The TAMIM Australian Equities Small Cap team take a look at a number of their holdings and outline what they expect and hope to see in the coming reporting season.
After a period where market sentiment has been dominated by global macro issues, we see half year reporting as a chance for the market to refocus on fundamentals, and an opportunity for companies to highlight their attractive fundamentals. The portfolio continues to trade on undemanding valuations (a median price earnings multiple of less than 10x across the portfolio). Accordingly, there are a number of stocks in the portfolio which have the potential to re-rate significantly on the back of pleasing half year updates.
We are looking forward to seeing our stocks report their half year results in February. We expect to see good revenue and earnings growth coming through across our portfolio holdings, which will underpin valuations. In this update we cover five stocks in the portfolio ahead of their half year reports, and highlight some of the areas we will be focusing on when they report.
CML Group Limited (CGR)
We expect CGR’s half year result will show a strong uplift in profit, due to lower finance costs and the accretive impact on earnings of the TDF Loan book purchased early in 2018. The company upgraded its full year guidance at its November AGM, with Underlying NPATA in FY19 expected to be $9m+.
More specifically, when CGR reports, we will be monitoring the following:
CGR trades on around 10x FY19 NPATA, a significant discount to the 17x multiple that its key competitor, Scottish Pacific, was acquired on by private equity, in late 2018.
Legend Corporation (LGD)
LGD has already given 1H19 guidance at its AGM in October. EBITDA is forecast to be 32% to 37% higher than the previous corresponding period. Approximately 20% if this growth will come from recent acquisitions, with the remainder from organic growth.
When LGD reports, we will be looking for signs that its recent acquisitions, Celemetrix and PCWI, are performing to budget; as well as how LGD is seeing the state of each of the key markets that they operate in, in particular infrastructure and mining.
While we don’t expect LGD’s second half to be as strong as the first, we are forecasting LGD to be trading on a pe of less than 10x and paying a healthy dividend (6%).
Apollo Tourism and Leisure (ATL)
A casual observer of the ATL price chart might assume that the company had performed poorly over the last year. While they have not shot the lights out, they have met their guidance and at their AGM again confirmed their FY19 earnings forecast ($22-24m). With peer weakness, poor consumer sentiment, and a slowdown in overseas visitors, the market may already be factoring in a downgrade. With good visibility around forward bookings, any downgrade is likely to come from the retail (Recreational Vehicle sales) business. We have seen some weakness in new car sales, so it will be interesting to see if this translates to RV’s.
Of particular interest will be the progress in Europe. The company acquired the UK based Camperco in March 2018. This is being used as a platform for mainland Europe expansion. Evidence of traction in this region will increase the growth profile of the company.
While only reporting their half year result in February, we would expect the company to comment again on its full year guidance. If ATL meets the midpoint of guidance, they will be trading on a pe of 9x. If guidance is met, the current price would appear to be a great entry for a company that has a strong diversified global business and a track record of growth.
Sequioa Financial (SEQ)
By the time the half year result comes out, we should have resolution of the battle for management control between CEO Scott Beeton, and shareholders aligned with SEQ’s executive chairman Garry Crole. The shareholder vote to remove Scott Beeton from the board is to take place on 5 February. Therefore, we hope to get some clarify around the strategic direction of the company at the half year results.
While no guidance has been given, the actual result should be a strong one given the full year contribution of Interprac in this result.
SEQ maintains a large cash balance ($19m) and is working on a number of growth initiatives that we are looking forward to hearing progress on.
Kip McGrath Education Centres (KME)
At the 2018 AGM in November 2018, KME Chairman Kip McGrath said the following…
“Last year’s result of a 41% increase in profit was the 7th year in a row that we have reported an increase in profit. Based on results to date, next year will continue the trend.”
Being a franchise business, the company exhibits strong operational leverage with modest revenue growth. Combined with the recent earnings accretive buy back of master franchises, we expect to see double digit earnings per share growth across FY19. With almost half their revenues coming from the UK, we will also be monitoring the unfolding Brexit situation.
We note that KME’s earnings are seasonal with a consistently stronger second half, so we will be looking for growth on the 1H18 result as a measure of progress. We expect KME to deliver NPAT growth of approximately 15% over 1H18 which will be a pleasing result.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.