Investment Matters

Volatility, opportunity and company results from late last week

Volatility and opportunity

As many clients are aware, First Samuel has generally seen prices in the market as demanding and have been weary of the resulting market fragility. Over the past two weeks, we have seen the result of this fragility: with volatility rising significantly and a market correction. We have been pleased with the resilience of your portfolios over this period.

Volatility creates uncertainty for investors, but it ultimately creates opportunities for active investment. Over the past few weeks, we have been presented opportunities to invest in several new companies at what we see as discounted prices, as well as top up some of our existing holdings.

This is the benefit of the ability to hold cash at times where valuations appear challenging. 

We are excited that we have the opportunity to purchase what we see as great businesses at a discount to what we assess they are worth.

Shortly, we will provide an update to clients regarding our activity and the performance of your Australian Equities portfolio over the preceding weeks.

Company results you may have missed

CML Group

CML Group this week announced that the takeover offer from competitor Scottish Pacific has progressed to a binding scheme of implementation. As such, the previous scheme of implementation with Consolidated Operating Group (ASX:COG) has been terminated.

We are pleased to have seen the company through its journey to this point, particularly as CML Group constitutes a meaningful portion of the Australian Equities Portfolio

Under the scheme, Scottish Pacific Group will acquire 100% of CML Group for a total consideration of $0.60 per share (including a $0.03 dividend to be paid prior to the implementation of the scheme). 

We support the offer and have indicated to the company that we intend to vote in favour of the scheme.  CML Group’s board have also unanimously supported the offer and determined that it is superior to COG’s offer (of 5.4 COG shares for every 1 CML share or 2.7 COG shares and $0.24 for every 1 CML share).

The company also released its result for the first half of FY-20 late last week.

Its result reflected a number of changes to the business through the half, including the acquisition of Classic Finance group. Underlying net profit after tax (NPAT) grew by 5% (excluding impairment of goodwill relating to its legacy HR business).

Invoices funded grew by 9%, which reflected improving funding volumes and the acquisition of Classic Finance, however, a greater proportion of this was attributable to invoice discounting, which led to lower margins.

It is also worth noting the result in the first half did not reflect the earnings impact of Classic Finance acquisition yet to be reflected in results (given the acquisition was completed in early November).

Lynas Corp

Late last week the market received encouraging news from Lynas with respect to its Malaysian operations. The company confirmed its license to operate its processing plant in Malaysia has been renewed for an additional three years (until early March 2023). This reduces some of the uncertainty that surrounds the company, as well as time to build a cracking and leaching plant in Australia and a permanent disposal facility in Malaysia.

Lynas’ result partly reflected the disruption caused by these regulatory issues, with production volumes reduced due to Malaysian regulatory limits on processing.

However, revenue remained stable, with weak pricing for light rare earths (NdPr) offset by higher pricing for heavy rare earths, leading to a higher average selling price. Furthermore, the company booked higher costs of goods sold, partly due to a higher depreciation allowance.

Despite these short-term pricing and regulatory challenges, the company-maintained profitability during the half and continues to possess what we see as attractive, well-positioned strategic assets.


This week, Paladin announced it has received contractual consent from the government of Malawi for the sale of its less economic mine, Kayelekera, with final consent from the Reserve Bank of Malawi imminent (expected prior to the 13th of March 2020).

This is an important development for the company, as the sale provides additional funds, as well as reduced future expenditures, which will assist in sustaining its operations as it looks towards the turn of the uranium price cycle.

The company also released its result for the first half of 2020 late last week.

Over the period, the company completed the first phase of its pre-feasibility study, which it has conducted in preparation to restart its operations. The results of the study have provided greater surety with respect to capital requirements, time frame, ongoing operating costs and has identified opportunities for operational improvements (improving costs and production).

Unrestricted cash grew by 48% to $37m (excluding proceeds from the sale of Kayelekara), with a cash usage of approximately $7.8m over the half (including study costs).

Following the sale, management has indicated annual cash usage expected to be less than US$10M per annum ($5m per half a year – a reduction of 46%), which will be a significant improvement.

Threat Protect

Threat Protect released its half-year report (1H-20).

With the acquisition of OnWatch, revenue has grown (+53%), with monitoring revenue growing to $11.5m for the half-year.

The company continues to work towards rationalising and consolidating costs to improve its gross and operating profit and capitalise on its monitoring revenue base.

Freedom Foods

A relatively new addition to the portfolio, Freedom Foods released its 1H-20 result last Friday. The company continues to demonstrate strong sales growth (+33%) and growth in operating profit (EBITDA) (+55%) as it continues to pivot from contract manufacturing to producing value-added products and developing its brands.

Growth of its Dairy and Nutritionals (revenue growth: +45%, EBITDA growth +103%) and Plant-Based (revenue growth: +40%, EBITDA growth +70) segments was particularly strong. The Dairy and Nutritionals segment grew as the company processed higher volumes of milk and began producing higher value nutritional ingredients (such as lactoferrin, micellar casein and whey protein isolate) and associated products. The Plant-Based segment grew strongly with growth in the company’s MilkLab and almond milk products and as factory utilisation improved.

The company is well position to expand its dairy volumes in the near term and continue to drive its brands and high value-added products.