October 2026: Three Stocks, Three Catalysts

October 2026: Three Stocks, Three Catalysts

Rob Hogg:

This is Rob Hogg from SGHiscock Investment Management, and welcome to the October edition of the Active Investor with SGH. Steve Hiscock is away this week, but my special guest this month is Rory Hunter. Rory is head of our emerging companies area and portfolio manager for the Opportunities Fund and the Small Companies Fund here at SGHiscock.

Now we’re recording this podcast on Tuesday morning, October 6th. Welcome, Rory.

Rory Hunter:

Thanks, Rob. 

Rob Hogg:

Before I speak with Rory, I just wanted to give a very quick summary of some of the key elements and things we spoke about in the most recent October monthly update. We spoke, look, again about bonds for the second month in a row, or maybe the third, actually.

Because, as I’m sure all of you are aware, yields have been rising very sharply, and that occurred even more sharply or more quickly in September. But so far equities seem to be little impacted. Now, we think one of the reasons for this is that yields, the overall yield is rising because real yields are going up, not because inflation fears are going up.

Now, what’s the difference, and why is that important? The real yield is the component of the overall bond that is more indicative of sentiment about growth, economic growth. But it also tends to be a good balancing pointer to supply and demand, and we think what’s happening in the bond market is that better-than-expected economic growth across the world, the US and across the world, and of course increased supply of bonds from the public sector.

So that’s governments with increased fiscal spending in the US, Continental Europe, and Japan. Increased funding requirements, so increased auctions of bonds, but also increased supply from the private sector, and that’s particularly related to AI, where we’ve seen a significant increase in bond issuance there.

That is what we think is driving bonds, not inflation. And that’s probably why, possibly why equities have so far taken in their stride the pretty sharp increase we’ve seen in bonds. But a word of caution: volatility in the bond market has increased, so day-to-day change has definitely increased, and that is a potential concern.

But we’ll see how that travels through time. Apart from the bond market story, growth around the world still seems to be doing pretty well. The US still seems to be surprising on the upside. The story here, of course, is quite different. The RBA had to raise rates again in September. They may or may not be finished.

The August inflation report suggests that monthly momentum in inflation pressures may have peaked. Even if it has, the RBA’s best case will be leaving rates unchanged for quite some time. Worst case, if momentum hasn’t stopped rising, we might see the RBA have to increase rates again. For now, the market still expects a higher probability of a rate hike than no rate change, and nobody is talking about rate cuts.

And that’s even though business confidence is weakening, consumption is weakening, and of course, the housing sector is weakening. Now, if those weakening trends accelerate, it could be the turning point for interest-rate expectations here in Australia. But for now, inflation pressures remain too strong for the RBA to talk about the possibility that the next move is still up. So that was really what we covered in the October market outlook.

As I mentioned before, I’m joined by Rory Hunter. He’s head of the emerging companies team here at SGHiscock. Now, Rory, you’ve been busy over the last few weeks with three names that have all had strong updates. Which three are we talking about?

Rory Hunter:

Yeah, thanks, Rob. So first of all, Viridis Mining & Minerals, that’s a rare earths developer in Brazil. The Koala Company, which most people will know as a sofa-in-a-box business. And Codan, the metal detector and radio company.

They’re all very different businesses, but each one has had a recent event that changed how we think about it. A takeover next door to Viridis, a first result for Koala, and a big earnings upgrade for Codan.

Rob Hogg:

All right. Let’s start with the one that’s had the most excitement, Viridis. So for those listeners out there who don’t know what they do, what does Viridis do?

Rory Hunter:

Viridis owns a rare earths project called Colossus in southern Brazil. Rare earths matter because NdPr, and in smaller amounts DyTb, go into permanent magnets used in EV motors, wind turbines, robots, and defence systems. Now, China dominates the supply and processing of these rare earths, so Western buyers and governments are increasingly willing to pay and lend for supply from elsewhere.

Colossus is an ionic clay deposit. An ionic clay is a rare earth loosely attached to clay. So you dig it like soil and wash it with a salt solution. No blasting, no crushing, no acid, cracking, or leaching. That keeps costs low, and the clays are also the main source of the scarcer heavy rare earths in increasing demand; that’s DyTb.

Rob Hogg:

So can you give us a guide as to where the project’s up to, please?

Rory Hunter:

They’ve recently finished their definitive feasibility study in August. It’s a 25-year operation producing around 3,000 tons a year of rare-earth magnet. CapEx is approximately $450 million US, and at spot prices, the study gives a post-tax net present value of about $1.2 billion US on a very attractive IRR in the mid-30s.

The equity funding piece is now covered following a $100 million US equity raise, and the export credit agencies and Brazil’s development bank are working on the debt. They’re targeting a final investment decision this quarter, with first production in the second half of 2028.

Rob Hogg:

Now then, on the 1st of October, Lynas announced it was buying Meteoric, which owns the project next door. Why does that matter so much for Viridis?

Rory Hunter:

Really, Rob, because it gives us a real price for a project or a look-through value in the same district. Lynas is paying about 0.7 times the NPV of Meteoric’s Caldeira project.

Viridis was trading at around a quarter of its net present value. Now, development companies normally do sit well below a takeover price until they’re brought into production, so some gap is fair. Still, the size of that gap is really what caught our attention on the announcement.

Rob Hogg:

And can you just apply the Lynas price to Viridis?

Rory Hunter:

I think that’s what a lot of the market looked at first. You can take the price Lynas pays per tonne of annual output and apply it to Viridis’ tonnes, which gets you a look-through value of about $5.50 a share. But we think that’s probably a bit too simple because not every tonne is worth the same, and on the DFS numbers, Viridis’ tonnes are worth more.

So really, for three reasons. First, it’s cheaper to run, so all-in sustaining cost is about 27% lower than Meteoric’s project. So Viridis keeps roughly 30% more margin per kilo. Second, the product is actually richer. So a refining step strips out the low-value lanthanum. So its product is about two-thirds NdPr against about a third NdPr for Meteoric’s project, with more DyTB as well. Third, that richer product should earn a better price from a separator that buys it via an offtake, although nothing is signed yet, so we only give a little credit for that.

If you put all those things together and adjust for shares still to be issued, we get a read-through value of anywhere between six dollars and seven dollars fifty per share against current market valuation that sits just below four dollars a share. So that’s anywhere between fifty to a hundred percent upside from here.

It’s worth being clear, though, that’s a takeover price, so without a bid, you’d expect Viridis to trade at some discount to it. Also, one caveat on those adjustments. They’re based on Meteoric’s feasibility study. Lynas has been processing rare earths for quite some time, and they’ve likely identified cost optimisation and better impurity removal at the Caldeira project, which aren’t in the existing Meteoric study.

If so, the real gap between the projects is narrower than the published numbers suggest, and some of what Lynas has paid reflects improvements it expects to make rather than the study economics we’re comparing against.

Rob Hogg:

Now, I think you said you see a scarcity angle as well.

Rory Hunter:

Yeah, that’s absolutely right.

With Meteoric going to Lynas, Viridis is one of the last independent quality ionic clay deposits left outside China, and the only one that’s independent and at a DFS stage in the region. The separators looking at Caldeira as a feed source have just lost it, so that should strengthen Viridis’ hand in both offtake negotiations and with any potential future bidder

Rob Hogg:

All right. But as they say in the classics, what could go wrong?

Rory Hunter:

Rob, it’s a pre-production developer, so lots really can go wrong. The potential Solvay offtake is still a non-binding letter of intent, and the binding agreement that they were targeting for September quarter still hasn’t yet landed.

The installation license, which effectively is the final permitting piece, is lodged but not yet granted, and they still need the debt package to get the project off the ground. And so the timeline to production has already slipped a little bit. We’ve set out what we think needs to happen over the next six to nine months, so that’s a binding offtake at a decent payability, the installation license, so that final permitting piece, and FID in the next couple of quarters without having to issue further additional equity.

If those land, our conviction goes up. If they don’t, we then renew or review the position.

Rob Hogg:

Great. Thanks, Rory. Now let’s move to something completely different: Koala.

Rory Hunter:

So for anyone that doesn’t know Koala, Koala designs and sells its own sofas, sofa beds, and mattresses directly to customers online in Australia, Japan, the US, and now the UK as well.

Design happens in-house in Sydney, and manufacturing and delivery are outsourced. There are no stores, and the range is deliberately narrow, about 20 core products, which gives them volume per line and drives a gross margin in the mid-60s. Koala listed in March at about $3.40 a share, and we thought its first results as a listed company were very strong.

Revenue of $330 million, up 20%. EBITDA up 140% to $28 million. And half of that revenue number now, importantly, comes from offshore, so it’s an international business.

Rob Hogg:

So why do you like it now?

Rory Hunter:

Three reasons really, Rob. So first, it’s undervalued against its peer group. On our numbers, it trades at about 11 times next year’s EV/EBIT, versus a peer median of about 14 times, while growing earnings faster than any in that peer group.

Second, it’s a capital light business. Last year, its CapEx was under $2 million on $330-odd revenue. Customers pay upfront, while the company has very favourable payment terms with third-party suppliers. So cash conversion sits at over 100% of EBITDA, and there’s a strong balance sheet. The company has $71 million in net cash and no debt.

Third, the US market. The US is now 22% of total company revenue, and it grew over 60% last year. The American consumer is still spending broadly, and management has pointed out that the US business is running ahead of plan. More broadly, the first eight weeks of the financial year saw orders up 27% in constant currency for the company.

Rob Hogg:

You’ve also called it well-managed, but what exactly do you mean by that?

Rory Hunter:

So first of all, it’s a founder-led business, but really importantly as well, the incentives are set up the right way. So last year’s management bonus was paid nothing on revenue, but paid well on EBITDA. So they’re paid for margin, which is exactly what our case or our investment case depends on.

You can see the discipline in how they enter new markets. The UK launch cost only $300,000 and one person. It was contribution positive within months.

Rob Hogg:

And the risks?

Rory Hunter:

The key question really for us is whether the second half gross margin of almost 67% can actually sustain around that level.

Management said freight and a strong Australian dollar helped, but they wouldn’t quantify it. The first proper test is the half-year results in February. Second, the US contribution margin is much lower at the moment than Australia and Japan because they’re really continuing to invest in marketing, which makes sense given the size of the prize in the US.

And third, the stock’s up quite a lot since that strong result, so that sort of easy entry point has now gone. So we started with a small position, and we have clear tests and targets for adding to that position.

Rob Hogg:

Okay. Let’s now move to the last one, Codan. Now, Codan’s had quite a run.

Rory Hunter:

It’s had an incredible run, Rob.

And at a $12 billion market cap and ASX 100 inclusion, it’s not exactly an emerging company anymore. So Codan, for anyone that doesn’t know the business, it’s got two main businesses. First, Minelab, which makes metal detectors for recreational users and artisanal gold miners, mainly in Africa.

That business earns a segment margin of about 45%. The second business segment is communications, which includes Zetron, an emergency dispatch business, and DTC, which makes rugged encrypted radios. Those radios go into drones and other unmanned systems, and that’s part of the business driving the story right now.

Rob Hogg:

And can you tell us what happened at the end of September?

Rory Hunter:

So it was a very big trading update, Rob. So Codan guided to first-half net profit of $160 million. That compares with $71 million in the same half last year, and $175 million for the whole of last year. Communications margins went up to 40%. Management had previously guided that 30% was a long-term target or a bit of a ceiling, and full-year growth guidance for communications went from about 20% to 30% to 40%. The stock traded up 24% on the day.

Rob Hogg:

So you’ve been taking some profits?

Rory Hunter:

Look, we have, and that’s really because essentially all of the upgrade came from conflict demand, mainly Ukraine. So conflict regions went from about 20% of communications to about 50% this half. Outside conflict regions, growth is about 20%, which is exactly what management guided to in August.

So DTC sells to drone makers on purchase orders, not long-term contracts, so visibility is very short. Management talked about three months for conflict demand in terms of visibility. So the stock’s now trading on something like 47, 48 times this year’s earnings. So the price is assuming some, but not all, of that level of demand continues. When upgrades are driven by conflict and visibility is that short, it makes sense to manage the risk and take some money off the table, and that’s exactly what we’ve done.

Rob Hogg:

Okay. So you haven’t sold out.

Rory Hunter:

No. We haven’t, because we still think there’s room for further upgrades. And the reason for that is what we’re seeing in terms of European funding for Ukraine. So the EU has a €90 billion support loan for Ukraine, which they announced back in April.

About €60 billion of that is for defence. The 2026 allocation of about €28 billion is committed, but only €11 billion has been paid by mid-September. The first package was about €6 billion for Ukrainian-made drones, and those drone makers are DTC’s customers.

In other words, we’ve seen some of that funding flow through; that’s what’s driven the uplift in conflict-derived revenue. We think there may be more, but management doesn’t have clear visibility into it; we know management quite well, and they are inherently very conservative.

So if you add the rest of 2026 to half of the 2027 allocation, around €32 billion is still to flow into Codan’s financial year. So compare that to the €11 billion, which has already come in. Codan’s guidance, the guidance that they provided in the recent upgrade for the second half, is 25 to 40% lower than the first half.

On the funding timeline, that looks like caution rather than money and funding actually running out or demand running out. So if those orders arrive, the second half could come in well above the guide.

Rob Hogg:

So what are you watching now?

Rory Hunter:

So really a few things. First, the AGM on the 20th of October for an update on the second quarter, and then the first read on the second-half orders.

Then the February result. We want to know how much of the conflict revenue is EU or donor funded, and whether any of it converts into longer US programs of record, which would give it the sort of contract quality it doesn’t yet have today.

Rob Hogg:

That’s great. Thanks very much, Rory. But just before we wrap up, is there anything else in the research file that’s caught your eye?

Rory Hunter:

A couple of things, Rob. My colleagues on the resources side continue to like Many Peaks Minerals. That’s a West African gold explorer which has a resource update due this month and a pre-feasibility study expected around the end of November.

We’re expecting close to 2 million ounces in the resource update. So the pr- previous resource was at about 1.2 million ounces, so a big uplift. On ounces, it really does look cheap against its closest peer. We continue to like Lycopodium, which is a significant position across our strategies.

That’s the engineering firm; they guided to FY27 well above consensus, and we see the earnings momentum continuing, which is quite a compelling valuation still versus peers.

Rob Hogg:

That’s tremendous. Thank you so much for coming in, Rory.

Rory Hunter: 

Thanks, Rob.

*Transcript has been edited for clarity.