Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, SG Hiscock portfolio manager Rory Hunter explains why he's so pumped about one possible IPO later this year.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for four years, which stock would you want to hold?
RH: Okay, a slightly different one here, in the sense that it's not actually a listed position, but a position that will soon be listed — so I think it will be of quite a lot of interest to readers — is a company called Planet Innovation.
[Editor's note: Planet Innovation is a public company but is unlisted. This means investors have access to buy shares for it off-market from time to time.]
They're actually the parent company of Lumos Diagnostics Holdings Ltd (ASX: LDX). They've recently been in the press a bit, because Anthony Albanese gave a press conference from their headquarters in Box Hill, talking about the fact that there was a need for more local manufacturing of, not for rapid diagnostics, but medical devices. Pretty much giving the public commitment to fund businesses in this space.
This is, first of all, fantastic for a fund like ours, because you're going to see a lot of government funding and broader funding in the sector. But also great for Planet Innovation.
I actually just think that the Planet Innovation business is just a strategically brilliantly set up business. They've got two sides to the business. One side is a services business and the other side is a ventures business — [which covers] the cost of all the specialising in medical devices.
The way the business model works, the way it's worked historically, is that the ventures businesses as they mature, Planet Innovation actually harvests their investments in the ventures businesses in order to fund the more capital-intensive services business.
In terms of the services business, PI are now generating 70% of their revenue from the US. And they've built quite an incredible track record there with some of the world's largest medical device companies in the US.
The interesting bit is there's a bit of competition in this space. And this space in the US is worth about $25 billion at the moment. That market is expected to double by 2025, which I think is quite an extraordinary stat. It tells you a lot about the tailwinds in this space.
PI actually have a competitive advantage over their competition, in the sense they do a lot of the design before they actually win manufacturing contracts. What that means is that they're actually at the front of the queue when it comes to the manufacturing contracts now. I think what will be the case for the business when it comes to [the share] market, is that sell-side analysts will always undervalue the service business, because they'll look at it and they'll say, "Manufacturing business, short-term contracts. Not a very sticky customer base."
But actually, I think potentially they'll undervalue it, just simply because the nature of the contracts is with the large medical device companies. They'll win contracts over and over again, because of that strong execution.
It's a fantastic management team. It's the old management team from Vision Biosystems, that actually spun out when Vision Biosystems was acquired by Danaher back in, I think it was, 2008 or 2009. So that's Sam Lanyon and Stuart Elliott. They had incredible success with Vision Biosystems and they're replicating that now with Planet Innovation.
We expect Planet Innovation to come to market in the shape of an IPO at some point this year.
