As mentioned last month, with reporting season in full swing, we will address the trading outlooks and our expectations around the upcoming results for some of our core holdings. Last month, we discussed Pioneer Credit, Fiducian and Zenitas, whilst this month we will focus on Apollo Tourism and Leisure, Elanor Investors and Konekt.
Apollo Tourism and Leisure (ATL.ASX)
ATL NPAT guidance: $13.0m to $13.6m
TAESC estimate: $13.4m
ATL is a leading integrated, global player in the RV (recreational vehicle market) – manufacturing, importing, retailing and renting RVs in Australia, NZ, United States and Canada.
The company was recently profiled in the Australian.
In early May, ATL provided a strong trading update, expecting FY17 NPAT to be between 5% and 10% above its forecasts. Management commented that forward rental bookings were ‘looking positive’ in all geographies, with bookings for the upcoming USA season tracking ahead of last year. In relation to ATL’s retail operations, Management noted that continued growth in new vehicle sales was expected in Australia and New Zealand, particularly for the Adria and Winnebago brands.
We believe beating the company’s prospectus forecasts will give the market increased confidence in the ATL strategy. Growth into FY18 for ATL will be supported by earnings contributions from its recently acquired Australian caravan and motorhome retail operations and its new wholly-owned Canadian RV subsidiary, CanaDream Corporation - one of the largest RV rental and sales companies in Canada. Both acquisitions are expected to be earnings accretive in FY18. Ongoing tourism growth from ATL’s key markets, particularly Europe, and increased RV fleet utilisation is expected to result in strong profit growth for ATL in FY18.
During FY18, to support its Australian retail RV footprint, management expects to relocate it Brisbane manufacturing facility to larger premises, resulting in an incremental ~$1m operating cost in FY18. This incremental cost will diminish in future years when the existing facility is fully exited. Notwithstanding this additional FY18 expense, ATL continues to trade on an undemanding multiple for a growing global company of ~12x FY18 earnings.
KKT EBITDA guidance: $5.3m - $6.2m
TAESC estimate: $6.25m
(FY16 EBITDA: $4m)
Konekt provides workplace health solutions, helping organisations prevent workplace injuries and minimise the impact of workplace injury costs by assisting injured employees return to work. KKT is an Australian market leader (~11-12% market share) in a very fragmented market.
In May, Konekt confirmed its revenue guidance in the range of $51.0 to $53.5m and EBITDA margin in the range of 10.5% to 11.5% (of revenue).
In H117 KKT recorded revenue of $26.3m at 11.3% margin and noted it was well positioned going into 2HFY17 with some good momentum across the business. We would expect a result at the top end of guidance which implies earnings per share of c. 5 cents. This places KKT on a price/earnings multiple of c. ~11x FY17 earnings.
We do not think that is demanding pricing for a market leading national business, very well led by Damian Banks, and with a strong track record of very high earnings growth (EPS was just 1.4 cents in FY14). The business has the potential to take further market share in a fragmented market and/or expand its range of service offerings to become a diversified corporate health provider. To drive organic growth, KKT continues to open new offices (to add to its existing network of 40+ services) and to offer to existing clients a wider range of services (ie workplace mental health).
Notwithstanding a significant CAPEX program undertaken for FY17 (approximately $1.8m), KKT’s free cash flow and acquisition funding facility of up to $10m positions it nicely to take part in industry consolidation and provides further potential upside to organic growth. Given the sector consolidation, KKT also may be seen as an attractive takeover target itself at some stage.
Elanors Investors (ENN.ASX)
ENN guidance: not provided
TAESC estimate of core earnings: $12.3m
(FY16 Earnings: $11.6m)
Property and hotel fund manager and investment company, Elanor Investors, is a portfolio holding where we are expecting a small increase in earnings for the year, but a weaker earnings per share result relative to the prior year due to share issues during the year. While ordinarily this would be concerning, for the reasons set out below, we believe ENN now represents compelling value for investors.
After a strong first half where ENN delivered a record result on the back of significant performance and acquisitions fee, ENN’s second half will be softer with reduced contributions from performance and acquisition fees.
However, based on a market update in June, as a result of recent valuation uplifts to its hotel and tourism assets and the mark to market of a development asset, ENN’s underlying net asset value is now approximately $2.00 per share, almost equal to its current share price.
What this means is that the market is essentially valuing ENN based only on the value of its hard assets (its hotels and property investments and some minor non-core assets) and is attributing almost no value for ENN’s actual ‘operating business’ – its highly regarded fund management operations.
This fund management business currently has $700m funds under management, and generated segment EBITDA of $8m in FY16 and $7.8m in H117 (driven by $5m in performance and acquisition fees), and has significant leverage to ongoing FUM growth and significant potential performance fees. ENN management are optimistic about converting their strong pipeline of new fund initiatives which should support growth into FY18 after a relatively quiet last 6 months in terms of FUM initiatives and divestments.
As value investors, we believe that this represents a compelling value opportunity, and we like the ability to buy a share of a high quality funds management business with a top class management team for next to nothing. Catalysts to potentially unlock this value include the sale of non-core assets, new fund initiatives and asset realisation / generation of performance fees.
Note: All three stocks mentioned here are currently held in the TAMIM Australian Equity Small Cap IMA portfolio.
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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.