Continuing on my recent theme of exploring different share-price strata for opportunities, here are three stocks presently sitting under $1 that I think have excellent prospects for heading higher.
- Judo Holdings (JDO, 86.5 cents)
Market capitalisation: $960 million
12-month total return: –37.3%
Three-year total return: n/a
Analysts’ consensus target price: $1.35 (Stock Doctor/Refinitiv, eight analysts)
Listed in November 2021 at $2.10 a share, Judo Bank was the first fully licensed Australian bank to float on the stock exchange in 25 years – since Macquarie Bank in 1996 – just three years after the ‘challenger bank’ was granted its full banking licence in April 2019.
A matter of days into its listed life, Judo was valued at $2.32, but it has been all downhill, to the current price.
Judo is a digital bank focused on lending to small and medium-sized enterprises (SMEs). The company’s business proposition is to leverage data to lend to SMEs based on the performance of the business; not just the value of the available security, or “collateral,” that the incumbent banks concentrate on.
Judo has employed experienced bankers that have SME credit risk as a core competency. Each of the bankers looks after 30 customers, and knows those loans well – Judo can detect any issues early, and be proactive in engaging with the borrower.
The company says its total addressable market – the SME lending market in Australia – is $605 billion, not counting the agriculture industry. At 30 June 2023, it had less than 2% share of that market – giving it significant room for growth if it executes its strategy well.
Judo has grown its loan book impressively: from $1.8 billion at June 2020, by June 2023 the loan book had grown to $8.9 billion. In FY23, Judo loaned $3 billion more, or 46% lending growth; that was eight times the growth of lending in the overall banking system. The company has stated that it will not consider itself as having reached “scale” until it has a loan book of between $15 billion—$20 billion.
As expected, business loans dominate the loan book, at 76%, but Judo also offers customers home loans (11% of loan book), equipment loans (7%) and lines of credit (6%). At 30 June 2023, Judo had 3,758 borrowers, and 35,050 term deposit customers.
Of the $9.7 billion funding base at 30 June 2023, half is term deposits: the company expects to push that as high as 75%. It accesses the same kind of wholesale funding that larger lenders do; over the longer term, wholesale funding is expected to represent 15%—20% of total funding. Judo recently raised $75 million through an issue of capital notes.
The underlying net interest margin (NIM) was 2.79% in FY22, but Judo lifted that to 3.53% in FY23. Net interest income (NII) more than doubled, to $347.6 million, driven by the increase in and an increase in underlying NIM. Net profit swelled more than eight times, to $73.4 million.
Judo says it is bringing back the craft of relationship banking to transform banking for Australia’s small businesses, who often find themselves stymied from gaining funding because their circumstances do not fit the cookie-cutter approach of the big banks, which emphasise the owners putting their houses behind loans. It is a genuine alternative for SMEs looking to grow through debt funding. The market has, in its wisdom, given the company a big haircut on its IPO (initial public offering) valuation – but I think that’s been overdone, and the current share price represents a very attractive entry, into a business whose crucial numbers are all heading in the right direction, and which has plenty of room to grow.
The most bullish analysis on Judo that I have seen comes from broking firm Morgans, which has a price target on the stock of $1.43.
- 4D Medical (4DX, 97 cents)
Market capitalisation: $336 million
12-month total return: 104.2%
Three-year total return: –25.5% a year
Analysts’ consensus target price: $1.175 (Stock Doctor/Refinitiv, two analysts)
I looked at medical imaging company 4DX Medical in May 2022 (can we link) at 75.5 cents; and also, in case that looks to be good tipping, in October 2021 (can we link), at $1.58.
But certainly, at 97 cents, I think it should reward patient investors.
4DMedical is looking to disrupt the US$31 billion ($44.9 billion) global respiratory diagnostic imaging market (that figure is spent every year on respiratory diagnostics across more than 377 million procedures around the world) with its unique four-dimensional lung imaging technology, XV Lung Ventilation Analysis Software (XV LVAS), which maps and measures lung motion and air flow by converting sequences of X-ray images into four-dimensional quantitative images, which are used by a doctor to understand how the patient’s lungs move and function when breathing. At the heart of the process is a proprietary technique 4DMedical has developed, inspired by wind-tunnel technology, which combines fluoroscopy and advanced visualisation to generate high-resolution images of the motion of, and airflow through, lung tissue.
In May 2020, the XV LVAS technology received 510(k) clearance from the US Food & Drug Administration (FDA) – which demonstrates that the FDA accepts that the device to be marketed is as safe and effective as a legally marketed device – following a major confirmatory clinical trial of the XV Technology, conducted at Cedars-Sinai Hospital in Los Angeles, California. The clinical trial showed that XV gave clinicians much more detailed information than the commonly used pulmonary function test (PFT) and computed tomography (CT) imaging methods, confirming 4Dx’s belief that the unique and non-invasive XV technology enables unprecedented insight into pulmonary functioning, which is critical in the analysis and treatment of respiratory diseases.
The clinical trial demonstrated that XV not only matched the performance of current “gold standard” measures and other clinically available measures, but it was also more predictive than other measures in assessing the onset of conditions such as radiation-induced pneumonitis and/or pulmonary fibrosis. In addition, the trial found that XV was clearly superior to the major incumbent testing technologies, PFT and CT, in detecting loss of regional lung function associated with early-stage disease progression, both in terms of sensitivity to structural changes in the lung (where it was compared to CT) and in standard lung function tests (where it was compared to PFT.) 4DMedical says XV is a break-through medical technology and a potentially world-changing advance in better and more timely diagnosis – and thus, improved treatment outcomes – for all lung disorders, including asthma, chronic obstructive pulmonary disease (COPD), cystic fibrosis and cancer.
The business model uses existing diagnostics equipment through a cloud-based software-as-a-service (SaaS) offering, with gross margins of more than 90% on XV Technology software.
The focus of commercialisation is in the US where, last month, the US Center for Medicare and Medicaid Services (CMS) assigned US$299 as reimbursement benefit for XV LVAS – gaining reimbursement is a crucial step in cracking the US market, because public or private third-party payers compensate the provider for the costs of a treatment.
From 1 January 2024, XV LVAS scans conducted in a US hospital outpatient facility for Medicare patients will be able to be billed to the CMS. This decision will accelerate adoption of XV Technology.
That was not the only big news that 4DX Medical dropped in November. It also announced that its CT-based ventilation product (CT LVAS) had also been cleared by the FDA. CT LVAS provides an almost identical report to XV LVAS product, but uses widely available CT imaging infrastructure (instead of X-ray equipment), providing clinicians and patients with greater access to XV Technology. FDA clearance follows the rollout of CT LVAS in Australia since October 2022: 4DMedical signed a contract with I-MED Radiology Network, Australia’s largest outsourced provider of radiology, with more than 250 clinics nationwide.
CT LVAS also represents significant progress towards release of the company’s CT:VQ technology, which will allow quantitative functional imaging of both ventilation (airflow) and perfusion (blood flow) within the lungs from a traditional CT scan.
And also in November, 4DX announced a memorandum of understanding (MoU) with Dutch-based global healthcare giant Philips to establish a strategic collaboration to expand federal and commercial sales opportunities for XV Technology in the US. Philips is one or the largest providers of medical imaging hardware and software globally, and represents a powerful partner that 4DX says “may accelerate adoption of the LVAS scan by years.” XV LVAS will be included in the Philips catalogue of services.
The major commercial benefit to 4DX is that Philips is an established provider to US Healthcare providers including the US Department of Veterans Affairs (VA). The Veterans Health Administration (VHA) healthcare system is the largest integrated healthcare system in the US, providing life-long care and services to eligible military veterans and their families, and serving 9 million veterans each year – it has been a major commercial target of 4DX since it entered the US. Half of VHA clinics use Philips imaging systems: offering the XV LVAS scan as part of the Philips catalogue from 2024 avoids the need for extended contract negotiation work by 4DX.
The Philips deal – which should turn into a binding distribution contract – is potentially transformative for 4DX, putting it a big step further down the track to its massive global market opportunity.
- Dusk Group Limited (DSK, 92 cents)
Market capitalisation: $57 million
12-month total return: –48.2%
Three-year total return: –11.7% a year
Analysts’ consensus target price: $1.80 (Stock Doctor/Refinitiv, three analysts)
Home fragrance retailer Dusk Group is yet another retailer that has been hit by rising interest rates and cost-of-living pressures, sales as cost-conscious consumers tighten their spending. but the company finished last year with a strong balance sheet. This business does nearly 70 per cent gross margins.
Dusk sells candles, perfumes, oils, diffusers and other home fragrance products, including related homewares and accessories. The company’s brands are Jo Malone London, GlassHouse Fragrances, Circa Home, ECOYA, The Aromatherapy Company, Peppermint Grove, Palm Beach, In Essence, From Wilds, Mews Collective, and diptyque. The company is a big player in the main gifting and seasonal celebration periods such as Christmas, Easter, Halloween, and Mother’s Day – like many in the non-discretionary retail arena, DSK will certainly be hoping for a healthy Christmas. Candles is the biggest sales category, at 35% of the total, followed by diffusers and consumables, at 27%.
In FY23, Dusk’s sales fell 0.6%, to $137.6 million, with like-for-like sales down 13.2%, and online sales an alarming 35.2% weaker, at $7.5 million (5.4% of total sales). The gross margin declined 1.6 percentage points, to 64.1%. Net profit slipped 36.6%, to $11.7 million. 14 new stores opened and one closed during the financial year, finishing at 145 (including online), with three in New Zealand and the rest in Australia. Dusk paid a full-year dividend of 11 cents a share, fully franked, down from 20 cents in FY22.
In August, Dusk flagged that sales were down 15.6% in the first seven weeks of FY24, and it was looking to save $2 million by cutting store staff, head office and logistics costs. At the annual general meeting (AGM) in November, shareholders were told that sales for the first 20 weeks of FY24 were down 11.2%, to $38.8 million – but there had been a slight improvement since October, with a solid Halloween.
The FY24 result will be significantly influenced by Christmas performance: the company has opened six new stores in Australia to capitalise on the peak season. But Dusk says it draws confidence from its fundamentals: it is a category leader, in a low-price “affordable luxury” segment, with a loyal customer base: Dusk Rewards has 735,000 active members, and who collectively account for 62% of total sales. The company has strong cashflow and no debt.
Dusk is another company that has had an overly optimistic start to listed life stripped out of it. Dusk Group listed in November 2020 at $2 a share, and by mid-2021, the shares traded as high as $4. But it has been a bruising slide since then, to as low as 87 cents in June this year. The slide makes DSK look much more attractive: at 92 cents, it trades on a prospective fully franked FY24 yield (on analysts’ consensus) of 6.5% (grossed-up, 9.3%), based on an expected six-cent dividend: and on 8.6 times expected FY24 earnings, versus 19.9 times earnings for its sector.
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