Investment Matters

Dividends up sharply. Company profit reporting wrap.

Dividends up 17%

First Samuel's clients enjoyed a strong dividend increase: first half FY-17 dividends increased by 17.4% over H1FY-16.

This was backed by better than expected dividends from seven companies in which we invest.  Only two (being the Centuria Office and Industrial funds, which are under new management and were sandbagging for the future) disappointed us.

On revised forecasts, we currently expect full year FY-17 dividends to be up 16% (on FY-16). This includes still having six investments (Cardno, Threat Protect, Emeco, Heemskirk, and TZ Group) that are not expected to contribute to dividends in the year (but will in future periods).

Company profit reporting season wrap 

Well, it ended with a bang.  Six companies in First Samuel clients' equity portfolios released their results, including some of the smaller growth-oriented companies.

QBE Insurance

QBE's result was well received.  Cash profit was up marginally on FY-15, but on a constant currency basis (without the impact of exchange rate variation) it increased 12%.

The key drivers of the business exhibited positive trends.  These included Gross Written Premium (excluding one-offs and constant currency) $13.9 billion to $14.1 billion (FY-16 vs FY-17), expenses $2.1 billion to $1.9 billion, return on equity 7.5% to 8.1%, and insurance profit margin 9.0% to 9.7%.  It was good to see an improvement in the key measure of insurance profit margin, after a period of time of it being under pressure.

Dividends increased 8% year-on-year.  A buyback was announced, reinforcing the strong capital position of the company.  This is also a sensible way of returning some extra funds to shareholders, given the limited franking credits available.



Cardno's result reflects a company that has made significant change, and is looking to change focus to growing earnings.  The result, while demonstrating a company still in transition, was better than our expectations.

Operating profit fell 9.8% half on half.  As expected, no dividend will be paid.  New debt is close to zero at $7.3m, reflecting a very substantial debt reduction over the last 2 years.

Fee revenue has returned to growth, and backlog is strong at $762.7m (as an indication, this compares to H1 revenue of $575.7m), with a tighter definition than previously used.

Restructuring has focused on decentralising; pushing accountability and responsibility back to the individual business unit level.  This is essentially complete in Australia. Restructuring of US operations is underway, but is more complex and not complete.  Head office functions have been paired back to business unit level where practicable, and divestment of non-core assets is now complete.

The company's Asia Pacific operations (including Australia) continued to perform well.  EBITDA and EBITDA margin were healthy, and both the higher than the previous two quarters.   The company's America's operations showed improvement in margin and earnings in H1 (as compared to H2FY-16), but are at unacceptable levels.  Cardno also has a smaller International Development business, that has shown an improving trend over the last three quarters.

The company has put in place a share buyback.  This is important for what it signals - that the turnaround is on its way.  The company would not put this in place unless it had a high degree of confidence in the company's prospects and outlook.  It also reinforces the company's intention to grow the company's earnings on a per share basis.



Emeco has clearly turned the corner.  This can be seen in the key financial numbers, and also in operational statistics.

EBITDA increased to $33.6m in the Dec-16 half, up from $23.2m in the pcp.  In addition, margins increased materially - EBITDA margin increased to 38.3%, from 21.3% in the pcp.  (Note: one-off finance related items means a half-on-half comparison of NPAT is misleading.)  Operating costs are down 34.4% as compared to the pcp, and net debt declined a little over the half.  Additionally, cash flow markedly improved with a $9.0m operating cash inflow for the half, vs -$3.3m for the pcp.  However, underlying cash flow declined, mainly due to an increase in receivables.

Operationally, equipment utilisation is a key metric.  Australian utilisation improved.  Specifically, in NSW average utilisation was 92% in H1FY17, up from 85% in the pcp.  In Queensland it was 87%, in line with the pcp (but higher margins were achieved).  In WA average utilisation was 59%, up from 36% in the pcp. 

Utilisation in Chile returned to good levels (>90%) after a dip which was exited at the start of the half year.  Average Canadian utilisation improved, but more significantly an asset swap for machinery in Australia, and a rent-to-purchase agreement have been enacted.  The positive nature of these steps has been demonstrated by the Canadian operations generating strong positive cash flow.

Overall, it was a good result, and now we look to the merger with Orionstone and Andy's - which is to be progressed later this month.


TZ Limited

TZ exhibited strong revenue growth - up 32% on H1FY-16.  This was driven by sales of smart lockers (the company's PAD or Packaged Asset Delivery business) in Australia, Singapore, Malaysia and the USA. 

Sales were under pressure in the Infrastructure Protection business (data centre smart locks), which the company has assured is because of project timings (not, for instance, a reduction in demand).   This division is expected to deliver a stronger H2FY-17, with year-on-year growth (FY-17 vs FY-16).

Whilst profit improved in the half, it was still negative.  This reflects the investment in growth that the company is undertaking.  For example, smart locks are expanding into new areas such as retail click-and-collect and decentralised inventory management, new software has been developed for residential applications of the smart locker as well as for the tighter security requirements for data centre locking systems, and TZ opened a new office in San Mateo.

We are closely monitoring the cash position of the company (which is a little stretched given the investment spend).  We expect the company to be cash flow positive in H2, through receipts of cash associated with project deliveries.


Threat Protect

Threat Protect delivered a good H1FY-17 result - with revenue up 93% to $5.5m (although this was assisted by a $0.9m government R&D grant), and profit turning from a $4.7m loss in the pcp to a $0.6m profit.   The company absorbed acquisition and integration costs into this reported number - so the business is actually performing better than would appear based on the numbers.

The company's cash position improved, with positive operating cash flow, and corporate activity is afoot (see below).


CML Group

CML's result was clean, it achieved good earnings growth, and showed that the CA and 180 acquisitions made in H2FY-16 have been successfully integrated.

Specifically, profit increased from $0.4m in H1FY16 to $1.4m in H1FY17, and EPS more than tripled.

The company has branded its factoring operations under one name "Cashflow Finance", and it is excepted to focus on organic growth - including a marketing push under the new name. 

Additionally, margin (on invoices purchased) post the acquisitions is 2.4%.  This is expected to increase over the coming year or so - towards the ~3% level it was pre the acquisitions.

CML retains a strong balance sheet with capacity for some organic growth.  Given the larger scale of its operations, it is now looking to secure a larger funding package with a lower cost.

CML affirmed its guidance for a FY-17 EBITDA of $10.6m+.  Considering the company's EBITDA for the first half was $5.9m, we are comfortable that this guidance will be achieved.