Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, SG Hiscock portfolio manager Rory Hunter reveals the 2 medical tech ASX shares that will reward those with enough patience.
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The Motley Fool: What are the 2 best stock buys right now?
Rory Hunter: As the small companies guy, I'd probably mention two smaller caps in this space at the moment, with the caveat of course that within a rising rate environment, you're going to get to the valuation-multiple compression. So one would have to be quite patient with the stock picks.
The first one I'd mention would be a company called Beamtree Holdings Ltd (ASX: BMT).
So Beamtree used to be known as PKS Holding, which, I think, was Pacific Knowledge Systems. Basically, it's a technology that works — they capture, manage, and analyse and review AI [artificial intelligence] analysis to provide to decision support systems — to doctors in hospital settings.
Operating in the same space — data analytics or health IT — as the likes of Alcidion Group Ltd (ASX: ALC), Mach7 Technologies Ltd (ASX: M7T), and others.
The first thing I'd say is, Beamtree is a fantastic growth profile. We see the prospect of them getting to about $50 million of ARR [annual recurring revenue] over the next 3 to 5 years from a base of around $10 million they are now. They operate in over 20 countries, 4 continents.
From a valuation perspective, they're trading on about 5 times ARR currently.
If you look at the wider sector, you'll probably get valuation multiples of, from about 9 to 15 times sales. So with the growth profile, we're protective of the functionality that they have. Customer satisfaction, they have 99% client retention. We think that they're fantastically placed to continue to grow really strongly.
Within the healthcare industry, something that's key to remember, is that when customers come to making a decision on buying a product, technology or anything, a lot of the time it's about the people involved. They need to be able to trust the people that they're buying from.
Tim Kelsey, who's the CEO of Beamtree, he's got a fantastic reputation in the industry. He was previously the national director for patients and information in the NHS in the UK. He's incredibly well connected in this space and has a very reputable track record.
So bringing all of that together in a really good place.
MF: And your second pick?
RH: I'd say Lumos Diagnostics Holdings Ltd (ASX: LDX). You've probably seen there's been a bit about Lumos in the news over the past few days.
I think a lot of the institutional and retail holders that took positions in Lumos with the IPO went looking for a bit of a stag [short-term speculation]. And when they didn't get that, they sold out. They're not actually long-term holders. That's why you've seen a bit of a weakness in the share price since the IPO. I think it's a function of the construction of the register as opposed to the health of the company itself.
One thing that has been disappointing is the fact that the approval of their FebriDx product or device by the FDA has been somewhat delayed. We fully expect that approval to come through. We think that will be one huge catalyst.
Also just looking at the wider thematic, what you've seen as a result of the pandemic is that it's ultimately been a global lesson for consumers in how to undertake home-based rapid diagnostics, in terms of prevention testing. The reality is, that doesn't stop when the COVID pandemic becomes endemic. Once we get through the other side of the pandemic, there are so many applications for rapid testing.
Lumos are ahead of the curve, in the sense that they're developing a test, CoviDx, and that will basically be an all-in-one COVID test with flu test as well. They've recently announced that they're going to receive government funding for a manufacturing facility in Victoria. We don't know what the quantum of the funding is as yet. But it will give them the capacity to develop or manufacture 50 million tests per annum.
We fully expect that rapid diagnostics to be undertaken from the home, and will continue to accelerate on the back of the pandemic. We think Lumos is very well placed for that. We have a lot of conviction around the management team in order to execute as well.
MF: Certainly a very topical thematic, isn't it?
RH: Very topical. I think what you're seeing is that people are hesitating to buy in because there's very much a feeling that we're over the other side in terms of the pandemic, and so they think that actually their earnings profile, or the demand for their products, isn't that durable. People are missing a trick there.
MF: After the January sell-off, do you reckon there are plenty of bargains out there?
RH: Yeah. There definitely are.
Whether the bargains are as good as they're going to get, is another question.
Without going too deep into the macro… if you see any durability or duration in this rate hike cycle amongst global central banks, then all medical technology or technology healthcare businesses are going to be under pressure for some time, just because by nature they are long duration, so they derive a significant portion of their intrinsic value from earnings found in the future.
So in an environment of increasing bond yields, you're going to get valuation multiple compression. So they're going to have to grow at exponential rates. The growth in those businesses is going to have to be absolutely extraordinary for them to push against, or sort of push against the hot flow of water, if you like.
If you're looking back on the last 12 months, you'd perceive a lot of the opportunities right now as bargains, but the market could be on sale for a while longer, given what's playing out now.
I think there is the prospect of central banks actually having to put a stop to the tightening cycle earlier than people expect, and that's when there will come an opportunity. That's really why we've positioned the fund as we have — we've been very defensive. We had 35% of the total fund in large companies and we've handled about 20% cash. So less than 50% in smaller companies. That's basically to… make us as nimble as possible, to actually take advantage of the bargains that present themselves.
If you were to watch our monthly newsletters, what you'll see, as you expect the sell-off to continue the same pace, you'll see a lot of that weight in cash and larger holdings shift to smaller holdings, as they get cheaper and cheaper.
The reality is that even if things play out as we expect them to do, timing is really challenging. So the way we do it is just incrementally shift the weight, just to make sure that we're constantly topping up at discounted pricing, basically.
