Proteomics set for growth, says Kardinia

<p><strong>Lex Hall: </strong>Hi, I'm Lex Hall for Morningstar. Kristiaan Rehder is Portfolio Manager at the Bennelong Kardinia Absolute Return Fund. We're here today to talk about some top performers in the fund.</p> <p>Welcome again to Morningstar, Kristiaan.</p> <p><strong>Kristiaan Rehder: </strong>Hi, Lex. Thanks for having me.</p> <p><strong>Hall: </strong>Now, there's a few interesting pretty juicy stocks in your fund, which have done pretty well. And the first of them is a company that I've certainly never heard of, but it's done very, very well. It's called Proteomics. The ticker is PIQ. Tell us how you discovered it and what it does, and can they keep it up.</p> <p><strong>Rehder: </strong>Well, Proteomics, I'm not surprised you haven't heard about it, it's on the smaller end of the spectrum, not many people have. It's got a market cap of about $150 million. It's actually of all places is based in Perth in WA. It is a medical device company which is somewhat unusual for Perth. You usually associated Perth with resources. But they do have a number of very intersesting biotech companies and this is certainly one of them.</p> <p>Look, we all know that diabetes is a growing issue, I guess, globally. Most sufferers of diabetes, in fact 40 per cent of diabetics, will end up developing what's referred to as diabetic kidney disease. And so, the cost to health insurance, the cost to governments globally is quite enormous. So, 9 out of 10 DKD sufferers don't suffer from any symptoms. So, they suffer without any knowledge, I guess, of the symptom or the inflections that they have. And what Proteomics has developed, they developed a device that is able to predict DKD four years in advance with around an 86 per cent accuracy. So, it is a game changer. And just to give you an indication of how expensive it is to treat DKD&mdash;the US Medicare system spends around 40 per cent of its total budget to try through dialysis and kidney transplants to treat diabetic kidney disease.</p> <p><strong>Hall: </strong>So, is that a stock you hold onto, or do you trim because it's had such a stellar rise, hasn't it?</p> <p><strong>Rehder: </strong>It has had a stellar rise. I mean, it's a largely undiscovered company. The one thing about this company, it's got an enormous total addressable market size. So, there is approximately 460 diabetics in the US and globally at the moment. We expect that number to grow to around 700 by 2045. That's tremendous growth. It's a company that is right on the precipice of their sales. So, it's got CE Mark approval, which is the equivalent of FDA approval for Europe. There is tremendous upside. We see a clear pathway to around a million tests in next three to four years, which will see the market cap expand to multiples of what it is today. So, it's a long way of answering your question. We're quite happy holders. Even though it's been a strong performer, we think it's got a long way to go.</p> <p><strong>Hall: </strong>That's good. Well, we're not too late then?</p> <p><strong>Rehder: </strong>No.</p> <p><strong>Hall: </strong>Second name on the list today is one that I've heard of and I imagine a lot of people will have is the online bookmaker PointsBet. It's the only one that offers more markets on the NBA, AFL and NRL, I think, than any other bookmaker in the world. When did you get in and what else do you see in it?</p> <p><strong>Rehder: </strong>Yeah. Look, we've been in PointsBet for over a year. It's a reasonably new company. It only listed back in 2019. It's based in Australia, but it's got massive ambitions to enter the US. The US is well behind Australia in terms of online gambling and the reason for that is that they had a federal law that was recently struck down back in 2018 that prevented online gambling. With the striking down of that law it's now up to the states as to whether they allow it or not. So far, 20 states have opened up their markets to online gambling. That allows approximately 20 per cent of the US population access. The Americans are sports mad.</p> <p><strong>Hall: </strong>It's hard to believe, isn't it, that they would sort of put on those kinds of curbs on online gaming.</p> <p><strong>Rehder: </strong>Yeah, it is surprising, and I think one of the motivating factors, I think, for states to legalise gambling is just the fact that many of them are so indebted and they're all looking for revenue streams. And this is low hanging fruit for many of those.</p> <p><strong>Hall: </strong>I see.</p> <p><strong>Rehder: </strong>It is a sports mad country. We think Australians are sports mad; the Americans are equally as so. The US market, we've seen estimates for online gambling at around $17 billion. I almost fell off my chair when I was reading the investment presentation of a major competitor of sports bet, DraftKings, only a couple of weeks ago, and they were estimating that the market is more like $70 billion. So, it's a tremendous market opportunity for these guys. They are certainly well placed looking to achieve 10 per cent market share into the US and they are on track to achieve that.</p> <p><strong>Hall: </strong>OK. Fantastic. So, that's PointsBet. PBH is the ticket. And finally, Kristiaan, a name, pretty much a household name in Australia, BlueScope Steel.</p> <p><strong>Rehder: </strong>Yeah. Well, as you see, I've kind of taken you down the path of a medical device company, a tech company and now we're going through the (old industry). But BlueScope is a $9.5 billion company. It's well understood. It's got 50 per cent of its revenues derived from Australia. It's got 30 per cent derived from North America. It is in a terrific position at the moment. It's got a very strong balance sheet, $300 million cash on its balance sheet. It has a free cash flow yield at the moment of about 7.5 per cent, which we think is particularly attractive. It's just upgraded earnings 3 times in the half. We think it's due for another upgrade before the full year results. The reason we say that is steel industry in the US is really booming. There is strong demand for steel and that's seeing a big increase in steel spreads. You're the automotive industry really bounce back. The US housing market is flying so as the Australian market. You're seeing tremendous investment in ecommerce logistics, warehouses and government stimulus. And so, you've got this demand equation which is firing on all pistons.</p> <p>And then, on the supply side, you've had serious consolidation over the last 20 years. We're very optimistic on BlueScope. Currently, steel spread is around $800 a ton. Their guidance was predicated on steel spreads of about $610 a ton. So, it's a big gap there that will need to get bridged. Just to give you an idea, every $50 increments in the steel spread translates to about $140 million to EBIT in their US business. So, they will either beat their numbers, I think, in the full results or they will come up with another earnings upgrade in the next three or four months.</p>