Every investor is looking for cheap stocks. Here are three that I think fit that description.

1. Lotus Resources (LOT, 26.5 cents)

Market capitalisation: $486 million

12-month total return: 8.2%

3-year total return: –10.1% a year

FY25 estimated yield: no dividend expected

FY25 estimated price/earnings (P/E) ratio: n/a

Analysts’ consensus price target: 54 cents (Stock Doctor/Refinitiv, four analysts); 54.7 cents (FN Arena, three analysts)

Up until 2020, Lotus Resources’ main focus was its Hylea cobalt, platinum, nickel and scandium project in the Fifield district of New South Wales, but that all changed in March 2020 when Lotus bought an 85% stake in Paladin Energy’s Kayelekera project in the African nation of Malawi for just $5 million (the Malawi government owns the remaining 15%).

Paladin wanted to concentrate on restarting its Langer Heinrich operation. Kayelekera was a proven uranium operation that had successfully produced 11 million pounds of uranium oxide over five years, but which had ceased operations in 2014 due to sustained low uranium prices.

Lotus started work on a definitive feasibility study (DFS) for re-commissioning Kayelekera in August 2021. It has turned out to be a very well-timed acquisition, as the uranium price started to turn northward at around the same time. From the time Lotus bought its Kayelekera stake, the uranium (oxide) price has risen from US$24.70 a pound to more than US$105 a pound in January 2024, before a period of weakness in the uranium spot price as utility buyers held back. But with nuclear energy well and truly back in the energy conversation as part of the green energy mix – supported by Microsoft’s decision to turn to nuclear energy to power its hungry data centres – the price has stabilised around US$80 a pound. Google is now also in talks with nuclear utilities about power for its data centres.

All up, it is a great time for Lotus to have announced, this month, an accelerated restart plan for the Kayelekera, bringing the time to first uranium production forward from about 15 months to between eight and ten months, which would mean the first uranium is produced in the third quarter of 2025, and at a cheaper total capital expenditure cost of US$50 million, down from US$88 million.

The definitive feasibility study (DFS) envisages average production of 2.4 million pounds of U3O8 a year over the first seven years of an initial mine life of ten years. The cash cost of production is estimated at US$29.10 a pound, with the all-in sustaining cost (AISC) – a figure that incorporates not only the cash cost of production but all the costs that allow production to be sustained – of just US$36.20 a pound during the first seven years of production, and a life-of-mine AISC at US$37.70 a pound. The Restart DFS is underpinned by an ore reserve estimate of 15.9 million tonnes at 660 parts per million (ppm) of U3O8, for 23 million pounds of U3O8.

With the uranium sector showing plenty of appeal for investors, Lotus has an excellent project at the right time. The stock looks very cheap.

2. PlaySide Studios (PLY, 46 cents)

Market capitalisation: $188 million

12-month total return: 15%

3-year total return: –13.1% a year

FY25 estimated yield: no dividend expected

FY25 estimated price/earnings (P/E) ratio: n/a

Analysts’ consensus price target: 82.8 cents (Stock Doctor/Refinitiv, three analysts); 90 cents (FN Arena, one analyst)

I last looked at Melbourne-based PlaySide Studios (PLY) in August, when it was trading at 68 cents (can we link to SR article “Four Stocks in the 50s,” sent on 28 August). I described PlaySide as “one of the ASX’s true global leaders, but not a very well-known one.”

PlaySide is Australia’s largest video game developer, and a big name in the global video game industry, in which it is one of the top independent developers in the world. PlaySide develops its own intellectual property (IP) in the form of self-published games delivered across four platforms: PC, mobile, virtual reality (VR) and augmented reality (AR). In 2022, PlaySide established a publishing arm, which provides funding, development support, marketing and publishing of third-party games from smaller independent studios, on a work-for-hire basis. The company develops video games for multiple platforms including mobile, PC/console, virtual reality and mixed reality, with a portfolio of more than 70 titles. It has developed games in collaboration with studios such as Disney, Pixar, Warner Bros, and Nickelodeon.

On October 23, PlaySide released an operating update and fresh FY25 guidance, and the shares tanked 32% in response. PlaySide told the market something it never likes to hear: that the guidance for the current year will be less than the actual numbers in the previous financial year. The company said:

• FY15 revenue is expected to be between $62 million–$68 million (FY24: $64.6 million).
• FY25 EBITDA (earnings before interest, tax, depreciation and amortisation) is expected to be between zero–$5 million (FY24: $17.5 million); and
• The cash balance at 30 June 2025 is expected to be between $15 million–$20 million (FY24: $37.1m).

Analysts expect PlaySide to make a loss in the current financial year, but to be back to profitability in FY26.

But the share-price scalping seems to be an over-reaction that potentially gives investors an attractive entry point to the stock.

It seems to ignore the fact that PlaySide has some big launches in the works, including a major deal with Warner Bros to create a Game of Thrones video game, and a deal with Polish game developers Fumi Games to publish the 1930s-inspired game MOUSE, which is expected to launch in 2025. Those releases are capable of significant commercial success.

Broker Shaw & Partners says investors panicked by PlaySide’s balance sheet (that is, the lower cash forecast in the updated guidance) are “essentially assuming that MOUSE will spectacularly fail,” which it says is “an extreme view.” It believes PlaySide Studios remains well-funded to enable new title launches and expects new releases (like MOUSE to boost cash from $20 million to $33 million. While the broker categorises PLY as a “high-risk” buy, it has a 90 cents price target.

3. DUG Technology (DUG, $1.90)

Market capitalisation: $224 million

12-month total return: 2.7%

3-year total return: 32.6% a year

FY25 estimated yield: no dividend expected

FY25 estimated price/earnings (P/E) ratio: 32.6 times earnings

Analysts’ consensus price target: $3.22 (Stock Doctor/Refinitiv, six analysts); $3.135 (FN Arena, two analysts) 

High-performance computing (HPC) company DUG Technology specialises in analytical software development, data services and sustainable high-performance computing, with the bulk of its revenue and earnings coming from processing vast quantities of seismic data for oil and gas companies. DUG says it delivers a “comprehensive geoscience offering” and that it “maximises the value of seismic data.” This year, DUG has begun rolling-out its new proprietary multi-parameter full waveform inversion (MP-FWI) imaging technology, which has revolutionised seismic data processing, giving resources companies – mostly in the oil and gas industry – better results, and much more quickly than the technologies they have used in the past. DUG says the MP-FWI technology can produce higher-resolution images and reduce data processing from nine months to four weeks – removing the need for a conventional processing workflow – and stands to replace the incumbent methods for processing and imaging of seismic data, as the new global standard.

The Services segment, the bulk of the business, provides clients with two types of services: data loading, quality control and management; and seismic data processing and imaging. The Software segment has one main product, DUG Insight, which is an intuitive and interactive software package for scientific data visualisation and interpretation, and processing of data sets of all sizes (including the extremely large) on a range of tools, from workstations through to very large HPC installations.

Apart from software and services, DUG offers high-performance computing-as-a-service (HPCaaS) from its own network of what it describes as “some of the largest and greenest supercomputers on Earth.” The company’s patented, award- winning, immersion-cooling technology ‘DUG Cool’ reduces power consumption by more than 50% compared to a typical air-cooled data centre, and is used in all of its data centres:

Clients connect to DUG’s supercomputers, located in three global locations, and can use the substantial compute and storage capabilities. DUG also provides software and algorithm support and development to enable a client to successfully operate on its HPC network.

In July DUG formed a new business unit, DUG Nomad, to commercialise the “DUG Nomad” technology, a mobile, modular data centre solution that puts HPC where clients need it – the company calls it “DUG Cool in a container.”

There is also DUG HPC Cloud, a collaborative cloud platform that enables clients to mix and match the three product offerings with their own codes and expertise, to suit their needs and desired outcomes.

In FY24, revenue rose 29%, to US$65.5 million, driven mainly by services, with MP-FWI Imaging revenue making up about one-third of total revenue. Software revenue appreciated by 11%, to US$7.4 million, with the top three software clients accounting for more than US$1.4 million revenue a year, on contract terms from three to five years. HPCaaS revenue was down 16%, to US$3.4 million.

DUG’s top ten clients accounted for 60% of revenue in FY24, testament to the company’s ability to foster long relationships with large clients, across multiple product lines.

Underlying EBITDA lifted 54% to US$23.2 million; and pre-tax profit increased by 7%, to $8 million; but at the after-tax level, net profit was down by 33%, to $3.3 million. The Services order book at 30 June was a record US$36.5 million, up 31% on June 2023. DUG says it has a strong pipeline of services work, particularly in the Middle East, which is expected to be the company’s leading region. DUG did not issue earnings guidance for FY25, but said it was “well-placed for accelerated momentum into FY25, underpinned by commissioning of an office in the United Arab Emirates (UAE).”

A relatively disappointing first-quarter update, and a $30 million institutional placement completed at $1.90 a share, have weighed on the share price, but the company is poised nicely for future growth, benefiting from major thematics, and the shares look cheap on a longer-term basis.

Management felt the disappointing 1Q update was an aberration, highlighted likely growth of circa 20% in FY25, and was constructive on the longer-term, notes the analyst.

DUG develops software and high-performance computing (HPC) for real-world applications, built around innovative processing, algorithm development and storage solutions to leverage big data. Aside from the resources industry, its client base also features customers in radio-astronomy, biomedicine and meteorology, from the government and education sectors, as well as growing commercial use. Demand for HPC services is expected to surge on the back of processing of big data: according to Global Industry Research, HPC is already a US$35 billion market and is expected to grow to US$57 billion by 2028.

The company has developed a specialisation in the resources industry, in which it has operated for more than two decades: oil and gas is the primary driver of revenue and earnings.

The Services segment, the bulk of the business, provides clients with two types of services: data loading, quality control and management; and seismic data processing and imaging. The Software segment has one main product, DUG Insight, which is an intuitive and interactive software package for scientific data visualisation and interpretation, and processing of data sets of all sizes (including the extremely large) on a range of tools, from workstations through to very large HPC installations.

Apart from software and services, DUG offers high-performance computing-as-a-service (HPCaaS) from its own network of what it describes as “some of the largest and greenest supercomputers on Earth.” (The company’s patented, award- winning, immersion-cooling technology ‘DUG Cool’ reduces power consumption by more than 50% compared to a typical air-cooled data centre and is used in all of its data centres.) Clients connect to DUG’s supercomputers, located in three global locations, and can use the substantial compute and storage capabilities. DUG also provides software and algorithm support and development to enable a client to successfully operate on its HPC network.

There is also DUG HPC Cloud, a collaborative cloud platform that enables clients to mix and match the three product offerings with their own codes and expertise, to suit their needs and desired outcomes.

At the FY23 result, services generated 75.6% of revenue, with software 16.5% and HPCaaS 7.9%.

While DUG is rightly considered a resources specialist,

In February, DUG got pounded after the release of its half-year result (to 31 December 2023), plunging as much as 29%, despite revenue rising by 23%, to US$30 million, and EBITDA by 4.4%, to US$7.1 million. The revenue boost was powered by a strong performance from the key services business, which delivered a 28% lift in revenue to US$25.3 million, but the market did not appear to like the fact that the EBITDA margin weakened significantly, down from 28% a year earlier (and from 31% in the second half of FY23) to just 24% for the March 2024 half-year. Net profit slid 31.6%, to US$1.3 million, compared to US$1.9 million a year earlier (and US$3.1 million in the preceding six months). DUG did not issue earnings guidance for FY24, but net profit will be down substantially.

But the analysts that follow DUG Technology are looking for a profit rebound in FY25, as MP-FWI is rolled-out and the company’s client base diversifies further from the cyclical oil and gas industry.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.