Ron Shamgar looks to review a number of the key holdings in the TAMIM Australian equity portfolios in the midst of the coronavirus carnage.
Note: This is an extremely fluid and rapidly evolving situation. What applies today may not apply next week or even tomorrow. It is imperative that you note the date at which any commentary was written/published.
In this update we will keep the half year result commentary brief and focus on what we think the potential impact of Covid-19 may be on these businesses. Our thoughts are informed by the discussions we have had with management teams on a daily basis over the last couple of weeks. Once again, investors should keep in mind that the situation is rapidly evolving what applies today may not apply next week. This is a fluid situation and we are doing everything we can to stay on top of it.
EML Payments (EML.ASX)
EML reported $19.7m EBITDA for 1H and tightened the mid-point of the guidance range to $41m EBITDA. Based on the historical split between 1H/2H, EML was on track (prior to the virus impact) to hit $43m EBITDA. The acquisition of PFS should be approved by the end of March and is set to contribute $6m of EBITDA, potentially more. Cashflow conversion was weak in 1H due to some one-off payments and the seasonality in breakage revenue conversion to cash. Like previous years, 2H cash flow will be strong.
The good news is that both the EML and PFS businesses were seeing good momentum in new contract wins with a strong pipeline of deals ahead. Unfortunately, the impact of the virus on shopping mall gift card sales and the suspension of professional sporting leagues around the world will have an impact on EML. At this stage we estimate that, if the virus impact continues into the last three months of FY20, there will be roughly a $6m EBITDA hit.
On the flip side, PFS should benefit from the virus’ impact as their core business is government disbursement funding and we expect a huge spike in available contracts all over the world as governments look to implement their stimulus packages. The contribution of PFS could potentially negate any major impact on EML as a whole and so FY20 may still come in at around $40m+ EBITDA for the combined group.
We are long term investors and, on a long-term basis, the EML thesis has not changed. We still expect anywhere between $65-$80m of EBITDA in FY21 depending on whether the virus continues to impact shopping malls later into the calendar year or not.
People Infrastructure (PPE.ASX)
PPE reported a 1H result in line with expectations. Revenue was up 46% to $194m and NPATA was up 54% to $9m. The company will pay a 4 cents fully franked (ff) dividend. 51% of revenues are now coming from the health and community care segment and 25% from the IT sector. The pipeline of acquisitions is well advanced and we expect some deals in 2H of the year.
The Covid-19 virus is and will continue to place significant pressure on the healthcare sector in Australia and we see demand for nurses and community care rising dramatically over the next few months. PPE should benefit significantly here as the leading player in the sector. We expect acquisitions as the key catalyst for further share price appreciation when we return to a more rationale market.
MNY delivered an outstanding result for 1H. Revenue up 55% to $63m, NPAT up 56% to $15.7m. More importantly impairment allowance (bad debts) is 6.3% of receivables against a current annualised rate of <5% and against group current guidance of 4.5-5.5%. We estimate FY20 NPAT to be at around $33m. The dividend for the full year will be maintained at 10 cents ff.
As of the time of writing, MNY has yet to see an impact from the virus. Management are conservative and, although we expect bad debt to creep up in the next few months, the historic provisioning does provide a buffer. MNY has $100m of debt headroom and is expecting a bank funding facility in the next couple of months which will reduce the cost of funding by $4m per annum. The stock is trading on a PE of 6x and the market is pricing in bad debts to materially spike. We believe the business can withstand a tougher economic environment over the next 3-6 months as people will prioritise car finance repayments as they require their car to commute to and from work/school etc.
RMC delivered 1H NPAT at the top of their guidance range of $27m and indicated that 2H will either equal or exceed the first half. This is led by strong originating and settlements during the seasonally quieter months of January and February and favourable net interest margin spread on their cost of funding. We estimate FY20 NPAT of $55m. Loan book arrears are at industry lows.
The Covid-19 impact could see an impact on debt markets for RMC to access further funding, but the company has reassured the market that it is currently well funded for the remainder of the year. So far, the Australian property market has shown resilience and even if new originations drop, the current loan book will see longer back book loan durations which will benefit recurring revenue. The stock is currently trading on a PE of 5x and we believe the market has priced a worst case scenario into the share price.
Vita Group (VTG.ASX)
Vita Group is the largest Telstra mobile store reseller in the country with a footprint of 100+ stores. The business has been around for twenty-five years and is managed by its founder and one of the best retail executives in Australia, Maxine Horne.
The business has gone through a number of transformations over the years and has proven to be resilient in terms of profitability and cash flows. The Telstra relationship provides some risk in terms of changes to remuneration every few years. We see this part of their business as a cash cow that, in any given year, it generates $40m+ of EBITDA and throws off $15-$20m p.a. of free cash. 1H results had recorded revenues of $432m, up +14%, and NPAT of $14.5m.
The more appealing part of the Vita Group growth story is the skin care and beauty brand called Artisan Aesthetics Clinics. VTG launched the brand over eighteen months ago and is on track to have 20+ clinics by June 2020, generating over $25m of revenue. VTG is targeting 60+ clinics in the next 3-5 years and, at maturity and scale, we see this network of clinics generating $40M of incremental EBITDA.
The recent selloff has made VTG very cheap, trading on 6x PE and a 10% fully franked (ff) dividend yield with a net cash position of $24m (or roughly 15% of the current market cap). We spoke to management last week and there is yet to be an impact. Telco services should remain resilient in times like these and a strong balance sheet means the company can sustain a few months of lower sales.
When the market returns begins to return to a rational state, we expect a growth multiple on the stock as the clinic business begins contributing to profitability over the next twelve months and the telco stores remain resilient.
Shaver Shop (SSG.ASX)
Shaver Shop is the leading hair and body grooming retailer in Australia with 122 stores nationwide. The business has a strong brand, generates healthy cash flows and has a strong balance sheet ($8.3m net cash). SSG provides a great store experience that appeals to all consumers. Over the last year, the company has focused on growing their online channel with great success. Online sales are already at 18% and have grown by +60% in 1H FY20.
SSG reported very strong sales growth of +12% (to $108m) in 1H FY20 but more importantly like for like sales grew +9.3%. Cash NPAT grew to $8.6m and EPS to 7 cents. We see SSG continuing to grow online sales and we see no reason why the online component can’t reach 30% of sales within the next two years. In the current environment, we believe SSG can focus on further growing their online sales and reduce staffing costs in their store network to mitigate any mall foot traffic falls. SSG trades on a PE of 7x and pays an attractive ff dividend yield of 8%. Directors have been buying shares the last few days.
ADH is a homeware and bedding accessories retailer. The business has strong brand awareness and a conservative management team. Sales growth has slowed down in the last twelve months as consumer confidence has been sluggish. Management’s strategy is to open larger format stores alongside a handful of new stores each year. 1H FY20 results came in line with revenues of $179m, up +9%, and NPAT of about $16m. The balance sheet has $30 net debt or 0.3x EBITDA.
In December last year, ADH acquired fast-growing online retailer Mocka, who specialise in furniture, bedding and homewares. Mocka transforms the growth profile of ADH and increases online sales to almost 30% for the group. We see ADH earning 20 cents EPS this year and 24 cents in FY21. The stock has been sold off aggressively last few weeks and is trading on PE of 5x and dividend yield of 13% ff. Directors have been buying stock for the last few days and the business can increase online sales to cater to demand. So far there has been limited supply chain impact from China. There is no doubt sales will be impacted short term, but the company can safely manage several months of a slowdown in sales.
Viva Leisure (VVA.ASX)
VVA reported a strong 1H result with revenue up 53% to $23m and EBITDA up 91% to $5.6m. Their member base was up 47% to 71,000. More importantly, at their current run rate, figures are impressive, with a member base of 96,000 at end of February 2020, growing at about 400 per week. The balance sheet was strong with net cash at $23m (with $13m of that spent after reporting on the recent acquisition). We expect the company to finish FY20 in a positive net cash position.
VVA is continuing to see strong growth and, prior to the virus outbreak, was well on track to report $95m revenue and $26m EBITDA next year. That implies 20 cents cash EPS. There is no doubt that over the next few weeks and months membership growth will stall and some members will likely decide to freeze or even cancel their membership. VVA can account for this with a pullback on marketing spend, staff numbers/hours and can slow down new club openings and refurbishments. 60% of their staff are casual employees. We are confident the above savings can negate the expected revenue loss.
VVA’s current average member age is 33 years old. Going to the gym is a part of their lifestyle and thus far the virus does not seem to pose a serious health risk on this age demographic. Gyms are still being used, people are simply taking more care when doing so; sanitising equipment and hands before and after use, taking care to not touch the face etc. Unless there is a government mandated closure of all gyms and health clubs for a few weeks, we are confident (after discussions with management) that the company can weather this one-off event over the next few months. Unlike many metropolitan gyms, VVA has the lowest member density and its hub and spoke approach strategy can help reduce member crowding even further. The stock is now trading on a forward PE of 5x which is pricing in the impact of the virus over a very long period.
Uniti Wireless (UWL.ASX)
UWL is a leading telco providing fibre connectivity to residential buildings and communication services/solutions to small and medium sized businesses. The company was formed via a series of acquisitions last year by a very experienced board and management teams with a very successful track record in M2 Telecom and Vocus. UWL upgraded its FY20 pro forma forecast at the 1H results to revenue of $68m and EBITDA of $36m. At the expected run rate, EBITDA at June is now forecast to be $40m. This provides a good base to grow from into FY21 and beyond.
With the impact of the virus forcing people to stay or work from home, internet connectivity will be an essential service and we expect UWL to benefit. The company has a net cash balance sheet with $40m. The current EV of UWL is $270m which places it on a FY21 multiple of 6x. This is extremely cheap and we see telco services as a defensive business in times like these. We expect management to take advantage of the current turmoil and look to deploy their cash by buying other companies at a lower valuation than before.
Note: This is an extremely fluid and rapidly evolving situation. What applies today may not apply next week or even tomorrow.
Disclaimer: All stocks are currently held in either the Australia All Cap or Small Cap Income portfolios.
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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.