No fewer than 374 ‘cash burners’ and 180 ‘zombies’ can be found lurking on the ASX, a former Thorney Investment Group fund manager has revealed – representing a significant opportunity for investors.

Cash burners are defined here as ASX-listed companies, excluding the mining and energy sector, that reported a cash flow statement for the March quarter of 2022 that featured negative operating cash flow.

Equitable Investors founding director Martin Pretty – who gained invaluable experience under billionaire Alex Waislitz’s tutelage in his former role at Thorney Investment Group – said the biotech and technology sectors make up a significant part of these cash burners.

“The technology sector is probably the most interesting sector to us,” he said. “That’s where we’ll be actively hunting.”

Of the 374 cash burners identified by Equitable Investors, nearly half had one year or less worth of cash remaining, based on their burn rate in that quarter.

“This just shows you how many companies are out there [in this predicament],” Mr Pretty said during his Meet the Fund Manager presentation in late June.

“Even if you’ve got more than four quarters [of cash remaining], on paper, you’re probably still thinking about your funding.”

And with many companies having received a helping hand in the form of R&D grants and other cash injections that are not part of ongoing cash flow, Mr Pretty suggests the true number with less than a year of cash remaining is probably higher.

Herein lies the ‘Recap Opportunity’

With capital markets drying up – due to factors such as inflation, interest rates and the Russia-Ukraine war triggering a large sell-off and raising the cost of capital – smallcap stocks are being hit hard, particularly growth companies that need capital to grow.

Mr Pretty refers to the market’s tendency of punishing these companies for being undercapitalised as ‘the Recap Opportunity’ and says there are plenty of investment opportunities for those with capital.

“You should be able to pick through those companies and find high-quality ones where you can recognise that giving them the capital will make a difference to their valuation,” Mr Pretty told Reach Markets recently.

“We’re confident there’s good businesses with strong management teams that just need a bit of help to get to where they’re going.”

Similar opportunities exist, he said, among ‘zombie’ companies – “those who can’t cover their interest bill with their EBITDA” – of which Equitable Investors identified 180 on the ASX.

Mr Pretty said data shows “a clear trend” that the number of companies that have not reported EBITDA levels substantial enough to service their net interest expense has been on the rise.

“As money was cheap and companies got bolder, their willingness to take on debt clearly increased,” he said. “And it’s got to the point where there needs to be some rebalancing among some of those companies.”

Click here to view videos from Martin Pretty’s The Insider: Meet the Fund Manager session. And click here to join our next session, a biotech-themed online event featuring multiple speakers on Thursday, 21st July.

Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets’ position