the call: Monday 28 September

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1:01Good day and welcome to the call 10 stock. People are here to experience one hour. It is Monday, the 28th of September. I'm Andrew Gagan. Thanks for joining us. Also joining us on the show. Data Landtrend Focus Partners, Australia. And Steven Madd from Team Invest, gentlemen. Welcome to you. Welcome back, spend a while since we've had you on the show. Let's start with you. What you're thinking just in terms of what we've seen on the market. Obviously, ASX is down around 4.5% September. Look, seasonally we know September is not a great month. But there is so much more going on at the moment. What are you considering? This is one of our favorite times of the year at Team Invest. We get annual reports for most of our companies. And that really gives us a chance to dig in deep to how the businesses have performed over the past 12 months.

2:01And obviously compare them to previous years as well. Get an update from our management teams and our boards in the annual reports as well. And then head into AGM season where we get a little trading update from them normally as well in the next month or two as all the AGMs rollout. So, yeah, for Team Invest, it tends to focus more on the individual companies than the market as a whole. It's a great time of year for us and we really look forward to reading all those annual reports of the 2030 companies that most Team Invest members are following closely. Good to have some optimism on the show. I've got to say, give us what's going on. What broadly? David, how are you approaching at the moment? Yeah, it is an interesting time of the year and definitely a lot of going on globally. I think probably the thing that our investors like is the fact that this time of the year we get a lot of dividends. We've got about $40 billion worth of cash coming through this month and another $12 billion or so in the month of October. So, time when investors get rewarded for holding stocks and a lot of the dividends through the reporting season were fairly positive.

3:08So, that's the positive side. The question, though, a lot of us have grappling with is what do we actually do with that cash? And given the global uncertainty that we've got at the moment, we are starting to see pockets of value in Australia because we have been sold off a little bit, but also still remaining a little bit cautious about the potential of global markets being sold off a little bit further. So, holding a little bit more of that cash ready for future opportunities. All right. Well, let's begin with opportunities potentially we're going to see with stock of the day in terms of whether it's presenting some compelling value at the moment given that news of Kroon energy has slashed its full year production guidance after an electrical fault forced to pass shut down at its one oil field in Brazil. So, total 2026 production has been revised down to 26.6 and 7.2 million barrels pushing expected unit operating costs up to 15 to 16 US dollars per barrel.

4:13Kroon saying its insurance coverage is expected to reimburse substantially all repair costs and partially cover lost revenue. But as you can see, they stopped taking a big hit today down around 12%. So, Stephen, look, I know you guys at Team Invest don't traditionally go into energy or resources as such, but I'm interested to get you view on on Kroon, I guess, particularly given the global backdrop of what's going on with those energy prices. Yeah, look, I guess today's announcement is as possibly one of the reasons why a lot of Team Invest members don't play in this industry so to speak or this sector. It is just so cyclical and it's really difficult to project with any certainty over the next day, four or five, six years, where the commodity price will go and in turn, you know, where the earnings will go. And that's without the production or the drilling or the mining risks that can go with it. So, I guess a few specific things I could add for Kroon at the moment.

5:15We've got a new CEO in place there in the last 12 months and there's been a lot of upheaval in the last few years with some of their institutional investors, I think, and I think it's a lot of pressure to allocate their capital or use their capital maybe in a different way to what management was previously. It's been a pretty good last few years if you're just truly looking at the revenue and the profit numbers coming in from Kroon. But again, it's a cyclical industry. There's a lot of geopolitical risks like you touched on earlier. I guess the other good things that I saw here was that the debts come down a little bit in the last few years and they have started returning some capital to shareholders in the form of dividends as David just touched on. But it's a capital intensive business and return on capital never really gets above 10%. So, I would say without a lot of industry expertise here or really close access to the current management team for us to be in the too hard basket.

6:17The value right now probably looks okay from a multiple perspective, but we just couldn't have much certainty around where the earnings are going to go, even without all of the geopolitical stuff that's applied. All right, I'll call that an avoid then from your perspective at least David. How much exposure have you had in the energy sector? Yeah, a reasonable amount, Andrew, but probably with the larger companies, the Santos and the Woodside's. Karin's a stock that I've followed for quite some time. And unfortunately is one of those stocks that continues to disappoint that they do have a lot of good assets and they've got a lot of potential and the fact that they are unhinged should mean that they have a very good leverage to the current higher or price. The problem with Karin is being execution. So, they've had one of their fields, the who that which has had long term operational issues.

7:17The Boiner field, which is the one where they've currently got the issue has actually been the one that should have been providing a lot of the potential upside. So, it is a concern that we need to continue, continue challenges for the business. So, it's yeah, from a valuation point of view, they actually look quite good. As I say, their execution has yet not been what you would expect from a high performing oil miner. So, I think that by virtue of that, I'd probably be avoiding it as well. Right, I double avoid. Then for our stock of the crew energy. Well, let's take a look at the first five stocks we're going to get across on the show then and we're going to take a look at Ostal, Mervak, Washington, eight salt hats, ordinate and sigma health care. So, let's kick it off with a look at Ostal, the ship builder, as presidents obviously here in Australia, but also critically in the US.

8:27In fact, Wildcat private equity making its bid for the US operations there. I think also recently that the US business receiving a contract valued at 10.8 million awarded by the US Navy a lot has had some problems with the US Navy contracts. David, let's start with you. What are your thoughts on Ostal and the money potentially with that break up the business? Yeah, that's obviously the big question as far as Ostal is concerned. They've got that bid from Wildcat as well as Hanwai, who's South Korean business who have 19.9% of the business and have expressed an interest in taking that over as well. So, it's certainly in play. The problem with Ostal is that the last result was very disappointing and announced a loss of $125 million below expectations. And you would think in this current environment that producing ships for defense would be a fantastic business and it is a good business.

9:29And as you've mentioned, they've got a lot of good contracts in place, not just with the US Navy, but with others around the world. And with building those large ships is that it is very costly. And as we know with the global shipping routes and the cost of steel and oil and the input costs, it can be a business that is vulnerable to external factors. Yeah, it's a difficult one. It is a good business long term. They don't pay much of a dividend yield. So it's really one of those stocks that you're looking at for long term growth. And as we said, the potential of a takeover target there. I think if you've got the stock, I'd be holding it because I think that there is future potential for it. I just think at current levels, I can't see enough value in it. The PE ratio, even though we've seen the share price down quite a bit, PE ratio is still fairly high.

10:31As I mentioned, the last result was a loss as well. So they're not generating a lot of cash to pay out as dividends. So it's one of those long term stocks that, yeah, if you've got a node, be holding it, but certainly wouldn't be buying with any new money at the moment. So they've hold for you. Seven, what are your thoughts? Yeah, look at 10 agree with some of David's comments there. But when you look at Bostolav the long term, it really hasn't been a lot of sales growth. They're eight or nine years. Now I think they've grown their revenue about 2% a year. So even taking quite a long view, it looks like there's some kind of headwinds for their industry in general potentially. Or potentially they haven't had a management team that's been executing particularly well over that extended period. I did notice that the chair here was the former secretary of the Navy in the US. So given they're trying to do more business in the US and with defense in the US.

11:33Hopefully that that might open up some helpful connections. And he has a reasonable share holding. He's about the only person on the board at the moment with any significant ownership in the business. So that could hopefully be a positive in the next few years to unlock some value with you with the US defense opportunities. But again, if you just come back to what we do know rather than what we're guessing or hoping for the future. The last seven or eight years were really haven't seen any significant revenue growth. And we certainly haven't seen any profit growth. We've seen losses in quite a few of the last few years. So it's again not one of the best 20 or 30 businesses that we could find on the ASX right now. We'd leave it in our too hard basket and for us it would be a sell. Hold on a sell for OSTL. Let's now attention now with a focus on property in move. I was asking about this one. And look at having more recently actually warned that home building is about fall off a cliff.

12:39Saying that small developers want hard to make projects stack up essentially while builders so buyers have stopped showing up at new displays. Obviously just more evidence there what's going on in the broader property sector. Given all that and certainly what's going on in property more generally. Steven, what do you thoughts on the vet? Yeah, I did read that article last week where one of their key leaders mentioned that quite about home building about to drop off the cliff, which is a concerning comment. If you own shares in a home builder, I guess I do have a personal story here. My first home was actually a move back home in a move back estate up in Queensland. And I was really happy with it. They did a good job. And from there I stayed in quite a lot of move back hotels as a home buyer. They gave you a nice little discount to stay in their hotels around the country. And I was very happy with my personal experience with with move back. But then when you come and look at the business performance over the long term.

13:40As we probably expect it's a very competitive industry. They do tend to have a pretty good net profit margin year in year out. But despite that the return on equity or the return on capital for the business never really gets above 10%. And in nominal terms, again, over 10 years they've only grown their total revenue about 10% in 10 years. And as a result, profit really hasn't gone anywhere over that period of time as well. In actual fact, earnings are lower than they were 10 years ago right now and have been for every one of the last five years. The other thing I noticed here was I'm not sure our management team are as aligned to the business performances we might want them to be. The CEO's pay doesn't really seem to change much in those down years. Which is surprising. Normally you'd expect to see CEO compensation dropping a bit when you're having a bad year.

14:42That doesn't seem to be the case at first glance at Merback. So I would probably again say he really competitive industry, not great business performance over a very long period of time. You know, it's a profitable business and I'm sure we're going to continue to need to build more homes. But without some great industry expertise or without this being really in your circle of competence, we'd again put it in our to hard basket and it'd be a sell for us. David, are you seeing any recent optimism in Merback? I think there is a reasonable amount of potential in Merback. They are undervalued from a fundamental point of view. Their P ratio is sitting at 13.7 times forecast in the future that that will decline to about 11.9 times with earnings growth coming through. They do pay a decent dividend yield as well. So a yield of about 5.7 percent with the potential that that grows also.

15:44So for a fairly conservative portfolio where you're looking for a reasonable return with a decent dividend yield, I think Merback sits reasonably well in that space. It is obviously a very challenging period though because they do have a lot of residential properties available. They've got a lot of apartments available for sale and reportedly, as you've mentioned, the housing cycle is on the downturn. We've obviously seen the announcements from the banks as well that mortgage applications and investment loans are down as well since the budget. So there's all of those sorts of issues that they are battling with. But I think Merback is reasonably well diversified so that they do have some exposure to that residential but also to other parts of the property cycle as well. So as I said, if you're looking for a stock that has a reasonable dividend yield with an OKPE ratio, I think that Merback sits in pretty well in that.

16:47I wouldn't necessarily say to buy it at the moment, but I'd certainly be holding it if you've got it in your portfolio. Hold on a cell then for Merback. Turning our attention now to the third stock, it is Washington, Salt Pat, Stan, you're asking about this one. Often described as the local bookshare, Halfway, maybe that's overstating it. Nonetheless, it's last result. 31% increase in post next nav to 14 and a half billion cash flow will net cash flow from investments at rose 11% to 572 million. So did see a profit surge there 500% jump on statutory profit. In fact, but I guess investors watching whether that's that's true profit translates into sustainable underlying earnings and cash generation. Don't have you said. Yeah, it is an interesting one. As you said, Andrew, similar to a Berkshire Halfway or really a listed investment company as it is.

17:50The first result that they've just announced was the first one with the brickworks business as part of the overall conglomerate. They've cleaned up that cross share holding, which means that it is a bit of a cleaner business now. But the brickworks also means that they've got an exposure to residential property as we were just talking about with with Mervak. But it is quite diversified. It's got exposure to fixed income to private credit to emerging companies. So really if you're looking at an investment in Salt Patents and you need to have a look at the underlying investments and be comfortable that you are investing in a portfolio of interesting assets. And obviously the management that are able to manage that portfolio well. Again, I'm probably sounding a little bit like a broken record at the moment, but I'd probably say it's a hold. I think it's probably fair value at the moment, but not compelling value. So again, if you're looking for that diversified exposure in a listed investment company, Salt Patents and Fits that bill, but not a reason to be buying it at current levels.

19:02Yeah. Okay. Stephen, you agree with that? Is this one that team invests members have considered or in fact, on at this point? Yeah, look, it has come up on our filters for many years because it has been a very well run conglomerate from at first glance. And they have been a profitable and financially healthy business for a long time as well. The one thing that's kept us away for a long time was that cross ownership and the very complicated financial structure, if you like, that made it really difficult to to analyze their financials and kind of really understand how they were making money. Now that that's been resolved with the merger recently, it should get easier going forward to really understand, you know, how Salt Patents are making money year and year out. And also, you know, what their what their real mates or strengths of the business are at that any given point in time.

20:02So it's not a widely held stock amongst 10 invest members yet, but it possibly will be going forward as we start to, you know, to get cleaner, simpler financials each year for the next few years. I do know they've got wonderful management, Todd Bale is a terrific CEO from from everything I've seen of him. And and the Milner's Rob Milner, who's the chairman here is a very experienced and steady pair of hands. They're great at engaging with their retail shareholders and their regular shareholders as well. They get out every year and come and talk to talk to their other shareholders, answer questions, engage with them, which is always good to see. A lot of ownership, of course, in the business as well from the management team and from the board, which is again, just gives you a better chance when you've got that partner mentality and really well aligned leadership. And I think the other thing that's not worth it at the moment is that they're sitting on about 20% cash.

21:04And given that their main job really is to to invest capital wisely, that's an interesting sign that they're not deploying all of that cash right now, potentially waiting for some kind of juicier opportunity in the next 12 or 18 months. I'm guessing a little bit like what Berkshire are doing to us, opposed with their pretty significant cash holding as well. Not liking any predictions about that. It's just an interesting thing to note that so perhaps 80% invested at the moment, I guess you'd say, and the other 20% of their capital they're sitting on and looking for a better home for it. But yeah, good business, good management. And certainly if they continue to perform well in the next couple of years, it could well be a company that starts to become more popular amongst the time investment. If you were there, would you hold it? Yeah, I think it's a hold at the moment. I think as David said, it doesn't look like it's a screaming by to us valuation wise, but certainly doesn't look like it's a sell either if you owned it on valuation grounds. So yeah, that would be a hold for us as well.

22:04That's pretty positive in the context of what we heard from the show staff. So it is a double hold therefore Washington, Seoul, Pat, let's now move on to ordinate. So let's talk about this one now having recently been fact been dropped from the SBA six all odds index last, it's annual report there revenue of around 68 million that was up, but it does remain lost making look also appears to be trying to transition from an audio networking company into more of an AV software platform. Have you taken with this before? No, look, it's not one that passes the 10 invest filters predominantly from a financial point of view. I have followed the business a little bit personally and I know that delivered some some pretty good sales growth over the years. I think over the last 10 years sales have grown from about 15 million a year to 67 million a year. I mean, it's still a relatively small business, of course, but that's been you know some pretty significant top line revenue growth over that period.

23:10But over that same 10 year period collectively the businesses lost 20 million dollars. So they haven't been able to generate that operating leverage or you know that consistent profit from all that sales growth over the years. And as a result, they've also had to mine their shareholders while it's a little bit by raising capital and deluding existing shareholders, which makes it you know tough if you're in for the long haul. I guess the other thing even in the years where they have been profitable that return on equity or return on capitals, you know, only been above 10% once during that 10 year period. One of the good things that's still led by their co founder, Aiden Williams and he owns about 2% of the business, which is great, but no other really significant skin in the game from the rest of the board. So just purely on that financial performance over a long period of time now this again would be in our to hard basket and would be yourself for most of our members. All right. David. Yeah, look, I tend to agree with everything that Stephen said that you know, it is an interesting business, but I don't think it's it's really large enough to warrant an investment in and the fact that they have struggled to actually generate a profit is is obviously a negative tool as well.

24:29Part of the reason that the company is trying to shift away from being a bit more focused on on the software side of the business away from being at the hardware is the fact that the the cost of chips is increasing dramatically with the global increase in AI and interest in in that side of the business. That does potentially provide some upside to ordinate, but it also increases their cost base. I think it is difficult for a company like ordinate to, you know, to make money as Stephen said. So yeah, it's again too small and probably one that that I would be avoiding also or selling if you've already got it in the portfolio. Okay, double cell then for ordinate. So let's run out the first half of the show with a look at sigma health care. David asking about this one. In fact, I'm wrong. It is our own David on the show today. It's his pick. We have us both there. They're chosen one side David. You've come up with sigma. Now look, I do notes that positive result there normal, I see a bit up 20%

25:44had those those mergers energies obviously with chemist warehouse and also obviously trying to make or expand into the UK at the same time. Yeah, that's right. I think that you know, sigma is an interesting business. They've effectively done that back door listing of chemist warehouse as you said. And it came onto the market with a lot of excitement, but it's really drifted off since then and you know, chemist warehouse remains an excellent business. And I think that it will continue to grow. As you mentioned, they're growing internationally as well. I think that it is a business that does have a lot of growth potential. But you are investing in a company that that is priced for growth. So they're trading on a relatively high P ratio at the moment, and dividend yields about 1.8%. So it's an OK dividend yield. But you're really looking for that longer term growth.

26:44And I think that the management of chemist warehouse have shown that they've been able to deliver that over a long period of time. And it is a business that will continue to grow fairly strongly. So I think currently they do actually look like an appealing stock. And at current levels, I'd be prepared to be buying them. OK, no surprise giving that's the one you brought to us. So chosen it for a reason. So what do you make of it? Yeah, look, obviously we have a lot of experiences consume as with the chemist warehouse business as most Aussies do. And there's no doubt there are wonderful retailer and a wonderful Aussie success story. It's a little bit too early for us still to wait in to sigma because it really is a basically new business since since the chemist warehouse merger. And we like to see normally like to see four or five six years of listed history before we jump into a company.

27:45So we'd be looking for a couple more years of financials yet as the new entity. So far, it's obviously looking positive in terms of what chemist warehouse are delivering for the old sigma business. As David mentioned that it is a pretty steep multiple for what's predominantly a retailer, I guess. If you compare it to most of our other Aussie listed retailers, the JB high fives, the Nick Scali's, the sicker retail groups, the accent groups, it's still trading on a much higher P multiple than those businesses. Now I probably argue it's a better retailer with better long term growth potential than some of those other listed retailers we have. So it's really a question of just how much of a premium that you want to pay. Certainly a game changer for the old sigma. I did used to do a little bit of business in the pharmacy industry with the old sigma. And it was known nowhere near as impressive as what the chemist warehouse business is. So I assume it was a good opportunity and a good merger for sigma.

28:49But would like to see a couple more years of listed history before before we jumped into it, but would probably be in our whole basket right now if you already owned the business. So sorry, a whole. Yeah, yeah, being a whole. If you already owned it, yeah, we probably holding it based on how it's performed. Right. Let's sum up the first half of the show then we actually began with Karoon and having its production having been hit with some operational issues there. It isn't a void from both seeing if you're in energy, but particularly David, it'd rather be in stock, such as woodside and santa's. And those ones that chosen by you, Ostal, it is a hold from David. Let's see if there's a little vulnerable at this point. Obviously in midst of perhaps selling it. So it's US business. Seven point out no side of revenue growth continue lost making this. So he would sell it. Move back in the property sector. It is a sell from Steven looking at competition. Just a not great space to be in at the moment. He says David also pointing out obviously given the housing downturn.

29:53Dividend yields as a positive there. He would hold it. Washington's sole pats. It's a hold from both. Looking at sort of fair value point out good management worth considering. Perhaps but not buying at this point. Ordinate. Yeah, both negative on it would sell it. Just seen as struggling to make any to growth at this point and filing their sigma. It is a buy from David and a hold from Steven. Right. Let's take a look at our own investment committee picks then. That's picked. In fact, the latest episode is from the committee meeting is available. Fiddle was it was biz.com.au. Checking in with the portfolio update going into September the panel sold out of CSL electric systems and new months after a strong month adding a couple of goldmiders. It's a really a sad northern star. Interestingly northern star. It's just had a bid lob debt it which has seen its share price jump.

30:57IPD group also on that list. Why do they make those decisions? Well, you can head to ospes.com.au. Look for that drop down menu the investment committee for their explanation and of course keep your investment ideas and stock picks coming in. A strike go. Do I need my glasses? No, it's eight percent. Yeah, strike like name. What have they done? Most of the dividend. Happy days. I'll never a dull moment. Bring me the next shiny new day live weekdays from 4 p.m. Eastern watch on demand all catch up with the newsletter or podcast. The C.O.B. is brought to you by Longview a new way for investors to access Australian residential property. Visit longview.com.au. Second half of the show we're looking at made a group. Primedicus, chorus, mineral resources and deter royalties. Right. So king of made a group in fact, this is Steven's pick.

32:04It is industrial equipment maintenance company, particularly the focus on resources. Think of the picks and shovels there. Steven, what is attracting you to this stock at the moment? Yeah, this is a company that's come into the team invest group over the last couple of years. Now that it's been listed for I think seven years and it's a really interesting business. It's still found a found a lead Luke made up was the founder of the company. He's the chairman today and he still owns over half of the shares. So you've got some serious alignment there and really what he saw was an opportunity to to help speed up and potentially lower the cost of repairing and servicing mining equipment. Having worked for some of the original equipment manufacturers in self back in the day. So so he's created this company really from scratch and they now the market leader they now service roughly 40% of the equipment on roughly 70% of Australia's. Mind sites when that equipment's no longer under warranty.

33:08It's basically a labor hire business if you like so they have a team of about 4,000 trade lots of diesel mechanics auto electricians etc that go out and get these things fixed as quickly as possible and as cost effectively as possible so that miners can can get up and running again when something's not working or broken down. The business fundamentals are fantastic return on equity return on capitals been well above 20% every year but for seven years now their net profit margins been very consistent. They actually paid off all of their debt in the last financial year so they're now debt free sales and earns per share have been growing at over 25% per annum since listing. They had a very impressive five year plan for the business when they listed they delivered on that plan and they're now just unveiled their next five year plan. They do have a North American business as well so about 20% of the business now is coming from North America and they have some pretty high growth aspirations I think for the North America basically doing the same thing there that they've been able to develop in Australia.

34:18They're expanding into a few new segments as well they're starting to deploy some of that team into infrastructure into defense and while they're still very small think over the years they're hoping to develop those businesses as well. There's still I guess a cyclicality question we haven't been to a significant mining downturn while made a group has been listed so we don't know absolutely yet what would happen in a really significant mining downturn. But they're not just exposed to one commodity they service you know all kinds of different miners and as they diversify into those other industries that might give them a bit more protection as well. It's a very capital light business unlike a miner unlike a traditional mining services business that needs a lot of equipment. This is basically trades people and and and units and tools that they send out to repair equipment. Very impressive culture that's really what the MoT is here the culture of the team seems to be very strong their team members seem to love working there and love the experiences that they get working across the world really for later if they're interested and on the valuation side.

35:29The valuation looks good to us at the moment and interestingly the company's just announced a new share buyback that they started about a month ago and they have begun that buyback so clearly the the board and the management team who own roughly 70% of the company still feel like it's pretty compelling value at the moment too. So it's a business we like it's a business we've been following for a couple of years and everything we've seen so far since they've been listed looks pretty good. Taking that as a buy then yes yeah definitely David would you concur. Yeah look I think Stephen did a fantastic summary of the business and gave a great overview of it. Yeah from our point of view it's probably smaller than or too small for our clients to look at but when I look at the fundamentals of the business it does stack up very very well there. You know being growing their earnings quite strongly there.

36:29Currently down about 20 as you can see there about 23% over the last 12 months I can't really see a reason for that sell off and I think that based on the current share price there they are attractive. I would be prepared to put a buy on it but as I said it's probably a smaller stock than what our clients would be looking at but I think from a fundamental point of view it actually stacks up very very well. Maybe you speak you buy then for you. Yeah yes speak you buy. We'll call it a double buy for the sake of the show. First one of the show it is made a group brought to us by Stephen. Alright let's now turn our attention to ProMedicus. Certainly one of the favorite stocks among viewers so let's get into it then and of course look at share price off about cutting half over the past year of course after that stunning growth we have seen more broadly.

37:30And those contracts keep coming in I guess most recently was late August another 25 minute dollar US contracts there. So I guess you know for the market for the rest is it's a question of whether that growth can continue particularly that he pays we've seen David what do you think. Yeah I like ProMedicus I think that it is a business that has been growing quite strongly as you as you said although their share price hasn't been growing at the same rate so I think it currently levels it does. Yeah it does appear very very attractive when I look across the market pretty much all of the brokers who cover it have a buyer and overweight recommendation on the stock. I think that it is very very well managed they've got some excellent contracts in place and yeah they've got the exposure to the global market as well so yeah I like ProMedicus I think that you know it is speculative from a risk point of you given the fact that they have been so volatile and that they are priced for growth.

38:37But I think if you're prepared to accept that risk at current levels that actually looks pretty attractive to the point you would buy it yes you would be at current levels yeah okay all right. Stephen. Oh we've lost your audio. Sorry it's a wonderful business and one that's been very popular and held by a lot of 10 investment members for quite a few years. Fantastic management team and they've done a wonderful job obviously growing the business particularly in the US in the last five or six years as those that have been following the company closely. No regularly announcing new contract wins with big US hospital systems and yeah it's been a terrific Aussie success story so far. It's also one of the companies at the moment that causes you know probably the most discussion within the team investment membership over the valuation because it's possible for two things to be true at once here one being it's a wonderful business but the other being is it potentially not a great investment at this point in time.

39:49And I think at the you know the current price it's still trading on about 120 times last year's earnings that's a very rich multiple if they don't continue to grow it very high rates for you know five plus years from here and that's really what the question is now if you own or interested in pray medicas what do you think the growth rates going to continue to be from this point forward for five to 10 years. Now there might be some of this changing a little bit of pray medicas as well in terms of their strategy that we've seen out of the last 12 months to which has been some investments in other companies so they've invested in echo IQ recently and 40x prior to that and they've been fairly small sums of money from our primedicus point of view they've got plenty of cash and they've been able to utilize some of their cash to make those investments. So the question is does the growth rate slowed a little bit in the last couple of years it's still very impressive but it has slowed a little bit in the last couple of years from what the previous five or six years have been so does the management team of pray medicas think that the growth rate might slow a little from here and are they looking to bolster that with some investments in some of these other emerging companies that they might be able to add some value or utilize some of their contacts and infrastructure with potentially and if that's the case that's great but you're now looking at a slow and

41:16slightly different business to what you were a couple of years ago where they're now investing in others for growth rather than just driving more sales of the discharge product itself. I know recently the echo IQ share price took a bit of a beating when they didn't get their FDA clearance and the way that pray medicas that invested in echo IQ I think they gave them 10 million upfront with some contingencies in that initial investment and then the second 10 million they were going to give them the money. The second 10 million they were going to give them was contingent on them getting that FDA clearance which it looks like they haven't got it this point in time. So that's second 10 million likely not to be deployed now at scenes. The question is what will happen with the first 10 million that they've invested with that with echo IQ. So wonderful business. The future still looks bright from a business perspective. The question for our members just continues to be what price is a reasonable price to pay. I don't think it would be a hold for us but for most of our members if they didn't already on it they wouldn't be paying over a hundred times an exam in for businesses as grand as pray medicas.

42:25That is by and a hold for pray medicas. Let's head across the ditch now with a look at course does operate New Zealand's fiber optic network there it's which is growing. In fact there I think the transition to ultra fast broadband that's where the it's moving at the moment. So I guess the question of but also regulation is an issue for them or so that it's debt costs which are in focus for investors. So even if you looked at this one before. Look it's not one we've looked at very closely because again the financial performance hasn't been great for a decade really now again very tough and very competitive industry. And the numbers really tell us that it's just not one of the best 20 options on the ASX or the NZ market that we would want to invest in over you know 10 years the sales have gone backwards.

43:25And as a result profits been in on going decline over 10 years as well they've also got a lot of debt which is a big problem for most 10 investors members we don't like to invest in companies with a lot of debt. So this one we don't even really need to look much further we don't need to dig into ownership or management etc because the financials tell us that at least for the last 10 years it's been a very difficult business and and we've got better opportunities elsewhere. Alright elsewhere so you're avoiding it I take it David what are you doing with it. Yeah it's interesting in that looking into the stock you know you tend to think that New Zealand is a much smaller market obviously with than Australia which it is but of course is actually invested in that fiber network and it's the internet speeds are apparently 10 times faster than the NBN in Australia. They've actually invested in a decent network I think though for investors the problem is that it's too small a network and I think that you know we would prefer to be exposed to a larger market like Australia and I think that you know there are some comparable businesses here.

44:38You could look at Telstra as a comparison but we also like Aussie broadband as a stock that has a lot of growth potential over over the coming years and continuing to grow their market share. Corus does have a reasonable income and they are paying that out to shareholders so from an income point of view it looks okay but as you can see by that share price it's been a pretty rocky ride so yeah probably similar Steven it's one that I'd probably be avoiding and looking at some larger markets for that telecommunications exposure. Right such as Aussie broadband. Right over then let's turn to the resources sector with a look at mineral resources the ninth stock of the day and now I'm asking about this one and it looks bounce back well in fact FY26 was a record year strong as a strong financial result in 20 years in fact has had problems at the top though managerial in particular with its founder Chris Ellison.

45:45And mine you are no enforcement action taken in the wake of some investigations on that than that particular space. So David has been bounce back well I don't know whether you got on that train before it left the station but what are you thinking of it now? You're right Andrew it has it's done quite well recent times it's got exposure to a range of different commodities there we've also seen the the lithium price improve and outlook a little bit better there but then you've also got exposure to iron ore and other commodities as well. Look I think at current levels mineral resources is reasonably priced fair value I suppose at current prices so I'd be more of a hold on it. I think that you know those management issues have had a cloud over the stock for some time as you say though I think they're probably through that it doesn't appear to be as bad as some of the other corporate governance issues that other companies are doing.

46:52So I think minres looks okay at current levels but as I say probably more of a hold at where we're at this point in time. Okay now Stephen once again I know you guys are too invest don't go to resources although I do know that you were at least invested in mineral resources I guess when it was more of services companies now very much digging the stuff out of the ground itself. What do you think over right now? Well look that's right Andrew it used to be a very popular holding back when it was a mining services business and the fundamentals had been improving steadily every year quite a few of our members did continue to hold it as it transformed into more of a mining business but most of our members have exited over the last few years. So it's highly around the management concerns and also you know obviously a couple years of rough business performance as well.

47:56Obviously they also have quite a high level of debt still it is coming down but it's still a higher level of debt than most of our members are comfortable with. So it's really frustrating and much more of a cyclical industry obviously being exposed to the commodities themselves so yeah the last year was terrific business performance big improvement and and looked like a great result but for most of our members it's going to continue to be a sell predominantly on that earnings uncertainty over five years again we just can't be confident in where the commodity prices will go on their own or in lithium businesses in particular. And also you know one of the one of the really golden rules if you like of ten invest is that we need management that we feel are incredibly aligned with us and have partner mentality and and when we don't see that or we see you know issues with management that really break that alignment or break that partner mentality.

48:56It really leads us to question what else might we not know about or what other things might be happening that we haven't yet heard about and it could be nothing but again given we're looking to own roughly 20 companies out of the 2000 odd companies that we can choose from on the ASX that tends to put a company in the two hard basket where less confident in the alignment or the certainty of partner mentality from our management team. So that's right therefore you are selling it David's holding it so Stephen there are of course other ways to get exposure in mining without like a direct exposure to the underlying commodity price if you like. Hence the next stock we're going to look at which is the terror royalties which does well it clips the ticket doesn't particularly with BHP's mining area C. So would you be prepared to go to this one? Yeah it's a really interesting business actually it's not one we dug into a lot but I guess the idea of helping finance miners as opposed to doing the mining of the development work yourself.

50:04Is a different way to get exposure to that that commodity business and ultimately if if that teams very good at the terms of those financial agreements with those that they're doing deals with and making sure that you know they're likely to to return royalties to them for a long period of time it could be a good way to play that that commodity or that mining industry. Now we've got about six years of listed history now with de Terrorist they were spun out of a Luca resources and a Luca continues to own 20% of the business so they're the largest shareholder but over that six year period we've really got the last five years being very flat. So we're not seeing any growth really in the last five years in either the sales or the profit line it's you know still an acceptable level of sales and profit but we're not getting any growth for five years now so that would be the thing that probably will would worry some of our members. The second thing is they took on a bit of debt quite a bit of debt a couple of years ago and even paying it down last year it's still a bit higher than most of our members would like.

51:11So I wouldn't say this would be a never stock if it continues to perform well and maybe starts to grow a little bit more than it has been in the last four or five years that could become more interesting for some of our members but at the moment the debt and the growth rate would probably keep us away but yeah more more interesting and potentially more appealing than a traditional miner for our members. All right is that push you to a sell would you be fed all of them? We still be a sell but yeah less of a sell than some of the others. Yeah. We take that as a positive I don't know that we do. All right David what do you see? Yeah as Stephen said it's an interesting stock and an interesting way to play that resource market effectively you're buying the income stream from those assets. So you've got exposure to about 28 or sorry 28 different royalties and off take agreements predominantly in WA but they do. Actually have operations around the world so they've got exposure to about 11 countries around the world and really what you're looking for is that dividend yield so the cash yield is currently 4.9% looking over time that should grow that is fully frank as well.

52:27So you are getting a growth up dividend yield of north of 7% so from an income point of view it looks appealing and again Stephen mentioned that the lack of growth you are effectively buying that income stream so you're not really expecting the share price to grow by too much. You're expecting effectively an infrastructure like return and getting some franking credits on it so from that point of view it's a reasonable hold I wouldn't be buying it because you don't get the growth but for income investors it's actually a reasonable play so yeah those investors who like that that long term return can comfortably hold it in their portfolio. Right I would send up the second half of the show then beginning there with what was actually Siemens picked made a group so he is buying it seeing their found lead which he likes North American growth compelling value and David saying really sort of too small but he would be prepared to to buy also we are calling it to double why then for the sake of the show.

53:39ProMedicus obviously having done so well over the past few years with it so growth particularly into the US market although the share price haven't come off around half over the past year. David would still be buying it seeing obviously price for growth there's some risk involved whereas Stephen saying look at it is a wonderful business but contentious valuation there just particularly among their members there at team invest so he would hold it. Of course the Faber Optic Network in New Zealand seem worried about debt there he would have ordered David also would have ordered he would prefer a stock like as he broad banned mineral resources David's prepared to hold it whereas Stephen obviously had that management issues which he was concerned about also high levels of debt too he would sell it and finally their deterra. Here a soft sell if he'll hate from Stephen where it's David is prepared to hold it that is the show thank you to our experts Stephen great to catch up with you again thanks for joining some team invest.

54:43Thanks very much for having us and likewise David thanks for joining some focus partners. Thanks Andrew. All right and thanks to you of course for watching. Thanks for listening to the call from Osby's keep your earphones in our bonus CEO interview is up next. Dr Andreas Schweyer is the managing director and chief executive of Electro Optic Systems and Australian Defence and Space Technology company developing remote weapon systems counter drone technology, high energy lasers and space tracking capabilities Andreas welcome to the corner office. Thanks for having me here. So Andreas for anyone new to aos can you explain how all the different components of the business fit together. So we have two strategic objectives and all what we're doing is falling into one of the two categories one is all what relates to anti drone business whether it's effector type of activity like anti the laser weapon business or can

55:43then base their defense or whether it's the integrated system approach with all the command control software behind all that falls into this category. And the other one is the so called space control business where we also need the laser weapon that means engaging against any object in space including satellite from ground. And you've built an international career against aerospace for space and defense you've had senior roles at the European Space Agency and Airbus. How did you eventually come to be at aos and what attracted you to the company. Before I joined the electopedic systems I have been working in Saudi Arabia to build up Saudi defense industry at that time I was in charge also to identify any kind of key enabling military technology and the laser weapon technology was one of the very top of this list. And we reached out to all international potential partners in this domain and we selected us to become our partner in laser weapons because US owns all the IP for me to set and was willing to collaborate and to also start a local production in Saudi.

56:47The boss is starting point and later on it was a coincidence when my term in Saudi came to an end that exactly at this point in time US was looking for a new chief executive. And I took the chance because it's I knew that the company is a tremendous portfolio of IP innovation you just need to be commercialized so I thought that's a good chance to do that. And you became CEO in 2022 and as you say at that time it was facing significant financial and operational challenges so at that point what did you believe needed to change and how different is the company today from when you joined. The company was founder let the founder he's one of the best laser physicist worldwide and obviously the focus of the company was very much on R&D and at during that time they have missed a little bit to commercialize and to reach out to key markets to make money out of all that they were very much concentrated on generating those kind of IPs. And that was the main reason why the company got in distress another one was co it during that point in time plus one contract in the Middle East which was signed under unfavorable terms and conditions so all that together we're creating the kind of perfect storm.

58:01So it was not a rocket science to get the company back on track we needed to really go shed those contracts and start to commercialize the products which were sitting almost ready on the shelf. Did you have to make any very difficult decisions during that turnaround. We had to let go many people that was obviously very very difficult about 30% of all staff had to go we had to exchange the entire management team and we had to cut off some of the businesses which we are money losing so we were concentrating on a few product lines which we're highly profitable and giving us a promising outlook to the future. So all in all it was not an easy time. So I want to turn now and ask you because drone warfare is an area that is rapidly evolving. How do you stay ahead of changes in drone speed or autonomy and swarm capability and what gives you that competitive advantage against other companies particularly bigger companies. So we are greatly benefiting from the fact that we have 100 of installed and deployed systems in the two major conflict areas of the day one is the grain war and one is the conflict or war in the Middle East.

59:11We have no grain more than 250 systems in active operation and in the Middle East we have more than 60 fully integrated systems active to protect the lean fast doctor on a daily basis we are shooting down drones and rocket submissiles. And we get feedback motors on a daily basis on what's ongoing so we can adopt software wise on the actual needs. So is a lot of your research and development and driven by what's actually going on on the ground right now. Yes on the ground and in there that is indeed happening so we are getting I think more feedback than anybody else because of this large installed base and we are a highly agile organization. We have very thin overheads we have very quick decision making processes and we allow our engineers to adopt in almost no time without waiting for a large approval to get acceptance by complicated booth attacks within the company. So that is giving us I think a significant leading edge. And you acquired Mars not the planet earlier this year what capability did that business add and why was acquiring better than perhaps developing the technology yourselves.

1:00:21We have been for the last couple of years probably one of the largest anti drone effect or provider so effect or is a weapon system to shoot down drones with our laser weapons and can't base their defense systems we are quite dominant in that domain. But we want to be able to offer to the client integrated solution turn key solutions which require the so called command control system which is controlling commanding and managing and administrating all different types of effect or sensors with one piece of software. Mars is one of the very few companies worldwide having developed a very specific anti drone command control system. The core is their software called neither which is a I driven and this is quite unique this piece and that's the reason why we have offered the why we have acquired Mars. We are now in the position with all those ingredients together to offer fully indicated systems to the client and systems which are really designed develop for the anti drone warfare.

1:01:21It was not developed for very complicated network centric warfare where you have to control even complicated missile systems such as patriot. Those systems are an overkill for most of the user demands and that's the reason why with Mars we have done exactly the right thing. And what would the successful integration of Mars look like over the next 12 to 18 months. We will so Mars has already integrated all of our effect or so we can Mars instantaneously roll this out but we can also benefit on the remote weapon system and laser side by integrated by integrating specific algorithms. Software algorithms for Mars with AI features in to allow our effectors to also have a more accurate and more reliable tracking and identification of threats once those weapon systems have locked on a target. So in this kind of cross fertilization is still to happen. We have not done the set but it's on our work plan.

1:02:21And let's turn to your results quickly because you've just reported first half results. What can you tell us about those? We've had the best half year in the company history. We have more or less quadrupled our revenue in the first half from around 44 million 2025 to 169 million first half of this year. For the first time in history we have had an positive EBDA of 21 million dollar which was external extra order and are good. And we are most proud of the order book which we have over the last three years quadrupled to about 849 million actual status. That is quite amazing and we are by far not at the level what we think we can achieve by end of this year. We expect further growth to happen also in order in the entire intake pipeline. So that is probably the piece which is most was amazing. So that order book how much of that do you expect to convert into revenue over the next 24 months? So we have to distinguish between the border clients the mass products are quite quick in turning from or intake backlog into revenue.

1:03:27That's because of the fact that mass is a softer company softer you can easily copy or multiply. There's no scaling problem coming with it. It's just a problem of procuring quickly radars and other types of sensors and effectors from the market. Or I would say 70% 80% of all mass or intake will convert into revenue within 18 to 22 to 24 months. So that is extremely quick in turning over. If you talk about a hardware oriented product such as the high energy laser weapon that typically is between 18 and 24 or 30 months. It takes a little bit longer. Mass is the more agile part because of the nature of the product. And does that existing balance sheet give you enough capacity to deliver the order book or will you need to raise capital again? We don't need capital to increase our production footprint. We have production capacity in excess for what we need in terms of remote weapon systems.

1:04:27We produce weapons systems at WS in Australia where we can produce more than 300 systems per shift. We can also introduce the second shift if needed. And we have the same type of capacity in Huntsville, Alabama, United States. And we are opening the also facility in cooperation with our transversal partner Gen 5 in the UAE. So there's no need for additional capital investment on the software sacrifice. As I mentioned before, there is no production capacity increase needed because it's just software where we might need some money here and there is to provide campank guarantees and bonds. For large prime level contacts, which we expect to sign in and be least in the course of the next year. Yes, as we are now and OEM we are competing now against the big companies, companies like Raytheon, Palace, Leonardo for not only systems protecting a single piece of infrastructure, but also regional or country wide anti drone systems. Those are large scale contacts, which require from time to time significant level of bonds and guarantees.

1:05:33For that we might need some more money, but not to increase production capacity. So there's a lot of potential milestones for investors to watch out for coming up. What would be the first ones to come along in the next six months? We still expect some significant orders to be realized. Those would be the very positive announcement to come and we expect those to start to happen before end of the year already. So all the days order book with 850 is not the end game of the year. Defense stocks sometimes get valued on the size of the opportunity before the profits and the cash flow catch up. What evidence should investors use to judge whether AOS is successfully converting its technology and backlog into a durable business? By watching very carefully our order intake pipeline, hoping to increase the order book and how we convert this into revenue. We have now started this journey by having given an update on our guidance. So we expect for this year, the revenue being within 360 to 400 million dollar.

1:06:38We would see that we are very optimistic to increase this further on next year, very significantly because of the order book and the conversion rate. Those had the 2 parameters to be watched out on the intake and how quickly we can increase the revenue base. It's not very complicated to see that trend happening and we were always under promising and over delivering. That was our motto since the first day, 2022, when we came and joined the company and that we remain our motto for the future. We will always surprise the market by good news, better than expected. Andreas, I want to ask you some personal questions now so investors can get a bit of a sense of your background. So what's the biggest lesson you've learned? It's the silence. Never give up. We have had in particular during the time when I started this job here. We were really facing critical problems. We were almost running out of money at that point in time. And we count the coins every evening more or less in order to make sure that we can survive.

1:07:44The hard time was in the very beginning and we had a couple of negative experiences during that point in time when governments or when other stakeholders didn't want to support us anymore because of the risk profile we came up with. And that was very hard. There were quite some disappointment during those days. But all that we could convert into optimism very soon and that's history. Nowadays we have no problems raising capital or getting credits. We are in a superb upswing that is behind us. But the first few months were really very tough. And what inspires you? It is the tremendous opportunity to shape something very big. Again, the company was close to collapse when I joined and I see the potential to make this a multi billion dollar enterprise in terms of revenue. And that is something which is not in the far future. That is something which we can achieve all the next three to five years. There is hardly any other defense company with this kind of momentum and co-respective.

1:08:46The key is really the high level of innovation which we have on the shelf which we can easily convert without investing big money into R&D. And what do you think your team would say about your leadership style? They would say, Bobby, extremely agile. I'm extremely marketing customer focused. I spend most of my time with clients, with industrial partners to form up networks to open new markets. That is something where I think most of my team can learn a lot. And some of them they would say Andreas is the locomotive and we have to take care that the train is not decoupled from the locomotive because it's pushing so much. I love that locomotive. And I get a sense you're also very positive. Would that be correct? Yeah, I'm always optimistic. The glass is always half full, not half empty. That's correct. Yeah, it is a good way to look at life. Finally, Andreas, where would you like AOS to be five years from now? In five years from now, we will have a multi billion dollar of revenue. I'm quite convinced about that.

1:09:51A huge order book. We will have a more international operational footprint with active production facilities in Europe. More in the Middle East. By that point in time, I expect that our US operation will deliver in large scale to the US Army, to the US client. We are about to capture to get back the US market. And I believe that we will be the world leading system provider, not only for undidrone systems, but also for laser weapons. And the world leading company outside the United States of America, in what we call space control, space warfare, the ability to engage against space debris and satellites from ground with high energy laser weapons. That is the kind of scenario I see coming in three to five years. Dr. Andreas Schweyer, CEO of Electro Optic Systems. Thanks so much for joining us at the corner office this morning. Thanks for having me. Thanks for joining us.

1:11:19Thanks for joining us.