Reporting season on the ASX is about to expose the zombie companies

Get ready for corporate Halloween – the week in which zombie companies roam the bourse and all sorts of never-dead companies air their scary red stained accounts for all to see.

That’s right, the half year company profit reporting season is coming to an end and all of the terrified companies that have been spending up big and lurching from one capital raising to the next will finally be forced to reveal all.

The usual pattern is for all of the wounded and dying companies to disclose their results in an unholy rush, hoping that their sins will be hidden by a welter of similar disasters.

It never quite works out that way as business journalists and the ASX comb through the detritus looking for signs of life – or, more accurately, signs of imminent death.

ASX will be asking lots of questions

What usually follows is a string of requests from the ASX asking how the companies plan to raise enough cash to meet their current rate of spending – a flurry that also happens after cash flow statements are issued.

The “dog ate my homework’’ excuse is not acceptable either – companies that fail to lodge their accounts in time are faced with temporary and eventually permanent delisting, with the ASX issuing a list of companies that have failed to release their results on time and demanding that they do so straight away.

What is truly amazing is how many of these zombie companies keep surviving year after year, often pruning costs dramatically and slimming down, hoping that their listing – which can be their major asset – might attract a suitor or that by some other deal or new asset they might thrive again.

Some top companies reporting this week

While none of them are even close to the zombie status, there are some really interesting companies releasing their results this week.

Ardent Leisure, owner of Dreamworld, will be one that is worth watching with Dreamworld itself expected to continue posting losses even as visitor numbers improve while the company’s other US assets and theme parks should perform better.

Bluescope Steel’s continuing profit recovery should be confirmed, which has led to quite a few buy ratings from brokers while the extent of losses by insurance giant QBE will interest investors as it continues to struggle with its US insurance arm.

Mineral sands miner Iluka Resources should confirm an improving trend, as should Caltex Australia but it is tougher to predict what might happen with biotechnology companies such as Mesoblast and Starpharma.

Results from retailers have been very mixed

Retail has been of particular interest this reporting season with some terrible results such as Myer and arguably Wesfarmers due to their UK hardware expansion while other such as JB Hi-Fi and Woolworths have been quite strong.

This week Harvey Norman will fill out the retail picture and some other interesting companies reporting include Adelaide Brighton, Ramsay Healthcare and almond grower Select Harvest.

Interesting actions last week

In the past week there have been a few interesting developments such as the revelation that Apple Inc. is in talks to buy long-term supplies of cobalt directly from miners for the first time.

That move comes as the industry becomes more concerned about security of supply of the key battery ingredient as demand for electric vehicles begins to take off.

At the moment smartphones swallow around a quarter of annual cobalt production but with car batteries using large amounts of cobalt the competition for raw materials could get hotter.

It would not be a surprise to see other big electronic companies and even car makers begin to get involved in dealing direct with cobalt miners instead of relying on battery suppliers to source the raw materials.

Another interesting long terms trend that emerged during the weeks was that Western Australia slipped a few places on the Fraser Institute report on mining investment attractiveness.

It is an important measure given that it is decided by mining industry leaders so it is a bad sign that Western Australia fell from third spot in 2016 to fifth in 2017.

Finland took out top spot, followed by Saskatchewan, then Nevada, Ireland, Western Australia, Quebec, Ontario, Chile, Arizona, and Alaska.

Small cap news

Plenty to report on in the small cap space this week.

Viralytics (ASX: VLA)

At 8:20pm on Wednesday night when you thought the day was over and no major news would break, oncolytic immunotherapy developer Viralytics released an announcement that no one was expecting at that hour.

In what is seen as a major boost for the Australian biotech space, pharmaceutical giant Merck (NYSE: MRK) plans to acquire Viralytics at a 160% premium to its one month volume weighted average price (VWAP).

The deal primarily came about due to Viralytics’ lead development candidate CAVATAK, a clinical-stage immunotherapy with the potential to treat several different cancers including melanomas.

Shares in Viralytics having closed at 61.5c on Wednesday prior to the release, closed out the week slightly above the takeover bid to finish at $1.70 a share on Friday evening.

Imugene (ASX: IMU)

No doubt the news regarding Merck and Viralytics caught the eye of the team at Imugene.

The immuno-oncology focused biotech company has been releasing a series of positive news to the market in recent weeks with regards to its cancer fighting technologies currently in development.

This week Imugene revealed that its clinical stage arginine modulator drug candidate had demonstrated anti-tumour activity in 12 different cancer mouse models of the most prevalent cancers, with significant activity in a melanoma cancer model.

The results represent a significant milestone for Imugene and pave the way for the company to move onto more comprehensive trials.

Rather than spend billions on risky research and development, big pharma companies in recent times are opting to acquire smaller biotech companies that show promise and have cleared early stage trials.

With various trials underway, Imugene could come on the radar of big pharma in the future. Although just as easy could a failed clinical trial lead to failure.

Australian Mines (ASX: AUZ)

In what is a landmark occasion for the company, Australian Mines has secured an offtake agreement with SK Innovation for 100% of its anticipated cobalt and nickel production for seven years from its flagship wholly-owned Sconi cobalt, nickel and scandium project in Queensland.

SK Innovation, a global lithium-ion battery manufacturer for the electric vehicle market, will purchase Sconi’s nickel and cobalt production at volumes of 12,000 tonnes per annum of cobalt sulphate and 60,000tpa of nickel sulphate. The agreement allows for a six-year extension.

In addition to the offtake deal, SK Innovation, which generates more than US$120 billion in annual revenues, will assist Australian Mines in optimising its current bankable feasibility study for Sconi.

The battery manufacturer will help with enhancing the proposed Sconi processing plant and mining operation through sample validation.

As well as the collaboration and offtake agreements, SK Innovation will purchase up to a 19.9% slice of Australian Mines – buying around 669 million shares at A$0.12 each.

The agreement remains subject to regulatory terms and conditions and shareholder approvals including SK Innovation validating the suitability of Sconi’s cobalt and nickel in its batteries.

Australian Mines must also obtain financing to develop Sconi by the end of the calendar year.

Raiden Resources (ASX: RDN)

Formerly known as Subzero Group (ASX: SZG), Raiden Resources was reinstated to official quotation on the ASX on Friday, after raising A$5 million to fund its move into Serbia’s mining sector through a takeover of Timok Resources.

Raiden signed the deal to takeover Western Australia-based Timok Resources in November last year in order secure ownership of its wholly-owned Serbian entities Skarnore Resources and Kingstown Resources.

Skarnore owns the Donje Nevlje project which covers about 74 square kilometres in a region that has produced copper and gold for more than some 100 years.

In addition to Donje Nevlje, Skarnore has a joint venture agreement to earn up to 90% of the Stara Planina project, which encompasses 63sq km and is believed prospective for gold and copper.

Raiden claims Stara Planina’s geology is similar to a nearby past producing gold mine in Serbia’s east and the Ogosta gold deposit in Bulgaria.

Brookside Energy (ASX: BRK)

US-focused oil and gas producer Brookside Energy said this week that it expects to earn around US$2 million over the next 12 months, thanks to the steady ramp up of oil and gas production at its Stack leasehold area in Oklahoma’s Anadarko Basin.

Brookside announced it expected a boost in production to around 1000 boepd via contributions from its interest in an additional 14 wells that are either already drilling, being completed or are currently permitted.

In addition, estimated ultimate recoveries for the current producing wells average 1.3 million boe – higher than Brookside’s 1 million boe estimate for this section of the Stack oil play.

The company believe the results achieved to-date strongly endorse its business model of building an inventory of high quality oil and gas reserves and ultimately, increasing acreage values.

Upcoming IPO

Expecting to list in early April is Universal Biosecurity under the ASX ticker UBL.

Universal Biosecurity (ASX: UBL)

The company is seeking to raise A$5 million in an upcoming IPO to commercialise its proprietary non-toxic pest control technology to target the US$7 billion global fumigation market.

The company was established to create alternatives to the toxic fumigants extensively used worldwide to control pests in grain storage, grain crops, fruit and vegetables, quarantine, and numerous other applications and commodities.

It has developed a patented Fume8 apparatus, which can deliver any liquid fumigant safely and efficiently – particularly, ethyl formate.

Initially, Universal Biosecurity will be targeting the grain storage industry in Australia and overseas and expanding into fruit and vegetables, with the product also believed effective against bed bugs and a host of other potential applications.

However, before Fume8 with ethyl formate can be sold on the market, Universal Biosecurity will need to submit efficacy data to Australia’s regulatory body to prove its formula works against a range of pests in specific commodities.

The company hopes to achieve this in 2019, along with gaining regulatory approvals in international markets with the US, China, South Korea, the European Union and New Zealand first in its sight.

The week ahead

Other than the continuation of profit reporting mentioned earlier, we are in for a fairly sparse week of local economic announcements compared to last week when the Reserve Bank indicated that low interest rates are here for some time to come.

Figures on home prices and business investment are the indicators of most interest, while in the US the first testimony to be delivered on the economy by the new US Federal Reserve chair, Jerome Powell.

The China purchasing managers’ manufacturing and services surveys for February are out on Wednesday will be keenly watched for how China was growing before the lunar New Year celebrations and there are a host of US indicators from construction spending, economic growth and new home sales and prices to manufacturing and new car sales.