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May 23 2015 at 12:15 AM | Updated May 23 2015 at 12:15 AM
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Seven stocks with potential to disrupt their markets
Avoca'sJeremy Bendeich says Freelancer is building a strong position in the global micro-jobs market. Louise
Kennerley
With dozens of technology companies and "disrupters" lining up
to list on the Australian Securities Exchange through floats or
back-door listings, not all of them will last the distance.
This makes them highly speculative investments for investors,
by Tony
Featherstone
with advisers saying that picking the right stock is a bit like
finding a needle in a haystack.
With expert help from fund managers who specialise in the area, we've identified
seven stocks with the greatest potential. Freelancer
Market capitalisation: $498 million
One-year total return: 13 per cent
X factor: rising internet connectivity in Asia and ability to work for Western
companies.
The micro-jobs platform had a rollercoaster ride after listing in November 2013. Its
IPO raised $15 million at 50¢ a share, soared to $2.50 on debut, and slumped to 73¢
eight months later as the hype subsided and inefficient stock allocation weighed on
its price.
Avoca Investment Management bought Freelancer near its lows and it has since
rallied to $1.01. Avoca chief investment officer Jeremy Bendeich says Freelancer is
building a strong position in the global micro-jobs market, where Western companies
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typically recruit service workers in emerging markets for projects at lower cost. "We
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like the concept and Freelancer's potential to win the race to become the dominant
global micro-jobs platform," he says.
"Freelancer has a strong trajectory of quarterly revenue growth and, importantly, the
ability to fund years of development through its cash flow. We don't envisage large
debt raisings or equity raisings that dilute shareholders. With disrupters, we favour
companies that can ease back on development costs if their growth options slow,
harvest that investment and become quite profitable."
Avoca has allocated 1 per cent of the Bennelong Avoca Emerging Lead Fund to
Freelancer. "If Freelancer works, its valuation could increase many times, but
the risks are high so it is prudent to allocate only a very small proportion of the
portfolio to it," Bendeich says.
NEXTDC
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Market capitalisation: $471 million
One-year total return: 24 per cent
X factor: faster-than-expected adoption of cloud computing among larger enterprises.
Investors could not get enough of the fast-growing data centre builder and operator
when it raised $40 million at $1 a share in a 2010 IPO. NEXTDC soared to $2.80 in July
2012, then halved within 12 months, before recovering to $2.43.
The company was an early mover in data storage and management. It built state-ofthe-art data centres in Sydney, Melbourne, Brisbane, Perth and Canberra, and has
been growing storage capacity and tenancy levels.
Avoca's Bendeich believes NEXTDC is a lower-risk play on the cloud computing boom.
"In some ways it's like a toll road: once all the development cost is sunk up front, the
challenge is filling the data centres with clients and lifting the return on that
investment," he says. "The trend of more companies outsourcing data storage will
only get stronger and NEXTDC is ideally positioned."
Unlike many other disrupters, NEXTDC is revenue and earnings positive: its guidance
is for underlying earnings of $6 – $8 million in 2014-15. "It's not cheap, but we are
comfortable with NEXTDC's valuation given its growth prospects and ability to build a
large base of contracted, annuity-like revenue," Bendeich says.
Bulletproof Group
Market capitalisation: $25 million
One-year total return: -25 per cent
X factor: rising demand for service providers in cloud computing.
The cloud computing services provider was one of several technology companies that
came to market through a back-door listing. Bulletproof raised $2.85 million and
listed in January 2014 through the shell of explorer Spencer Resources.
Bulletproof shows how small caps can benefit from industry disruption, rather than
drive it. As more companies "lift and shift" their data to the cloud, demand for
specialist cloud management service providers is expected to rise sharply.
Microequities' chief investment officer, Carlos Gil, believes Bulletproof is well
positioned to benefit from growth in cloud computing, thanks to a valuable
relationship in Australia with Amazon Web Services. "AWS is by far the biggest
provider of cloud computing infrastructure in this market. We believe Bulletproof can
mimic its revenue-growth profile as companies need help from service providers to
move the cloud."
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Page 3 of 5
Gil says Microequities, a substantial shareholder in Bulletproof, rates its revenue and
earnings profile. "Unlike most so-called disrupters, Bulletproof should deliver
underlying earnings of $4 – $5 million and revenue above $30 million in the next few
years. It's a go-to player in this market for cloud computing services and strongly
leveraged to the mother of all disruptive trends as companies outsource data and
software is sold as a service." As a micro-cap stock, it suits experienced investors who
are comfortable with higher risk.
iSelect
Market capitalisation: $413 million
One-year total return: 30 per cent
X factor: rapidly expanding into other insurance and online comparison categories.
The online insurance aggregator reinforces the investment dangers of in-demand
tech IPOs. After raising $215 million in a heavily oversubscribed IPO in June 2013, its
$1.85 shares sank to $1.03 after iSelect missed revenue forecasts within months of
listing and hurt its market credibility.
As the market gave up on iSelect, top-performing fund managers, such as Paradise
Investment Management and Pengana, bought shares.
Pengana Emerging Companies Fund co-manager, Steve Black, says iSelect is
benefiting as about a quarter of health insurance policies are bought via aggregator
sites and 80 per cent of younger health fund members buy their policy online. "As the
largest player in online insurance aggregation, iSelect is very well positioned to
disrupt how insurance is bought."
Black says iSelect's move into life insurance could shake up that segment of the
market. Life insurance typically provides higher commissions for brokers and agents,
something iSelect can change through its distribution network. "They have potential
to cut margins fairly drastically, lower life insurance premiums, and attract a critical
mass in life insurance to the platform. iSelect also has good long-term growth
prospects in comparison services for mortgage broking and utility bills."
Black believes iSelect is benefiting from new management that is focused on cash
flow through a revised business model that relies more on upfront, rather than
trailing, commissions. Other experts have speculated iSelect could be a takeover
target for a large UK aggregator of insurance policies.
Rhipe Limited
Market capitalisation: $225 million
One-year total return: 137 per cent
X factor: rapid growth in Asia is securing more clients and a bigger market for
software.
The wholesaler of Microsoft's public cloud offerings has starred since it came to the
ASX as a backdoor listing, soaring from 60¢ in April 2014 to $1.69.
Rhipe provides Microsoft's public cloud software offerings, including Microsoft365
and the Windows InTune and Enterprise Mobility Suite, to resellers. As it secures
other global software vendors as clients, and expands the range of program licences,
it has potential for rapid earnings growth in Australia and, increasingly, South-East
Asia. Rhipe's latest annual report said: "We remain positive on the business and see no
reason today why revenue growth won't continue in the vicinity of 30 – 40 per cent
growth for fiscal 2015."
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Page 4 of 5
Fund managers are attracted to Rhipe's recurring revenue from licensing, business
model and growth prospects as more consumers use cloud-based software and pay a
monthly, rather than upfront, fee.
NAOS Asset Management chief investment officer, Sebastian Evans, says Rhipe has
proven itself over several years and has strong relationships with key software
providers. He says Rhipe's share price, due for consolidation after strong gains, could
be $2.50 within a year or two as its growth trajectory continues.
Urbanise.com
Market capitalisation: $279 million
One-year total return: n/a
X factor: faster-than-expected migration to remote management of building and
home services using cloud computing.
The provider of online property management services listed on the ASX with little
fanfare through a $20 million IPO in September 2014. Its 50¢ issued shares have
soared to $1.25 as the market re-rates its potential to provide software for building
operators.
Urbanise.com's service helps building owners manage help desks, maintain common
areas, manage energy consumption and fix system breakdowns. Its cloud-based
software allows it to remotely monitor buildings using the "internet of things", where
building equipment is connected online.
Urbanise.com should benefit from population growth and capital-city densification as
more apartment blocks are built. About 6.5 billion people will live in cities by 2050,
from 3.4 billion today, predicts research group Frost & Sullivan.
Urbanise.com forecasts 170,050 occupants and 1150 buildings using its service by June
2015. The company is growing rapidly in the Middle East and has expanded into South
East Asia, and the United Kingdom and Europe.
NAOS's Evans says: "Urbanise.com is reasonably easy to understand and use with a
clearly defined market segment, where owners are always looking for cost savings
and productivity gains."
ClearView Wealth
Market capitalisation: $542 million
One-year total return: 17 per cent
X factor: greater demand for life insurance and investment products offered by
independent firms.
Companies that use technology to disrupt parts of the financial services sector, the
"fintech" providers, are attracting great interest. Their opportunity – to disrupt huge
financial institutions that have high-cost bases and legacy technology systems.
Celeste Funds Management chief investment officer, Frank Villante, prefers
ClearView Wealth, a fast-growing provider of life insurance, wealth management and
financial planning services. He believes it can disrupt larger competitors that have
grown through bolt-on acquisitions, have legacy technology systems, and are aligned
with the big four banks.
Villante says: "ClearView is in a really interesting part of the cost curve because it
doesn't have the overheads of big players, and not being aligned with a big-four bank
means it is attracting more financial advisers to its product because of its
independence. As sensitivities around conflicts of interest in financial planning grow,
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Page 5 of 5
advisers will increasingly ensure a proportion of products recommended are from
independent firms."
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