Woolworths’ buyback, Evergrande’s debt and expert’s stocks for the next 5 years

HOSTS Alec Renehan & Bryce Leske|27 September, 2021

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

It’s another chat episode! You’ve been talking non stop about the Woolworths buyback in the Facebook Discussion group, so Alec and Bryce give you the 101 on what’s going on. Then the guys do a deep dive on Evergrande, break down the facts about the latest SPAC merger: $DNA, and compare their notes about a recent article on Livewire: 13 stock picks for the next five years.

If you want to let Alec or Bryce know what you think of an episode, write to them here

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Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy Ren. How are you going? 

Alec: [00:00:30] I'm very good, Bryce. Great to be back for another Monday episode. A lot happening in the world. 

Bryce: [00:00:35] Earthquakes down in Melbourne, protests down in Melbourne. It's all happening in Melbourne, EM starring on Channel seven. 

Alec: [00:00:42] Yeah, well, I think you made your debut on the Channel seven News. 

Bryce: [00:00:48] I actually didn't say that we for those who are unaware of what we're talking about, we were recording a podcast with Owen and Kate from Rask Australia, while the earthquake was happening and caught it all on camera, which is pretty intense. And it was picked up by Channel seven. No surprises there. It was a viral video. We went viral videos nonetheless. 

Alec: [00:01:10] Yeah, I didn't even feature on it. 

Bryce: [00:01:13] I think it did on the long form, but I think they. 

Alec: [00:01:15] Yeah, yeah, yeah. They gave the people what they wanted. 

Bryce: [00:01:18] So look, on today's show, we are going to do the one on one on the Woolworths buy back. A lot of questions coming through from the community on that. We're going to have a chat about what's going on with every grand and we will break down the latest spaak. That is interesting, which is the day and a and then we're going to close out with a quick one on 13 stocks to hold for the next five years from some experts around Australia. So looking forward to today's episode, but before we do Ren some housekeeping by the book. Yes, that's it. 

Alec: [00:01:50] Keep the housekeeping short by four if you're wondering why the book hasn't arrived yet. Don't look at us. Don't look at Booktopia. Don't look at Amazon. Don't look at your local bookseller. Look at Australia Post. 

Bryce: [00:02:03] But we would really appreciate your support. So go and buy Get Started Investing for anyone who wants to start their investing journey. It's going to be a great Christmas present. Get on that. Now, we also have a big favour to ask, and that is that we need your help to build our Get Started Investing feed summer series, Ren. 

Alec: [00:02:20] That's right. We have done some a series on Equity Mates for a few years now. We want to do one on GSI and we want to focus on your investing stories. Bryce and I have made a lot of hay out of some of our investing stories. May losing everything on Slater and Gordon Bryce following a stock tip and losing all his money, only to find that the mate sold like directly after he gave the tip. But we know there's heaps of good stories out there, the bad ones like I've just touched on, but also a number of great ones. And we we love hearing other people's investing stories. You know, we always whenever we have experts on, we ask them about their investing stories, their first investment and stuff like that. And we want to hear yours as well. So if you've got a great story, if you've got a mate that has a great story, head over to our contact page, Equitymates.com/contact, or email us at Contact@equitymates.com. We'd love to get you on the podcast. Chat about your story. We promise no hard questions. We just want to hear the stories. 

Bryce: [00:03:18] Yes. So looking forward to hearing from you and we will get in touch. But let's get on with it, Ren. 

Alec: [00:03:24] Let's do it. So we've been getting a number of questions about the Woolworths buyback, and you've done a bit of work to aggregate those questions and try and answer them all. So let's let's start at the top. Woolworths is doing a buyback. What does that mean? What's happening? 

Bryce: [00:03:39] So they've announced that they're going to be doing a two billion dollar off market buyback. I guess the question is, Will, what is a buyback? 

Alec: [00:03:47] I'm asking the questions here. What is a great question. 

Bryce: [00:03:53] So buyback is where a company buys shares back off its shareholders. Now, there are two ways that they can do this. They can do it on market, which is literally going to the share market via the listed means, just like you and I would buy stocks and buy stocks to the value of two dollars billion in this case by Woolworths. And then they cancel those stocks from circulation. Or they can do an off market, which is what Woolworths is doing, where they essentially go to their shareholders and ask for them to do it, to buy back shares off the market. So it's not not through a listed means.  

Alec: [00:04:30] It's worth pausing here and just quickly explaining why a company would destroy its own shares because it sounds aggressive. Yes, there are two ways that companies can return capital to shareholders. They can pay a dividend or they can buy back shares. Now, in Australia, the dividend has been the preferred method of giving money back to shareholders. And that's because of the way we treat the taxation of dividends with franking credits. Australia is one of three countries that allow fully franked dividends, which means if the company pays tax on those dividends, you as the investor don't have to pay tax. In most other countries in the world, there's a double taxation problem. The company pays tax and then you as the investor pay tax. And so. In a lot of other countries and here I'm thinking specifically about America, the buyback has been the preferred way to return capital to shareholders, and the reason it's returning capital to shareholders is if Bryce and I both own one share in a company with 100 shares, we both own one percent of the company. If the company buys back 50 shares from the market and destroys them, then Bryce and I own one share of the company that has 50 shares. So we both own two percent of the company. So you're returning capital to shareholders by giving them a bigger percentage ownership of the company. And so that's what Woollies are doing here. They're returning capital to shareholders, but not through dividends, but instead through a buyback. 

Bryce: [00:05:52] Yeah, well, there is a dividend component to the war. So, yeah, I believe the fundamentals are there. And you mentioned what it means for shareholders. So it does reduce the shares outstanding. And we know that when that happens, that's just basic supply and demand less shares on offer can often reduce result in a higher share price if the demand is is still there for these stocks. So that's one sort of benefit. Another is that with less shares on offer, if you're looking at those sort of per share basis earnings, dividends, they obviously increase in value as well. So those are some of the advantages. But you're right, it's a massive thing over in the States and we've seen it this reporting season, pretty prolific here in Australia as well. 

Alec: [00:06:41] So that's a one we won on what a buyback is. Let's get specific about Woollies. We've got a lot of questions because a lot of people have got offers through their brokerage accounts saying, do you want to participate in this Woolworths buyback? What does it mean? What do I have to do if I want to participate, should I participate? Probably can't answer that because that's financial advice, but give me some broad strokes.

Bryce: [00:07:03] Yes. So what Woolworths have said is we want to buy two billion dollars worth of shares back off our shareholders and we're going to do it off market. So the first thing is you don't have to do it. That's the first thing to consider. You've probably received a letter or three brokerage, as you said, Ren. So, yeah, you don't you don't have to do it if you do want to participate. The way that they're doing it is through a tender process. So essentially what they're saying is if you want us to buy your shares back, we're looking to do it within a discount range from 10 to 14 percent. You put in a tender to us and say what you're willing to sell your shares at in that range. And then we're going to determine at a point in time in October through that tender process, who will be buying the stocks from. 

Alec: [00:07:43] I assume it's just they'll take the lowest price, of course. 

Bryce: [00:07:46] Or you can say that we will. I'm willing to sell my shares at the price determined by Woolworths at that point in time if you don't want to fiddle around with giving and discounted price. 

Alec: [00:07:56] So I'm a Woolworths investor. I can sell my shares on the stock market, whatever the share price is, or I can tender at a discount. Why would I tender at a discount? 

Bryce: [00:08:05] Great question. So this all comes down to how Woolworths are going to be buying these back and it's a big tax advantage play and this is where you need to consider if it's right for you. So what Woolworths are essentially saying is of the price that we're going to buy it off you four point thirty one is actually going to be a return to you in capital. So cash, we're going to give you say if you're selling your stock for 35 bucks, we're going to give you four point thirty one back in cash. The remaining amount is actually going to be paid as a fully franked dividend assessable income. So as you mentioned there, Ren, that component is where you get serious tax advantages. 

Alec: [00:08:43] Well, both components, because if I bought a Woolworths share for thirty dollars, it's now thirty nine dollars. And I am saying I sold it for four point thirty one plus massive capital loss. But then you get the franking credits as well. Exactly. 

Bryce: [00:08:58] So depending when you bought your shares and this is the key component, depending when you bought your shares, also where they're held, if they're held in a super fund or another sort of vehicle, that also has a tax advantages associated with it. And after the franking credit, you may end up actually coming out above the share price that it's at in October. Once you claim the credit for the franked income and also you're then going to have a loss that you can carry forward if you're in a situation where you've bought it at a price that is higher than the four point thirty one. 

Alec: [00:09:32] When's the last time Woolworths was below four point thirty one? 

Bryce: [00:09:34] Probably 1980. 

Alec: [00:09:39] I've gone back as far as I can on Google. If you bought it in like two thousand. Okay. 

Bryce: [00:09:45] Yeah, yeah, yeah. So I imagine for a lot of retirees, it might be a very appealing offer to do it this way. But look, if you've just bought your Woollies shares to get the Endeavour stock split eight months ago or whatever, you know, you need to consider what it means from a tax advantage point of view because, yeah, you can probably sell it on the market at this stage. You're not going to be getting a capital loss. 

Alec: [00:10:09] Yeah. So I think it's up to an accountant or a professional financial adviser and figure out the tax implications. If you've made bulk cash on old coins and NFTE this tax year and you need something to offset some of that, maybe this is a play. Yeah. If you're long term Woolworths shareholder and you want to hold it for the next 20 years, this is all just noise. Yeah. Just depends. 

Bryce: [00:10:31] Yeah. So if that's right, if you want to hold on to your shares, you're going to actually end up owning more if the company wants to. Buyback is complete and yes. Depending on the situation. 

Alec: [00:10:40] There we go. All right. Well, I hope that clarifies it for some people. Unfortunately, there's never an easy answer when it comes to should I buy or should I sell? But hopefully that helps people think about it. Let's move on to what has been the biggest story of the week. We've certainly made hay of it on our Sociales, and that is the Chinese real estate market. 

Bryce: [00:11:02] Yes, it seems like it's the end of the world. 

Alec: [00:11:06] If you if you read some headlines, it would sound like it was the end of the world. And like there is there is a number of very smart people saying at the end of the world, Michael Burry of the 2008 GFC Big Short Fame has been tweeting about it. He does this weird thing where he tweets and then he deletes his tweets right after reading. And then there's a Twitter account that's called Michael Burry, deleted that screenshot all of his tweets and then repost them. But yeah, it's a weird, weird tactic from him. But let's start with the most recent news, because and then let's let's go back last Thursday, Evergrande, which was has the inauspicious title of the world's most indebted property developer. Yeah, over three hundred three. Billion US dollars in debt. It had about 120 million US dollars of interest payments due to its bondholders and there was concern that it wouldn't be able to pay it. And so that's where a lot of the panic was in the past week. And, you know, markets were falling. Evergreen's bonds were basically trading at worthless. Their share price continue to fall its fault. It already is falling like over 80 percent in the past 12 months. But people were worried that they wouldn't be able to pay this 120 million of interest. Last Thursday, they struck a deal with their bondholders and they survived that payment deadline. And so everyone took a big sigh of relief because this property developer didn't default on their debt last week. But the bigger risk is still there. So let's take a step back and do a let's chat about what's going on. So what is going why why has everyone suddenly become an expert in Chinese real estate markets? And why is this company that no one had probably ever heard of until two weeks ago suddenly capturing headlines? 

Bryce: [00:13:02] Well, it all starts with the China property market that has gone through an incredible boom over the last decade. We've seen know places like Beijing, Shanghai, Shenzhen, all rising sort of 500 percent plus since 2002. So, you know, if you look at other sort of real estate, Bubbles Island, one hundred percent, Spain, two hundred and thirty percent. This is a significant property boom that's been happening in China. I don't know what the percentage is here in Sydney are, but it doesn't feel like I should have looked at that. 

Bryce: [00:13:38] And yeah, so it's become very expensive. You know, there's a you know, that price to income ratio when it comes to property. You know, cities in, you know, like London, it's 22 times. New York is 12 times. But what are we seeing in China? 

Alec: [00:13:52] About 40 times in those tier one cities like Beijing, Shanghai and Shenzhen, 40 times. It's crazy. So basically, the the dynamic since 2002 is China. China property has got more expensive, especially in those tier one cities. And you can understand the dynamics of that, lifting hundreds of millions of people out of poverty, building a middle class China, much like Australia, much like a lot of the world, Chinese consumers tie up a lot of their wealth in property. And, you know, this is just led to a boom in the property market. Big Chinese developers have responded by taking on heaps of debt to buy land and to develop that land. And the supply of housing in China has just grown at an unbelievable rate. But prices have continued to grow, especially in those Tier one cities. So everything's been OK. 

Bryce: [00:14:45] Yeah, it's weird the dynamic, though, because there's also many, many cities that have thousands and thousands of houses with no one in it. 

Alec: [00:14:52] Well, this is where I was about to go there. There's this concept of ghost cities in China where there's millions of apartments or apartments for millions of people. And I think like a few thousand people living that crazy, I think that I was looking it up yesterday. I think it's 50 ghost cities in China. 

Bryce: [00:15:06] And and when we're talking cities like these, there's millions of apartments. 

Speaker 1: [00:15:10] Yeah, yeah.

Bryce: [00:15:11] Not just they've thrown up a building and said, that's our guy city. 

Speaker 1: [00:15:14] Yeah, yeah. Like cities. Right. 

Alec: [00:15:18] And so for a number of months for some people, for a number of years I was reading an article that was one Hong Kong private equity manager who was anonymously quoted as saying, I haven't wanted to touch ever ground for 20 years. And like he's flat out told all of the people that work for him, you know, let's touch every ground, equity or debt. For a long time, people have saying this risk in the Chinese property market, like if you're a company that's heavily in debt, you rely on the market continuing to go the way that you want it to go to service that debt. Like if the Chinese property market fell, then all of a sudden you're getting less income for your development and then all of a sudden it becomes harder to pay debt might become harder to tap into debt markets, to get more debt to service your existing debt. And basically, that's the situation that Overground has found itself in. 

Alec: [00:16:12] Now, as we said, the immediate sort of payment crunch is has been averted. They've got through last week unscathed. But there's still a broader risk that they've got more debt that they need to pay. And it's going to be difficult to do it, I guess, in terms of some of the concerns that people have. So if these developers are struggling to pay that debt, they're going to have to clear inventory off that balance sheet and inventory off their balance sheet is apartments that are trying to sell unused land that they're trying to develop. They're going to have to clear that off to free up cash to pay their debt. And that could burst this Chinese property bubble, which will slow down the Chinese economy. So that's that's a risk one. Risk, too, is like a contagion risk, so let's say ever grand have to sell stuff on the cheap to free up cash or they default on their debt and they collapse, there's a risk that there could be flow on effects to other Chinese property developers because they're in similar situations where they leave it up to make the most of this boom. 

Bryce: [00:17:15] Just on that, though, didn't the Chinese government step in at some point to say, you guys all need to deleverage? 

Alec: [00:17:21] Yeah, which is why this has come to a head, because previously these companies could tap into a whole bunch of different funding markets to get more debt servicing existing debt. And the Chinese government stepped in and a lot of those funding sources really dried up. It's this policy called the three red line policy. 

Bryce: [00:17:41] Having said that, the only way that you can deleverage, I guess, will one of the ways is to just start going cash on your balance sheet. And by selling property and that sort of stuff, they would have seen this coming. 

Alec: [00:17:53] Yeah, probably, yeah. I mean, like the Chinese Central Bank has been calling out systemic risk in the property market for a while. Yeah, it's just now everyone's listening. Yeah, but yeah. Yeah. Now you said the only way that they can deleverage is to sell inventory. You think that's the case. Every grand also had the interesting play of floating an electric vehicle start up and rising and rising I think about four billion dollars in cash from investors this year. So that is another way that you can raise money if you need to in a pinch. But, yeah, you're right. It's it's something the government probably saw coming. And I think the Chinese government don't want to crush the Chinese economy. Yeah. But they can go hard at companies in ways that other governments probably can't. Yeah. So in terms of risks, we've touched on the real estate bubble bursting in China and not having a slowdown on China's consumer confidence and the wealth of Chinese consumers because so much of their wealth is tied up in property. So that's one. Number two is contagion in the property sector. And other developers also follow Evergreen's suit and default. The third risk, and this is probably the scariest risk and this is probably the most sensationalised one because every financial media outlet loves to write the headline. China's Lehman Brothers moment is that this property sector issue flows into other parts of China, the global economy, because Evergreen. So there was a letter leaked last year in terms of who owns their debt, that three hundred billion U.S. debt, one hundred and twenty eight banks and over a hundred and twenty one non banking institutions. And so if similar to the global financial crisis where the American housing market, a lot of that debt was collateralised into products that, like really important financial institutions like Lehman Brothers, held when the property market collapsed, banks like Lehman Brothers also collapsed. And so the other concern here is that a lot of the owners of these property developers debt could be holding things that are ultimately worthless and they're not going to get their money back. And that creates systemic risk in China's financial system. 

Bryce: [00:20:15] Well, the big question there is whether or not the government lets that happen. Yeah, because they have the ability to step in and go, whoa, whoa, whoa. All right. We're happy with some sort of economic slowdown. The property market burst. Let's let that play out. But do we want this company to fully go bust and have that sort of an effect amongst financial institutions around the world? Maybe not so will bail these guys out. 

Alec: [00:20:39] Honestly, I reckon that's. Yeah, that that's the most likely outcome here. I mean, maybe not. We don't we just don't know. It's like trying to predict what China is going to do. But they've got a big chequebook. And then so so that's that's the concern. I guess the question is how concerned should we be? It's a tough one. But I think if you think about yourself retiring in 20, 30 years, you're probably not going to look back and say, I wish I'd I wish I'd hedged the Chinese property market risk better. Yeah. 

Bryce: [00:21:13] And I mean, if you look at what the market did, everyone was making it out that it was by Armageddon and portfolios. We're seeing we're seeing a crash where the markets were frothy. It's about time this happened. I mean, the S&P is down from it's down three percent. Yeah. So it's like the markets. They're not certainly reflecting that. They're really worried about this at the moment anyway. 

Alec: [00:21:35] Yeah. Yeah. And then finally, I think the last thing we should touch on is the Australia specific implication. Yeah. We are an Australian podcast. The biggest impact is going to be the price of iron ore because iron ore has had a day in the sun based not solely but largely driven. China's property developers, if they are buying land and are developing at a rate of knots, they need steel and that means they need Australian iron ore to make that steel and now they don't need it. 

Bryce: [00:22:10] And funny story. So my partner, Harriet, she had a bunch of BHP shares from years ago, years and years and years ago, and completely forgot about them finally and came across them the other day. Amazing. This is awesome. Forgot about these shares. And then from that moment, it's been the iron ore collapsing price and so had shares. It just came tumbling down. 

Alec: [00:22:41] I don't think Harriet's alone. There's been a bit of noise in our Facebook group about people who bought like Fortescue to pay dividends, a rookie. But according to the latest government budget, for every ten dollars, the iron ore price falls. The Australian budget loses one point three billion in receipts, and Australia's nominal GDP falls by six point five billion. Wow. So, you know, Australia, Australia relies on a high iron ore price. The government who are trying to get the budget back into surplus one day rely on a higher iron ore price. So there are Australian effects. And that's why we saw the Australian share market fall last week, driven largely by those miners. But I think I think there's always something to be worried about day to day is my big takeaway. I'm sure the worst could happen. We could see contagion in the Chinese property development market that spreads to China and financial institutions that then spreads to the global economy. Sure. Like there is a risk that that happens. I don't know what percentage you give that risk or how remote that is. 

Bryce: [00:23:52] But I mean, to that point, exactly at the same time, this is all going on. You've got the Fed over in the States talking about when they're going to be winding back on the and 120 billion per month bond buying programme. You've got some sort of a cool off of the American economy. You've got this sort of lock up on the debt ceiling stuff that's going on like this. There's all these factors that are going on that it's not just about the Chinese probably market at the moment. And you're right, keep an eye on the long term. 

Alec: [00:24:18] And my final takeaway is it's been a really bad year for things that start with the word ever, ever grand and then ever given it. So my strategy for the rest of the year is short everything that starts with ever. 

Bryce: [00:24:32] OK, I'll try and think of something else I can't think of anyway. 

Bryce: [00:24:39] Ren, let's take a quick break before we have a chat about pretty amazing SPAC that's happened over in the States and then close out with 13 companies for the next five years. So Ren, we know that there's been a lot going on in SPAC world, and I'll let you have a chat about the latest that has come across our desk, DNA. But for those that are unaware, a speck is a special purpose acquisition company. It's been all the rage over in the States. Essentially, it's a company that is listed, a shell company, a holding company that then goes out and raises all of this money from investors and then then they have two or three years to then use that money to actually go and acquire privately held companies to bring them onto the public markets. And a great example of this is a recent merger that took place with a company called Ginko Biotechs Ren. 

Alec: [00:25:34] Yeah, that's it. The largest ever SPAC merger. So the suspects have had a tough year after, you know, some big years and some big names, Virgin Galactic Draught Kings. You know, there's some big names that have gone public via sparks, but sparks have really fallen off this year. They aren't aren't doing that well as a group. But the largest merger has taken place, 15 billion dollars. And this company is one that just is fascinating. Like for me, this is it's just really cool. So basically, bingo, they focus on programmable DNA. So basically, rather than manufacturing things out of petrochemicals, they make things out of biochemicals. The company was started in 2009 by a team of MIT scientists, and they make made to order microbes and bacteria that enable customers to grow products rather than manufacture products. Make sense of. 

Bryce: [00:26:37] Yeah, it's it's it is. 

Alec: [00:26:41] It's just weird conceptually and your mind goes to a number of places. But basically the company, the way they sum it up is they programmed cells, i.e. DNA in the same way that other companies programmed computers with code. So some of the some of the products that the company has created using this synthetic biology, editing DNA and making these made to order microbes or bacteria or whatever, they've made food ingredients, they made cosmetics, they've made medicines. They are essentially using biology to create new products. Now, the question then becomes like, how do you do this on an industrial scale? How do you do this for big commercial customers? And like, how is this a business that goes through a 15 billion dollar merger? They operate bio foundries. Now, the foundry model is probably well known to those who are interested in semiconductors. Taiwan semiconductor manufacturing company TSMC really, I guess, pioneered the foundry model, which is where companies come to them with specs or what they want to achieve. And then TSMC have the expertise and the facilities to create other companies products. And then they so there is sort of like a central point in the manufacturing chain. And they've enabled companies that don't have the expertise or the capital to create their own semiconductor foundry to play in the semiconductor space. And that's enabled companies like Nvidia and AMD and the like. Now, that concept is important because Ginko operate bio foundries. So tell me what the hell that is. 

Bryce: [00:28:32] Yes, I have these Presevo in front of me. I'm assuming it's their one of their investor presentations. It's titled We Programmed Cells or Cells for our customers so they can develop new products. On the left hand side. It has an input which is customised specs that goes into a section where they say that they design right and debug DNA code using software, a bunch of hardware and automation, but then things like genetic coding and all sorts of incredibly amazing. I guess it's just mind boggling. And then out of that, on the right hand side, Spetz, the output, which is essentially a cell that's been programmed to your specifics and and you can use that how you how you will. And so I guess many companies just come to them and say, we want these cells. This is how we want it to perform. And that's that foundry model. Yeah. 

Alec: [00:29:22] So let's get specific and talk to some examples, because that will that will help ground what the hell is going on here? Some of the partnerships that they've formed with companies that are using them for their foundry, for their bio foundries, Roche or is it rachet the chocolates? No, it's a pharmaceutical company. OK, so together with Russia, they've they're creating new antibiotics. To combat antibiotic resistant bacteria with Robert Atit, they're creating new flavours and fragrances at commercial scale with Cronos Group, they're creating cannabinoids. Now, I know this one's exciting for you as a gardener, but in in weed, THC and CBD of the sort of very highly present. But there's also all these other chemicals that are not really that present, like a meaningful scale. CBSA, CBG, THC, V and Ginkgo are manufacturing them in larger quantities to, I guess, find new uses for cannabis and new treatments and stuff like that. So like all of these partnerships where they're working with companies from across these industries, you know, food, pharmaceuticals, cannabis to create new biological products. So that's that's step one of their business. 

Bryce: [00:30:53] Where on their business plan do they start going into the human genetics? Exactly. This whole thing's going. 

Alec: [00:31:01] I didn't say that in any of the material. 

Bryce: [00:31:04] Is that where it's going, though? You'd have to ask them. I mean, honestly.

Alec: [00:31:09] so that's number one. And, you know, the revenue stream there is they get you know, they get paid for people to use their foundry. The second part of their business is actually partnering with these companies to create new companies, essentially. And so basically, they partner with companies with domain expertise or field expertise to create products, and that spins off new companies. And then they ever get paid royalties. Kinko they get paid royalties or they hold equity in these new companies that are developed. So there's a few that have come out of their bio foundries already. There's joint bio which is working in advanced agriculture alone, which is working in wastewater treatment and motive Foodworks that work in food technology. So, I mean, you can see a world where they can continue to create new products that themselves companies can be built around, like meaningful companies can be built around, and then they can be equity owners in those companies or just get paid a royalty whenever that product is used. 

Bryce: [00:32:16] Fascinating. Yeah, yeah. Truly fascinating. But Ren, you mentioned that it was a 15 billion dollar merger, one of the largest or the largest. Where does that stand, though, in terms of a valuation for this thing? 

Alec: [00:32:31] So the technology and the story is incredibly exciting as an investment. It is expensive. Now, this is something I don't understand. And if any Equity Mates listeners are listening and can explain this to me, I would appreciate a DIAM. The merger was for 15 billion dollars, but the market cap of the company is only two and a half billion dollars. Don't get it. But still, with a two and a half billion dollar market cap, the valuation is expensive. This is an incredibly new technology. The company. Sixty four million dollars in revenue from their foundry in twenty twenty. And that gives them a price to sales ratio. Forty, which is expensive. 

Bryce: [00:33:11] Yeah, well yeah. In tech world. 

Alec: [00:33:14] True. True. And the company themselves don't expect to be profitable until twenty, twenty five. So you know, like for me this is an incredible story and I just love to think about like where this world is going and like what this means in terms of, you know, new medicines, new products moving away from petrochemicals, advances in synthetic biology. Your concern about what it means for like programming human DNA is a fair concern. 

Bryce: [00:33:47] Yeah, well, I mean, I feel like at some stage it's inevitable that this is where this stuff goes. 

Alec: [00:33:52] Well, I mean, with Chris Burns stuff that's already on the cards. Yeah, yeah. 

Bryce: [00:33:56] I think with these types of companies and particularly the foundry model in certain industries, incredibly high barriers to entry here. This is not like a company that you and I will just go, you know what? That's that's fascinating. We can see that working. Let's go start this out. Like you've got to be in the know, incredibly highly skilled. I'm assuming the the infrastructure that go into doing this is incredibly expensive. So, you know, a lot of positive sort of economics when it comes to this sort of stuff. 

Alec: [00:34:28] Yeah, yeah. And the the the moat is obviously like there's a barrier to entry in terms of cost. There's a barrier to entry in terms of expertise. But the other is that like if you can be first mover in this space and you can really have a lot of proprietary knowledge about how to do things like that should be self reinforcing, like the better you can understand how to programme DNA, how cells work. You know, there's a bunch of stuff they're doing around the fermentation process and like if they can master that and then they can find more applications for that before and like everyone else has to play catch up. There's a there's a real, like, first mover advantage in terms of the knowledge that they can gain. So it's a pretty fascinating story. And that's why I love investing. It's like, yeah, you just see these these incredible stories and whether or not they play out, like the human ingenuity and endeavour to create something like this is pretty remarkable. 

Bryce: [00:35:26] Yeah. Yeah. Fascinating. So that is listed. It's available. If you're really interested, you can go and check it out and get on the ticker code is DNA. 

Alec: [00:35:35] Yeah. Over in the States.

Bryce: [00:35:36] So you can check that out. Nice Ren. Well, we'll just close out really quickly. I came across an article that was titled 13 Stock Picks for the Next Five Years. 

Alec: [00:35:47] Got to love the click bite of the of the title. 

Bryce: [00:35:50] Yes. And this is from 13 investors from an article in Livewire. So I think what stood out to me, though, is just the home country by bias and no offence to the NFL, but the boringness 

Bryce: [00:36:04] before 

Alec: [00:36:04] you start, you give you a commentary. Why don't you tell us what the stocks 

Bryce: [00:36:07] are in a minute or less? So we had Alphabet, Microsoft, IDP education, Safran Woodside, Wesfarmers, Woolworths Equity Trustees, Alumina, Fisher and Paykel, Disney, Calix and Wesfarmers again. 

Alec: [00:36:25] OK, so of the 13, nine were from Australia. Yes. Three were from the States. 

Bryce: [00:36:33] Yes. And one from Spain. OK, like home country bias guys and a lot of them are pretty boring and I'm not going to call out the experts, but the thesis for Woolworths, I'm like Woolworths the next five years. The thesis was because it's going to be around, it's going to still be here and we're not sure that any other company. 

Alec: [00:36:58] The question, though, before you just really start taking off on this article, was it 13 stocks that will outperform in the next five years or was it just name a stock that you're owning for the next five years? Because potentially it's like potentially the fact that it's going to be around and probably bigger than it is now. Maybe that's maybe that's just answering the brief, 

Bryce: [00:37:22] boring, fair. Like, I'm not sure exactly what the brief was, but when I think about stocks for the next five years, I'm not thinking about stocks. Quote, I know it's going to be here in five years. And I know sales are going to be roughly in line, 

Alec: [00:37:38] roughly in line. 

Bryce: [00:37:40] I could probably pick a sales number where it's going to be. 

Alec: [00:37:43] I come on. Yeah, yeah, yeah. 13 stocks that you can do a perfect five year DCF. 

Bryce: [00:37:48] That's that's just not fun. 

Bryce: [00:37:50] Interesting that Wesfarmers came in there twice. One of the experts who picked that, the reason she picked it was because she just doesn't think there's any better business in Australia than Bunnings. Yeah. And it's obviously Wesfarmers owns Bunnings over her. That's just it's just going to continue to be the amazing business that it is. Microsoft Alphabet makes total sense. If I was to pick something off this list, I would probably be going along those lines. Disney I like Calix is interesting. A smaller cap. That's the one that's in that concrete kiln space in there that 

Alec: [00:38:24] that is the of is that's the picnic's answer. Your brief, which is give me give me something that's a bit high risk but could run. 

Bryce: [00:38:32] Yeah. But it's also in the climate change space like there's some good tailwind trends. Yeah. Yeah. So I like that. But yeah it's just interesting to see where fund managers heads are and when they think about these sorts of companies and when they think about what they're trying to achieve in a five year time span. 

Alec: [00:38:50] Woodside is an interesting one for me. Yeah. I mean, five years. Sure. And, you know, this merger is going to be good for it. But if I was trying to pick something for the next five years, I would be avoiding not oil and oil and gas. 

Bryce: [00:39:04] Yes, it's crazy. 

Bryce: [00:39:06] So I just I just thought that was interesting. You know, as a fund manager, you're obviously not trying to lose clients money. And so your risk tolerance. And I think that's kind of displayed a bit here. And it's it's just interesting to differing from how we might approach this if we were to say what's the next stock for five 

Alec: [00:39:23] years, I find it interesting that they have the dates, the stocks were picked and both Alphabet and Microsoft were picked in February. And then it seemed like everyone went a bit soft on tech and came back to Australia. Yeah. Yeah, which is weird. Yeah. I mean, we had a bit of a peak in February, but fundamentally those businesses haven't changed. Yeah, yeah, exactly. 

Bryce: [00:39:48] Well nice one Ren another great episode. Covered a lot of ground. We'll be back next week with another episode of EM Chat, just a reminder that if you do want to come on to our Get Started Investing feed series, hit us up at Contact@equitymates.com. There'll be a link in the show notes as well. It's going to be an awesome series later this year. So please dob in a mate who might have an amazing story or come on yourself. We won't bite. It's going to be a lot of fun. 

Alec: [00:40:13] Yeah. And watch out for our episode on Thursday where we're interviewing Paul Wilson, who is the co-founder of Bailadoor a technology investments. 

Bryce: [00:40:23] Absolutely. Well, Ren always good to chat stocks and we'll see you next week. Sounds good. 

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