This week the small cap team provides us with a summary of notable FY17 results from their core positions. Detailing six stocks, it is a must read for avid small cap investors.
Konekt Limited (ASX:KKT)
NPAT + 16%
KKT, a leading provider of workplace injury management and prevention services reported a very strong full year result. KKT benefited from its increased scale with underlying EBITDA margins increasing from 10% to 11% (and up from 8% in Fy16), resulting in significant earnings growth. KKT’s increasing earnings EPS trend is shown below. During the year KKT secured over 30 new corporate customers, achieved a significant panel appointment in the Commonwealth Government sector and extended its Australian Defense Force contract.
During the month, KKT also announced a significant acquisition - Mission Providence, a leading provider of employment services. The acquisition is consistent with KKT’s Return-to-Work focus with the purpose of maximising individual’s workforce participation - the expansion into adjacent return to work and employment placement services markets diversifies and expands KKT’s revenue streams. The merged business is projected to approximately double revenue and EBITDA and deliver EPS before amortisation accretion of c20% in FY18. At current prices, KKT is trading on about 8x forecast FY18 earnings.
Paragon Care Limited (ASX:PGC)
EPS + 11%
Paragon is a leading medical equipment, device and consumables supplier offering a one-stop-shop service to most of the major hospitals and aged care facilities in Australia. Paragon’s earnings are underpinned by long term contracts with hospitals for regularly purchased consumables, that comprise two-thirds of Paragon’s revenue each year.
Revenue for the year was up 25% to $117.2m with EBITDA margins improving from 13.0% to 14.6% due to cost synergies and operating leverage, resulting in EBITDA growth of 41% to $17.1m.
PGC Results highlights FY14, FY15, FY16 & FY17
Paragon’s growth is expected to continue as its product portfolio expands through new innovative products joining the platform and an expanded geographical footprint and sales penetration, with a focus on Queensland, South Australia and New Zealand. Paragon has a medium term target revenue of $250m, driven by a combination of strong double digit organic growth and acquisitions. At a 15% margin, this equates to $37m EBITDA – or a 120% increase on FY17’s result – suggesting a long runway of further earnings growth.
Fiducian Group (ASX:FID)
EPS + 23%
Integrated financial services company FID reported another strong increase in its underlying after tax profit in FY17 of 24%. Its total funds under management, administration and advice (FUMAA) increased 20% to $5.7b across the year. The FY17 result adds to FID’s impressive track record of profit growth - FID has now recorded double-digit EPS growth in 14 out of 18 years since listing on the ASX. The operating leverage inherent in the business is coming to the fore now, with FID’s Cost to Income ratio reducing significantly in recent years as the business scales up (2013: 70%, 2017: 60%). This ratio is expected to further decline into FY18, underpinning another year of strong earnings growth.
FID’s increasing revenue and EPS trend is illustrated below:
With 44 offices throughout Australia, FID is now a substantial national financial services business, benefitting from increasing recurring revenue. FID is well placed to continue to build scale organically and through acquisitions, and to leverage its integrated service offerings to “deliver consistent double digit earnings growth in coming years”.
Pioneer Credit Limited (ASX:PNC)
Debt purchaser PNC reported strong headline numbers in FY17, achieving record cash collections ($71m) and investing a record $70m in new debt ledgers. PNC expects to generate a return of 4x on these investments. PNC’s cash earnings (EBITDA) were up 12%.
The strong result was achieved despite a significant (100% expensed) investment in the development of new products and in hiring 120 new employees. Due to PNC’s commitment to staff training, it takes 5 months before new staff are profitable. This investment will underpin PNC’s forecast strong FY18 results.
PNC NPAT history and forecast:
PNC has forecast FY18 NPAT of at least $16m (48% increase) with changing market dynamics expected to provide improved opportunities for PNC as a premium provider of differentiated financial services. Of PNC’s expected $70m investment in new ledgers in FY18, $65m has already been contracted.
Zenitas Healthcare Limited (ASX:ZNT)
Zenitas reported a very strong result - FY17 Pro-forma underlying EBITDA was ahead of forecast by 6% and EBITDA margin improved 25% over FY16. The improved margin was a result of focusing the ZNT Home Care business on higher margin business, the benefit of cross-referral capture, the provision of higher margin corporate health services, and cost synergies being realised.
Over the course of the year, Zenitas has built a leading Australian healthcare business, now employing over 1600 staff, and operating from 55 locations. Its subsidiaries now includes Australia’s largest physiotherapy practice, the largest aged care podiatry provider, and one of the leading national homecare businesses. Drawing on an experienced management team, the execution of this strategy has been pleasing and the market will take confidence from this strong result as highlighted below:
Zenitas announced a very positive outlook, highlighting a long growth runway, with multiple growth drivers in place – organic growth initiatives including furthering cross referrals between businesses and more sophisticated marketing capability to increase market share; potential acquisitions in what remains a very fragmented market, and continued focus on internal operational improvements.
Based on the initiatives and businesses currently in place, ZNT expect organic growth of between 7.5% and 10%, resulting in FY18 EBITDA of between $13m to $13.5m compared to $7m generated in FY17. With strong cash flows being generated, ZNT have indicated they will pay their first dividend this coming half.
Joyce Corp Limited (ASX:JYC)
EPS + 20%
Dividend + 5%
Joyce Corporation, an investment company that owns the Bedshed Franchise, the fast growing Lloyds online auction business, and Australia’s largest kitchen renovation company, reported a strong operating result relative to FY16.
Total written sales across the Joyce group (including franchisee sales and gross auction sales) were $211m up +80% from FY16. Consolidated revenue was up +43% for the same period in 2016 to $81.1m.
Joyce is a diversified business that offers attractive counter cyclical features. Five years ago Joyce was solely dependent on its Bedshed business for growth. Today, as a result of prudent acquisitions and diversification, Bedshed comprises less 20% of Joyce’s revenue. This diversification strategy has been implemented without Joyce having to raise equity since 2011. There are numerous growth drivers heading into FY18:
Joyce is led by a proven, commercially astute, management team, has a solid balance sheet underpinned by significant real estate holdings, and is yielding 7.5% in fully franked dividends.
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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.