Investment Matters

Company Profit Reporting Season home stretch: company results and market pullback

Overall, we were pleased with the results from your companies this week. However, share price performance on the announcement was difficult to assess given the sell-off in markets (both US and Australian). The sell-off, while broad in nature, has impacted companies and sectors by different magnitudes. Given our positioning, your portfolio’s performance remained resilient and outperformed the market over the week. See below for company-by-company reviews. 

An overvalued market will always correct. 

While many may point to the spread of NCOV-19 as the culprit, markets had reached levels where valuations were extremely demanding. The resulting precariousness has meant it took little to instigate a pronounced sell-off. This has also been evidenced by the fact that the speed of selling and subsequent fall this week has been unprecedented:

im3Source: Bloomberg Finance LP, DB Global Research

We see this sell-off as a clear opportunity to purchase companies below what we assess is their fundamental value – we have a list of companies and prices we are willing to pay. We will look to put our cash to work while maintaining a strong discipline around valuation.

MMA Offshore

MMA Offshore reported a half-year revenue of $131M – an increase of 9.5% on the previous comparative period. Pleasingly, this translated to a significant improvement in operating profit (EBITDA), which grew by 50% to $18.9M.

The result was well received by the market.

While utilisation (the proportion of its fleet that is currently active) was slightly lower than the previous half at 70%, demand continues to be strong for its larger vessels, which had a utilisation of over 80%. The company is also continuing to see day rate increases across its higher quality vessels.

MMA Offshore continues to be positioned to benefit from increasing offshore oil and gas expenditure and the consolidation of the offshore-service vessel market. The company estimates that each $1000 increase in day rates will add $3.2m in operating profit, with each 5% rise in utilisation (for uncontracted fleet) adding approximately $9m in operating profit. Recent trends have demonstrated both an improvement in vessel utilisation and rates.

The company continues to integrate Neptune Marine (the subsea services business it recently acquired), which it expects to be a positive contributor to cash earnings in FY-20. Furthermore, it is looking to increase its exposure to long term growth in offshore wind, and is currently negotiating a related joint venture in Taiwan.

Based on the company’s current projections, they expect to see continued improvement in operating profit (EBITDA) in the second half of FY-20.

Healius

The prelude to Healius’ result on Wednesday was an announcement that it has received a non-binding, indicative offer from a financial buyer (private equity firm Partners Group) at $3.40 per share.

This represented a 23% premium to the company’s last traded share price, and exceeds the previous bid made by substantial shareholder Jangho Group of $3.25 per share last year.

This saw shares in the company finish the week approximately 5%  higher (end of day Thursday).

In terms of its result, Healius demonstrated growth in its operating profit (EBIT) for 1H-20. Underlying operating profit was $75.7m, a modest increase of 4%.

The company saw pleasing levels of growth in both its Pathology and Imaging (radiology) segments over the half.

Pathology (which represents 57% of operating profit) volumes and fee increases culminated in revenue growth of 6%, which was above market levels (relative 12-month Medicare data). Furthermore, operating margins improved over the period, as the company’s Sustainable Improvement Program contained cost growth. This result was a growth in operating profit (EBIT) of 10%.

Imaging (which represents 24% of operating profit) also experienced an improvement in revenue of 5% - driven by expanded sites and two key contracts. The division’s operating profit (EBIT) grew by 16% over the period due to cost reductions as part of the Sustainable Improvement Program.

Medical Centers (which represents 19% of operating profit) was lifted by improving profitability of Montserrat Day Hospitals as well as contributions from Health and Co and Dental. The company’s core medical centre business experienced a weak half, with technology transitions (the adoption of Medical Director) leading to higher than expected GP retirements. Despite this, a number of centres are generating the $1m in operating profit that the company has targeted.  It is worth noting that the company is well advanced in seeking the full or partial sale of the division.

Overall, the company has increased the bottom end of its guidance range and now expects to achieve a net profit after tax (NPAT) of between $96m - $102m for the full year.

Here, There and Everywhere (HT&E)

HT&E’s result delivered a higher than expected final dividend of 4.6 cents per share (fully franked) – bringing the dividend yield for the financial year to approximately 6.5%. This reflects the company’s strong balance sheet – with $111m in cash and $250m in undrawn debt.

Revenue growth for the year (FY-19 – the company reports on a calendar year basis) reflected the challenging conditions we have seen in the advertising market recently, down 7%. Operating profit (EBITDA) was similarly impacted (-17%) at $59.9m.

Radio revenue declined by 6%, which was in line with the broader decline in the radio market, with the decline in operating profit impacted by the decline in revenue and partly reflecting higher talent costs (contracted increases).

The company’s outdoor segment (Hong Kong based) was relatively resilient performance, given protests in the second half of the year, delivering a relatively flat result. This segment represents a marginal portion of the company’s overall operating profit.

Furthermore, the company’s non-audio investments continue to, in our opinion, remain underappreciated, the majority of which management indicates they will look to realise in the near term.

Conditions continued to be challenging in January, however, the company continues to retain a strong cost discipline and is in a strong financial position at an undemanding valuation.

Worley

Worley delivered a result which was in line with expectations.

Underlying revenue grew by 20% relative to the previous comparative period (1H-19) and by 9% on the previous half. This translated to an increase in underlying operating profit (EBITA) of 9% relative to the previous comparative period (1H-19) and 2% on the previous half.

The company saw strong revenue growth, particularly in North America however this was largely in lower margin construction and fabrication work. Subsequently, while profitability improved, overall margins were lower than expected.

What was most pleasing is the company continues to identify further opportunities to realise synergies from its recent, company transformative, acquisition of Jacobs ECR (energy, chemical and resources) division. As part of its half-year release, the company increased its expectation for synergies between the business – for the second time since the completion of the acquisition in April of last year. The company now expects the combined business to generate US$175m more in earnings (compared to $130m when the transaction was initially announced.

Furthermore, the company has maintained its strategy during the period of transition between chief executives.

Despite the current uncertainty globally (NCOV-19 related and otherwise), the company has grown its backlog of contracted work to $18.7b (up from $18bn at 30 June 2019).

The company has declared an interim dividend of 25 cents per share, unfranked.

Coronado

Coronado delivered an operating profit (EBITDA) of US$634m in FY-19 – a 6% improvement on the prior year (Coronado reports on a calendar year basis).

Overall production was 30.8 Mt – largely flat along with saleable production (post-processing) of 20.2 Mt.

Although average prices achieved were lower than the previous period (US$128.8 per tonne) the group benefited from lower mining costs, which were down 8.2% over the period (US$51.8 per tonne).

Pricing and sales volumes the company’s US operations were impacted by a range of factors, including Chinese tariffs and port restrictions as well as steel production cuts in Europe and Brazil. However, this was somewhat offset by a change in production mix, with production at the company’s Logan operations skewed towards higher value metallurgical coal.

Production at Curragh remained strong, with the company undertaking several initiatives in preparation for expanding production (which will increase tonnes produced from 12.9 Mt to 14.8 Mt).

In the near term, the company sees improved sales from as tariffs (US/China) ease (subject to the impact of NCOV-19) as well as an improvement in pricing relating to competitor supply issues. Furthermore, it sees costs at Curragh continuing to decline as a result of a reduction in royalty payments.

The company declared a final, fully franked dividend of 2.5 cents (USD) bringing total distributions for the year to 27%.

It has guided towards total production of 19.7-20.2 Mt in FY-20, with slightly higher costs of US$55-57 per tonne.

The company remains committed to paying out 60-100% of its free cash flow.

Woolworths

Woolworths delivered a strong growth in net profit (normalised) – which was up 15% on the previous comparative period.

However, growth in sales was below expectations with total sales growth of 3% and like for like store growth of 2%.

The company’s Australian Food and New Zealand Food divisions grew its operating profit (EBIT) by 9% and 10% respectively (less stock loss and premiumisation). Growth in the profitability company’s liquor business was more muted due to pricing pressure (5.2%) while growth of hotels (10.8%) and Big W was pleasing.

Costa Group

As anticipated, Costa delivered a muted result. However, the result and subsequent guidance was better than the market’s expectations, leading to a significant rally in its share price (+5%) on what was a negative day for the market (XAO: -0.78%).

EBITDA-SL (that is, operating profit before accounting for the change in value of its biological assets and operating leases) was $98m, which was $26.9m less than the previous year.

Revenue was 6% higher, driven by growth in its citrus category (after a recent acquisition) and strong international growth – driven by volume growth in China. This was offset by weaker sales and prices achieved for its mushrooms.

Overall, profitability was significantly impacted by drought conditions, which resulted in higher water costs as well as reduced fruit sizing and yield. The company has several strategies in place to ensure sufficient water supply in the coming seasons.

The company also booked a number of one-off items relating to the closure of high-cost mushroom production facilities and amortisation of acquired intangible assets over the period.

Furthermore, profitability of its joint venture with Driscoll’s was impacted by raspberry crumble (which impacts the growth and quality of the berries).

Importantly, after recently raising capital the company has reduced its debt levels and has shored up its balance sheet.

The market also reacted positively to forward guidance issued by the company, in which it maintained its forecast of $150m in operating profit (EBITDA-SL).

Overall, our stake was purchased at a price that we believe discounted the near-term factors reflected in its results. We have therefore see ourselves as well position to benefit from improvements in conditions as well as the company’s productivity and economies of scale.

Cardno

Cardno reported an increase in gross revenue (which includes revenue from contracting or procuring goods from third parties) of 8%, with fee revenue of 15%, relative to the prior comparative period. This resulted in an improvement in underlying profit of 3.4% (relative to the prior comparative period) to $19.7m.

The performance was mixed amongst its three divisions (Americas, Asia Pacific and International development).

The company’s Americas division saw a significant increase in gross (+15.2%) and fee revenue (+24.4%). This reflected improved conditions over the period as well as the benefit of specific high margin projects. Overall the division’s operating margin (EBITDA margin) expanded from 8% to 14% resulting in an operating profit of approximately $18.6m.

The company’s Asia Pacific division is yet to see an uptick in activity, and broadly broke even on an operating level. Cardno anticipates to see an increase in future projects and recorded a number of project wins over the period.

Lastly, the company International Development division (which manage and contracts large projects) grew revenues by 8.9% however margins contracted, delivering a marginal operating profit.

The company has guided towards similar to stronger performance in the second half, anticipating an operating profit (EBITDA) in line with or better than that of last year.

Intega

In its maiden result, Intega demonstrated a 17.4% improvement in gross revenue, with fee revenue growing by 10.4%. This resulted in an operating profit (EBITDA) of $16.6m, which grew by 4.4% compared to the prior period. Net profit grew by approximately 50% to $3.6m

The company’s Asia Pacific division grew strongly – with revenue growing by 7.3% to $77.9m and operating profit increasing by 9.6% to $9.1m. Margins were broadly stable.

The Americas division saw a 23.3% rise in revenue to $153.2m while operating profit (EBITDA) was flat at $7.6m, largely due to the impact of a recently acquired subsurface testing business which is in the process of being turned around. Absent this, margins would have risen from 6.1% to 8.3%.

The company continues to grow its backlog and is expecting its profitability in FY-20 to be higher than FY-19.

TZ Limited

TZ Limited received A$8.0 m in revenue over FY-20. This was lower than the previous half-year, which the company attributes to a lumpiness in sales (the previous comparative half benefited from two key significant sales orders).

Results reflected an improvement in gross margin to 53%, which reflected a greater contribution from software licensing revenue.

Importantly, the company has seen a promising improvement in activity in the key US market and is focused on converting a substantial opportunity pipeline. It also continues to create awareness of its product and develop opportunities in Australia and New Zealand, amongst its other territories.