Investment Matters

A big week of company news

A blast from the past – MMA

MMA Offshore (ASX Code: MRM), previously known as Mermaid Marine, is a marine services business that caters largely to the offshore oil and gas industry (off WA, in Asia and in the Middle East).  It owns a fleet of 30 boats (with an average age of 5 years) and has an exceptional track record of service delivery and safety. It is a good business, with historically high long-term return on capital.

Mermaid Marine is a name that would be familiar to longer-term clients, who benefited from its ownership from 2008 through 2011.

Subsequent to us owning it over this period, and with the turn down in oil prices, the industry experienced a fall in rental rates and utilisation.  This stretched a number of operators to receivership and pushed MMA Offshore into an unsustainable financial position. 

To ensure the company’s financial strength, and position it for the future (more on this below), a capital raising is being conducted.  Specifically, a placement and sub underwritten recapitalisation, which we will participate in on our clients' behalf.  We have been following the company for some time before this raising and view this as an excellent opportunity (obviously looking with our 3-year investment horizon, and noting that investment journeys are often not linear).

The raising is occurring at $0.20cps, which is ~7% below the theoretical price, and ~15% below the last traded price. The issue price is 43% of (post capitalisation) book value.

With oil prices and industry conditions now stabilised and slowly recovering, there is a medium-term pathway back to strong earnings for MMA.  Vessel utilisation globally bottomed in January and has picked up subsequently.  However, whilst a recovery in utilisation is expected, the timing is uncertain, as is the timing around a recovery in margins.  We are not predicting the company to return to profitability until 2019.  However, it will generate good cash flow straight away.

It is clear that now is a good time for them to restructure the company’s balance sheet (both via reducing debt and extending the debt for several more years) so that the company is positioned for the future.

The initial portfolio weight will be <1% and is likely to increase in coming weeks (up to ~2%, depending on the degree to which existing retail shareholders take up their rights).

Pact gets acquisitive, and a trading update

At its AGM (Annual General Meeting), packaging company Pact reiterated it is on track to meet its FY-18 financial guidance, for higher revenue and earnings, as compared to FY-17.  The first 4 months of the year has seen early signs of organic growth (despite a slow start of the dairy season in NZ).  Higher energy costs were noted, with the company investing in efficiency programs.  Past acquisitions and the crate pooling business are performing to expectation.

Pact announced a fairly sizable acquisition, significantly expanding its Asian scale.  The acquisition involves operations across China, the Philippines, India, Nepal, and South Korea, in the area of plastic bottles and closures for soft drink, FMCG (fast moving consumer goods), and supplements / nutritional uses.

A second smaller acquisition was also announced, of a WA based company called EPC Industries, which provides Pact exposure to the ISO tank market (ISO tanks are bulk liquid tanks, up to ~25,000 litres at capacity, used to transport everything from hazardous chemicals, through to food-grade liquids such as orange juice.)

Pact announced a capital raising to assist funding the acquisitions – a 1 for 9 rights offer at a 9.1% discount to the last traded share price.  We view these acquisitions favourably and have taken up the additional shares under the rights offer on our clients' behalf.

Northern Silica’s quarterly update

Northern Silica (previously Heemskirk and developing a frac sand mining and processing operation in Canada) released a quarterly update for the period ending 30-Sep-17.  Practical completion of the construction of the processing facilities was achieved on 29-Sep-17.  Commissioning then commenced, and is expected to be completed (including rectification of any deficiencies) by the end of 2017.  Production is expected to commence in Jan-18.

Progress is also being made on other items, e.g. completion of the rail switch from the processing facilities to the main adjacent train line and evaluation of alternatives for raw material haulage to the processing site.  The company reiterated the strong demand outlook for its end product.

Aveo’s bouncing back

Aveo held its AGM this week.  A positive update was provided.  Significantly, retirement unit sales have bounced back strongly since the negative press in early July – sales volumes have been increasing steadily since mid-September and are expected to be back at historical levels by 31-Dec this year.  The simplified contract (Aveo Way) initiated by the company around four years ago, combined with new measures (e.g. a money back guarantee), have assisted this.

Regulatory risk also appears to be under control, with various state-level parliamentary reviews, and legislation updates in SA and Queensland (other states likely to follow), not expected to have any significant impact on Aveo’s business model.  Aveo is also working constructively with the ACCC in relation to the review of retirement contract terms.

In relation to their non-retirement business – the sell down of assets is continuing to progress well, with the sale of Gasworks (Brisbane) commercial and retail expected to be complete in Apr-18, and all land sales completed by the end of FY-19.

Aveo has maintained FY-18 guidance; 7.9% increase in earnings per security on FY-17, as well as being on track to achieve the RoA (return on assets) target.