Consistent small caps: they’re out there — just follow the whistle

Many people I meet say, “Oh, small caps, they’re too risky!” I nod and walk on. Small caps do move a great deal more than their larger counterparts, I admit. When the news reports Telstra had a big day, declining 3 per cent, I think to myself, that’s nothing! Double-digit rises and falls are almost de rigueur in a small cap, which I define as an ASX-listed company with a market cap less than $500m.

When you focus on small caps as a whole, you are forgetting that the big advances in reducing risk from investing have been through diversifying that risk, which means holding stocks that complement each other, otherwise known as reducing correlation.

Because the big companies represent the market, to produce more consistent returns you need to buy stocks that are off the beaten track, so to speak. In stockmarket parlance, “low beta”.

Generating exposure to the market through an index fund provides the cheapest form of diversification, but if you want to reduce your risk further, and generate bigger returns, stocks that have a low correlation to the market are worth thinking about.

Before I get to some of these stocks, it’s important to point out that every stock is going to have a correlation coefficient of at least 0.5, which means the influence of the market is 50 per cent or more on its price movement. If a stock has a correlation coefficient of 1, it moves in line with the market. Conversely if it’s -1 it moves in exactly the opposite direction.

You don’t want to pretend that a stock’s behaviour is going to be separate from the market, although through history there might be the odd incidence of this. What you have to do is be careful in selecting stocks that won’t behave like the market, which to my way of thinking includes those stocks that are not expensive.

Certainly, two stocks that have looked cheap, the junior nickel producer Panoramic Resources (PAN) and the sleep apnoea specialist SomnoMed (SOM) have both spiked 40 per cent-plus in recent weeks, the former on a takeover bid from Independence Group (IGO).

For a company like Panoramic it’s not a diversified producer and has had significant problems resuscitating its Savanah Mine in the east Kimberley region of Western Australia. Consequently, its shares hadn’t moved despite a buoyant nickel price. It recently raised emergency capital to keep the Macquarie creditors from its door. Independence swooped. Name a big cap taken over recently? I can name three or four small caps.

SomnoMed, like so many small caps, is undergoing a turnaround, this one due to some serious strategic missteps. Hence it was cheap. The med-tech is also part of an industry going through a secular growth trend — the treatment of sleep apnoea. It has been attempting to tap into this demand and has recently woken investors up through its success in the US.

Another medical stock I have mentioned often in this column is Medical Developments (MVP), producer of the famed Green Whistle (emergency pain relief analgesic). This company is tapping into demand from around the world for affordable non-opiate-based analgesic pain relief.

Then there is ship builder Austal (ASB). Its earnings are less correlated with the market because of its 20 year-plus purchase cycle. It is unlikely to be affected by month-to-month variations in consumer demand.

The ASX is very concentrated from a market capitalisation perspective. Investors have great opportunities to look at its long tail in order to diversify their portfolios and gain access to stocks that move independently from the BHPs and NABs of this world.

Oh, and the next time I’m told about risky small caps I might offer them the Green Whistle.

Richard Hemming is an independent analyst who edits [email protected]

Call to push China to open its pork market for Australian export

Investment banker David Williams has urged Agriculture Minister Bridget McKenzie to push to sell Australian pork to China to help ease a shortage as a result of its swine flu problem and get in ahead of any US-China trade deal.

Pork is not on the list of agricultural products from Australia which can be exported to China.

But in an interview with The Australian, Mr Williams, the founder of investment bank Kidder Williams, which specialises in agricultural deals, urged Senator McKenzie to lobby China to open up the market for Australian pork.

US President Donald Trump said on Friday that China would be buying some $US40bn to $US50bn in agricultural products from the US as part of a trade deal that could be finalised by the two leaders at the APEC meeting in Chile next month.

Mr Williams said China had shown it was open to quick changes in its import restrictions as it sought to buy more pork from the US to cope with the fallout from its devastating swine flu problem.

“We need to urgently amend the list of agricultural products that can be sold to China,” he said.

“The Chinese are desperate for pork given the cull in the herd in China from African swine flu.

“The Chinese are so desperate they recently said they would be amending the US import list to allow US pork into China at a concessional rate.”

He said this move was made in September at a time when the US and China were “still sparring partners” and had not reached a potential deal for China to buy more US agricultural products.

“This is an indication of how an urgent application to allow Australian pork into China might get a quick reaction,” he said.

Australia should also look at asking the Chinese whether it could help rebuild the Chinese pig stocks once the swine flu problem was over.

“They are slaughtering their herds in China and they clearly can’t get enough,” he said. “They are releasing stocks from their stockpiles but it is not enough.

“Pork producers in Australia have been losing money for three years and access to China would kick start them in a positive way.”

He said China’s push to change its regulations to buy more pork from the US showed that it could “turn on a sixpence” if it wanted to amend its agricultural import licensing arrangements.

China is expected to buy more pork from the US under the trade deal now being finalised.

But he said Australia should move quickly to push China to be allowed to sell pork into its market ahead of any US-China deal which could also cushion the impact of any deal on other Australian agricultural exports to China.

“This could be a big opportunity for Australia to not only make some short term gains but to use it as a basis for having a market going forward,” he said. “Even though it wont be anywhere near what China needs it would help give the Australian pork industry a boost.

“The government has a small window before the trade deal with the US to try and capitalise on it.

“Achieving this would bring a short-term benefit to Aussie farmers that are put on a new list but also lessen any downside when the US and China finally cosy up to each other again,” he said.

The world’s largest pork consumer, China has already been forced to cull more than a million pigs since the outbreak of swine flu more than a year ago. Agricultural specialist Rabobank says China could lose as much as 70 per cent of its domestic pig herd this year as a result of the disease. China has 350 million pigs or a quarter of the world’s stock. With pork prices skyrocketing in China, Beijing released some 30,000 tonnes of pork from its official stockpiles in the lead up to the October 1 national day celebrations and holiday time.

Mr Williams said Australia should also push to expand the list of products sold to China to include blueberries and other fruit.

Williams. David Williams.

WilliamsDavid Williams. Not armed with a Walther PPK or an exploding pen but something nonetheless just as menacing — a rolodex as thick as a telephone book and a penchant for doing deals so personally rewarding that it makes Ahmed Fahour look like an unlucky pauper.

Racing around town in his new Aston Martin DB11, the car made famous by the Bond films, Williams is once again drowning in cash thanks to his latest wheeze, selling off printing and digital media company Wellcom for $265m to South Korea’s Innocean, which is owned by the families behind Hyundai and KIA.

Maybe Williams was just born lucky, but he seems to have a habit of always winning twice or more from the same deal. Not only does he win from the takeover, being a major shareholder in Wellcom through his merchant bank Kidder Williams as well as personal holdings, but his firm is also advising on the takeover. That’s nice. The explanatory booklet for the takeover was released yesterday, showing Wellcom will pay total fees to all its advisers of just under $3m.

Williams is a bit like the guy who can go into a revolving door behind you, and come out of it in front of you.

Of course Williams has a rewarding history with Wellcom and its founder Wayne Sidwell. Williams floated a business called Shomega for Sidwell in 1993 and then sold it to News Corp for PMP in 1996. Come 2001, after Sidwell had served his non-compete and technology had changed, he started from scratch with new technology and the business — Wellcom — was floated by, guess who? Yes, our man Williams.

Williams just has a licence to print money by the looks of it. And the colour of his Aston Martin? Red of course, it goes faster.

ASX Release: Coca Cola Amatil | Sale of SPC Business Completed

Coca-Cola Amatil has announced completion of the sale of the SPC fruit and vegetable processing business (SPC) to Shepparton Partners Collective Pty Ltd and its group of companies (Shepparton Partners Collective), for consideration of $40 million payable at completion. The sale was completed on Friday 28 June 2019.

Taking into account forecasted working capital balances, working capital adjustments to the sale price and costs of disposal, Amatil is expected to record a profit on sale of approximately $14 million. The sale agreement also includes a 4-year earnout structure which, subject to business performance, could result in up to an additional $15 million of sale proceeds at that time.

As previously announced, due to the realisation of recognised deferred tax assets Amatil’s ability to frank dividends will be significantly impacted in the short to medium term.

Group Managing Director of Coca-Cola Amatil, Ms Alison Watkins, said with the completion of the sale of SPC, Amatil will continue to focus on being a beverages powerhouse.

“SPC has been a much-loved part of our portfolio since 2005, and we’re confident it has a bright future in the hands of its new owners,” Ms Watkins said.

“Shepparton Partners Collective recognises the value of SPC’s brands, the opportunities for innovation and category growth in Australia, and its export potential.”

“On behalf of Amatil, I thank everyone at SPC for their commitment to the business and wish them well in continuing to grow their domestic and international markets.”

Since acquiring the SPC business in 2005, Amatil has invested around $250 million including in technology, operational and energy efficiencies, and new equipment. A $100 million co- investment program from 2014 to 2018 also modernised SPC’s tomato and snack cup production and introduced a new aseptic fruit processing system and pouch line at the Shepparton site.

Amatil commenced the divestment process for the SPC fruit and vegetable processing business in November 2018 and received transaction advice from Kidder Williams Limited and legal advice from Gilbert + Tobin Lawyers.

Chris Judd’s podcast Masters of the Market

Click below to listen to Chris Judd’s podcast Masters of the Market, with a special mention of David Williams’ investment journey.

“In this episode I head to Perth to catch up with the Managing Director of the Merchant Group Andrew Chapman. With almost 20 years of experience in the industry, Andrew walks us through his experiences in investing in biotech stocks, medical marijuana and other micro caps.”

Investment in Australian Agriculture Drying Up

Investment banker and chief executive and founder of Kidder Williams, David Williams in his Melbourne office.

The party is over and those mouthing “nine billion to feed by 2050” look like dinosaurs.

The wall of money from countries we have rarely seen before to invest in Australian food and agriculture is slowing. Some money came from family offices and pension funds escaping the crisis in the eurozone. Some of it was chasing the new understanding of the growth prospects in food to feed the growing middle class in Asia. And some came from North American pension funds and universities chasing low-risk horticulture.

Australia is attractive to all as we produce high quality product, have reliable infrastructure and low sovereign risk. Interest in our assets and our products will to continue but at a much slower pace as alternatives in South America, Asia and Eastern Europe sometimes don’t offer these qualities in one package.

There have been hiccups along the way with respect to government policy on foreign investment. But now the gravy train is slowing. Some of this is because it is getting harder to get money out of China and other countries and some because it is getting harder to get money to Australia. Investors who did come have fully invested and gone home, probably never to return for 10 years.

Demand for food processing assets has also been strong from foreign trade buyers, and from foreign and domestic PE firms. That has also slowed to a trickle with fewer buyers. A number of businesses bought in recent years for heady prices are now coming back on the market

and will be sold at discounts. There will be lots of opportunities for Australian trade buyers previously outbid.

Water continue to put uncertainty on cotton, nuts, horticulture and dairy. Recent fish kills exacerbate the situation by pressuring for more environmental flows. This will force water prices up and push horticulture to new regions and new types of crop.

While all this sounds pessimistic, if we pull our heads out of the China clouds there is an exciting future and much to do in all food companies. If I were preparing the board pack for a food company for next week, my agenda might look like this:

  • How can we improve our and our farmer suppliers’ water efficiency by adopting technologies, to lessen our reliance, improve our yield or change government policy?
  • What opportunities are there for us if UK leaves the EU without a deal and reverts to “most favoured nation tariffs”?
  • How are we reacting in our product development to the blurring of traditional meal times by snacking throughout the day?
  • We can’t wait around for large acquisitions and the old innovation model is not working, so what can we do to invest in start-ups to get new products to market quickly and more often?
  • What are we doing in our product development in ‘‘gut health’’ and the crossover between food, nutraceuticals, pharmaceuticals and personalised foods, that match DNA?
  • How can we turn our off-spec products, by-products and waste into valuable products?
  • How can we go direct to consumer with our products and change our logistics model?

David Williams Founder & Chairman of Kidder Williams

We were delighted to have lunch recently at Graduate House with Mr David Williams, the Founder and Chairman of Kidder Williams. David was born in Melbourne after his father, originally from Glasgow, Scotland, moved to Australia following the war and settled in Ferntree Gully. David, therefore, went to Ferntree Gully Primary. “Then when I was finishing Grade 5,” David said, “they built a new primary school right next to where we lived called Fairhills Primary… and so I was in the first class.” David then went to Boronia High (1966–1970) and Wattle Park High (1971–1972) for his secondary school education. He undertook his Master of Economics (1972–1978) at La Trobe University and his PhD research in finance at The University of Sydney (1982–1984) on the topic of co-operatives and their capital structure. That research led him to agricultural cooperatives, which in turn led him to the food industry. Today, David is the Chairman of Kidder Williams, Australia’s leading corporate advisor to the food, agriculture and beverage industries, with 34 years of experience in mergers and acquisitions, capital raising and corporate advisory services. Revisiting Ferntree Gully Primary and Boronia High years later, David remembered how surprised he was to see open fields where the schools used to be. “So… I have no alumni,” he concluded. Having no alumni, he, nevertheless, stresses the importance and necessity of building an alumni.

During his period at the University of Sydney where he taught Finance, the program conducted a survey at the end of each year, asking students about “the number one thing” that they got out of their MBA course. Most students ranked the alumni — the relationships and the networks they built — as the most important part of their course. For MBA programs, David recognises the lack of emphasis in this area: “We all know this but universities and their employees probably don’t do as much to foster it as we should.” Students turn up for their courses, and “we turn up for our job to lecture. That’s it. We give them case studies where they work together, and that’s how you breed a little bit of familiarity.

But we don’t do anything more than that as far as I can see in most of the MBA programs, or for that matter in most jobs.” David agreed with The Graduate Union CEO/Head of College, Dr Kerry Bennett, about the importance of places like Graduate House, where students have a live-in experience, allowing them to build networks they can call on throughout their post degree careers and professional lives while living with other graduates and professionals from all disciplines. “We’ve got to optimise it,” David noted, “and I think the older and the more postgrad people are, the more you need to do it; and the reason is because it is at that level you start to think about how what I’m learning can be applied across disciplines.” Professionally, David made headlines over the years for his role as corporate advisor to many Australian and international businesses, particularly for his role in the Bega Cheese acquisition of the culturallysignificant brand Vegemite from Mondelez International. The success, David noted, came from hard work, something that, he thinks, is sometimes missing among graduates and young professionals. “We’ve got kids that need instant gratification… there is no instant gratification, you’ve got to actually work for things.”

Remembering the early years of his career, David said, “I was the longest working, the hardest-working person in my group. I had a co-worker who had a rigid regime: ‘I leave exactly at 6 o’clock at night in order to catch the 6:15 train’… [so one day] I turned up at 6 and said… I need you to read this… and he said ‘Oh David, ten minutes to 6 — I can’t do it until tomorrow’.”

To David, this sounded like something he might say himself after he had become highly successful. “Well, now, I’m still one of the first in and still one of the last out.” David expands: “What comes through is that it’s not about intelligence — it’s about how much work you put in. It’s about being passionate about something and building your interest from the ground up.” In terms of future endeavors, David is keen to expand his horizons to corporate purchases. In a mergers and acquisitions business, “you see a lot of deals and sometimes my clients have no interest. If so, I can buy them myself and I do. So I have a business that is an advisor company but I also have a business that owns companies… So those things are as much part of my life as ever.” One of the big deals for which David made headlines was buying the Tasmanian Salmon Farmer Tassal Group out of receivership in his own name after which the company’s production soared. Referring to this success, David said, “it went into receivership 12 years ago and I bought it personally out of receivership for 42 million dollars.” The company “was doing six thousand tons of salmon when I bought it, now it’s doing circa 30 thousand tons. Salmon is bigger than every other aquaculture species you can think of: prawns, abalone, barramundi, put them all together, they’ll be doing 10 thousand tons.” David has recently started expanding his expertise in the pharmaceutical area.

He is currently the Chairman of Medical Developments International. Its key product is the Green Whistle which is manufactured with some CSIRO technology and is a medical device which releases the analgesic drug Penthrox when the user inhales. Early last year, the company received positive feedback from the Medicine and Healthcare products Regulatory Agency (MHRA) to sell its product in the United Kingdom, France, Belgium, Ireland and the rest of the European Union. David would like to take the Green Whistle, with the help of the Gates Foundation and the World Health Organization (WHO), to people in the Third World where operations are sometimes performed without pain relief. Another medical company David is Chairman of is PolyNovo, a tissue regeneration company which uses NovoSorb Technology for the treatment of burns and surgical wounds. The only competitors for the product in the market are organic products. But “the problem is,” David said, “when you put a biologic on a wound, it sometimes gets complications… We are available at a significantly lower price and with significantly better efficacy.”

No wonder hospitals and surgeons have been very keen to try the product. The company, David excitedly reported, has already supplied its product to “dozens of hospitals in the US and by end of January, it probably should be 60.” The company is also expanding its market around the world and is now supplying South Africa, India, Malaysia, New Zealand and Saudi Arabia. Information technology has not escaped him and he is the largest shareholder of RateMy Agent. This is a real estate agent ranking site now released in the United States, New Zealand and Australia. It was an honour to spend time with David and to learn from this innovative, inspirational and yes, very hard-working business leader who has clearly earned his success. We are very much looking forward to learning more!

Vying for Vegemite and IPO deals

James Kirby

Investment banker David Williams, of Kidder Williams, has been behind a string of very successful sharemarket floats. He’s also made the headlines for his role in ‘bringing Vegemite back to Australia.’

You like to claim you brought Vegemite back to Australia … what actually happened there? We were a small cog in the Bega Cheese team under chairman Barry Irvin. The trick was to find a way to buy Vegemite when it was not on the market at a value-enhancing price. (Bega bought Vegemite back into Australian ownership in a wider $460 million deal with food multinational Mondelez.) How this was done while potential competitors were sleeping … well, I’m afraid it is too soon after the event to reveal. This was an example of Investment Banking IOI and where clients get value out of an adviser. I will discuss it in a year or so but in the meantime think 007, Get Smart and international espionage!

Your specialisation is food: We never seem to create the great Australian food company though many have tried … why can nobody get it going on a global scale? Companies like Bega have done a fabulous job building a great Australian food company with substantial domestic exports. However, some of the best of foreign food companies have had the historical benefit of government support in terms of tariffs, subsidies and antitrust concessions. These have created an uneven playing field for Australian companies trying to be big on the world stage.

You’ve been in oyster farms and salmon and almonds … what’s the next big thing? For me the next big thing is in the crossover between food and nutraceutica1s (products derived from food sources with extra health benefits) and pharmaceuticals. Using new technology to improve gut health will, in many cases, also help companies use waste and by-products. There are many “next big things” in aquaculture other than salmon and trees in species other than almonds, especially in areas where land and water are cheaper.

You’re also active in financing medical companies such as the skin specialist PolyNovo – how do you select these high-risk! high -reward companies? I choose first by gut feeling and whether I believe the story, followed by significant due diligence. PolyNovo is already becoming a great Australian medical company. It has been a great performer for shareholders but better still it is changing people’s lives. People will see breathtaking advances in the way in which bums, wounds, hernia and breast implants are treated.

Are you concerned the IPO market may close up with this market volatility … we’ve seen a string of floats get cancelled such as Pexa and Firetrail? I have no concerns. The IPO window will shut for a couple of months while the dust settles. However, even now companies, like PolyNovo, with significant growth potential and diversified foreign earnings, can still raise institutional funds of good prices.

RateMyAgent was a very different float for you – how did you get involved there? The three founders (Mark Armstrong, Xavier Perronnet and Ed Van Roosendaal) came to me for seed funding and to act as a mentor and chairman, In a short period of time more than 80 per cent of Australian real estate agents are on the platform and RMA Global (the ASX-listed parent company) receives a review of agent performance for more than one in every three properties sold in Australia. There are over 29,000 agents and 500,000 reviews on the platform. The company has expanded to the US and New Zealand. [n the US, the company has agents in every state increasing in number every week. All this with 60 staff sitting in an office in Richmond, Victoria.

These monied families in Melbourne such as the Smorgons et al you have as clients … do you tell them about the best ideas or do they tell you? I know and have enormous respect for all the family offices but I only share information with those we have an advisory relationship with … Ervin Vidor in Sydney, for example, is a standout (Vidor is linked with Adina and Medina hotels.) The position of family offices has changed significantly over the last 20 years when “cash was king” and those offices could pick the eyes out of the best deals. Now money is a commodity and deal flow is king … family offices are seeing many deals once they have been used up and picked over by others. They have a tougher task than 20 years ago.

Investment bankers look like hipsters these days – when will we see you in chinos? I am slightly offended by the question [laughing]. I still see a 30year-old in the mirror – I am reinforcing my delusion by using a 25-year-old photo on Linkedln.

What was your best personal investment so far? Tassal (the salmon producer), PolyNovo and Medical Developments have been excellent financial investments. RateMyAgent will (hopefully) be my most attractive investment from a financial perspective.

What was your worst? I don’t have a worst “child” … all have been enormously satisfying, but my time will come.…/282394105483650

Investment Banker Williams Buys The Farm, No Bull

Australian agribusiness’ Mr Everywhere, investment banker David Williams, has splashed out with a big purchase of his own. It is understood the long-time Bega Cheese and Tassal Group adviser has picked up the Fairfield cattle property on Melbourne’s fringe, in a deal worth about $20 million. Fairfield is a 3700 acre farm located 25 kilometres north of the city’s Tullamarine Airport. It was owned by Charles Bright-a well known executive in listed Australian agriculture, and someone Williams would have come across plenty of times in deals over the years. Bright is a former senior executive at Elders, Tassal and Webster, among others.

The farm is now used by David Blackmore, founder of Blackmore Wagyu which makes one of the most premium wagyu products in the world, who runs about 4000 head of cattle on it. Street Talk is not sure what to make of the purchase, other than that it is proof that being “the Bega guy” can be lucrative work. Williams is founder of corporate adviser and investment banking services firm Kidder Williams, which has carved out a niche in the food, agriculture and beverage industries. Williams most recently popped up as adviser to Bega Capilano Honey. Bega snapped up an 11.2 per cent stake in Capilano last month, soon after the company signed an agreed takeover with a private equity suitor.