Investment Matters

Company Profit Reporting Season

Cardno FY-18 earnings were good, overall – with the US better than expected, but an unexpected decline in earnings from the Asia-Pacific region.  EBITDA (earnings before interest, tax, depreciation and amortisation) increased 27.7% to $56.2m, and net operating profit was flat y-o-y.  Operating cash flow was strong, reflecting good working capital management (and the timing of cash payments can be lumpy, for FY-18 likely in a beneficial way).  Backlog (an indicator of future revenue trajectory) increased 9.7%.

We view the growth opportunity for Cardno in its America’s operations – increasing revenue organically and through bolt-on acquisitions, but more significantly, via improving margins (which has significant earnings leverage).  Pleasingly, we saw a significant margin increase to 4.8%, vs 1.6% in FY17.  There is, however, scope (and expectation) for further improvement in coming periods.

Margins in the Asia Pacific operations declined from 10.9% in FY-17 to 7.5% in FY-18.  This occurred as a number of major projects were completed, without new ones being awarded in replacement (a number of major project announcements are expected in H1, with Cardno in a good position, i.e. being in a shortlisted consortium).

The company has created a Construction Sciences division, because of its size and being a separate business focus.  It increased revenue 26.2% on FY-17, on an EBITDA margin of 10.3% (vs 7.0% in FY17).

Cardno’s smallest division, International Development, had a marginal tickup in EBITDA margin off a slightly lower (-5.0%) revenue base.  The demand outlook is positive, especially from the Northern Hemisphere (e.g. the UK’s equivalent of DFAT).

Cardno is holding to its ‘aspirational target’ of 10-15% EBITDA growth for FY-19.



Primary Health Care released an acceptable FY-18 result.  The underlying profit was flat vs FY-17, but should be considered at a divisional level for greater clarity (see below).  Free cash generation continued to be strong, net debt declined marginally, and the dividend was held constant.

If we look at the result at a divisional level: earnings from the Pathology division were in line with FY-17, at $121.0m (EBIT).  Imaging’s revenue increased 10.5%, and earnings increased 16.6% to $33.8m.  Earnings from the Medical Centre division declined 33.2% to $31.6m, off a flat revenue base.  A big part of this was the continuing transition of GPs to the new format contracts (through three years of cycling the old 5-year contracts).  Additionally, $18m of GP capex (which was used to recruit a record 159 GPs in the year) was spent, dragging on the division’s result.

Primary forecast underlying profit for FY-19 to be at or above that of FY-18 (prior to the impact of the capital raising and potential acquisition, see above).

Primary Health Care


Emeco’s good result was as expected – given the company had released quarterly updates including data such as EBITDA and utilisation.

As an overview, the company had a significant upswing in EBITDA (earnings before interest, tax, depreciation and amortisation) – up 83.2% vs FY-17, to $153.0m.  Deleveraging of the business post the restructure is ahead of schedule, with net debt / EBITDA (run rate) at 2.0x (was 3.9x at the end of FY-17, with a target of 1.0x).   Margins increased materially (EBITDA margin 40.2% vs 35.8% for FY-17), and acquisitions have been successful (Force integrated and operations expanded, the more recent Matilda acquisition on track).

The evaluations were:

  1. Strong cash flow: free cash flow ex-disposals +$50.8m for FY-18 and,
  2. The uptick in utilisation towards the end of the financial year: 62% as at the end of the FY, vs 57.4% average FY-18 utilisation, and this is as the fleet size grew materially through the year (worth $399.5m at 30-Jun-18 vs. $339.6m at 30-Jun-17).

Emeco is forecasting further growth in revenue and earnings in FY-19.



We were quite pleased with Southern Cross’ earnings result.

Overall like-for-like revenue (excluding divestment of NNSW TV) increased 0.6%.  Without non-recurring items, EBITDA (earnings before interest, tax, depreciation and amortisation) was relatively flat y-o-y.  [Note: Southern Cross hasn’t included (refreshingly) such items in the underlying figures.]

At a divisional level, revenue from the Metro Radio division decreased 1.8%, but with H1 at -3.7%, there was a significant turnaround in H2 (driven by better survey results and the launch of a digital radio monetisation strategy).  The revenue decline impacted margin, and thus earnings declined 4.0%.

Revenue for the Regional Radio and TV division grew 3.1% (excluding the NNSW TV operations which were sold), but earnings declined 1.7% (higher costs including transmission and electricity were cited).

Other points to note were strong cash flow, debt decreased marginally (gearing is good at 33.7%), and the dividend was held constant.

Southern Cross advised that FY-19 had commenced with strong radio market conditions (including improved visibility and lead times).  Revenue for July and August is 5% ahead of the same time last year, and costs are being contained.  This is the most upbeat outlook statement we have seen from Southern Cross Media for a number of years.

The bottom line with Southern Cross is that it offers an 8.2% fully franked yield (using a share price of $1.35), and its earnings momentum turned positive in H2, which is continuing into FY-19.



BHP released a result in-line with expectations.  Strong commodity prices, and generally good production levels, equated to underlying profit growth of 32.7% vs FY-17.  Copper was the stand-out commodity produced by BHP, with earnings (EBIT) from the Copper segment more than doubling to US$4,389m and comprising 26.5% of the company’s earnings.

Costs were well contained; in fact, productivity improved in H2 after declining in H1 due to factors planned maintenance shutdown (Olympic Dam) and geotechnical issues (coal).   Strong cash flow assisted with the reduction in gearing from 20.6% at 30-Jun-17, to 15.3% at 30-Jun-18.

The FY-19 outlook looks favourable for BHP, with FY-19 production volumes forecast to be mostly in line with FY-18, and the favourable commodity price environment continuing into this financial year.



CML Group released a good result. 

Underlying NPAT (excluding amortisation of acquired entities, and costs associated with repaying Bond#2 and conversion of the note early) was $6.5m vs. $3.8m in FY-17.  On a per share basis, this equated to earnings growth of 31%.

The Invoice Finance division purchased $1.33 billion of invoices in FY-18 (FY-17 $1.0 billion).  Margin increased 0.1% to 2.7% (which makes a material difference at an earnings level).  Revenue growth of 17% was driven both by acquisition (+16%), and pleasingly organic (+17%).   The Thorn debtor finance business acquired in Feb-18 has been integrated into CML’s operations and made a positive contribution to FY-18 earnings.

The company’s new (started Jul-17) Equipment Finance division has reached a critical scale and was profitable in H2 – considerably ahead of when we thought it would be.  Additionally, cross-selling opportunities are adding to the company’s overall earnings.

CML upgraded its FY-19 guidance to underlying EBITDA of $20m to $21m (previous guidance $19.5m, and FY-18 underlying EBITDA of $17.6m).



South32 released a good FY-18 result.  Underlying profit increased 15.8%, to US$1,327m. 

Cash generation was strong (free cash flow from operations US$873m), but down on FY-17 because of higher working capital and tax payments.  The company has no gearing (net cash +US$2,041m).  Thus a high final fully franked dividend will be paid.  The yearly dividend (including special) is 35% higher than FY-17 (a greater increase in AUD terms).

FY-18 production volumes were down on FY-17, driven by operational issues at the Illawarra Metallurgical Coal and Cannington mines.  The company has advised production volumes are expected to rise by 5% in FY-19.

Looking at the bigger picture, the company is taking steps to address the issue of cost of production increasing / declining reserves at many of the mining operations it inherited as part of the spinoff from BHP.  This includes the acquisition of Arizona Mining (which has some parallels with South32’s Cannington polymetallic mine), Eagle Downs (Queensland metallurgical coal project), and an increasing focus on exploration.

Concerning the FY-19 outlook, with the production forecast mentioned above, and commodity prices remaining buoyant as FY-19 commences, strong earnings and dividends are expected to continue.



During FY-18, 360 Capital Group made a significant investment in the Asia Pacific Data Centre (APDC) Group (a listed REIT which currently owns 3 data centres in Australia).  It also launched and grew a real estate financing business, AMF Finance.  (This comes after it sold its ownership stakes and management rights of the 360 Industrial Fund and the 360 Capital Office Fund to Centuria in FY-17).

360 Capital has noted caution in regards to the real estate market and has actively positioned itself for a downturn (including low look-through gearing e.g. within APDC), and a strong capital position (forecasting to be debt free by Jan-19).  We support the prudence being shown in this regard and note that 360 Capital is well positioned to actually benefit from any times of stress in the property market.

Net tangible assets per security were $0.97 as at 30-Jun-18 (vs. $0.95 as at 30-Jun-17, and the current price of $1.02).

360 Capital