Investment Matters

A big week of company news

When it rains it pours, or so goes the expression.  It was certainly a big week of news this week – some good, and some not so good.

QBE Insurance has global insurance operations, including in Australia, the Americas, Europe and the Asia Pacific.  It is actually one of the world’s top 20 general insurance and reinsurance companies operating in 37 countries.

This week it advised that it will increase its allowance for large claims in FY-17 to US$1.75 billion.  This is because of the impact from the recent string of major catastrophes in the USA, Caribbean and Mexico. A ~US$600m pre-tax impact to FY-17 results are expected (for QBE FY = CY).

This is clearly a negative for profit in the short term.  However, we would note that insurance works in a cyclical way.  Typically these tough years (it looks like 2017 will be the costliest in insurance history) lead to strong price rises (to help rebuild balance sheets) in future years.  It is positive that QBE has most of its FY-18 reinsurance locked in now (before price rises).  Notwithstanding the history that QBE has in relation to disappointing versus guidance / market expectations, we see a number of signs that the business is in good shape.  And it is trading at an attractive valuation.

With a new CEO coming, industry pricing picking up, and a good balance sheet, QBE could easily show a meaningful turnaround in coming years - which will surprise many.

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HT&E announced that its outdoor advertising business Adshel has lost the Yarra Trams advertising contract, in a re-tender that has been going for 11 months.  It also announced it has won a much smaller 7-year Metro Trains contract. 

The net impact is around $15m EBITDA (earnings before interest, tax, depreciation and amortisation) annualised.  This is about 13% of EBITDA. 

Renewal of this contract has been the main outstanding risk for the business since it was restructured and rebranded.  Whilst disappointing, it doesn’t change our thesis around the overall quality of its assets, and the complementary nature of outdoor advertising and radio together.  It is early days, and the company still has work to do. 

The company remains very cheap, with high-quality cash-generating assets, a great balance sheet and good strategic positioning. 

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Threat Protect provides security services, including monitoring.  Please click here for our view on this sector and the opportunity of this investment (Security Matters - Threat Protect article).

Threat Protect announced the acquisition of five monitoring client bases from its resellers.  This will have the effect of lifting its directly monitored alarm base by +14%.  The additional customers are based in Queensland and NSW.

These types of acquisition are highly accretive for TPS as the price paid is low, and the extra operational cost required zero. 

Threat Protect has also received a Private Security Business Licence from Victoria Police.  This will allow the company to expand operations into Victoria.

We believe TPS continues to build a strong track record of sensible and diligent growth - both organically and by acquisition.  We look forward to seeing it progress further in coming months.  It is currently still only operating at ~50% of its fixed capacity of its control rooms.

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Morton Resources received mining licence approval for its Granite Belt project from the Queensland government (finally!).

The Granite Belt project is located near Texas on the Queensland / NSW border.  The company can now look to start commissioning silver mining operations.  Major contracts are currently being awarded, and the first silver (from the commissioning phase) is expected within 45 days.

The site also has potential in relation to proving up additional resources for mining, including the potential presence of copper resources.

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TZ Limited has announced a capital raising, which First Samuel supports.  It is a 2 for 5 rights offer at a price of 2.75 cents per share, which is expected to raise around $5.5m.  The smart lock company will use proceeds from the raising of working capital, including funding manufacturing, installation and support costs, as well as IP development.