Your investments were not quiet over the Christmas break
In the traditionally quiet December / January holiday break, a number of your companies have , in fact, been quite busy.
Threat Protect announced the intended acquisition of a major security monitoring company based in NSW - Apollo Security, along with a smaller Queensland based company, Queensland Security Rangers. The former is expected to double the company's revenue base, and both acquisitions provide scale benefits (with security monitoring having a large fixed cost base).
Whilst we were expecting these acquisitions to occur a little earlier than they have (TPS had articulated a desire to growth via acquisition, and last year set in place the financial capacity to do so), we see it is a positive that the company is taking a measured approach without being subject to time pressures.
Heemskirk received a non-binding proposal from major equity holder Taurus, to privatise the company. Shareholders would be able to elect to sell their shares at 7.5 cents per share, or to remain involved as a private (non-listed) investor.
The company's Board has commissioned an independent valuation.
Should Taurus be successful - in the longer term, and after at least the initial production stage is complete, either a trade sale of the company or re-listing it on the Toronto stock exchange would likely occur.
Separately, Heemskirk released an update of its Moberly project construction status in its Dec-16 quarterly update. More detail was provided in relation to completion of phase 1 of the project: positively, construction is expected to be complete by 30-Jun-17, followed by commissioning and first silica sales which are expected in Q3 CY-17. However, an additional AU$5mill to AU$10mil of short term funding is likely to be required, for which discussions are underway - including with Taurus (see above).
Late December we were informed by Komoona that it no longer intends to hit the 30-Jun-17 IPO window that it had been targeting.
Komoona is profitable, growing quickly and has no debt. However, they did have an issue in relation to reporting of website hits, which resulted in the caution in relation to the IPO. The lack of IPO at this time is dissapointing for us, however the company has indicated it will look to continue to build momentum before considering a listing again. This will likely be the end of 2017 or into 2018.
As a result we have redeemed our investment (which was essentially cash sitting in an escrow account), and will cease a financial interest with Komoona. Taking a conservative, staged investment approach with an opportunity such as this has proven prudent.
Emeco has reached a debt holders agreement, to enable the “recapitalisation and merger proposal” announced in September to be completed. A delay occurred after a failed creditor's vote in mid-December, when one bondholder rejected the proposal. Now a debt holders agreement being signed (including the debt holder who initially rejected the proposal), and a new creditor's vote is expected in early March.
Recently, market conditions for mining rental equipment have begun to tighten considerably. Given the lack of new mining capital expenditure in Australia for the past several years, it is now the case that 4 out of 12 of Emeco’s core rental lines are now in short industry supply. This is positive in relation to the rental prices of Emeco's equipment, and it expected to have a material impact on the company’s revenue and profit
As previously advised, the merger and recapitalisation will reduce the company's leverage (debt), extend its debt term, and materially reduces capital expenditure requirements for the combined businesses for the next five years. Whilst Emeco shareholders have been diluted in the process, the net result is a whole business which is worth more considerably more (thereby offsetting the dilution). Emeco will also be a free cashflow machine - we expect it to generate at least 1.7cps in the first full year of the merger, and 2.3cps in the second.
Last week, Emeco released a positive update for the Dec-16 quarter. Utilisation averaged 85% in the December quarter, up from 75% in the prior corresponding period (the Dec-15 quarter). Earnings before interest and tax were positive for the first half year of FY-17 - the first time since H2 FY-13. $7m cash operating cash flow was generated in the Dec-16 half, which we expect to further strengthen in coming periods. The company indicated it is seeing the early signs of a market recovery, with a number of project wins in the Dec-16 quarter.
As announced in Investment Matters on 25-Nov-16, Centuria has taken over co-investment assets and management rights of the 360 Capital Group. In early January the deal settled.
Subsequent to this announcement the 360 Capital Office Fund (ASX Code: TOF) has been renamed the Centuria Urban REIT (and the ASX Code has changed to CUA). Additionally, the 360 Capital Industrial Fund (ASX Code: TIX) has been renamed the Centuria Industrial REIT (and the ASX Code has changed to CIP).
Also in early January, the then 360 Capital Industrial Fund (TIX) (now CIP) advantageously sold a property in Villawood, NSW to an intended owner occupier. The current property lease was due to expire Feb-17, and the property was sold at an 8% premium to book value.
360 Capital released results guidance for the half year ending 31-Dec-16. Operating profit for the half is expected to be $9.7m, which equates to operating earnings per security of 4.1cents. Net tangible assets (NTA) per security is 92.6 cents, a 34% increase compared to 30-Jun-16 (increased because of the sale of the funds business and co-investments to Centuria). 360 Capital is now debt free with $111.0m of cash, and a security buy-back will be enacted.
South32 released its December quarterly production report. We are seeing a more variation than expected. Some commodities had lower than projected production levels for the quarter (and H1), whereas others were a little higher. There was also variation in relation to timing/ scheduling, and ore grade. For instance, lower production occurred at the Cannington silver and lead mine in H1, however production is expected to recover well in H2 with the mining of a new higher grade area. Overall, the company is on track to meet FY-17 guidance.
CML released an update regarding its finance book at the end of December. There was a small drop in book size compared to 30-Nov-16, in line with seasonal factoring variation (end CY). Overall, the growth in the book size is healthy, and the company is on track to meet our end of year expectations.
Suncorp announced it will incur a NZ$18m cost from over-cap claims associated with the 2010/11 Canterbury (NZ) earthquake. Natural hazard claims will be $40m above the company' natural hazard claims allowance. This will also impact the company's H1 FY-17 profit. These costs are disappointing, especially given the company's repositioning and increase in reinsurance provisioning. However, they are not large numbers in the context of the company's overall size / profit.
TZ released an update for the Dec-16 quarter. The company had another strong quarter of revenue generation, driven by sales in the US. Gross margins was down to 38% - still good but lower due to the sales mix. They are expected to improve in coming periods. Cash outflow improved compared to Q1, but was still an outflow of $1.7m - principally driven by large negative cash flow projects. We are mindful of this as a risk to the company, and expect to see it improve in coming periods.
Origin released a positive quarterly production report. Production for the Dec-16 quarter was 47% higher than the previous corresponding period (noting the APLNG project has come online in the interim), and 8% higher than the Sep-16 quarter. The quarter-on-quarter increase was driven by increased production from APLNG, and also new production from the Otway Basin.
Revenue stepped up also - an increase of 27% over the Sep-16 quarter - reflecting the higher production and a higher realised energy (oil) price.