By Tim Boreham | More Articles by Tim Boreham

When Michael Shelby and some colleagues formed mining services minnow Babylon Pump & Power in 2017, all he had was a good reputation in the sector spanning many decades.

“We didn’t have a single client or a trading history,” he says.

Undeterred, Babylon listed in January 2018 on the back of just one client, the Perth based indigenous mining services outfit Carey Mining.

“Usually if you list on the ASX you have a decade of operations behind you. We were brand new, a blank piece of paper,” says Shelby, who has two decades’ experience the oil and gas, mining and specialist rental markets.

“But you just keep soldiering on and doing what’s necessary, parlaying little wins into bigger ones.”

Since that shaky start, the company has parlayed significant contracts including with BHP, Rio Tinto, Fortescue Mining and Alcoa.

Defying the shaky conditions, the company has just finalised a $7.4 million capital raising to support a change in focus to the high margin specialty rental and services market.

Shelby says that when Babylon started out the key winning factors were management’s contacts and experience that enabled the company to win crucial ‘vendor identification’ status from these miners.

“We also have the requisite environmental quality and safety accreditation, while offering the financial transparency of a listed company,” Shelby says.

“Our whole plan has been to eliminate the reasons why people can’t do business with us.”

Across three divisions Babylon specialises in renting diesel pumping and power equipment, water and abrasive blasting and servicing and repairing large diesel engines – more than 2000 horsepower – for equipment such as generators and haul trucks.

In July 2019 the company purchased the Mackay based diesel specialist Primepower Queensland for $4.2 million in cash and scrip.

In February last year the company followed up by purchasing water blasting outfit Ausblast for $4.4 million upfront.

In the first (December 2021) half, Babylon derived 80 per cent of its revenue from the  diesel maintenance business.

In the March quarter, the company won a contract with Rio Tinto for 24 sites, followed by deals with Yancoal and Alcoa.

Such wins come in the face of stiff competition from much bigger players, notably original equipment makers such as Westrac which owns the Caterpillar franchise.

Flexibility is a key to being able to compete: the workshops can drop in a replacement engine and repair the faulty one later, thus reducing downtime for the client.

“We are nimble and give clients the flexibility to manage their assets in the way they want to manage them,” he says.

Despite Babylon’s diesel maintenance success, the division was never really intended to be the biggest part of Babylon’s business.

“That’s just how things evolved,” Shelby says.

Babylon now intends to ‘re-pivot’ to the rental market, in which it provides both the equipment and the skilled personnel to deal with on-the-site problems.

Once again, the sector is heavily competed by the likes of Cleanaway and Veolia in vacuum trucks and water pumps, Agreco Services in dewatering and power generation and Coates Hire in rental.

“Diesel maintenance served a purpose, such as enabling us to get those vendor IDs,” Shelby says.

“It kind of ran wild in a good way, but it is lower margin and consumes a lot of working capital.”

Babylon’s half year results for the year to December 31 2021 showed that revenue ticked up 33 percent to $13.7 million, with the service and repair arm accounting for $10.9m of this turnover.

The reported loss was steady at $2.38 million, while the underlying loss reduced to  $400,000 compared with $664,000 in the previous half and from $2.15 million in the second half to December 2021.

Operating cash outflows improved to a $1.28 million deficit from a $3.08m shortfall  previously.

Shelby says while overall diesel maintenance was up year on year, Primepower’s revenue and earnings were disappointing.

“But we have worked to right-size the business, reduce overheads and centralise admin and back office functions,” he says. “We are also planning more improvements that will flow through the business in the near future.”

As with the resources sector generally, pandemic-related supply chain issues remain a challenge.

“We had managed [logistics] pretty well but finally we struck some delays, not work that was cancelled but just trying to get hands on critical parts takes three or four more weeks,” Shelby says.

“We are trying to stock crucial parts and pre order but you just have to balance with not carrying too much inventory and having cash tied up.”

The capital raising was by way of a $1.04 million placement to professional and sophisticated investors and a $6.36 million entitlement offer, both at one-sixth of a cent per share.

Crucially, the rights offer was fully underwritten by broker Canaccord Genuity. Of the proceeds, $4.5 million will be used to redeem convertible notes that matured in June.

“2021 was a very harsh year for us. We took some major hits, we made some major changes and there are more changes to come,” Shelby says.

Another reason for the lowly valuation is that diesel repairs are aligned to the old fossil fuel economy and unattractive to investors adhering to rigid ESG (environment, social and governance) rules.

“Diesel maintenance is not sexy but it helps to make the world go around,” he says.

“In my working life I don’t think they will go away, but that’s not what people want to hear.”

Shelby says any capital raising is likely to be on the back of another event, such as another acquisition.

He says the company has the support of a loyal shareholders, including former Elders executive  and veteran investor and businessman Geoff Lord.

Shelby says he’s learnt  a lot from Lord, who is also a special adviser to the board. After participating in the placement, Lord sees his shareholding increase from 17 per   cent to as much as 26.7 per cent.

“He’s been there from the beginning. He’s a hard task master but he’s also been very supportive.”

Tim Boreham edits The New Criterion. Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades' experience of business reporting across three major publications.

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Kazia Therapeutics (KZA) announced yesterday morning that paxalisib did not meet the threshold to move into stage 2 of the GBM AGILE clinical trial (NCT03970447). The study was an adaptive trial designed to assess the potential of new therapeutics to treat the highly aggressive brain cancer glioblastoma (GBM) in a cost-effective manner. Demonstrating efficacy in GBM is an extremely high hurdle as shown by the fact that there is only one approved drug for the disease, temozolomide, and it is only effective in 1/3 of patients.

Given the high nature of the hurdle, in our original initiating coverage report on KZA, we only gave paxalisib a small chance of returning a positive result from the overall study. That is the nature of drug development with one group estimating only 6% to 7% of new chemical entities that commence clinical trials reach launch (Dowden & Munro (2019) Nat Rev Drug Discov). The small percentage that do make it to launch, however, more than make up for the cash spent on those that don’t.

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Terracom will report their FY2022 results in September 2022. In the last two months there have been a number of company announcements that have given us improved visibility on our earnings forecasts and valuation metrics so we have taken this opportunity to update our numbers.

With the combination of geopolitical factors in the northern hemisphere as well as disruption from other supply regions, we believe the visibility on export coal prices over the next 12 months has also improved since our March note.

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Based on our current forecasts, we derive a DCF equity value for SGI of $0.33 per share, with potential upside if full synergies can be extracted. We note SGI is currently trading on very undemanding forward multiples.

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TNG Ltd is an ASX-listed technology owner and developer of the world-class Mount Peake near-surface vanadiferous titanomagnetite deposit. To unlock value, TNG will concentrate ore from its central Northern Territory mine for processing through its patented TIVAN® process produce three premium quality revenue streams: hi-purity vanadium pentoxide (V2O5) for steel alloys and Vanadium Redox Flow batteries, a quality titanium pigment for paints and a premium steel input with >64%Fe iron ore fines.

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TMG is currently completing work towards the PFS due early 2023, including drilling to start in Q3 2022, evaporation trials and permitting activities. Results from these programs will support the PFS and any future resource upgrade.

Benchmark SOP prices have risen to ~US$940/t due to recent geopolitical developments. The Oct 2021 Scoping Study assumed a SOP price of US$550/t and contained a sensitivity analysis showing every 10% increase in price drives a +$144m increase in the project NPV of $364m. The c.70% increase above the Scoping Study thus implies a project NPV of ~$1.4bn.

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The news being reported about the performance of biotechnology has been dour, to say the least, for some time now. Those dour articles have been deserved with the iShares Biotechnology Exchange-Traded Fund down 25% and the SPDR® S&P® Biotech ETF is down 45% from their highs. However, those articles are backward-looking, and successful investors need to be looking forward.

Recently, however, an article in Nature Reviews Drug Discovery caught our eye which we believe should point the way forward for the vast majority of Australian biotechnology investors. This article indicates that, at least, two companies, Antisense Therapeutics (ANP) and Kazia Therapeutics (KZA), are right in the sweet spot in terms of the future of drug development.

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Despite the lower realised oil and gas price, which fell by 5.4% and 19.7% respectively in August, Calima managed to show improvement in its key business metrics.

We expect higher production in November due to the contribution by the new Thorsby wells which will be drilled in August/September which will see Calima meet its 2021 production guidance of 4,500 boe/d.

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WT Financial Group Limited (WTL) is a growing diversified financial services company, founded in 2010 and listed on the Australian Stock Exchange (ASX) in 2015. Its advice and product offerings are delivered primarily through a group of independent financial advisers operating as authorised representatives of WTL under its Wealth Today Pty Ltd (Wealth Today) and Sentry Group Pty Ltd (Sentry Group) dealer group operations. It has around 275 advisers across more than 200 financial advice practices Australia-wide. It also operates a direct-to-consumer operation under its Spring Financial Group brand.

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In May 2021, Corporate Connect analyst Marc Sinatra published a comprehensive research report on ASX-listed biotech Immutep Ltd (ASX: IMM). So impressed was he with IMM that Corporate Connect felt it imperative that a follow-up report be released placing a valuation on the company, because the market was not seeing the vast potential of eftilagimod alpha (efti).

This follow-up report has been released today. Using comparables, after adding cash back to their EV estimate and dividing by the total number of issued shares, Corporate Connect now places the fair value of an Immutep share at $A2.20.

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Phillips 66 (PSX) has entered into an agreement with NVX to acquire 77.9m new shares for US$150m (A$203m). PSX is the worlds largest producer of speciality petroleum coke a precursor for battery grade synthetic graphite anode materials found with an Enterprise Value of US$47.5Bn and assets of US$57Bn.

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PayGroup (PYG) delivers multi-country BPO services and cloud SaaS HCM solutions, assisting companies to manage employees in multiple, complex jurisdictions. The company has many growth opportunities, including new clients, new jurisdictions, new products, partner expansion, and new revenue sources. PYG’s scalable business model allows operating leverage and with savings from in-housing third party technology, support margin expansion.

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