What the heck happened to ASX chip stocks? Investor Webinar 12 October 2022

ASX chip stocks…what’s going on?

In this Investor Webinar from 12 October we asked the question … What the heck happened to ASX chip stocks in 2022, including BrainChip, 4DS Memory, Revasum, AudioPixels and others?

We also talked about Propel Funeral Partners (ASX:PFP) and HomeCo Daily Needs REIT (ASX:HDN).

See full transcription below.

 

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Transcription

 

Marc: Good morning. It’s the 12th of October, and it’s time for our weekly webinar. Good morning, Stuart.

Stuart: Good morning. What’s happening?

Marc: Well, we had a very choppy week last week. It seems that we’re in a bit of more quieter waters right now. Market overnight was actually mixed in the U.S. The tech was down a little bit, but the broader market was up, actually, a little bit. So it seems like we’re, might be bottoming out, hopefully, or at least becoming a bit more stable in the market. So, still very exciting times, if I can put it like that, because there’s definitely opportunities in the market right now. At least we think we see them. And all of you who subscribe to Concierge will have noticed that yesterday when we put out a new Concierge pick. So, if you don’t subscribe to Concierge yet, take out a free trial for the next three months, and see how we go with that. But there is definitely opportunities in the market. So, we’re talking about a few of them today, actually, and let’s kick it off, Stuart, with Propel Funeral Partners.

Stuart: Right. One of two companies that involved in what is euphemistically called “death services.” So, organizing funerals and cremations and burials around the country. And we wrote about it recently in in “Stocks Down Under.” Let’s have a look at why we like Propel Funeral Partners.

So, who’s Propel? A provider of funeral services. They’ve got about 140 locations around the country. And they’ve done quite well since listing. They came on the boards at $2.70 a share in 2017. The co-founders are Albin Kurti, who you can see there on the right-hand side of the screen, and Fraser Henderson. And they’re busy trying to acquire small and mostly family-owned companies in the funeral business, and integrate them into the larger company. 2022, they did about $140 million in revenue. That was a pretty strong growth year. And EBITDA was up, with a slight margin increase as well. So, an interesting growth story.

So, what’s the opportunity? Well, as I like to tell my brother-in-law, who’s in the funeral services industry, you gotta die sometime. So, the demand is fairly inelastic in that regard. But death services, traditionally owned by small family-owned businesses, focused on a specific location. There’s only Propel and Invocare that are nationwide in Australia. The opportunity, as well, is that funerals are changing. It used to be you die and there’d be a service in church and then they’d bury you. Nowadays, there’s a bit more show business in the whole thing for a lot of people. And there’s an annuity stream behind this. You can prepay your funeral. And that allows, for instance, a lot of capital to accumulate with the companies that they manage, ahead of when you’ve actually gotta deliver.

So, what’s the risk? Funerals are a deeply personal business, and you’ve gotta really execute very well. You know, if you make a mistake somewhere, the family will remember it. And importantly, people don’t wanna feel that their funeral’s been corporatized by some large companies. And the other thing I like to joke about is sometimes not enough people die. And I’ve noticed that over the years with Invocare. Occasionally, the results will come in slightly under consensus, and suddenly, the stock will get slaughtered. The funeral is for the actual stock rather than for the people that are getting buried. And so that’s your risk with Propel.

By and large, standards of living go up in Australia, so people live longer, and so that can mess around with how many people die in any one period. Propel importantly tries to keep it local. There’s a swag of some of the brands that sit underneath the Propel name. And so, for instance, if you knew Quinn Funerals, up there on the left-hand side, it stays Quinn Funerals once it becomes part of the Propel brand. And that’s important, in order to increase localization of this company, and allow it to continue to grow.

So, why we like it. Take a look at those numbers up there on the top right-hand corner. You’re talking about a reasonably strong grower over the next few years, just on the basis of the businesses they have now. But Fraser Henderson is out there talking to companies who are potentially ready to sell to Propel, so those numbers could end up being a lot higher. It’s always good to go with the strong number two in a particular market, because they’re gonna try a bit harder. And Propel, in this case, only has 7% market share, so there’s plenty of room to grow. Interestingly, started the FY23 year with a decent amount of momentum. And the cost of a funeral’s going up, at rate of inflation and slightly higher, so you’ve got some downside protection against prices being too high. The other thing is I’d like to point out is that the demographics are working in your favor. The last 30 years in Australia, the population has aged, so there’s more people getting close to needing Propel’s funerals at some point.

Marc: All right. And they acquire a lot of companies, right? Imagine just how many tombstones that will be in the CFO’s office. It’s crazy. All right. Bad joke, I know.

Stuart: Look, one of the things that I’m encouraging Propel to work on is some kind of app, so you can interact with their service as well, and I’d call it “the killer app” myself.

Marc: All right. All kidding aside, death is no laughing matter, so.

Stuart: Right. And it comes to you sometime, so it’s worth taking a look at, in terms of the resiliency of a business like that.

Marc: All right. Well, something else that seems to be almost dead on the market is chip stocks these days. So, you may remember…

Stuart: And you don’t mean Smith’s Crisps, right?

Marc: Exactly. I don’t mean those. It’s the actual semiconductor stocks. And there’s about 10 of them on the ASX, and up till about last year, some of them have done really well. But if you look at where these share prices are today, it’s, yeah, in line with the previous company, it seems like the whole sector’s dead at the moment. So, let’s have a look and see what happened there. Well, just to sum up the most obvious reasons for most of these companies, first of all, the tech wreck of ’22, well, that’s hurt all technology companies, including the chip stocks, especially the ones that are sort of still in development, that are actually pre-commercialization, because there’s some actually now in the process of commercializing, so that has affected all of the companies.

Then we’ve seen development failures. The most notable of all, I think, is 4DS Memory, that, a while back, had, again, quite some bad news. That share price has crashed, and we’ll talk about that a bit later, but that will have a hard time recovering, I think. Same for AudioPixels. It’s traded well into the twenties, mid twenties at some point. I think yesterday it was around $13. And same thing there. Development failure, and we’ll talk about that as well. Then, a complete failure to execute, with Sensera. Basically they got a couple of things wrong. They sold off one division in, track and tracing, in Germany. That wasn’t enough, because then their business in Boston, in the U.S., had some production failures, where the customer didn’t buy the product that Sensera produced, and it was basically too late to recover from the error, and now Sensera has been in process of selling the MEMS business, and it’s basically an empty shell at the moment, waiting for a new venture.

Then there’s companies that have a very long development pipeline still, development roadmap, I should say. So, that’s the case with Archer. It seems highly promising, the technology, but we think there’s a very long way to go still for that one before it can commercialize. So, in an environment where interest rates are going up, people don’t like non-profitable companies, stock like that will get impacted. And then there’s slow commercial progress. We’ve seen that for several stocks, including BlueChiip, where the problem is, again, the product is great, but the commercial uptake has been slow. And of course, we’ve seen COVID and supply chain issues hurting stocks like Pivotal Systems and Revasum, because these companies struggle to get certain components in. In the case of Revasum, it was just one component for their tools that they couldn’t get their hands on, which pushed out shipments into a few quarters later. So, right now, in Q4, Revasum is shipping it’s product, but it’s taken way longer than they hoped. So, you know, that was modules.

But what happens also, and again, we’ll talk a little bit about that, is that customers have just been late in taking tools, because other tools in the fab were also late, so they didn’t have a need for certain tools and components at that moment. And then there’s the last one, and that’s lack of news flow. There’s a couple companies, Weebit, BrainChip, BluGlass, that are actually moving forward, but it’s just a news flow lull, if I can call it like that.

Stuart: Marc, have you got, like, some good news for us?

Marc: Yes and no. Let’s start with the no, the bad news. Development failures, unfortunately, for a stock like 4DS Memory, I think the market has abandoned the stock. I mean, there’s been too many setbacks, and I think trust in a company like that, where they’ve stumbled multiple times, yeah, it’s going to be really hard. They’ll need more capital, at very depressed levels, so dilution for existing shareholders will be massive, I fear. Then with AudioPixels, they’ve been developing… You know this better than I, Stuart, because this stock has been listed for I don’t know how long, before I came to Australia, and they still don’t have a product out.

Stuart: Right.

Marc: So, that speaker, which is basically a chip, a MEMS, they still haven’t got that to work, right? And this, regardless [crosstalk 00:10:02]

Stuart: I seem to recall, we had a semiconductor conference several years ago, and AudioPixel was up to their, now, this could be an exaggeration, the 40th iteration of the product. Is that right?

Marc: Something like that. And this was pre-COVID, right? And it was three years down the line, and still nothing. So, development failures are killing for a stock in the longer term, because investors will have a bit of patience initially, because development, failure comes with that. You know, initially, it’s trial and error, but if you keep doing it, then yeah, investors will stay away, and will stay away from these ones as well. It’s just too shaky for these two. Then, COVID and supply chain issues. Well, I spoke about it a little bit. Pivotal and Revasum have had their fair share of issues and troubles in the supply chain. So, components were not there, so they couldn’t ship…they couldn’t finalize the tool to ship it to customers. And like I said, customers have also pushed out receipt of some of these tools, because other tools in the fab were not delivered in time.

We don’t think there’s anything wrong with these companies fundamentally, but looking at the balance sheets, I suspect both companies will need some sort of recapitalization, so that’s coming. And Pivotal actually may see the current slowdown in the semiconductor industry as well, because they supply to the big three OEMs, and some fabs as well, some customers of these OEMs. So, they’ll feel the headwind that is going through the semiconductor industry now. But Revasum should be able to continue to benefit from the secular growth in silicon carbide, and therefore their tools should see healthy demand into 2023, is what we think. But again, they need a bit of money, both of them, so we may see that sooner rather than later, so wait for that before you do anything, is my advice.

Then, slow progress, in terms of development or commercialization, right? So, BlueChiip is a company that’s got a great product. And we won’t go into all the specifics of all these companies in terms of products, but they’ve got a great product, but, in terms of commercialization, it’s going slow. They had a big step up in revenue growth, but looking at the market cap versus that revenue, you know, there’s not enough incentives to buy in right now. You wanna see a stronger growth jump this year, next year, etc. But the company itself is fine. The product is basically completed. They’ve got some traction, but they just need a bit of momentum behind them, and I think they may need to do a capital raise as well, so wait a little bit with that one. But fundamentally, it’s a solid company.

And then Archer. The prospects of their product, the potential is huge, which is quantum computing at room temperature. But, and this is a big but, and Stuart I know you like big butts, but in this case, you might wanna make an exception. The development process for this one is long, right? And I’m talking 5 years plus, maybe 10 years, before they can get to commercialization. Because what they’re doing is very cutting-edge, and it’s gonna take a while before they get this out into the market. There is regular news flow, but commercialization will take a lot of time, and that’s why the heat has come out of this stock. It was $3 at one point. It’s now 80 cents. And, yeah, I don’t see any near-term incentives for this one, although, if they can do what they claim to do, they will be able to do, this one, too, could be [crosstalk 00:13:26]

Stuart: This makes the front page news of every newspaper in the world, if I could use a 20th-century analogy. The day that Mohammad Choucair and his colleagues can say “We have achieved quantum computing at room temperature,” everyone sits up and take notes, right?

Marc: It’s a very, very, very big deal, if they can do it. But again, it’s cutting-edge, and it will take a long time to get there. So, moving to, well, the good news, Stuart. These companies are progressing, but their news flow right now is a bit slow. So, Weebit and BrainChip have signed their first commercial customers. In the case of Weebit, they’ve signed one, and are in the process of getting their products qualified in these fabs of their customers. And once that’s happened, these products can actually be sort of mass manufactured, so the volume production can start, and customers of their customers can actually start to order their, the technology in the products.

What will drive these share prices higher, I think, is commercial deals, additional commercial deals. So, Weebit signed with SkyWater, and this is more than a year ago. And they’re talking to a lot of fabs, as they’ve said in their presentations. So, they’re talking to a bunch of companies, and it’s just a matter of time, you know, waiting for one or more of these deals to come through fruition, and for an announcement to be made. And once that happens, I think, for both these stocks, share prices can really spike. And, I mean, you know, double or triple, basically. BluGlass, it’s starting to ramp up production in its Fremont fab. It will take several years to build up, you know, that revenue, to, the full potential is about $160 million, but it will take some time, obviously, for them to, you know, get new customers, get production going, and then get to that revenue level. But that’s the capacity for that fab.

So, I think, you know, there’s plenty of potential there. And we basically like all these three companies. We own Weebit Nano, Stuart and I. We own Weebit Nano, and we own BrainChip. At $2, I think Weebit is a steal, market cap of $350 million, with a commercial deal in the bag, and likely more to come. I think $4.50 is probably realistic when those announcements come through. For BrainChip, it’s spiked hard over the last year. We think at or below 78 cents, which is sort of a support level, it could be interesting. So, that’s a little bit more downside potentially, but then, yeah, I think at that level, it could be really interesting. Market cap is $1.5 billion, and I think as soon as they announce more customers, there’s a lot more upside to that stock. We think $1.50 is reasonable.

And BluGlass, it needs news flow, in terms of, you know, new customers, production ramp-up. Right now, it’s at 3 cents. The market cap is just $40 million, so it’s pretty low. We don’t have a price target yet for that one. We haven’t done the full model. But there’s substantial upside if it can successfully commercialize. And again, news flow will drive this, so as soon as they announce customers for their laser diode products, we think BluGlass has got a lot of upside, basically, Stuart.

Stuart: Right.

Marc: All right. Last stock. We’re talking REITs, Stu. Talk us through this one. The HomeCo Daily Needs. What does that mean, daily needs?

Stuart: Daily needs. So, this is the kind of retail that you need to visit quite regularly, to buy your milk, bread, whatever. So, the HomeCo Daily Needs REIT, I’ve gotta tell you, Marc, that is a mouthful. No wonder the stock is undervalued, because no one can actually say it without having to use up more of their verbal capacity than they really should do. So, it’s a REIT that got put on the market in 2020, at a buck 33 a share. Hasn’t gone anywhere in the meantime. That should say 5th of October, 2022, by the way, rather than ’20. But they own about 50 retail-based properties where the format is the convenience-based neighborhood kind of retail.

Now, what’s to like about this one? Is basically, the words “daily needs.” These things are virtually recession-proof. And if we’re heading into tougher economic times in the next year or so, it’s fair to say that they should come through okay. So, occupancy 99% for those 53 properties. Weighted average lease, very nice five years. Nationwide, and no correlation to traditional retail. You may be buying less dresses for your wife and less jewelry for your mistress, for example, but you’ll still be going to go get milk and bread every day. So, this REIT’s NTA is a buck 52. You can get it for a discount on that valuation.

And these valuations are generally pretty conservative. So, yeah, why is it underneath the NTA? Well, I think, and I’ll elaborate on this in a moment, the trouble with property is in a rising interest rate environment, everyone loses interest. And so you get all sorts of valuable properties that get thrown overboard. This is one of the more valuable ones that you’ll come across. What’s important here is that they’re actually expanding their asset base, with new developments on the properties they own. So it’s not a fixed set of properties. It’ll actually expand over time. Once you see the interest rate rises come to an end, it’s not unreasonable to think that this one would re-rate up closer to a buck 52.

There is a concern, mind you, that around, roughly, three quarters of their leases, the rent is fixed, and the average rent increase is only 3.6%, which is slightly below the inflation rate at the moment. Look, that’s temporary. These assets will be around for a long time. Once the inflation rate returns to more like normal, we’ll still be going down to Woolworths, and Dan Murphy’s, and Chemist Warehouse to get what we need. And you can see the rent review coming back to more like inflation, and probably a little bit more than that. So, that’s the HomeCo Daily Needs REIT. If you want something defensive in your portfolio, go take a look.

Marc: Excellent. Thank you for that, Stuart, and we’ll wrap it up there. Thanks everyone for watching, and we’ll catch you next week.

Stuart: See you soon.