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What to do with Weebit Nano (ASX:WBT): Investor Webinar 30 August 2023

August 30, 2023

G8 Education, GEM, WBT, Weebit Nano


In this week’s Investor Webinar we talk about Weebit Nano and G8 Education:


– What to do with your Weebit Nano (ASX:WBT) shares.

G8 Education (ASX:GEM) is a great way to play the Australian Childcare theme!

Full transcription below.


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Marc: Hello and welcome to our weekly Investor We++binar. The market is crap. Pardon my French, but maybe, Stuart, you’ve got some good news for us on G8 Education.

Stuart: So, a lot of top 200 stocks are still holding up quite nicely, and G8 Education is one of those that had a pretty good result and has been well received by the marketplace. Let’s talk about this provider of early childcare, which has been listed on the ASX for a few years. There’s the chart. It was terrible until about June or July. In the most recent result, which was good, the market received that quite well and the stock’s been re-rating. Several directors have been buying. So, that piqued my interest.

What exactly does G8 Education do? Well, it’s one of Australia’s leading providers of early childhood education, so you need a childcare center. There’s about 430 of them around the country. This company acquires various early-learning brands and then aggregates them into the G8 Education group. So, childcare is very much a local kind of thing. So, they’ve maintained all those brands rather than converting them over to the G8 brand. And the 2002 calendar year was pretty good. This company did about $900 million a year in revenue, $37 million in net income.

Now, 2022 was still affected by COVID in some way, which played havoc with the childcare sector in a serious way. As we’ll see in a second, the June 2023 numbers were not burdened by that. Recently, there’s been a change of management at G8. Pejman Okhovat, the man on the right there is the new CEO, and he’s recently taken the reins. He just bought $100,000 worth of stock on market as the window opened for him. So, he’s pretty bullish about his company’s future.

So, what’s to like about the half? The centers are only about two-thirds full. They were still able to grow revenue in this period by 9% to $455 million. EBIT went up $55. So, there’s the rebound from the COVID lockdowns, and there’s plenty of firepower on this balance sheet. They’ve only got 0.9 times net debt to operating EBITDA. Well conservatively managed from a balance sheet perspective, plenty of capacity to grow. And here’s the important thing. Plenty of public largesse is about to come into this sector. The Albanese government campaigned last year on improving affordability of childcare, and they’ve just delivered, as I’ll enunciate in a moment.

So, what’s it like right now? If you’ve ever tried to get a kid into childcare, the best way to do it is to hold a gun at the head of the operator of the childcare center to get a place. Often there’s no room or the nearest childcare center is a long way away, and you end up having to spend a considerable amount of your household budget on getting into childcare. So, the government’s response was to lift the subsidy that is already available for lower-income families from 85% of the fees for families with a combined net income of less than 80,000. They’ve brought that up to 90%. Wouldn’t seem like much, but it represents investment of several billions worth of dollars into maintaining the affordability of childcare.

Bipartisan interest on this issue, because a heck of a lot of Australian families have two working parents with young children that need to go into childcare.
So, the liberals might not care about this issue personally, but they have to care because a lot of the voters care about this. And I’ve been hearing some talks about this issue from the center-right side, and they’ve got some ideas about how to improve childcare. The reason why you can grow earnings quite strongly in the childcare game is the market’s inefficient. Sometimes there’s too much childcare and sometimes there’s too little childcare. So, if you cite your center in an area that’s underserved, you can tend to make out quite well in terms of running a pretty efficient center that makes good money.

The important thing is scale because with scale, you can attract the best talent. People are going into early childcare want to go and work for a reputable brand and a company that’s gonna be around. And when you’re a large company, you can tend to invest more in developing your talent. That’s what G8 is good at. So, they’re seeing the combination of increasing money coming in, increasing utilization of childcare services, and the ability to further expand the sector. They’re all playing in their favor. So, that’s why that chart is looking so good now. This is a stock that’s got on my radar screen and we’ll probably do a bit more work on it.

Marc: All right. Sounds good. So, yeah, we opened with the statement that the market is pretty crappy at the moment, but there is some light at the end of this tunnel.

Stuart: That’s an understatement, Marc. The end of the world, I think, is night.

Marc: Yeah. In that case, you should sell everything you have soon, including your house. But [crosstalk 00:05:02].

Stuart: If you won’t have to settle your accounts, right?

Marc: Sorry. No, exactly. Well, that’s another thing. But I’d buy a gun and move to the outback somewhere. But looking at what the numbers out of the U.S. showed overnight, and which is the reason that the market was up in the U.S. is that the job openings came down to 8.83 million. And so it was not as good as expected or, well, depending on how you look at it, could be better than expected because, as a result, the Fed now has a bit more leeway in keeping rates unchanged in September, rather than maybe increasing them one more time. And also, consumer confidence came down as well, right? So, these are all sort of signals that the market is cooling down or the real economy is cooling down. And, hopefully, that will lead to interest rates on hold in the U.S. And, hopefully, early next year, interest rates coming down, which would be good for the market. In any case, all initiatives in the U.S. were better overnight, so hopefully ASX picks up on that as well.

What didn’t go so well yesterday? One of our long-term favorite stocks, Weebit Nano, got hammered. In previous weeks, the stock had down already, but yesterday, the day before on Monday, actually closed on support level. And without any hesitation, the stock at the open was hammered big volume. So, probably a few large investors coming through, hitting the stock, pushing it straight down through support level, and it closed around $4. And so the question now is what to do with your Weebit Nano shares? So, there’s the development of the share price in the last couple of, well, basically last two years. But if you focus on the right side of that chart, you can see what happened yesterday, that big push downwards. So, that’s what happened yesterday. It was no hesitation at all. It went straight through support, again, on big volumes. And the reason for that is the stroke has been sort of drifting down on the back of no news, really, and concerning new customer announcements, which is something that Weebit has flagged a number of times, that they would report on that around the middle of this year.

So, we’re sort of past the middle of the year now and so everyone was hoping that those announcements would come through. That hasn’t happened yet, and so the market is disappointed. Shorters have come in since the company got into the ASX 300 a little while ago. So, it’s a big boy market right now that Weebit in. It’s no longer in Kansas, and so you have to deal with all these forces in the market. And looking at the chart, next support is around $3.10. Let’s hope we don’t get there. So, there’s two options, really, for shareholders if you own Weebit stock at the moment. The first one, obviously, you can sell now because if you’re afraid that things are going to take much longer than the company is flagged, our share price would come down. And in that sense, you could be looking at a BrainChip scenario where there’s been no news, really, no commercialization news. The company has been invisible basically in the last year or so. Hardly any interviews, roadshows, that sort of stuff. So, that’s what I call the BrainChip scenario. The main risk, of course, if you sell Weebit shares now is that they might come out with that announcement after all very soon, and you miss out on the upside.

Stuart: And, Marc, share with us this, what kind of customer are you looking for? Is this an evaluation customer or this is a real-life customer that will be installing Weebit-type chips into real-life products that you and I will be buying?

Marc: Look, any type of customer that comes on board would go through evaluation, design, in testing, all that sort of stuff, right? So, that needs to happen anyway. But in terms of the profile, so Weebit is flagged a couple of times that it is talking to all of the top 10 foundries in the world. Foundries are chip manufacturers that manufacture chips for third parties. For instance, Apple doesn’t manufacture their own chips. They design them and then ship the design off to TSMC, and that was a foundry, and they make the chips for them. So, that’s a foundry. So, that’s the kind of companies that Weebit has been talking to, including the integrated device manufacturers, as they are known, like companies such as Intel, or SD Micro, or NXP. Those are companies that are integrated.

So, they design the chips, they manufacture them, and they sell them as well. So, there’s two big groups there. But Weebit’s flagged and is talking to all of them. But the likelihood is that a foundry will be the next one, next scab off the rank. And if you compare, I said BrainChip scenario. If you look at the differences between BrainChip and Weebit when it comes to communication, they’re massive, right? Weebit Nano has been in Australia at least three times a year for the last seven years. It’s done really well in terms of presentations, communications, setting their own deadlines, and actually adhering to them. So, there’s a big difference from that point of view. So, that’s scenario one.

Scenario two is, you hold on to the stock in anticipation of that all-important announcement. The benefit of that is that you won’t miss out on the upside. If and when that announcement comes, that’s really important, so you’re not out of the market, so to speak. The key risk, obviously, is that if that announcement is actually postponed into maybe even 2024, the share price will drift lower as well and more shortage might come in. So, that would be a very volatile ride from that sense. But from where we’re sitting, Stuart, you and I have owned Weebit shares for a long time. I’ve actually been in the stock since 2017, and I’m pretty confident, looking at the track record of the company over time that they can live up to their promises in terms of announcing that new customer. And if you look at the interview that we’ve done with Coby Hanoch, the CEO, early August on the Stocks Down Under website, you can find it. If you look at that interview, he’s actually hoping that they can get more than one in 2023. So, we’ve got a couple of months left for that.

And on top of that, there’s revenues coming from Skywater as well, right? So, the Maiden revenue should be coming in this calendar year still, so that’s something else to look forward to. So, at the end of the day, as a shareholder, you need to make up your own mind about what sort of risk you wanna bear and what your acquired return is. But, yeah, from our point of view, we’ll stick with Weebit. We’re very, very bullish on the management team, on the board of directors. We’ve said this a hundred times and I’ll say it again, these are rockstars, right? When it comes to semiconductors. So, with the chairman being the former number two at Intel, for instance, and one of the other directors having worked with the actual inventor of nonvolatile memory. So, these guys know what they’re talking about. So, we’re pretty confident. But, yeah, the market is what the market is. And right now, Mr. Market is not happy with Weebit. But that can change overnight if that announcement comes through, Stuart.

Stuart: So, Marc, I was joking the other day. I was in a nightclub and I was surrounded by a lot of pretty young girls, and they’re all coming up to me saying, “Stuart, is it true that you know Dadi Perlmutter?” And I said, “Yes, I’ve had the privilege of meeting him.” So, you talk about mixing with rock stars, Dadi Perlmutter, the man you were just citing. All jokes aside, Dadi Perlmutter was so senior at Intel. He had Andy Grove’s mobile number, basically, and they would talk on a daily basis, right?

Marc: Look, Dadi, as you and I can call him, Stu, as everyone calls him.

Stuart: Real name, David.

Marc: David. He was at the foundation, founder, basically, of the innovator at Intel and their move to Israel to set up Intel in Israel. He later on moved up the ranks to be one of the potential successors to the CEO back then. He didn’t get the top job, unfortunately, but it’s fair to say he has a very big Rolodex that is very helpful for a Weebit in commercializing the technology, definitely. All right. Well, that’s all we have time for. So, hopefully, the market should be better in Australia as well as it is in the rest of the world. And we’ll catch you next week. Keep your questions coming, so we can answer those. One of the questions we had was on G8, actually. So, we’ll answer those questions as they come in. And in the meantime, happy investing.

Stuart: Happy investing.