4DS Memory

4DS Memory (ASX:4DS)

We talked about 4DS Memory (ASX:4DS) in our Investor Webinar on 13 April 2022. This stock was one of Marc & Stuart’s Top Picks from 8 December 2021 to 28 April 2022 and generated a massive 125% return for us!

Check out this Investor Webinar from April (from 4.20) to see how we picked 4DS.

Full transcription below.

 

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Transcription

 

Marc: Good morning. It’s April the 13th, and it’s time for our weekly webinar. Stuart, I’m still stuck at home with my two friends, my crutches. How’s life on your end?

Stuart: Well, it’s nice to come into the office. The observation I’d make looking around is that Australia is well and truly back to normal. In terms of COVID, it’s now ancient history, and we can now operate as normal. So if it weren’t for the fact that there were natural disasters hitting the country somewhere, be it bushfires or floods or whatever, we’d be feeling great.

Marc: All right. Are you back to ordering pizza again, at home, when you don’t feel like cooking?

Stuart: No, but there’s enough people who do that on a regular basis to guarantee a pretty strong market for Domino’s, and that’s the first stock we want to lead off with this morning. You want a dependable growth franchise on ASX, you can’t really look much further than Domino’s. It’s done everyone a lot of favors since the IPO, which is more than a decade and a half ago now. What do we like about Domino’s? Great management team, great suite of products. Marc, do you like the pizza?

Marc: Actually, it’s a bit too fat for me. If you wring a slice of Domino’s pizza, you’ll see the fat dripping out of it. So it’s not my kind of thing.

Stuart: Well, turns out there are a lot of people who have less discriminant tastes than you have. I confess to being one of those. More importantly, it’s got one of the best cookie-cutter franchise models I’ve ever seen. So they open stores somewhere in the world on a fairly regular basis, and they’re going to double their store numbers by about 2033. The systems to work each store have been worked out pretty well, and the backend on the IT system in terms of the apps and so forth works pretty well as well. Importantly, they’re pioneering new markets, so they’re not just teaching Aussies or Dutchmen how to eat pizza, they’re teaching Japanese people how to do it as well.

Marc: All right.

Stuart: And that’s the problem. The big dip in the stock that you can see on the right-hand side of this chart is because of Japan. Domino’s is now a pretty significant player in the Japanese market for quick-service pizzas. And the wash-up of that is, at the end of lockdown, suddenly japan was eating less pizza than before because they were able to go out. The way the market behaved, that was like the end of the world. And I reckon it’s a dumb reason to sell a great stock like this one because, over time, Domino’s has proven to actually be able to educate whatever markets they go into, and Japan has been no exception to that.

Marc: Yeah. If you look at this chart, actually, Stew, if you zoom out, you can see that this trend line that you’re seeing there is actually a very, very long-term trend line. And it’s proven to be very supportive of the share price at any time, which you can see in the middle there. When it touches that rising trend line, it spawns right back up. And I think this one goes back about 13 years. So we’re getting close to that level there, around $70, and you’re purely looking at the long-term history of this stock. It’s a pretty interesting chart to begin with.

Stuart: Absolutely. So, yeah, got by between $70 and $75 when the stock gets down near that chart. In terms of the financials, they’ve got everything you need in order to continue a pair and growth. Fancy getting return on equity of 48%, how many companies do you reckon can achieve return on capital employed 18%? And we’re talking a doubling of store numbers and with it a more of a doubling in the EBIT over the next five years or so.

I mean, the only thing that could go wrong here is if suddenly everyone in the world got healthy all at once and started…I don’t know, converted to vegetarianism or something. I don’t see that happening anytime soon.

Marc: Is that a religion or a…vegetarianism? All right. Well…

Stuart: Not a church I would really want to join myself.

Marc: Exactly. Yeah. Let’s not even go there.

Stuart: You and I do agree on religion after all, right?

Marc: Well, on this one, yeah. I like the smell of a good steak in the morning actually. All right. Let’s move on to one of our topics, 4DS Memory specifically. So as you may remember, back in December, we put 4DS Memory on our topics list. The stock had taken a big hit in November, and we’ll go into the reasons for that, but it’s actually bounced back nicely. So looking at what happened last year in August, the company announced that its third test batch of wafers displayed some errors where malfunctioning chips were actually witnessed, too many of them on one wafer, so the so-called yield of that wafer was way below where it needed to be. And then in November, the company said, “Look, we need to go back to the drawing board for certain elements of the chip design. Not the whole thing, but certain elements.” And at the same time, the company raised capital at 5.1 cents, which is where we put it on the topics list. And then this week, Monday, the company said, “Look, we fixed these technical issues, and we’re now back on track with the manufacturing of the third test batch.” And we’ll get some more updates on that as well, a little bit on that later too.

But really what happened with 4DS Memory, well, essentially, what they said is the so-called etching process, and it’s one of the many steps in chip manufacturing. The etching process left some residue on the individual memory shells. And typically etching is used to get rid of materials on the chips that you don’t want there, right? So when you remove that unwanted material, usually you can see the circuitry exposed, and that’s where the next step puts in copper, for instance, or aluminum, so that you can get that circuitry going.

So what happened, it was residue after the etching process, which caused short-circuiting of certain cells. And what the company has done now is it has fixed what they call the mask, which is sort of a slide where you shine light through onto the wafer. This so-called mask, they’ve made some tweaks to the design which now should have resolved this issue. So what we should expect in the very short term is an update on this etching process step, that should be late April, and then the third batch of wafers should be completed in July, and then 4DS will have a look through the qualification and the testing, and we should get an update on that as well.

So that could be July, could be August, but that’s the near-term sort of news flow that we should expect. If you look at the chart, to the right there, you can see that big crash. That was November, when the company said, “Look, we’ve got serious issues, and we need to redesign it, and we’ll be delayed by six to nine months.” So share price came down. You can also see where we put it in a topics list because we figured the chip design is over something gone wrong, but it’s not binary, right? It’s not that this particular issue will make the entire technology redundant or obsolete, whatever you want to call it.

So it’s always tweaking of a certain product, and we figured the same with this one, the company will get on top of this, and sure enough, it has. And so all the way to the right there, you can see that spike in share price on Monday, and we think there’s more room to the upside. Initially, 11.50 cents, which is where you can see the orange resistance line, but hopefully, yeah, we’ll break through that, go back to about 13 or 14, and potentially…and this depends on what the company will announce later in the year, we can go back above 20 cents. So, again, a doubling of where we are now. But, for now, we’ve got a pretty decent performance since we put it on the topics list, I think something like 83%. So we’re pretty happy with that. We think there’s more room to go, but for investors that got in at that level, you know, you might want to take some profit because it’s a pretty decent run in just, you know, four or five months. And for others that are thinking, “This is a nice one to have for a little while,” we think there’s more upside, but we’ll leave that decision to you.

As always, it’s always general advice, not personal advice, so we’ll leave that decision up to you. But, for now, we’re pretty happy with that one. Then, Stuart, there’s two topics that we want to talk about as well, uranium, that we’ve talked about before, but also coal seam. Let’s start with that last one, coal seam gas.

Stuart: Coal seam gas. Now, if you’ve been watching the news anytime in the last 10 years, you will have heard about coal seam gas. It’s a little bit controversial to many people on the left. There’s a number of coal seam gas players on ASX, and I think they’re set for a good run, once people can get comfortable with some of the issues involved.

What’s coal seam gas, also called coal bed methane? Well, it’s gas in coal deposits. And it goes without saying a lot of that gas is methane, which is pretty easy to use as a power source. To get it, you just drill into the coal seams, pump the water out, and that pushes the coal below what’s called the critical desorption point, at which point the gas starts to flow out as well.

Now, why is this controversial? Because the pump water can have more salt content in it. So if you go to the country and talk about coal seam gas, you might get into some arguments with some of the local farmers who are concerned that it would worsen the solidity levels in the soil they’re trying to farm. But that’s the main element of controversy.

There’s also an issue with fracking as well, which is a dirty word in some circles. Fracking just means you use chemicals to fracture the seam so that the gas moves more freely as well.

Why do we like it? Well, we take the view that the pump water is actually treatable. Take these issues to courts that decide on environmental issues. For instance, Santos are trying to develop such a project in the New South Wales Land and Environment Court, and you can get a tick of approval.

So it’s not like you’re going in there and trying to fell 1000-year-old trees in some virgin rainforest somewhere in terms of the environmental impact of tapping coal seam gas. In an environment where the world needs more gas, wherever you go, in Europe, here on Australia’s east coast or elsewhere, this is a great transition fuel until we go 100% renewable, you know, sometime in the 2050s…well, maybe by then. So we’ve taken the view that the coal seam gas plays actually have a lot of life in them.

And if you look at the next slide, I’ve listed a few that we’ve covered in Stocks Down Under. What I wanna draw your attention to, we wrote about in September last year, was Comet Ridge. And Comet Ridge has had a great performance lately. They’ve just taken an extra stake in a field called Mahalo they have up in Queensland. And they got that stake at a bargain-basement price. And they’ve just converted their first pilot well into a regular commercial flow, so it looks like that field’s going to go ahead and the stocks are performing accordingly.

But there are others we’ve covered more recently, notably Jade Gas, earlier this month, JGH.

Marc: And interesting to mention as well, I think the interview…I hear you talking about it, the interview with Kinetiko.

Stuart: That’s right. Now, Kinetiko, I’m particularly excited about. This company has carved out about 1300 square kilometers of coal seams in the South African province of Mpumalanga, a place called Amersfoort. Marc, you’ll be pleased to know they named it after the town in Utrecht, back where you’re from.

Marc: Yep.

Stuart: So 4.5 trillion cubic feet of gas is the contingent resource there. Probably before the year is out they’ll actually be able to convert some of that contingent resource into reserves. Amazingly, in this case, the seams are so good the gas can flow without fracking, which is actually banned in South Africa at the moment.

South Africa is an important place in terms of producing gas because at the moment they get most of their power from really ancient and dirty coal-fired power stations. And they have a serious problem of load shedding. Load shedding is just blackouts, so where they can’t get enough power to run their economy. So gas would be a great alternative.

This company is a black economic empowerment partner, and remember, in South Africa, you generally need such partners to develop projects. They’ve just vended their stake into equity in KKO. So that enlarges the whole company. But the big breakthrough here was the Industrial Development Corporation of South Africa, which is a government instrumentality, will actually invest in the development of this field.

So I’ve recorded an interview with Executive Chairman Adam Sierakowski over in Perth recently. You can view that at stocksdownunder.com and get the lay of the land on, I think, one of the most underappreciated gas plays you’ll find on ASX right now.

Marc: All right. Good stuff. And we’re actually quite close to that company, right? You did an interview…I think six months ago?

Stuart: Yeah. So this is a follow-up interview. But the big breakthrough is getting the South African government to sign off on actually investing in this project. That was a big deal.

Marc: All right, excellent. And then one of our other pet sectors, I think I can call it by now, uranium, Stuart.

Stuart: Yeah. So the price of uranium has really been shooting the lights out of late. No surprises there. Suddenly, Russia’s flow of gas to Western Europe is choked off by the war in Ukraine. Countries like Germany are still relying on that in a big way. Well, you know, they’re investing heavily in LNG in that country, but it’s given another leg up to the idea of nuclear energy as a foolproof power source that’s absolutely carbon neutral.

So in an environment where the world’s running out of uranium, that’s good. And there’s the price there, it’s gone above $60 a pound, which is the level at which a lot of projects on the drawing board now are economic. So that chart there shows you in a nutshell that for years and years now the world has been using more uranium than actually comes out of the ground and then basically drawing down stockpiles of the material to the point where the big sucking sound you can hear from somewhere in Europe is, “Is the world running out of uranium?” Well, there’s a number of ASX-listed companies that are said to benefit from that with new projects they can develop.

And I’ve put a list of them here. Bannerman, Boss, Deep Yellow, Lotus, Paladin, Peninsula are a few of them. So if you kick around in Stocks Down Under, we’ve spent a lot of time in this sector because it was terribly out of favor when we first started writing about it in 2020. Things have changed a little bit, but there’s a heck of a lot more where that came from. Gotta remember that back in 2007, 2008 uranium got to $180 a pound. So when this sector booms, it really booms in a serious way.

The flag on the right there is the flag of Namibia. A lot of the developers of projects are based in Namibia, but I’m starting to see projects in other countries start to show up on ASX as well.

So, what’s changed? As I was flacking before, less gas in Europe, utilities that actually buy uranium are now starting to lock in long-term contracts, which they didn’t need before. In many parts of the world, uranium reactors are still coming online, and, of course, we’re expecting further booms in the price in the next level up.

All right. Now, one that’s crossed my radar screen recently is Devex Resources, ASX: DEV. They own about 4,700 square kilometers in the Alligator Rivers province of the Northern Territory, which many people believe will be the next big thing in the world of uranium after the Athabasca Basin in Canada. And they own the mining lease of the old Nabarlek uranium mine, which worked in the 1980s. So, ahead of a big drilling program, which will kick off in June, a lot of people were excited by that, including Chairman Tim Goyder, who many of you will recognize from his association with Chalice and with Liontown. He and two other directors were buying back in April ahead of that drilling program.

So there’s a lot of good things coming in Devex Resources. Watch out for an update in Resources Stocks Down Under very shortly.

Marc: Good stuff. All right. Well, that’s all we have time for this week. Happy investing, and tune in next week. And don’t forget to send us your questions.

Stuart: Okay. See you soon.