August 2019 Reporting Season Highlights – Part 2

Ron Shamgar takes a look at a selection of stocks - some good, some bad - following reporting season. Highlighting the important numbers and what to look for going forward, this is a must read for keen Aussie investors

​This week we once again highlight some of our holdings that reported during August. The TAMIM All Cap IMA portfolios delivered a very strong performance of +4.55% during August. Calendar year to date the portfolios are up +28.21%. The TAMIM Small Cap Income Fund also delivered a strong performance of +4.13% during the month, calendar year to date the fund is up +23.92%. We discuss a selection of holdings from both portfolios below, including ​ ISD, NEC, FXL, JIN, BBN, MNF.

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Isentia (ISD.ASX)

Isentia is the leading media intelligence company in Australia and Asia Pacific. We previously highlighted the turnaround story within ISD under a new management team. FY19 results were in line with guidance at revenue of $123m and EBITDA of $23m. Cash EPS came in at 4.7 cents and operating cash flows were quite strong, benefitting from some favourable balance date movements. Overall, the balance sheet now has the lowest amount of debt since 2015 at $28m net debt. The business is finally benefiting from lower negotiated copyright costs and a focused and incremental investment into the product suite.

Management has done a good job of taking out costs by automating several aspects of media reporting. Guidance for FY20 is for $20-$23m EBITDA and we estimate net debt to reduce further to approximately 1x earnings. This is a level that we believe will enable the board to consider reinstating dividends. Management believes from FY20 onwards both revenue and earnings will return to growth (10-20% growth) and we see FY21 Cash EPS of 5.5 cents as a realistic outcome. Right now, we value the company at ~65 cents and we believe it is highly likely that ISD will get taken over in the next 2-3 years for over $1 a share.

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Nine Entertainment (NEC.ASX) 

Nine has done an excellent job of diversifying their revenue base away from the traditional broadcast TV business with only 47% of group revenue coming from TV. The business is now less susceptible to the structural headwinds and cyclicality of TV advertising spend. The company has new and emerging growth businesses to help boost long-term growth.

Nine’s subscription streaming service, Stan, turned profitable in 2H19 and should add to profits in FY20. Stan has over 1.7m subscribers and should generate $200m+ of revenue this year. We believe Stan alone is worth a good portion of the current NEC valuation. Online property classifieds business, Domain (DHG), is recovering from one of the worst real estate listing environments in twenty years, and the acquisition of the remainder of Macquarie Media (MRN) should also be incremental next year.

Management can now focus on extracting revenue and cost upside on top of cross-selling opportunities from Nine’s full suite of media assets they have acquired in the last two years. Guidance for FY20 is for 10%+ growth on FY19 EBITDA of $424M. We estimate EBITDA to exceed $500M and EPS of 14 cents. We see the 5% ff dividend yield as quite attractive. We value NEC at ~$2.50.

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Flexi Group (FXL.ASX) 

FXL is a new holding, we initiated this position at $1.50. The company is a consumer and commercial/business lender and has recently appointed a new CEO, Rebecca James, who has finally pivoted and focused the business to target millennial customers in the Buy Now Pay Later (BNPL) sector. Under her stewardship, FXL has consolidated many different and confusing brands to a handful that are clearly resonating with their target market. We believe the company is on the cusp of not just lending volume growth but also a valuation re-rate.

FY19 results came in at guidance of $76m Cash NPAT after an impairment. The company is forecasting volume growth of 15% in loans for FY20 and has also seen strong traction for their newly launched BNPL brands. In addition to being profitable, FXL also pays a dividend of 7.5 cents fully franked. Both these metrics compare well to other listed BNPL stocks that not only don’t make a profit but won’t be paying dividends anytime soon. We feel that further evidence of customer and lending traction will see FXL re-rate materially. We value the company at about 100% upside to our buy in price. Our valuation is $3.00+.

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Jumbo Interactive (JIN.ASX)

Jumbo is the largest online reseller of lotteries for Lottery license holder Tabcorp (TAH.ASX). We have known the business and the Managing Director for many years now. JIN reported strong growth in FY19 and exceeded guidance. Revenue was up 62% to $65m on ticket sales (TTV) of $320m and 776k active customers. Active customer growth and the number of large jackpots are the key drivers of revenue growth.

Management has also, for the first time, given a 2022 TTV target of $1bn. This will be a mixture of lottery sales and the new and emerging vertical of charity lottery. The company has over $70m in net cash and we expect acquisitions to help drive international expansion of charity lotteries. Based on the 2022 target, we estimate that JIN can earn $70-$80m of EBIT. We value the company at $30.00+.

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Baby Bunting (BBN.ASX) 

Baby Bunting was probably the standout retail result for the year. Net profit came in 12% above market consensus with sales up 20% to $362m with like for like sales up 8.7%. Online sales grew 46% to 12% of group sales. The balance sheet is strong with net cash and dividends also up 60% to 8.4 cents ff. Guidance for FY20 is 30% growth and further margin expansion.
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BBN is benefiting from dominating its baby goods category. In fact, there’s no direct competitor left with more than a handful of stores. We see BBN as a “category killer” and will continue to take share away from competitors. The company is forecasting as many as five new stores to open this year. Private label brands are now 28% of sales and the long term target is 50%. This should see group EBITDA margins lift to 10%+. We bought BBN for the growth/dividend component of the Fund at $2.15. Our valuation is $3.00 and since the shares now exceed this level we have been trimming our position.

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MNF Group (MNF.ASX)

MNF is a telco software provider of managed services to businesses and other telco wholesalers. The company specialises in cloud based hosted phone numbers (Voice Over IP or VOIP calls) and other applications to help businesses manage all their communication needs in the cloud. The increase of cloud based technology adoption and the rollout of services such as the NBN are benefitting the company in growing its user base. A key leading indicator for MNF is phone numbers hosted. This has grown 18% last year to 3.8m numbers. We like the large proportion of recurring revenue within the business with $50m of recurring gross margins within a total of $83m in FY19 (up 20%).

FY19 results were a bit messy due to one off costs and acquisitions. More importantly 2H19 underlying numbers are showing strong momentum in the business and, on an annualised basis, are already within the mid-point range of the $33-$36M EBITDA guidance given for FY20. We expect the company to slightly exceed guidance, with a full year contribution from acquisitions and further organic growth, as they expand into Singapore and other parts of South East Asia. MNF is experiencing strong industry tailwinds as their small business and large customers - Google, Uber and the like - all require their services and innovation due to technology trends for the use of in-app and online communication technology. We value MNF at approximately $5.80.

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