ASX Small Caps: 3 Disruptive Shares

Richard Hemming

For ASX Share investors the hunt is always on for the next Seek.com or REA, who have moved from being labelled a disruptor stock to placing them firmly into the new “establishment”. These ASX stocks have now permanently changed the industry they operate in.

Disruptor ASX companies are Under the Radar Report’s hunting ground. Back in 2005 Seek was a small cap, with a market capitalisation of close to $500m, which was well outside the S&P/ASX 200 Index. At that time, Fairfax Media, publisher of numerous newspapers, which include the Sydney Morning Herald and The Age, had a market cap of about $4.1bn.

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If you look at the share prices today it is very different. Seek’s market cap is close to $7.5bn. Meanwhile, Fairfax operates in a fading climate, having been taken over by Nine Network for less than $1.5bn.

We will look more at how to define a disruptor business, but here are three ASX listed disruptors stocks

1. ASX Stock: Afterpay Touch (APT)

Recently ME Bank CEO Jamie McPhee proclaimed “I don’t think my daughters will ever own a credit card. They will have a debit card and a buy now pay later account,”. He then went onto outline why the Buy Now Pay Later disruption has forced his bank to discontinue its investment in credit cards.

Under the Radar does report on another Buy Now Pay Later ASX stock, but Afterpay Touch (APT) is the stand out with its unique offering and it is changing the payment habits (of mainly young people) around the world.

Under the Radar Report first researched and recommended Afterpay in May 2017 (it hadn’t merged with Touchcorp then). It was only two years ago and based on its $2.51 price it had a market capitalisation of $450m. Back then it accounted for 3% of all online sales in Australia and a staggering 15% of Australian fashion retail online transactions. It already had some big branded clients including Myer, Officeworks, Big W, Telstra and the Solomon Lew controlled Premier Retail, which historically has been reluctant to cede margin to payment intermediaries. Lew knows a good thing when he sees it.

Today its price is well over $32 and its market cap is $8.1bn. In FY19 its number of active customers doubled to 4.6m and its active merchants also doubled to 32.3k. Moreover, the company is generating big growth in the giant US market and it showed evidence that the longer people use Afterpay, the more they use it.

Under the Radar Report: Stock Comment Afterpay has first mover advantage and its competitive advantage is strengthening. It heads into FY20 with strong momentum and if management successfully execute the offshore strategy this stock will likely run further. Having already taken risk off the table, we are happy to hold on and ride the Afterpay wave, which is our preferred buy now pay later exposure.

Small Cap ASX Stock: Hazer Group (HZR)

In terms of company life cycle, ASX small cap Hazer is much further down the curve than AfterpayTouch, but it does have a technology that can make a bigger difference to the way we live.

Its “Hazer Process” turns human waste into clean energy, which could disrupt conventional producers of hydrogen and graphite miners. Not only is the Hazer Process cheaper, but it produces zero emissions, its product is water, and it fulfils the local requirement of waste removal.

The ASX small cap has successfully developed two pilot plants that convert methane from land fill sites and waste water treatment plants into hydrogen and graphite. The hydrogen produced can be used for clean energy for the mobile sector – trains/buses/ferries, while the graphite is commercial grade (versus graphite mined, which is 95%) for use in lithium ion batteries.

Under the Radar Report: Stock Comment Almost too good to be true? At 30 June the company had $6m in cash, having burned though almost $2.6m in the prior 12 months, so it does have some latitude to get to its next stage, which is a commercial demonstration plant, that if successful would produce enough hydrogen to fuel a small fleet of buses. The plant is for this to be operational by the end of 2020.

Small Cap ASX Stock: LBT Innovations (LBT)

LBT is based in Adelaide and it has developed an automated machine that utilises artificial intelligence for use in pathology laboratories. Its Automated Plate Assessment System (APAS) platform technology automates culture-plate screening and interpretation, speeding up the process by at least three times compared to manual reading. The technology was developed by LBT in collaboration with the University of Adelaide’s Australian Institute of Machine Learning (AIML).

In May 2018 the ASX small caps shares spiked after it announced that its 50% owned joint venture Clever Culture Systems got US FDA approval for its Automated Plate Assessment System (APAS).

This is an important milestone for LBT as it clears the way to ramp up US commercialisation activities. It does not guarantee that sales will follow, but the US is a large market so it markedly improves the company’s prospects.

Under the Radar Report: Stock Comment Don’t get carried away. While the US approval is a big step forward for LBT it is still at the high end of the risk spectrum. The group has only completed one sale to date and has still a long way to go to achieve profitability. While the balance sheet is strong, risks of further capital raisings remain.

About the Author

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (AFSL: 409518). The author does not own shares in any of the stocks mentioned.

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