Investment Matters

First Samuel's Clients' Company Profit Reporting Results

MMA Offshore

MMA’s result was in line with our expectations.  Our assessment is the market got ahead of itself – both in relation to the timing of an earnings turnaround (on the back of a turnaround in demand), as well as the share price.

MMA’s operating conditions remain challenging.  However, the oil price recovery, a turn in capex spending by oil companies, and a stabilisation of OSV (offshore service vessel) utilisation and values give confidence that a recovery is coming.  This comes as the equity raising (as part of which First Samuel clients became investors) shored up the company’s balance sheet and has positioned the company favourably for the future – net debt was $189.9m at 31-Dec-17 (vs $368m pcp) and gearing 35.4% (vs 52.5% pcp).

EBITDA (earnings before interest, tax, depreciation and amortisation) was $7.6m for H1, a more than doubling of the pcp, but lower than for H2 FY-17.

Sale of surplus vessels is drawing to a close – 35 since FY-16, with 3 to go (1 of which is under contract).  The company will then have a core fleet of 28 quality, young, specialised vessels, with the focus to be maximising returns from these assets.

The company has advised that it expects a stronger H2 than H1 – based on increased project activity in Australia.  It confirmed previous guidance for FY-18 EBITDA of $18m-$20m. 

MMA Offshore

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QBE Insurance

QBE’s results were disappointing – although mostly expected because of catastrophe costs and other factors announced in late January (See Investment Matters 2nd February).  Catastrophes cost US$1,227m in FY-17, vs $439m in FY-16.

Consequently, the company made a cash loss of US$258m for FY-17, as compared to a profit of US$898m in the pcp (FY-16).  In addition to catastrophe costs, a significantly reduced level of positive prior accident year claims development (i.e. past claim costs were closer to estimates in FY-17 vs FY-16, pushing up the net claims expense), and an increase in the attritional claims ratio (higher number of smaller claims) impacted the result.

In response to this result and the volatility of earnings we have seen from the company, QBE has released a strategy to simplify the business and focus on getting the basics right – being underwriting and pricing  (i.e. risk assessment), and claims.  In the first major step along these lines, QBE sold its Latin American business – more on this in Company News below.

Capital levels remain well within APRA’s (the regulator) tolerance levels, although balance sheet gearing has increased above the company’s target level (due to a write-down of goodwill valuation).  We expect the company will focus on this is coming periods, with proceeds of the sale of the Latin American business to partially assist.

The company released guidance for key performance metrics in FY-18, which should see a material turnaround in financial performance.

QBE Insurance

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Emeco

Emeco released a strong result; showing the recovery in demand, and the company’s financial performance, is well underway.  It produced an operating profit that was slightly ahead of our expectations.

Operating revenue was up 132% vs pcp, and operating profit turned from -$28.8m in the pcp to +$14.4m for H1.  This was supported by average operating utilisation for the half of 57% (compared to 52% pcp), and a slight increase in margin (EBITDA level).

The company also has a strong foundation for the future, with net debt reduced to $388.1m at 31-Dec-17 (vs $437.1m at 30-Jun-17, a good result supported by good cash generation), and leverage on track to meeting the company’s FY-20 target.

The Force acquisition completed last November has been integrated well and is achieving significant maintenance benefits - such as getting equipment back to work faster and reducing major component rebuild costs by 20%-25%. 

The company expects utilisation rates and revenue to grow through H2 and into FY-19.  We also expect some continued increase in margin (from the H1 39.2% level).  Together these will translate into significant future earnings growth.

emeco

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TZ Limited

TZ’s results reflect the major transformation that the company has been undertaking.  Revenue was down considerably, as the company focuses on higher margins sales (over half of sales in FY-17 were to the postal and logistics sector, with little contribution to profit).  Gross margin in H1 was 52%, as compared to 38% pcp.

The company considerably reduced its cost base as compared to the pcp, across a wide range of categories including employee expenses (e.g. wages), occupancy costs (e.g. office rent), communications, and travel.  Overall operating costs have reduced 12%.

Based on positive sales results in January and February, TZ is expecting full-year EBITDA between -$1.0m and -$1.5m. Given the -$2.8m EBITDA (loss) in H1, this represents a positive and strong growth for H2 (H2 EBITDA +$1.3m to +$1.8m).

TZ Limited

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360 Capital

360 Capital is a very different entity in H1, as compared to the pcp – due to the sale of its funds management operations and partial investments in the REITs it managed (excluding TOT, the 360 Capital Office Fund) in late 2016.  As such, comparison of financials vs the pcp isn’t really relevant.

Operating profit for H1 was $6.0m, as compared to $9.2m for the pcp. The decrease reflects the decrease in funds management revenue.

Net tangible asset (NTA) per share was $1.06 at 31-Dec-17, vs $0.69 at 30-Jun-16 (the last audited period before the Centuria sale positively impacted NTA).  Thus, although earnings are lower, 360 Capital has meaningfully increased the asset value attributable to each shareholder. 

The latest case of this is the acquisition of a majority stake in the Asia Pacific Data Centre REIT, as mentioned in company news over recent months.   TGP is expecting an IRR of 50%-60% on this investment, which we consider is likely to be realised in H2.  360 Capital has advised it will provide a 15.0cps special distribution upon the completion of the sale of this asset.

360 Capital did note the Australian real estate market (it is referring to industrial and office) is facing headwinds, such as a rising interest rate environment and investment yield at historical lows, i.e. asset values are too high.  It has positioned itself for a downturn, by, for example, being debt free, and having cash to invest in counter-cyclical opportunities.  We assess this to be a sound approach.

360 Capital

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Threat Protect

Threat Protect released a good result - with earnings and profit growth assisted by past acquisitions, as well as organic growth, both in the main monitoring division.

Operating revenue increased 27% vs pcp, to $6.7m.  Underlying EBITDA increased from $213k in H1 FY-17 to $411k in H1 FY-18.

The company's smaller Guarding and Services division increased revenue by 10%, but on a lower margin.

With the revenue base for Monitoring stepping up as H1 came to an end (providing an indication as to the base run rate for H2), acquisitions of the recent past expected to contribute to further growth, and a highly scalable business structure, the outlook for H2 (and beyond) is positive.

Threat Protect