Investment Matters

Company News: The tail end of Reporting Season

Paragon Care FY-20 Result (Mixed)

Wholesaler to the Australian healthcare sector, including hospitals and aged care. Paragon provides a variety of necessary consumable goods (such as surgical instruments) as well as more specialized devices and instruments.

It was a challenging year for Paragon. Restrictions on elective surgery had a large impact on the business in the second half of the year, after issues with one of its larger Capital and Consumables businesses in the first.

Demand for products in its largest segments suffered in 2H-20: with revenue in Capital and Consumables falling by 12% and revenue in the Devices business (which supplies products to support orthopaedic and ophthalmic surgery) also falling by around 9%.

However, revenue for the other smaller segments of the business held up well – particularly Diagnostics +0.2% and Services +44.3% - with the recently acquired Total Communications performing well during the period.
The company has incurred several costs as it looks to restructure and integrate its businesses. These include a reduction in its warehouse footprint, leaning out of its workforce and adjustments to the carrying value of some of its assets (the latter being non-cash items).

Pleasingly working capital normalised in the second half, with a marked improvement in collections. While operating profit margins were materially lower than the previous year, they should improve with a rebound in hospital activity and continued cost out initiatives.

Boral FY-20 Result (Positive) - Released on Friday of last week

Manufacturer and supplier of building and construction materials. It operates three divisions: Boral Australia (primarily the production of concrete, cement, asphalt and aggregate), Boral North America (primarily the supply of fly ash and residential building materials such as stone, windows and roof tiles) and USG Boral (a Joint Venture with which supplies plasterboard to Asia).

After a year marked by bushfire and flood impacts, trading in the second half for Boral was further impacted by COVID, with a slowdown in activity, plant closures and disruptions.

In Australia, the mix of products sold shifted, with margins experiencing a noticeable decline. Volumes and pricing for concrete and cement were particularly soft during the second half, as infrastructure activity slowed along with residential construction. This was somewhat offset by an increase in lower margin asphalt sales (many no doubt noticed the increase in roadworks during the period).

In the US, fly ash volumes were weak due to limited supply (flexing down and closure of coal fire power stations – a source of fly ash) which led to a strengthening of pricing. Building materials products did not participate in the increase in US housing activity we have seen and were soft.  USG Boral was similarly soft, with weak residential housing activity in South Korea and Australia.

While costs were elevated in FY-20, the company indicated margins have begun to improve as economies have come out of lockdown, with overall margins in FY-20 broadly tracking at pre-COVID levels.
Under its new CEO the company is engaging in a portfolio review (which will conclude in October), that will see a review of its assets, to ensure they are generating an acceptable rate of return and determine how its capital is best deployed.

While it has been a challenging year, this is a positive step towards Boral realising a return from its assets. The company’s share price has reacted favourably to the announcement (+6.8% since last Friday).


Costa 1H-20 Result (Positive) - Released on Friday of last week

Large fruit and vegetable grower. Produces berries, avocados, mushrooms, citrus and tomatoes. Has exposure to both domestic and international markets.

Costa delivered a good result, considering exogenous challenges it has faced recently, including drought, bushfires and COVID. Pleasingly, the outlook for the company has improved – which was our main focus.

The company’s International division was particularly strong, with higher planting volumes and an improvement in yields leading to a significant increase in revenue (+43%) and profitability (+97%).

While revenue was largely stable for its Produce segment (Australian production) profitability was impacted by higher water costs (associated with drought), bushfire related loss of crops and other weather-related issues, leading to weaker profitability. The company has benefited from improved rainfall in January and has increased water security prevention measures (including increasing water capture capacity).

Costa has been a strong performer, returning an average of 28% for clients in FY-20, however, we still see value that is not reflected in its share price. Its performance is relatively uncorrelated with the broader market and thus provides a diversification benefit. It also has a good profile for growth as a result of a large amount of investment it has made in the past (and continues to make).

While there will always be weather and agricultural-related fluctuations in profitability, experience shows that production and pricing is rarely weak for beyond a short period (6-12 months). We are willing to look through short term fluctuations in profitability to see value.

Costa will pay a dividend of 4c which will be fully franked, and we expect a modest yield of 2.5% for the calendar year.

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Threat Protect FY-20 Result (Mixed)

Security and monitoring business. The company provides monitored electronic security systems, alarm monitoring services and guarding/security advisory services.

Threat Protect has continued to look to reduce its operating cost base through rationalisation of its monitoring centres and associated staffing.

The company reported an underlying profit for the year of $4.9, a 69% increase on the underlying profit it reported in previous years.

Its projections show positive cash generation in FY-21 (after debt costs) and it expects revenue of $27m and normalised operating profit (EBITDA) in the range of $7.5 to $8.5 million.

Platinum Asset Management FY-20 Result (Mixed)

Australian based investment manager with a focus on international shares. Its flagship funds include Platinum International Fund and the Platinum Asia Fund.

In what was a challenging year for asset managers, Platinum’s management fee revenues declined, in line with a drop in the value of its funds and fund outflows. This was, however supported by the strong performance of its Asia fund, which outperformed its benchmark b,y 11.6%, delivering meaningful performance fees.

As an asset manager, we are attracted to the company's investment style, profitability and long-run revenue growth potential. However weak recent investment performance, and outflow of funds under management have dominated market concerns. Our analysis suggests the discount market was applying to the share price was too large. With the significant rally in the share price in recent months, the discount is now smaller, but value remains.

The company declared a final dividend of 11 cents per share, which represents a dividend yield for the financial year of 6.6% (based on the company’s current share price).


360 Capital Group (Equity Portfolio) & 360 Capital REIT FY-20 Result (Property Portfolio) (Mixed)

Asset management and financing companies. Both companies have a significant cash backing.

Our positions in both companies reflect a historical appreciation of the range of options both companies possess.  With high volatility and stress in the economy, companies that are holding a large amount of cash can deploy these funds in a range of new business options, in loans priced at large discounts and in real assets under stress. Both companies are now deploying cash in such options.

Early indications of the types of investment both companies are making are promising. Whilst not without risk, both stocks are fundamentally cheap, and represent a fair / good opportunity in your portfolios, especially in a market where a range of other sectors are expensive.