Investment Matters

Company News: Earlypay, Cardno, Lovisa and more

Results from your companies this week

QBE Insurance (positive impact) 

QBE reported its FY-20 financial result (it reports on a calendar year basis).

Net profit was as expected, with COVID related costs (circa $655 million in FY-20) leading to a significant net loss as the company had already flagged in December (-$1.5 billion).

So why has it rallied 6% since the result?

Several positives came out of the result:

  • No further COVID costs. There (so far) haven’t been any more surprises
  • “Smaller” claims (under $2.5 million) have continued to trend down. QBE’s numbers indicate it has made significant improvements in assessing and pricing small claim risk.
  • Investment profits are at their low. While this may not seem like a positive, as rates rise investment profits will also rise. As a reminder - insurers typically take the premiums they are given and invest them in securities. So, not only do they earn the premiums, they also get to keep (less insurance claims) any proceeds from investing these premiums.
  • Premiums continue to increase. Premiums are rising, which is good in the long term. This in part reflects changes in risks. But it also reflects the fact that investment profits are at an all-time low (low interest rates). As interest rates rise, insurers get to hold onto these premiums and enjoy higher investment profits.
  • Some costs to come out. The company is targeting a lower expense ratio (underwriting and administration expenses) moving forward.


The market has largely looked forward to next year’s profitability rather than the poor year it has been.

And as a reminder - we have exposure to QBE for the uplift in profitability it should see in a rising interest rates environment. The potential for this has been highlighted this week.

26.02.21IM6



Perpetual Limited (positive impact)

Perpetual provided its 1H reporting results on the 18th of February and the update generally disappointed the market.

There are three key determinants of the returns an investment management company generates - the level of funds under management, the performance of the funds, and the costs of running the business. The first two components are regularly updated to the market and hence present few surprises.

Costs of running the business, and in this case future expected costs, were higher than what the market expected.

Whilst this was also of concern to us, we felt the most important information contained in the update was the confidence the company had in investing in future capabilities, including in the business it purchased last year, Barrow Hanley.

With the rise in the importance of “value investing” in a global market that has assumed interest rates will never change, Perpetual provides a large-scale opportunity to benefit from any of the flows that are attracted to these themes.

Lovisa (positive impact) 

In what was one of the biggest result surprises of reporting season, Lovisa revealed its profit result last Friday, which has seen its stock rise by more than 30% since its announcement.

What was most impressive was just how resilient the company’s revenue has been over the last 6 months, despite widespread store closure in Europe, the US and Australia.

Global Sales Revenue was down by less than 10% for the half compared to the previous year.

Performance in Australia and New Zealand (which constitutes more than 55% of revenue) was particularly surprising, with underlying positive comparative sales towards the end of the half leading to a fall in revenue of only -0.4%.

It is therefore likely that, with a return to full store openings, revenue will rebound significantly.

Furthermore, gross margins continue to be incredibly strong at 77.8% - despite being impacted by higher freight costs over the period. This reinforces to us the strength of Lovisa’s low value, high inventory turnover, just-in-time business model.

Operating expenses were also flat as a percentage of revenue, through strong cost discipline.

Concerning the outlook, comparable sales in the Northern Hemisphere have been far more resilient during this calendar year and returned to significant growth – with same-store sales up 12% (noting that this is in comparison to January and February of last year – which were largely unimpacted by lockdowns).

Lovisa has been an incredibly strong performer in the Australian Equities portfolio, having returned more than 100% since first purchased in early March of last year during the market sell-off.

Platinum Asset Management (positive impact) 

Our initial investment in Platinum was based on the market pricing very little probability of inflows in the future. A rotation back into “cyclical” stocks has been highly beneficial for performance and in changing perceptions around future inflows. This has seen a return of approximately 50% since clients’ first purchased shares in late March.

Platinum’s result was in line with our expectations – although it did provide some unexpected (positive) surprises).

The result was driven by the International and Asia Funds which have been strong performers and constitute approximately 60% of Funds Under Management.

The International Fund has been a strong performer since November 2020 (when we received positive news about vaccine efficacy) – having outperformed its benchmark by 9% since the “cyclical” and “recovery” rally we saw from the 1st of November.

The Asia ex-Japan Fund continued the strong performance we have seen over the past year – having outperformed its benchmark significantly for the year.

This translated to performance fees of $3.7 million for the half.

The positive surprise was a result of gains in investments Platinum has made in its funds, which added a further $35.6 million in income.

Funds under management grew, largely due to investment performance as markets recovered over the half.

Fund outflows have continued although they have slowed. We note there is typically at least a 6-month lag before strong performance leads to strong fund inflows, and a further stemming of outflows will materially impact the value of the company.

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Woolworths (positive impact)

It was all-round a very encouraging result for Woolworths both from a short-term earnings perspective, as well as a long-term structural one.

At the short-term level:

  • Australian Food has maintained strength with LFL sales up +9.3% in 1H driven by online and successful Ooshies campaign in Q1.
  • The momentum continued in the first 7 weeks of 2021, with sales outstripping industry growth.

And long-term:

  • Significant progress in supply chain investment including capital to support online growth.
  • Improvements in Net Promoter Score across the COVID crisis, a time in which Supermarkets were called upon to provide key support to the entire community.
  • 92% growth in ecommerce sales, which are now 7.7% of sales. Combined with the enormous investment the incumbent supermarkets are building a significant moat to protect themselves from future online competitors. This is a central theme to our large positions in Woolworths.
  • A formal announcement of plans to use 100% green electricity by 2025.


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Concerns regarding the Woolworths result were heightened last week when Coles reported a disappointing set of numbers, that saw its share price down 15%. The market questioned if Woolworths had also seen weakness in sales, or whether Woolworths had continued to grow share. The result this week confirmed the answer is that Woolworths’ sales continue to outpace Coles.

The stock responded by rising 2-3% post result.

At the corporate level, there was additional positive news related to the postponed demerger of the Endeavour Group, originally proposed on 3 July 2019. As a reminder, the combination of its retail, drinks and hotels businesses to create Endeavour Group was completed in February 2020, but the demerger was postponed due to COVID.

The Endeavour Group separation is now expected to take place in June 2021, most likely via a demerger. We see this as a value-creating step, allowing a cleaner view of the Food business, and allaying legitimate ESG concerns.

Aurelia Metals (positive impact)

There were significant releases this week from Aurelia Metals: its first-half operating reports, and an updated resource estimate which further expands the potential of its highly prospective Federation project.

Despite a large sell-off in the Gold sector of the market during February (-10%) Aurelia has been relatively well supported (-2.5%).

Although most of the operating results have been pre-announced, the highlight of the presentation was the confidence the team had in the recent Dargues acquisition, the health of the balance sheet considering the huge range of options the company has, and optimism around the future value in the Federation deposit.

Regarding Federation, Aurelia updated the resource estimate by 35% in total tonnes of ore and delivered a 134% lift in contained gold. Study work continues to demonstrate strong metallurgical and geological similarities to the company’s Hera ore bodies.

Aurelia expects to release the final findings of the scoping study in 3QFY21, this will provide the market with an estimate of the cost of building out the project and the expected profitability across the life of the mine.

Viva Energy (positive impact)

Viva Energy - distributor of fuel to more than 1300 retail sites across the nation, provider of fuels to commuters and industry alike; It is also the owner of the Geelong Refinery, which has been in the eye of the COVID storm in more ways than one across 2020/21.

We have felt the market has consistently been too focused on the short-term issues which include the dramatic reduction in demand for Jet Fuel and the once-thriving (but small) provision of fuel to cruise ships.

Whilst headline-grabbing, these short-term issues obscured the fact that at the height of COVID related reductions in sales, strong market pricing (high margins) in retail fuel more than made up for lost profits from lower volumes.

The global reduction in fuel demand also depressed margins at the Geelong refinery by a significant amount. This has prompted a range of political and industry impacts, including the recent decision by Exxon to close the nearby Altona refinery, and the government proposing a levy to protect remaining refining capacity.

Our view remains that few countries with an eye to security or history would allow a nation to sacrifice the ability to refine fuel for purely “accounting reasons”.

The implication of low prices to Viva is clear in the chart below: the refining business lost a significant amount of cash in 2020. We accept volatility is to be expected in such an enterprise and remain confident that political and market outcomes will continue to support the refinery in the medium term.

26.02.21IM9


Intega (positive impact)

Intega once again delivered an excellent result.

It delivered $18.5 million in operating profit for the half, an increase of 11% on the prior year.

All relevant metrics continue to be pleasing, with backlog growing by 4.6% on the previous half, with infrastructure spending in the US beginning to come through.

We were particularly pleased with the turnaround in the T2 Utility Engineering business (sub-surface mapping) which made $3 million in operating profit after generating a significant loss in the prior year.

What surprised us was that the company has announced an interim dividend of 1 cent per share (unfranked). Annualised, this represents a 6.5% dividend yield on the current share price.

Moving forward, the company has outlined a payout ratio of 50-70% of net profit after tax (adjusted for amortisation of intangibles) which should provide a good source of dividends for the portfolio. The company is likely to put a share buyback in place to help bridge the gap between its share price and underlying value.

Intega expects to generate $34 million in operating profit in FY-21. It continues to scream as “cheap” to us, with an enterprise value (the value you would have to pay to buy all debt and equity of the company) of $178 million.

Putting this in context, at its current levels of profitability you could buy the entire company (debt and equity) and earn a return of 19% per annum in profits.

Cardno (positive impact)

Much like Intega, Cardno’s result reinforced to us how fundamentally cheap the company continues to be.

Cardno generated an operating profit of $24.7 million (pre-AASB16) for the half – an increase of 9.8% on the previous half as margins improved and revenue remained relatively stable.

Stronger than expected performance has led to Cardno upgrading its guidance for operating profit by 12% (at the mid-point).

Pleasingly, margins in the Americas division remained higher, despite the roll-off of a particularly high margin project over the half.

The Asia Pacific division has also begun to turn around, delivering an operating profit of $3.9 million after a period of significant underperformance, with the company implementing the same cost discipline that has seen margins improve in the Americas division over the past few years. This leaves it well-positioned to benefit from an improvement in activity as major infrastructure projects commence in Australia.

International development, although a smaller and lower margin segment, also performed well, however, the roll-off of several large, multi-year projects led to a decline in revenue (although operating profit was higher).

This resulted in an overall net profit of $14.7 million for the half.

Strong performance has resulted in the announcement of a dividend policy of 50-70% of the underlying profit on an ongoing basis. This has resulted in the announcement of a 1.5 cent dividend for the half and if annualized represents a dividend yield of close to 7% for the full year.

26.02.21IM10

Here, There and Everywhere (positive impact)

The company released another in a series of high-quality results, demonstrating strong control of costs and strategic initiatives, in a radio industry that has ridden a roller coaster of performance through 2020/21.

We own the stock for the range of options the company both in its core radio business, along with its equity stake in Soprano, and strong balance sheet during a period where we expect consolidation in the media sector.

Although the company’s revenue declined, the decline was significantly less than the broader radio advertising industry, indicating the company gained market share over the period.

Advertising spending has largely rebounded, although leisure, entertainment and direct (mainly small and medium enterprises) advertising remained subdued.

With revenue improving in the second half of the current financial year, it is foreseeable that the company will return to revenue comparable with FY-19 later this calendar year. This is impressive, considering the depth of the decline it witnessed.

26.02.21IM11


We again were encouraged by some of the less appreciated value that remains in the company – particularly its 25% ownership of Soprano.

Soprano’s performance continues to incredibly strong, having generated 25m in operating profit in FY-20. The company indicated it is actively pursuing a sale of its stake in the business.

If the market were to value Soprano on a similar revenue multiple to its peers (Whispr) its implied valued would be in excess of $1 billion, which would put a price take on HT&E’s stake of $250 million.

We, of course, are assuming a much more conservative sale value is achieved, however, the sale may provide a positive surprise.

Worley (positive impact)

Worley’s result reflected the reduction in project activity we have seen in COVID affected regions (particularly in North America).

It had already flagged this earlier in February, before its result release this week and thus results were in line with expectations.

Margins were lower than previous halves, due to a higher proportion of lower-margin procurement and fabrication revenue (relative to professional services – engineering work).

Overall, the highlights of the result were:

  • Backlog (that is, the amount of revenue expected from work performed under contracts or work already awarded to the group over the next 36 months) has not changed materially. This indicates that the delay we have seen to projects has not evolved into cancellations, with a large proportion expected to continue over the next 12 months.
  • Increased cost reduction targets were announced – with a further $75 million in annual operational cost savings anticipated to be delivered by December of 2021 (target is now a $350 million operating cost reduction vs 2019). These extra savings are expected to come from shared services (through outsourcing functions offshore). The company also expects these cost reductions to be sustained in the future – which would represent a significant uplift in operating margins. This provides a lean cost base for future profitability once activity returns.
  • Green is good – Worley expects work on renewable projects with a higher gross margin than its traditional oil and gas-based revenue. Energy transition and circular economy opportunities now make up 18% of the company’s factored sales pipeline and are increasingly a strategic focus of the company.


26.02.21IM12

Above: Worley’s latest project award which will see it, in conjunction with 1PointFive, commence front-end engineering and design work to build a direct air capture unit (DAC). The unit will be placed in the Permian Basin (where shale oil is produced from wells that often “flare” natural gas, releasing CO2 in the atmosphere) where it will remove CO2 from the atmosphere.

A large fan pulls ambient air through concentrators where CO2 is bound to a liquid sorbent, which is processing to precipitate the CO2 as a solid, which is then heated, recaptured and sequestered by injection into geological formations.

The company expects to see a seasonal and activity-based uplift (as deferred projects re-start) in the second half of the year.

While a return to profitability will be highly dependent on future capital spending (particularly hydrocarbons and chemicals in the near term), we are pleased with the progress the company is making in shifting its focus to becoming a leader in providing sustainable solutions and resetting its cost base – which sets it up well for the future.

EarlyPay (positive impact)

EarlyPay’s (former CML Group) result was ahead of our expectations.

The company has made strides in re-investing itself as a technology-driven business, with the integration of Skippr providing the company with a strong platform for growth.

The company’s first-half result was very much a tale of two quarters.

As expected, activity was subdued in the first quarter, as government support in combination with reduced economic activity reduced businesses funding needs. However, the company saw a dramatic increase in activity towards the end of the half and particularly in December.

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This also saw an increase in the drawdown of funding by businesses which improved margins.

Pleasingly, a significant percentage of new clients were onboarded through the Skippr platform.

The company now expects to fund approximately $1.8 billion of invoices in FY-21 – ahead of our expectations and at its current run rate expects to fund $2.0 billion of invoices in FY-22.

Equipment financing segment was subdued over the half, but the book remains in good health.

EarlyPay also continues to reduce its funding costs, with existing facilities now replaced with cheaper sources and further interest reductions anticipated with the repayment of the CML Bond (held in the Income Securities sub-portfolio) in FY-22.

This culminated in a net profit after tax of $3.5 million for the half, with a record second half expected – leading to guidance of $8.5 million in net profit for the quarter.

To put this into perspective, the company current has a market capitalization of $93 million – with $8.5 million in profit representing earnings yield of 9.1% - which is incredibly cheap for a business with the potential to grow.

With a return to profitability, the company announced a dividend of 1.5 cents per share, which if annualised would represent a dividend yield 7.4% based on its current share price – another indication that it is fundamentally cheap.

Sandfire (positive impact)

Sandfire’s result was another reminder to us that it continues to generate strong cash flow from Degrussa – a fact that the market appeared to wake up to this week.

Its share price has underperformed its peers (other copper producers) over the past few months, and we were pleased to see a significant turnaround in this performance this week – with shares in the company gaining more than 30%.

The company generated free cash flow of A$52 million during the half, including A$20.1 million of investment in the T3 project in Botswana. This was driven by surging copper prices over the half, which have lifted the broader sector.

Degrussa is expected to generate approximately $500 million in cash flows over the next few years as existing reserves run out and the company retains $321 million in cash on its balance sheet.

Therefore, prior to the result, we saw that the market was attributing very little value for Sandfire’s growth options in Botswana and Montana.

We were pleased to see some of this value recognized this week, as its share price began to close the gap to our price target.

MMA Offshore (positive impact)

MMA Offshore reported an operating profit that was in line with expectations and re-affirmed their profit guidance for FY-21.

The company delivered an underlying operating profit of $16.4 million (net of JobKeeper subsidies) and approximately $15 million in underlying free cash flow – which annualised represents a free cash flow yield of approximately 11%.

This, of course, is in a year where activity has been subdued and could increase significantly, particularly with an uplift in offshore oil and gas capital expenditure. We do not see that the current share price factors in much upside.

What is also pleasing is the company continues to diversify its revenue base – with non-oil and gas related work now constituting more than 20% of revenue, as it increasingly looks to grow its service-based revenue and win more offshore win projects. This has sustained its revenue base during a period of subdued activity.

Pleasingly, the company continues to reduce its level of debt, with the sale of a lower utilised boat over the half with further sales in advanced negotiation at book value.

This leaves it with a leverage ratio of 2.2x operating profit, having reduced its debt by $91.9 million as part of the capital raise we recently participated in – which is amongst the lowest in its industry.

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The above market commentary represents the views and opinions of First Samuel Pty Ltd. Such market commentary contains information of a general nature only. Such market commentary is not intended to provide a sufficient basis on which to make any investment decision and should not be taken as such. It has not taken into consideration your objectives, needs or financial situation. Before making decisions in relation to any financial product, you should always obtain and read any relevant Product Disclosure Statement or information statement and seek personal financial advice.