Ethical investing part 2: Health and social impact stocks to consider

By Trevor Hoey. Published at Oct 20, 2017, in Equities

Yesterday, Finfeed highlighted the increased interest in companies that offer exposure to ethical industries and services.

In doing so we noted the strong share price performance of Australian Ethical Fund (ASX:AEF) over the last five years and, taking a leaf out of its book, we searched through the same market segments as a starting point for where to invest when looking towards ethically and environmentally sustainable options.

While yesterday’s focus was on environmental impact companies, today we examine three stocks that come under social impact solutions. The three specific subsectors that AEF has identified under this banner are major disease treatment, sanitation and education.

As we did yesterday, we have focused on stocks that are at the small-cap end of the market, rather than bigger players such as CSL, ResMed and Seek that fit under this broader category within AEF’s portfolio.

Before we look at the following stocks, it should be noted that investors considering these stocks should take their personal situations into account and seek professional financial advice before making an investment decision.

Major disease treatment

Because of its leverage to the antibiotics and vaccines industry, CSL is front and centre in AEF’s portfolio. Beyond that, the fund highlights its strong focus on treatments for hepatitis and breathing disorders, in particular sleep disordered breathing which accounts for a company such as ResMed (ASX:RMD) being in its portfolio.

In the area of breathing disorders, Compumedics (ASX:CMP) is an emerging medical device company involved in the development, manufacture and commercialisation of diagnostic technology for the sleep, brain and ultrasonic blood flow monitoring applications — factors associated with sleep and breathing issues.

CMP owns US-based Neuroscan and German based DWL Elektronishe. In conjunction with these two subsidiaries, the company has a broad international reach including the Americas, Europe, the Middle East, Australia and the broader Asia-Pacific region.

Another plus is the fact CMP’s products can be used remotely by patients via information stored in the cloud, so it is accessible for both professionals and consumers.

With health services stretched to the point where demand is outstripping supply, the use of home devices to monitor problems such as diabetes, breathing patterns and sleep disorders is becoming increasingly prevalent.

Shares in CMP have retraced after doubling from circa 35 cents to 70 cents in June. The current price implies a PE multiple of 13.8 relative to consensus forecasts for fiscal 2018. This is a sharp discount to the industry group average multiple (RMD is currently trading on a forward multiple of 26.5), and the company’s share price of 36 cents is well below the 12 month consensus price target of 80 cents.

Cancer treatment and women’s health products

It is hard to go past Starpharma (ASX:SPL), particularly in terms of its industry exposure. It has taken some time for the company’s investment merits to be recognised, but in the last three months SPL’s share price has nearly doubled, hitting a 12 month high of $1.48 on October 10.

The past performance of these products is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Behind the most recent surge was the award of a Federal Government Innovation Connections grant to support research within the group’s proprietary DEP oncology program.

SPL has partnered with major pharmaceutical companies such as AstraZeneca that are using its DEP drug delivery platform to improve the results from existing drugs. The most advanced of these is DEP docetaxel, a dendrimer and enhanced version of docetaxel (Taxotere) which is in clinical development in patients with solid tumours.

In preclinical studies DEP docetaxel has shown significant tumour-targeting and superior anti-cancer effects across a range of important cancer types including breast, prostate, lung and ovarian tumours.

While this could be considered the blue sky attraction of SPL, its developed portfolio includes late stage women’s health products based on VivaGel, a proprietary dendrimer formulated as a water based gel and delivered vaginally. It is a European Union regulatory approved treatment for the rapid relief of bacterial vaginosis.

The company is also involved in the development of a clinical application for the prevention of recurrent bacterial vaginosis, a disease which affects approximately 30 per cent of women in the US. It is the most common cause of vaginal infection for women of childbearing age.

In conjunction with these developments, SPL has developed an anti-viral condom which uses the VivaGel in the lubricant. These condoms are available in Australia, Canada, China and Japan.

The combined value of the bacterial vaginosis treatment and prevention market is estimated to be in the vicinity of US$1.7 billion.

Education

While AEF’s investment in Seek in the education space is understandable, it may pay to think outside the obvious areas of getting people into jobs and providing associated services such as training. One industry segment that really addresses the social impact and personal welfare issue, is the area of maximising workforce participation and productivity while minimising the impact of workplace injury.

A relatively small, but fast-growing profitable business is Konekt (ASX:KKT). The company is focused on delivering these outcomes for businesses, as well as assisting in employment placement and workplace health and injury management.

The company offers end-to-end solutions which assist businesses of all sizes with training programs that serve to minimise workplace injuries. KKT also plays a role in getting employees back to work following injuries.

This is a fairly underserviced industry which has been highly fragmented. KKT has taken advantage of this environment by growing organically, while also making acquisitions to broaden its service offering and geographic reach.

The company now has 400 permanent staff and 40 offices throughout Australia. The most recent acquisition was that of Mission Providence, which was finalised in September. It is a leading provider of employment services and new enterprise incentive schemes under the Federal Government’s jobactive program.

In fiscal 2018, management expects that, on a pro-forma basis, the merged business will deliver a 100 per cent increase in revenue and EBITDA while generating earnings per share growth of circa 20 per cent.

This would equate to earnings per share of approximately 5.3 cents, placing KKT on a PE multiple of 9 — extremely conservative for a company that is poised to deliver earnings per share growth of 20 per cent.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of Maven Capital Pty Ltd (AFSL No. 418504). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

Publishers Notice

The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

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