CLOVER CORP (CLV)
ROB Millner's Washington H. Soul Pattinson has performed outstandingly in recent years, including the emergence of micro cap Clover Corp. Clover operates in the growing nutraceutical market, concentrating on the production and delivery of natural fish oils into food products such as baby formula and bread. In the developing world the overall market for infant formula is growing at 12 per cent a year.
Clover has grown its revenue and earnings at 20 per cent a year while preserving a cash-rich balance sheet and paying dividends. This approach is unlikely to change in the foreseeable future since Washington H. Soul Pattinson owns 28 per cent of the stock.
The company earned $2.6 million net profit for the six months to January 31 and said it was confident the second half would be strong. Assuming the company doubles the first-half result, that puts it on a P/E ratio of 10 times for 2012 once the cash is backed out.
If the company can grow at 20 per cent over the next two years, this P/E looks skinny. All going well, shareholders could benefit from the double whammy of earnings growth and P/E expansion.
SILEX SYSTEMS (SLX)
SILEX is one of those rare stocks that has made many investors wealthy and many investors wish they never looked at the sharemarket. The stock peaked in mid-2007, hitting $13.50 a share before tripping and falling all the way back to $1.80 in December 2011. However, in the past five months the stock has been sizzling, rising to $3.78, a gain of 110 per cent. This has taken place despite the closure of uranium reactors in Japan following the March 2011 tsunami.
Silex's main business is a new method of uranium enrichment. Some years ago it entered an agreement to commercialise the technology with a consortium named NRC that includes General Electric, Hitachi and Canadian group Cameco Corp. NRC is working on a pilot plant in the US and, all going well, the board will give the all-clear to begin a full-size commercial plant about September. Silex will receive a royalty of 7 per cent to 12 per cent on any sales. The technology uses lasers and allows uranium operators to save costs by building smaller plants and using less energy.
If NRC gives the green light to commercialise the technology then the consortium could grab a large slice of the uranium enrichment market in the US that is estimated to be $7 billion, growing to $20 billion in 2030. If NRC can get 20 per cent of the market and pay a royalty of 8 per cent to Silex, then revenue will go from $112 million to $320 million by 2030. It has been a long time coming, so tread with caution.
ALESCO (ALS)
WHAT are the chances of investors buying shares in takeover target Alesco at $2.10 a share and still making a decent return? Dulux's decision to purchase 19 per cent of Alesco's shares before making a $2 bid virtually guarantees the takeover will take place. Investors have to ask if they can make a reasonable return with Alesco trading 10? above the bid price.
Unless a competitive bid is forthcoming, the best Alesco and its shareholders can hope for is a 25? increase in the offer. This will allow Dulux to tell its irritated shareholders the acquisition is highly accretive through the housing cycle. Such a scenario would mean buyers of Alesco today would book a gain of about 7 per cent over the next four months.
Former fund manager Matthew Kidman is director of WAM Capital. The Age accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser.
Frequently Asked Questions about this Article…
What does Clover Corp (CLV) do and why might everyday investors be interested in this fish oil producer?
Clover Corp is a micro-cap nutraceutical company that produces natural fish oils used in food products such as baby formula and bread. Investors may be attracted by its exposure to the growing nutraceutical and infant-formula markets, a history of roughly 20% annual revenue and earnings growth, a cash-rich balance sheet, and a dividend stream — all factors the article highlights as reasons the stock could appeal to long-term investors.
How fast is the infant formula market growing and what does that mean for Clover’s growth prospects?
The article notes the infant formula market in the developing world is growing about 12% a year. Because Clover supplies fish oils used in baby formula, that market growth supports demand for its products and helps explain the company’s historical ~20% annual revenue and earnings growth cited in the article.
What recent financial results and valuation metrics does the article report for Clover Corp?
Clover reported a $2.6 million net profit for the six months to January 31 and said it expected a strong second half. The article states that if the company doubles the first-half result, it would be on a price/earnings (P/E) ratio of about 10 times for 2012 after backing out cash — a valuation the author describes as 'skinny' if 20% growth continues.
How does Washington H. Soul Pattinson’s ownership affect Clover’s strategy and shareholder outlook?
Washington H. Soul Pattinson owns 28% of Clover, and the article suggests that ownership helps explain Clover’s conservative, cash-rich approach and dividend policy. That significant ownership stake makes it less likely management will radically change strategy in the foreseeable future, which can be an important consideration for investors.
What is Silex Systems (SLX) and why has its share price been so volatile?
Silex Systems develops a laser-based uranium enrichment technology and has an agreement to commercialise it with an NRC consortium including General Electric, Hitachi and Cameco. The stock has been volatile — peaking around $13.50 in mid-2007, falling to $1.80 in December 2011, then rising to $3.78 (a 110% gain in five months) — reflecting long development timelines, sector-specific news (like Japanese reactor closures) and investor reaction to progress toward commercialisation.
What commercialisation upside and risks does the article associate with Silex’s uranium enrichment technology?
The article explains NRC is building a US pilot plant and could clear a full-size commercial plant around September (board permitting). Silex would receive royalties of roughly 7–12% on sales. If NRC captures 20% of a US enrichment market the article estimates growing from $7 billion to $20 billion by 2030, and pays an 8% royalty, Silex’s revenue could rise from about $112 million to $320 million by 2030. However, the author cautions this has been a long time coming and investors should 'tread with caution.'
What is the situation with Alesco (ALS) and Dulux’s takeover bid, and what returns might new buyers expect?
Dulux bought 19% of Alesco shares and lodged a $2 per share takeover bid. Alesco was trading about 10% above the bid price at the time of the article. Unless a competing bidder emerges, the article suggests the takeover is likely and that the best Alesco shareholders could hope for is a roughly 25% increase in the offer — which, in the author’s view, would translate to about a 7% gain for buyers who purchase at current prices over the next four months.
What precautions or next steps does the article recommend for everyday investors considering these stocks?
The article advises caution — especially with long-dated prospects like Silex’s commercialisation — and reminds readers that stock recommendations carry risk. It recommends contacting a licensed financial adviser for personalised advice and notes the publication accepts no responsibility for stock recommendations, underscoring that investors should do their own due diligence.
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