Investment Matters

Company Profit Reporting Season wraps up

Reporting season has concluded.  Summaries for six companies are presented below.  Threat Protect also released their results today – a summary for it will be presented next week.

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MMA Offshore released a result that was in line with our expectations.  The key metrics to consider for the business are the utilisation of its 30 vessels, as well as the contracting rates.  Although the turnaround in demand (driven by activity in the offshore oil and gas sector) is being seen in regard to utilisation (73% for H1 vs 65% at 30-Jun-18 and 48% at the bottom of the cycle, being H1 FY-18), rates have not yet shown signs of recovery.  With MMA Offshore’s more niche and better quality assets, we forecast better contracting terms, followed by higher rates, in coming periods - although uncertainty exists regarding the timing of this.

Financially, EBITDA (earnings before interest tax, depreciation and amortisation) was $12.6m for H1.  Gearing remains elevated at 65.8%, or 8.7x net debt / EBITDA.  The focus in regard to gearing is to increase EBITDA, and thus ensure that debt sustainability is increased.

NTA (net tangible assets) per share was $0.36 at 31-Dec-18.  This compares to a share price around $0.17 per share.  The opportunity with the MMA Offshore investment is to close this gap, as it moves the earnings (EBITDA) from its assets towards a more acceptable level.

MMA Offshore expects H2 to be stronger than H1, and it confirmed its previous guidance for a FY-19 operating EBITDA of circa $27m.

IM MMA offshore

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QBE released a good result.  Looking first to factors largely out of QBE’s control: lower catastrophe claims (reflecting a relatively benign period for major weather and other events e.g. earthquakes) assisted the result.  However, lower investment income (2.2%) dragged on the result.  This was caused by lower returns from investments, with the last quarter of CY/FY-18 of note (where considerable market volatility was experienced).

Looking to factors that QBE can drive – the simplification of the business it has been undertaking, combined with a focus on pricing, risk selection and claims management, has translated into bottom line returns for shareholders.  The Combined Operating Ratio (COR) of 95.7% indicates a positive underwriting result (and significant improvement from FY-17 when it was above 100%).  All geographies delivered better results, with a significant turnaround in North America of note – but more improvement in their Asia Pacific operations is required.   Also of note was the meaningful policy pricing increases (5.0% increase on average), with stable retention of customers.

Note: COR is the sum of the net claims ratio, commission ratio and expense ratio.  A combined operating ratio below 100% indicates profitable underwriting results.  A combined operating ratio over 100% indicates unprofitable underwriting results.

Overall, this meant cash profit was $715m for FY-18, as compared to a loss in FY-17. 

For CY/FY-19, QBE is continuing on a path of business improvement, with the commencement of a 3-year operational efficiency program.  It is forecasting an investment return of 3.0% – 3.5% for FY-19.  Additionally, QBE has forecast COR to be between 94.5% and 96.5%.

IM QBE

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Paladin is a relatively new addition to your equity portfolio (early Feb-19).  Paladin’s H1 FY-19 revenue declined as compared to H1 FY-18, as it sold lower volumes of uranium (sourced from trading rather than mining).  However, with lower unit costs on acquiring this uranium, a gross profit was made from these sales.   Higher depreciation and amortisation costs impacted the bottom line, along with costs such as care and maintenance for their two non-operating mines and other non- productions costs (such as the Study efforts, see the next paragraph).

The key to Paladin’s future returns is the timing and economics of a restart to the Langer Heinrich mine, which is currently in care and maintenance (commenced May-18).  In conjunction with this result, Paladin announced that it is proceeding with the Langer Heinrich mine restart Pre-feasibility Study.  This follows the positive results from the recently completed Concept Study. 

Paladin plans to restart the Langer Heinrich when the uranium price returns to more rational levels (prices of approximately US$40-50/pound). It is expected that Langer Heinrich will be a low cost, reliable and long-life uranium producer once operations recommence.  It will be able to take advantage of the expected recovery in uranium prices that is forecast to come through (given the very significant supply cuts that have occurred from 2016 to 2018, and the number of new reactors being constructed and planned for construction worldwide [e.g. India plans to bring 21 reactors into operation by 2031]).

The progression into Pre-feasibility is viewed positively by your Investment team, and aligns with the opportunity that we foresaw when making this investment.

IM Paladin

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TZ Limited’s numbers showed a continuing earning loss for H1 FY-19.  This was expected.  Over the half year, the company has completed a major restructuring, including of its US operations (58% of revenue). 

Results from the US business were lower than planned in the half, because of the restructure and some locker installation challenges.  Revenue was 14% lower than the pcp.

Other businesses delivered stronger results, with Australian revenue +33%, Asian revenue +17% and EMEA (Europe, Middle East and Africa) +122%.

With the restructure now complete, we expect revenue growth to come through in coming periods – which will translate into profitability with the increased scale.

IM TZ limited

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360 Capital’s financial numbers are “messy”, because of the sale of a number of investments. This included the major (and profitable) investment in the Asia Pacific Data Centres REIT (APDC), which concluded in FY-17.

360 Capital has paid 2.0cps of distributions for the H1 FY-18 half (paid quarterly).  It has also advised it will pay a 3.0cps special distribution in March, with no further distributions forecast for FY-19.

After a period of significant change and repositioning (that has resulted in a very strong balance sheet: cash on hand of $143m and no debt) 360 Capital has articulated the intention to grow its AMF Finance operations, which undertakes real estate lending.  It is also creating a number of vehicles so that it can opportunistically invest in a number of property-related opportunities as they arise.

IM 360

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As previously advised in Investment Matters (15-Feb-19), Paragon Care has advised it is planned to sell its legacy capital equipment business (expected by 30-Jun-19).  The statutory numbers below have been impacted by this.

On an underlying basis, Paragon is delivering ~9% organic sales growth.  Earnings from its non-legacy businesses (including FY-17 acquisitions) were lower than anticipated.  The company advised cost synergies from acquisitions haven’t been as high as anticipated, there are ongoing capital investments required and cost-outs are a key focus (cost reductions of >$3m in FY-20 are expected). 

Paragon has made a number of acquisitions, and under the newly appointed (31-May-18) CEO, needs to integrate these businesses.  Whilst progression of building an integrated efficient organisation has been slower than we appreciated, there is a clear path under the new CEO’s direction to now make this happen.  We expect that this will be shown in improved earnings from FY-20 onwards.

IM Paragon

- Fleur Graves