Investment Matters

Profit Reporting Season: the final week

It’s a wrap! The deadline for-profit reports from your companies passed on Tuesday, with all having presented their profit results for FY-21 (save those who report on a calendar year basis).

We cover the last profit reports for the season – including those from Cardno and Paragon, plus some follow up meetings we had with companies this week.

Australian Equities sub-portfolio

Cardno logo

Cardno (Positive result)

Company description

Cardno is a global infrastructure, environmental and social development company engaged in the development of social and physical infrastructure across the globe.

FY-21 result and read through for FY-22

We were once again impressed by the numbers Cardno presented in FY-21, with all three of its segments given a big green tick.

While headline revenue was relatively flat, margins improved across all divisions, despite lapping some high margin projects in FY-20.

This was particularly evident in the Asia Pacific segment – which management has worked hard to turn around. This saw the division generate $8m in earnings in FY-21, from a $1m loss in FY-20.

Working capital management continues to be impressive, with the company maintaining and even improving the discipline it established in FY-20.

The company is now in a net cash position, with $149m of undrawn debt, providing it with substantial ‘acquisition firepower’.

While the underlying business is firing on all cylinders our focus was on the company’s recently announced strategic review.

We note that the company did not hold an investor call for FY-21, not provide an update to its strategic review or guidance for FY-22 profits.

We will be meeting with the Cardno team in the coming weeks to discuss its result in more detail.

Price reaction

+5.4% on the day of the announcement

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Paragon Care

Paragon Care (Positive result)

Company description

Paragon is a wholesaler to the healthcare sector, including hospitals and aged care, around Australia. It provides a variety of necessary consumable goods (such as surgical instruments) as well as more specialized devices and instruments.

FY-21 result and read through for FY-22

We met with Paragon’s management this week (CFO & CEO) to discuss what was a much-improved result.

What stood out to us was the dramatic improvement in cash from operations, with the company generating more than $29m in operating cash (incl leases, excl Jobkeeper and interest).

This was due to significantly better management of working capital over the first half of the year by Paragon’s relatively new management team. Strong cash outcomes will help fund the 1c dividend (3% yield).

Furthermore, the company was able to deliver on cost savings year on year, with at least $4m of costs coming out of the business.

Gross margin also improved, driven by growth in the higher-margin Devices and Diagnostics ’pillars’ or business segment, as well as a return to higher-margin goods in its Capital and Consumables pillar (relative to low margin PPE sales).

While Paragon has had its challenges, we see that its new management is working to achieve the best balance between autonomy and integration across its businesses to drive growth and see earnings recover.

There is latent earnings power in its underlying businesses that we see is not recognised in its current share price.

Price reaction

+3.51% on the day of the announcement.

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MMA Offshore logo

MMS Offshore (Neutral result)

Company description

MMA Offshore is a marine services company that owns and operates a fleet of offshore service vessels (OSVs). Offshore service vessels are used in several capacities, including in offshore oil, gas and wind projects. The company recently acquired Neptune Marine, a subsea services business (underwater inspection, repair and maintenance).

FY-21 result and read through for FY-22

We met with the company CFO and CEO to discuss the company’s outlook post its successful capital raising in 2020.

It has been a transformative year for MMA Offshore, with the restructuring and down-payment of its debt. With a healthy balance sheet, the company is on a sturdier footing to benefit from an uptick in offshore oil and gas activity.

COVID has pushed back work on new and existing projects across the industry- with companies hitting the pause button on projects.

Added to this, the company is navigating the challenges of COVID.

These include ensuring the regular testing of its crew and undertaking appropriate quarantine measures, as well as work lost due to port closures. This has seen the company incur additional costs as well as lose several weeks of availability.

Despite this, as mentioned, the company is on much firmer footing. Further sales of its fleet that is less in demand will assist with further reducing its levels of debt and the drag these boats have had on the business.

While many of these challenges are likely to persist in FY-22, with activity is expected to recover as the impact of COVID eases and several projects come online in the coming years.

Price reaction

0% on the day and 0% for the week to date.

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Jervois logo

Jervois Mining (Positive result)

Company description

Jervois is positioning itself to be a vertically integrated cobalt and nickel producer. Its operations span the production of ore in Idaho (Idaho Cobalt Operations or ICO), the processing and refining of ore in Brazil (its Sao Miguel Paulista or SMP operations) as well as refining and downstream production of cobalt products in Finland (Freeport Cobalt Operations).

FY-21 result and read through for FY-22

A recent addition to client portfolios, Jervois is a mining company led by ex-Glencore and Xstrata employees (two of the world’s largest mining, marketing and distribution companies).

Clients participated in a recent capital raise undertaken by the company to acquire a stake in Freeport Cobalt - a significant cobalt refining and downstream production facility.

As mentioned, the company has 3 main projects, including a mining operation in Idaho and two refinery operations in Brazil and Finland.

The Freeport acquisition will begin generating cash flow from acquisition and provides significant leverage to Cobalt price and trading optionality.

Production from its Idaho operations is expected to begin from mid-2022, while production from SMP is targeted for Q3 of 2023.

The company provides exposure to the growing demand for Cobalt, as well as potential future volatility in the commodity’s price.

We note that we participated in the equity raise alongside the company’s management (who contributed A$3.57m), the vendors of Freeport (contributing A$46m) and Mercuria, one of the world’s largest commodity trading companies (contributing A$45.7).

Price reaction

Shares up 11% on raise price.

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earlypay logo

EarlyPay (Follow-up meeting)

Company description

 A longstanding position in client portfolios, Earlypay (formerly CML Group) is an invoice and equipment financing company that finances SMEs. It has grown its business over many years in a measured manner both organically and through acquisition.​

Takeaways

This week, we met with CEO Daniel Riley, COO Steve Shin and newly appointed COO James Beeson to discuss the company’s recent result.

There is a clear pick-up operating momentum in the business as the Australian economy moves past Covid related stimulus. The fundamentals put in place over the past 2 years are bearing fruit in volume, margins, and customer growth.

We walked away with further clarity around the company’s growth ambitions and how they will be financed, with the company signalling a 40% increase in net profit next year.

This does not seem unreasonable given the trajectory of the business. We continue to look forward to further growth of the business as it grows its sales capability and further develops its lending platform.

Stepping back from what has been a tumultuous 2 years, one of the most pleasing aspect of this investment has been the manner in which the EarlyPay team have continue to pursue growth options, adding additional capacity in areas that warranted it.

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Property sub-portfolio

Home Co. logo

Home Consortium (Positive result)

Company description

Home Consortium is a property fund manager. In addition to managing several property trusts, the Home Consortium owns quality convenience retail assets, leased to large format retailers and supermarket tenants.

FY-21 result and read through for FY-22

Home Consortium has been an incredibly successful investment since first purchased for clients in mid-2020.

In FY-21, the stapled security delivered a return of more than 100%, benefiting from demand for property exposure to large corporate tenants and oriented towards less discretionary spending.

Over FY-21, we saw Home Consortium completed several strategic transactions including:

- A spin-off of its convenience-based assets – the Daily Needs REIT (ASX: HDN – another holding in the Property sub-portfolio) – which it continues to manage and has grown to $1.4 billion in assets from $0.9 in November.

- The acquisition of more than $200 million in healthcare and wellness-focused properties which it plans to spin off as a Healthcare and Wellness focused REIT (ASX: HCW).

Home Consortium over the year has transformed into a more ‘capital-light property manager, with a focus on seeding, developing and ultimately managing assets across defensive property sectors (Aged Care, Childcare, Primary Care and Wellness, Private Hospitals, Government, Life Sciences and Research).  It now has a total of $2.5 bn of Assets under management.

While the pipeline ahead of it is promising, we are seeing these expectations reflected in its share price. The price has doubled since clients first acquired it in 2020.

Price reaction

-0.5% on the day of announcement., +13.5% since.

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Eildon Capital logo

Eildon Capital (Positive result)

Company description

Eildon Capital is a listed real estate investment trust. Eildon Capital’s investment style is opportunistic, with a mandate to fund a mix of debt and equity investments in property nationally.

FY-21 result and read through for FY-22

Eildon provides an exposure to real estate debt and equity, as well as a growing property fund management business.

We continue see this investment as a well-run efficient vehicle designed to provide access to a range of investments that would be difficult to manage in the private market. Management incentives are aligned with shareholders with respect to growth in funds under management, and successful asset selection.

This year’s result provided further evidence of strong execution.

The stapled security currently holds an investment portfolio which includes 5 debt positions and 7 equity investments diversified across the eastern seaboard.

With the internalisation of Eildon’s manager (Eildon Funds Management), Eildon benefits from a fund manager with growing assets under management (now $267m vs $169m when internalised), as well as the opportunity to participate in attractive opportunities.

The holding has also provided a good source of Income in the Property sub-portfolio, paying a distribution yield of approximately 7.5% in FY-21 (based on Thursday’s price).

Price reaction

-1% on the day of announcement, +4% since.

The company now trades at a 4% discount to Net Asset Value (NAV) of $1.11

The position has been a strong contributor over the past 2 years outperforming the property index by 5%, with arguably less exposure to underlying asset price volatility.

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