Our Order Pad | Tesserent (TNT:ASX) & SVB Financial Group (SIVB:NAS)

HOSTS Candice Bourke & Felicity Thomas|1 October, 2021

Meet your hosts

  • Candice Bourke

    Candice Bourke is a Senior Investment Adviser with over six years' experience in capital markets and wealth management, specialising in investment advice including equities, listed fixed interest, ethical investing, portfolio risk management and lombard loans. She discovered her passion for finance and baguettes, when working and living in France, and soon afterwards started her own business (all before the age of 23). Candice is passionate about financial literacy for women which lead her to co found Her Financial Network, and in her downtime, you’ll find her doing any of the following: surfing, skiing, reading a book by the fire, or walking her black lab, Cooper, with a soy cappuccino in hand.
  • Felicity Thomas

    Felicity Thomas is a Senior Private Wealth Adviser with over nine years experience in wealth management and strategic financial planning, covering areas including Australian and Global equities, portfolio construction and risk management, bonds, fixed interest, lombard loans, margin lending , insurance, superannuation and SMSFs. Felicity started her career in finance at BT Financial Group, speaking to customers about their superannuation and investments. This led to the realisation becoming a Financial Advisor would be the perfect marriage of her skills and interests - interpersonal relationships and economics. She is passionate about improving women’s access to financial resources and professionals, and co founded Her Financial Network. On the weekends you’ll find her on the beach, or going for an adventure with her black cavoodle, Loki.

It’s time for Felicity and Candice to look at their Order Pad, where they reveal what’s on their respective desks, and talk through the research, analysis and thought process behind their ideas. Felicity kicks it off with a micro-cap company called Tesserent (TNT:ASX), a provider of full-service, enterprise-grade cybersecurity and networking solutions. Then Candice goes to the other end of the spectrum, with the largest commercial bank, focussed on financing and supporting the innovation economy, by lending to the Tech, Life Sciences and Private Equity and Venture Capital segments, called SVB Financial Group (SIVB:NAS).

Follow Talk Money To Me on Instagram, or send Candice and Felicity an email with all your thoughts here.

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In the spirit of reconciliation, Equity Mates Media and the hosts of Talk Money To Me acknowledge the Traditional Custodians of country throughout Australia and their connections to land, sea and community. We pay our respects to their elders past and present and extend that respect to all Aboriginal and Torres Strait Islander people today.

Candice: [00:00:03] Welcome to Talk Money to Me. I'm Candice Bourke. 

Felicity: [00:00:06] And I'm Felicity Thomas. And this is your need to know where podcast where we make the complex simple Talk Money to Me is a podcast designed to help educate you on all aspects of your financial landscape, where we draw on our extensive expertise and experience in wealth management and capital markets. Today is our order pad episode. So stop whatever you're doing and pay attention as we're going to reveal two very exciting stocks that we're following at the moment. Now, before we jump into today's episode, you guys know the drill. Here comes our financial disclaimer already. 

Candice: [00:00:38] Even though we have registered financial advisors, please note this podcast and the content discussed does not constitute as financial advice, nor is it a financial product. The content on this podcast is journal Nature, and you should seek appropriate professional advice before making any financial decisions. So today, all the companies that we're going to be discussing on our show are offered in good faith based on the facts known at the time and do not contain all the relevant information in respect to the financial products to which they relate. So essentially, guys don't take these podcasts personal advice. So in case you missed last week's Order Pad episode, I spoke about an Aussie retailer Business DUSK Group. And Felicity, you are super bullish on Aussie tech company Nitro. So, as promised, we've been tracking our stock picks closely. So let's just quickly check in and see how these companies have gone. Drum roll, drum roll radio. Here we go. Most anticipating here. So in first place so far, we've only got two spots. We've got Nitro Upcher, Felicity at three point twenty five and now it's trading around three point seventy seven performance so far, 16 per cent. Well done. And then closely behind in this two horse race is dusk, which I pitched at three twenty and it's now three or three. So I'm down slightly about five per cent. 

Felicity: [00:01:55] All right. So I'm winning.

Candice: [00:01:57] That's right. Her two horse race. So we're going to add two more horses, though, first and second. 

Felicity: [00:02:03] Now, we don't usually like to check our stocks and portfolio performance at that regularly. In fact, we always say check back in six months time or even honestly in a twelve monthly basis. The less you play around with your portfolio, the better. However, in the fun and competitive spirit of our order pad stock picks, we do want to touch base every now and then, especially when I'm winning. 

Candice: [00:02:24] That's right. And nothing beats that feeling of getting a stock right in the first, you know, a couple of weeks or even hours after you first purchase. So today we've got another chance to add two more brewing companies to our order pad. Felicity, you go first. What stock have you brought to this week's order pad?

Felicity: [00:02:42] OK, so mine is a company that you probably haven't heard of. It's called Tesserent. The code is TNT. And no, it's not that big shipping company, Tesserent. 

Candice: [00:02:52] And that's a lot to get your mouth around. So what does TNT do? 

Felicity: [00:02:55] Well, Tesserent provides full service enterprise, great cyber security and networking solutions targeted at mid-market enterprise and government customers across Australia via its 350 plus security engineers. The company's Cyber 360 strategy delivers integrated solutions covering ID protection and 24/7 monitoring against cyber security threats. It was also founded in 2015, so it's a fairly new company as well, headquartered in Box Hill in Australia. It listed on the ASX back in February 2016 and has reached highs of 44 cents. But the company's really had a massive revamp recently. It's a microcap company and it only has two hundred fifty three million market cap. So super small, 

Candice: [00:03:41] which is right up your alley, right? High growth, super small micro-cap.

Felicity: [00:03:45] I definitely do love that. Look, I believe TNT is a buy for the order pad and a company that we've only recently initiated coverage. So yes, I've got to buy a typical typical high growth by Nancy. I probably will never have a sale. Now, the reason why I believe this company is now a buy is, as I mentioned, the recent revamp they've spent the last two years and twenty five dollars million in acquiring several smaller firms in the highly fragmented domestic cyber security market. Now, AT&T is now one of the leading players in Australia with a particularly strong presence in the government space. Actually, it's probably the largest player in the federal government market, which is pretty exciting considering all of the cybersecurity threats we do face, especially in this day and age. Now, the company has long term tailwinds in the cybersecurity sector, so 29 billion potential economic impact on Australian SMEs with cybersecurity threats, the Australian market will be worth seven point six dollars billion by 2024, which is an eight per cent Kaga and Israeli enterprise spend will be four point nine billion in 2021, which again, eight per cent. 

Candice: [00:04:57] Yeah, that's super interesting. And I think also like every day. I'm getting probably a scam or an attack on my email or phone, so it's definitely an interesting space to watch. And what are your key highlights for TNT? 

Felicity: [00:05:09] Well, they recently completed a 20 million placement to fund their future acquisitions because they've got a really strong pipeline. The placement was at a price of 21 cents, which I know was heavily oversubscribed. Now, the key highlights that I want to go through with you today is the company's core strategy, which is the Cyber 360, which to me is an Australian digital revolution. Look, these acquisitions have allowed AT&T to build out its end to end phone service offering marketed as Cyber 360, which actually allows the company to provide clients with high margin mission critical services. Now, these services cover the entire range of cyber security risk requirements, your whole basement to boardroom. And the approach ensures clients receive an optimal level of security at a satisfactory return on investment. So the second one, like I mentioned, AT&T is the largest Australian provider of cyber security services to the federal government. And the companies stated mission is to be the sovereign cyber security provider of choice for the protection of Australian and New Zealand digital assets. We've got confidence in the management teams ability to meet this goal and note the inherent competitive strength of a leading Australian cyber security player providing these services to Australian governments this year offshore competitors. We see this dynamic driving, strong revenue growth and high margins across the forecasted period with the added backing of stable long term contracts. And my third highlight that I just want to go through cyber risks and not only becoming increasingly prevalent, but also more recognised as critical issues for business groups and governments. Like you said, people are always trying to hack your computer, hack your email, hack your phone, you know, state based cyber campaigns, ransomware attacks to take out critical infrastructure. For example, pipelines and various forms of fraud are receiving increasing media attention as the world continues to digitise, especially in Covid. Now, governments, including Australia, are responding with significant increase in focus and funding in order to limit potentially enormous economic impacts. And look, it's the only pure play cyber security firm listed on the ASX. So this is why I believe it's an ideal place for domestic investors looking for exposure in this thematic. They've also had pretty great results. The recent Q4 21 result confirming the clear step change in both revenue and positive earnings, positive earnings. 

Candice: [00:07:37] We love that. All right. So give us a few of your key takeaways from the recent highlights. 

Felicity: [00:07:43] You don't usually have positive earnings in this microcap space, do you know?

Candice: [00:07:46] So that's a gem. 

Felicity: [00:07:48] Yeah, it's a hidden gem. So TNT strategic shift over the past two years has really transformed the company. I know I've said this before, but I'm just going to reiterate it, you know, with financial upside starting to come through and don't believe the market has prices in. So the company is even profitable. So at 22 is forecasting seventeen point nine million or thirteen point four times. It's also cash flow positive. So FII 22 seven mil and appropriately leave it to execute on further accretive acquisitions as they arrive after this placement. Look, pay is high at thirty point eight, but that's because it's still a relatively new company with its recent strategic revamp. So it's high, high, high growth. It has impressive and strong FII 21 financial performance with turnover of ninety six point seven million. So that's 370 per cent versus PXP, the operational abida of nine point six million versus FII twenty. It was two point one dollars million loss. So they've really turned it around in the last year and now it's got an annual run rate of sixteen million as of Q4 FII. And lastly, they're doing a lot of strategic acquisitions, which they usually pay a multiple of between five to six times a EBITA. So, you know, they're really, really building out strategic capabilities, a larger footprint, organic growth and looking at cross-sell opportunities as well. 

Candice: [00:09:14] And so what about the future outlook for AT&T and maybe touch on some of the risks? You see, because cyber security is obviously very hot, but there's regulation risk involved as well. 

Felicity: [00:09:24] So TNT core strategy is to continue integrating these businesses under the Tesserent brand. So build on the strong organic growth by targeting high value customers with high margin services, in particular in the government space. And they're going to execute on further strategic acquisitions as they arise. They've got probably four key risks that I'll go through. So acquisition, integration. So a lot of their earnings in the last year have been from these acquisitions. So if these companies are not successfully integrated, those earnings could be at risk. Key management, there's the strategic shift of the company over. The past two years has been driven by a small group of people, and we believe the continued success of the company strategy remains highly dependent on their continued involvement, then you've got your competition risk. So while we believe TNT has a high quality differentiated offering, there is, of course, the potential for increased competition in the form of either domestic or international peers. And then the fourth, which I think is important, is reputational. So if clients of TNT are exposed to negative cybersecurity outcomes, Tandy's ability to retain existing clients and win new clients could be impacted. 

Candice: [00:10:35] Yeah, no, definitely. And what about risks around valuation? You know, where do you see ultimately the share price moving to?

Felicity: [00:10:41] So ultimately, AT&T offers investors high quality exposure to a key thematic at a reasonable price, with our conservative forecast indicating the stock is too cheap relative to peers, you know, at 20 percent discount in particular given the recent earnings growth outlook. So our 12 month price target is 31 cents. I can't give you the consensus, as no other brokers have picked up this hidden gem, which is good for our listeners and upside from its current levels of around 23 cents is 35 percent. So that's why I think Tesserent is a buy. Now, I'm going to predict you're bringing another buy recommendation to this week's episode, am I right? 

Candice: [00:11:19] Yes, I'm also in the buy camp today, but my company's also probably one you've not heard of or not maybe as familiar with. I'm going global for this stock this week and I'm also going big given the fact that the stock has a market cap of 38 billion. So just a tad teensy weensy bit bigger than Felicity's AT&T market cap of 250 million.

Felicity: [00:11:41] Definitely. That sounds like a mega cap. But before you Candice's stock pick, which we're going to hear from our sponsors. Okay, Candice, don't keep us waiting any longer, what investment idea are you bringing out what happened this week? 

Candice: [00:11:54] OK, so I'm pitching a bang today and trust me, you just hold out. It's not going to be a boring bank. 

Felicity: [00:12:00] I was about to say snoots. 

Candice: [00:12:01] Yeah, no, no, it's not a snooze. Don't worry. It's a company that you've probably not heard of before, despite the fact that it's the largest commercial bank, which is focus on financing and supporting the innovation economy. So this bank that I'm talking about is in leading position really as it's fast growing and is totally differentiated from its peers. In my opinion. It's primarily lending to the tech, life sciences, private equity and venture capitalist segments of the US economy. So my company is SVB Financial Group and it has the best loan growth amongst all of the US banks and is super impressive with this asset sensitive balance sheet. 

Felicity: [00:12:39] So when he said the bank lends to the innovation economy, what do you mean by that?

Candice: [00:12:43] So SVB financial group lends to the VC investors, like I mentioned, and primarily to the tech based emerging growth companies directly. So essentially the bank is where the likes of Elon Musk and Jeff Bezos go to hang out, grab a coffee, you know, discuss their new big tech idea. And it's where they get their funding to get the ground up and running. Oh, wow, that's cool. Yeah. So it's very different. Not a news bank. So the bank dominates this segment and it's part of the lending market which has really been so successful as a depositor as it's really pioneered the use of the off balance sheet funding. So it's recent acquisition of Leerink Swann, which is actually a health care banking boutique business. And this actually places SVB in now the prime position to be the advisor in capital markets for the business. SVB is headquartered in the US, obviously by the CEO, Greg Bekka, who joined the bank in nineteen ninety three. So far, I've got your interest. The code for you'd look up on your Bloomberg app is SVB on the Nasdaq and as mentioned, it's a large cap or mega cap in the US given it's a 38 billion market cap. 

Felicity: [00:13:54] So it's definitely not like your majors. So not like you, Goldman Sachs, not like

Candice: [00:13:59] Citigroup or CBA, Bank of 

Felicity: [00:14:01] America. Yeah. 

Candice: [00:14:02] And in fact, it's probably the polar opposite to those banks and in particular to our Aussie listeners is the polar opposite to the Aussie banks as this bank doesn't pay any dividend which investors in the Australian financial markets are really used to. In terms of similarities, though, SVB has a capital to one ratio of twelve point six per cent. And compare that to a lot of the Aussie banks that we're familiar with that since around 11 per cent. So they've got high cash and a very strong balance sheet really is what that's indicating.

Felicity: [00:14:32] That sounds 

Candice: [00:14:32] good. And unlike other financial institutions, SVB is no normal bank in the fact that it's not really at the mercy of the economy in the short term interest rates. We're hearing a lot about inflation at the moment. That's coming across our desk with all the macroeconomics and really the position that this piggy bank is sitting at is not really going to be impacted if inflation does move too quickly. So that's the reason why or one of the reasons why I like this business in the fact that it's super niche and it really caters to the disruptive companies and disruptive tech, really. In fact, SVB, if you go on their website, it actually boasts about having 50 percent of all the venture capital backed businesses in the US as their clients, as well as 68 percent of the venture capitalist backed businesses that went public in 2020. So, you know, SVB as a business really has equity or stakes in these companies that they're investing and lending to at the early stages, eruptive outset. And, you know, for us in our last couple of episodes, we've been talking a lot about this space. So the bank is primarily one of the major lenders to these really cool, disruptive businesses that are trying to get an early start. And so if you've heard of the term specs, which stands for special acquisition companies, this bank is heavily involved with the financing and really finding the next big IPO, which focus on disruptive tech companies. 

Felicity: [00:15:53] My favourite. So what about recent company highlights? What caught your eye there? And I mean, how did the results compare this expectations? Well, to 

Candice: [00:16:02] start off with the operating EPS or earnings per share, guidance of nine point thirty three was significantly above our expectations, down at six point thirty eight and the consensus around six point forty two. So beat there. In fact, the company's EPS growth is sitting around thirty five times, which is just killing it against the PS. Like you've mentioned, JP Morgan, I think is about 13 times EPS growth. So revenues were also way above expectations, 862 million versus five hundred and sixty eight million. So eight hundred and sixty two versus what the market was expecting, 568 million going to let that sink in, driven by, again, a super massive, robust quarter in earnings. When you look at a bank, you look at their metrics like what was the loans and the average loans? Was up seven point six per cent, cash was up fifteen point nine per cent, and the security balances surging again 35 per cent. So this is really an impressive balance sheet that I'm looking at. This is a really impressive net interest margin bank, which is another metric that you look at for any financial and in fact the net interest margin income or near more NIM in, they say in the industry was also about 720 million versus 712. So really on all traditional banking metrics, the company's results was a solid beat against expectations. So overall, if you're a shareholder in SVB like me, you should be super happy with these results. And we've seen the market respond accordingly. I think it's up about 21 per cent in the past quarter or so when the share price. And what about

Felicity: [00:17:35] the company's outlook? Has guidance changed? 

Candice: [00:17:37] So the full FY twenty one for their loans has really seen no change to the mid thirties growth. That's good. Net interest margin or the NIM has slightly increased from two per cent margin to two point one spread, now sitting at two point one per cent to two point two per cent. And the net interest income also remains the same. Along with the core fees and expenses, the Boston private segment of the business will add about 10 basis points to the overall loan growth, which will also add some more NIM to the core growth, too. 

Felicity: [00:18:07] So what's the Boston private segment? 

Candice: [00:18:09] That's the business that they bought, which is their pelander?

Felicity: [00:18:13] Okay, cool. 

Candice: [00:18:13] But it's also like with any stock pick, right? It's also important to note the few risks associated with any business for the bank. I can say the following risks as being a change in the economic environment, which is one you really got to closely watch with the bank, you know, driving industrywide changes and shifts in the loan demand. Secondly, change in the competitive environment for deposits, anyone coming in and changing the rules. So regulatory risks will really impact revenue. A massive change in interest rates. The Fed moving too quickly over there or material change in credit trends.

Felicity: [00:18:50] Yeah, and I think just to add on this, you did say economic environment and shift. I mean, you know, Speck's was so hot last year in the year before. What happens if Cmax are no longer hot?

Candice: [00:19:00] Yeah, that's right. That's definitely another risk. And I think it's important to note with Speck's, they given about, I think about a 12 to max 24 month run rate. So they get given a loaded gun, so to speak, of cash. They got to find the next big idea and they've got to list it. So if you run out of great ideas, then your market will dry up and your IPO market will dry up. So that will impact, obviously, lending side of things to 100 percent. 

Felicity: [00:19:25] All right. That sounds really exciting. Now, this is what everyone's been waiting for. How about the valuation? Where do you see the share price moving in the next 12 months or the next one week?

Candice: [00:19:35] Well, it would be great to be up 1000 per cent by next week, but that's a little bit unrealistic. But as a disruptive company and it's on the path to continue making these headways I've mentioned, I think it's going to benefit greatly from their strong banking balance sheets and the stakes that they're taking in these businesses. So in terms of metrics, before I answer your question, just going to shout out to a couple of my favourite metrics that the company is showing me market capacity at doing like we know, net income of one point eight six billion, revenue of 2.5 billion, low levels of debt. Eleven percent equity to debt ratio. That's super impressive for a bank high T1 cash ratio like we know of twelve point nine super profitable business, the margin of seventy two percent, ROIC of twenty two percent, ROIC, 17 per cent. And if you weren't excited, this stat will make you excited. EPS growth predicted for twenty twenty two, expected to be twenty eight point thirty four per cent. Let's read it up to thirty percent because nobody likes those funny numbers. So essentially translation the most bullish share price valuation I can see is eight hundred and forty one dollars per share price, which is about a 30 per cent upside. That's why I said let's bring that up to 30 per cent because that pretty much matches my EPS forecast that I can save for the company. And the stock currently is trading at eight times P, so that's indicating that the stock's super cheap at the current levels, given the forecast guidance. And obviously we need to look at the most average consensus out there. There's about thirty seven analysts that cover this US bank. So the average couple sitting around 750 share price, which gives conservative upside of 15 per cent. But let's go for the 30 percent. 

Felicity: [00:21:23] Fantastic. And what is it trading at at the moment?

Candice: [00:21:25] So right now you can buy the stock at around six hundred and seventy five dollars per share. But as of the close of the twenty eight, it was up nearly four percent overnight. So that's a wrap on why I liked SVB Financial Group and I think it deserves a nice spot on a order pad 

Felicity: [00:21:41] Fantastic. I'm excited this order pad is going to be really, really, really awesome. 

Candice: [00:21:46] So far it's got four buys. And hopefully skyrocketing the next time we catch up with you, but before we say goodbye, we've had a few great questions this week come in through our listener mailbag. So firstly from Georgia, she wanted to know more about the different investing platforms, Comsec versus smaller ones like superhero. Thanks, Georgia, for your great question. We could honestly talk about this topic for ages about which brokers to start. How do you start investing in stuff like that? But our friends, Bryce and alike over at Get Started Investing feed have actually already done this topic in their own miniseries. So we'll link the episodes in our show notes or visit Equity Mates.com for more information.

Felicity: [00:22:25] And we've also got one from Will in regards to cryptocurrency as to whether it should have a spot in your portfolio. This requires a whole need to know episode. So we will definitely look to address this before the end of the year. Now, please remember, although we Candace and I, our financial advisors, please note, our discussion today does not constitute as personal financial advice. As always, you should seek professional financial advice before making any financial or investment decisions. Feel free to reach out to us on our social media channels or send us an email which is displayed in our show notes below.

Candice: [00:22:58] If you're not already, jump on to Instagram. Give us a like. Follow us there and keep those writings coming through, especially those five star ones. We like those until

Felicity: [00:23:07] next time

Candice: [00:23:09] Viento. 

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