20/03/2007 - 22:00

Market moves to be aware of

20/03/2007 - 22:00

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Market moves to be aware of

It’s not Brian Burke’s Panama hat that is causing so much trouble in Western Australia these days. It’s something far simpler – it’s the letter ‘b’ itself.

Before dismissing this idea out of hand consider all things beginning with ‘b’ that are slightly off tune; and you can include Briefcase and Burke on that list.

Breweries are an example of tough times on the stock market, judging by the performance of most of the new floats, which have created a class of boutique brewers trying to follow the original Perth micro-brewing success story, Matilda Bay.

Biotech stocks are another category in strife, and biofuels a third.

As far as Briefcase can see, there is nothing linking breweries, biotechs and biofuels – except the letter ‘b’, and a rather poor performance of each class of stock on the market.

Before looking at each b-class stock, here’s a quick explanation of how Briefcase discovered the poisonous effect of the letter ‘b’. It wasn’t a search for anything related to Panama hats or Brian Burke, but rather a trawl through the small end of local industrial stocks to see how they were performing relative to their cousins in the mining sector.

In other words, have investors fled local industrials in pursuit of faster share-trading profits among the miners, especially the uranium explorers, a class that’s getting stronger every day as the price of the metal rises (it has risen from $US12 a pound to $US91/lb over the past few years)?

The quick answer to the question seems to be yes, judging by what’s been happening in the sectors of brewing, biofuels and biotech.

•••

Brewing first, because this is where thousands of WA investors have placed their bets on discovering the next Matilda Bay.

Unfortunately, of the four microbrewers that Briefcase examined three are looking rather flat – unlike their beers, of course.

The pick of the pack is Little World Beverages, which started life as a $1 stock and it now trundling along at around $1.62. That’s a handsome capital gain, though even at that price it shouldn’t be overlooked that the latest price only capitalises the business at $95.7 million – small beer alongside the value being assigned to uranium, iron ore, coal, and nickel stocks.

But, after Little World it is indeed a little world.

Gage Roads was a 40-cent float late last year that is currently trading around 32 cents, a price that values the entire business at $11.4 million.

Empire Beer Group also started life last year with a float of 35-cent shares, which are now trading at 23 cents, a price that capitalises Empire at $6.7 million – $3.3 million less than the $10 million raised from investors.

Oz Brewing, however, takes the flat float award with a current share price of 12.5 cents compared with an issue price of 20 cents last October, and a current market capitalisation of $2 million. This is less than most house prices in Dalkeith (perhaps the shareholders should group together and swap for an investment property in Waratah Avenue?).

Without being too rude to the people behind the brewing floats, it seems to Briefcase that these companies fit the same description as a host of small wineries from an earlier era. That is, too much focus on the fun and lifestyle aspect of making booze, and not enough on the business case.

Brewing is not so much about indulging the brewer in the hunt for the perfect drink as it is about making a product at the right price, ensuring that other people share the brewer’s taste, and finding well-developed distribution channels through which to sell the product at a profit.

Nothing better underlines those points than two personal experiences of Briefcase when it comes to beer.

One was a close friend who sometimes makes a dose of home brew. He is astonishingly proud of his creation, which, to a most other people tastes like cold dishwashing water.

The other was a tasting organised at a club recently, when a newly created, but not stock exchange listed, brewer dispensed his best ale – it was truly horrible, but somehow he had convinced himself (or been convinced by friends with burnt-out pallets) that other people would drink the stuff.

Meanwhile, over at Foster’s and Lion Nathan, not to forget countless international brewers such as Heineken and Millers, a never-ending range of excellent beers (at excellent prices) create a market that is far too crowded for most micro-brewers.

•••

What you see in the world of small brewers you also seem to be seeing in the world of biofuels, where it is hard to find an alternative energy producer with its head above water.

Of the stocks examined by Briefcase, Mission Biofuels seems to be the best peformer with a share price at $1.24 compared with a float price of $1.

Three other biofuels stocks are looking less appealing. Natural Fuels, a float from late last year, continues to sink. Its $1.50 shares are now trading around $1.03. Australian Biodiesel did trade up to $1.69 last year but is now around 20 cents, and Australian Renewable Fuels, a local favourite spun-out of Amadeus Energy, has sagged from a high last year of $2.37 to recent trades around 37.5 cents.

What’s wrong with biofuels, apart from the curse of the letter ‘b’? Nothing really. They all have a bright idea, but it’s an idea based on a belief that they can do better than the likes of Shell, BP, ExxonMobil and a couple of other global gorillas.

The liquid fuels business, like the beer and wine business, is a fine margin affair, all about economies of scale, quality control, and distribution channels.

•••

Our third b-class industry is biotech. It’s here that we find three of Briefcase’s favourite stocks, and not too much space will be consumed reminding readers that having a bright idea is not enough to build a successful business.

The chosen three are:

• pSivida, which once promised the delivery of a range of pharmaceutical and medical-related products, has fallen over the past 12-months from 78.5 cents to 21.5 cents;

• Chemeq, which once attracted stockbroker reports rating it a buy up to $7 a share (and more), is now limping along at 4.7 cents; and

• Clinical Cell Culture, which promised to heal the world’s burns with its spray-on skin, but has slipped from a high last year of 19 cents to around seven cents today.

The biotech problems are no different to those being suffered by the brewers and the biofuel players – small companies trying to muscle in on the turf of much bigger competitors, which is a very hard ask for anyone.

•••

“One should always play fairly when one has the winning cards.” Oscar Wilde

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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