by Amy | Aug 18, 2016 | Stock Insight
Investment Theme – US Infrastructure
Robert Swift – Head of Global Equity Strategies
by Amy | Aug 10, 2016 | Stock Insight
oyce has a strong track record of partnering with business the company acts as a business partner, providing capital and management expertise to good profitable businesses that currently lack the capital and management to reach the next level. The key in this business partnership is to ensure that the risks and rewards are appropriately shared and incentives are aligned.
Stock Picking – Joyce Corporation Ltd (JYC.AX)
Joyce Corporation Limited has been listed on the ASX since 1986, but its origins go back over 125 years. For much of this time, Joyce was involved in foam manufacturing (Joyce was the first company to make foam in Australia) but disposed of this business in 2005. This is not however the reason for investing in the business. Joyce has a strong track record of partnering with business the company acts as a business partner, providing capital and management expertise to good profitable businesses that currently lack the capital and management to reach the next level. The key in this business partnership is to ensure that the risks and rewards are appropriately shared and incentives are aligned.
Transformation
Over the last several years, Joyce has been slowly building out a business of considerable scale, with the group’s total network revenue in the home improvement and furniture space now in excess of $125 million. The recent sale of a non-core property asset and the purchase of another property, together with the purchase of an interest in (and subsequent accounting consolidation of) a new business unit, has meant Joyce’s recent financial reporting is messy, and the Joyce story (and its potential) is perhaps poorly understood by the market. We expect the story to become clearer over the coming reporting periods – below we provide our thoughts on where the business currently sits, and it’s potential.
Balance sheet and operations
Joyce currently has $13m cash and a property with a market value likely to be in excess of $5m on its balance sheet. Joyce’s strong balance sheet, in the words of its Chairman, puts “the company in a relatively impregnable position with little downside”.
With a market capitalisation of $30m, given the value of its cash and property assets, (simplistically) the market is applying a value of approximately $12m to the Joyce operating business that could generate close to $2m (normalised) NPAT for the full year. Joyce reported $900k NPAT after non-recurring items and minority interests (& paying full tax) for the first half of 2015. While traditional value investors would be attracted to the strong cash backing and low implied earnings multiple on offer, we are equally excited by the opportunities associated with the operating model Joyce has quietly been developing over the past few years.
Essentially, Joyce acts as a business partner, providing capital and management expertise to good profitable businesses that currently lack the capital and management to reach the next level. The key in this business partnership is to ensure that the risks and rewards are appropriately shared (between Joyce and the incoming owner/manager partner), and incentives are aligned. Joyce’s two businesses are discussed in detail below.
Bedshed www.bedshed.com.au
Joyce owns 100% of the Bedshed (franchise) business. The first Bedshed store was opened in Perth in 1980 (as a waterbed expert!). Today, it is one of Australia’s largest specialist mattress, bedding and bedroom furniture retailers with a network of 30 stores (the bulk of which are franchised). Bedshed has been able to consistently grow like for like sales through offering a compelling customer proposition – personalised service from highly trained bedding specialists, with the benefits (and value) of being part of a substantial buying and marketing group.
The benefits of the ‘partner’ model is evident through the success of the franchised stores which consistently record superior profit metrics to the small number of company (Joyce) owned Bedshed stores – reflecting the drive and commitment that a passionate business owner/manager can bring to a retail business. Joyce is committed to expanding the retail footprint of Bedshed through recruiting high calibre new franchisees. As well as the alignment of interests, this franchise model serves Joyce well as it means the store fitout, leasing costs and working capital investment required to roll out a new store is funded by the franchisee, not from the balance sheet of Joyce. In return, Joyce can offer franchisees support, specialised advice, training, a proven structure and 35 years of franchising experience that significantly reduces the risks relating to starting a new business, in many cases facilitating a positive change of lifestyle for a new franchisee The Bedshed operations currently contribute approximately $2m+ in annual EBIT to Joyce. As the footprint expands (together with ongoing same store growth) this has the potential to deliver Joyce solid ongoing returns with low capital requirements.
Kitchen Connection www.kitchenconnection.com.au
In 2013 Joyce acquired an interest in KWB Group Pty Limited, Australia’s largest specialist retailer and installer of kitchens, laundries and wardrobes, and currently owns 51% of the company, having made an investment of approximately $1m. KWB targets the lucrative renovation market, providing a unique (for a national provider) “do-it-for-me” (rather than DIY) one stop, premium, full service consultation-to-design-to-installation kitchen, laundry and wardrobe offering, with competitive pricing.
When Joyce acquired its interest in 2013, annual sales were approximately $22m. For the six months to 31 December 2015 sales were at $19m (+28% on the corresponding period) with EBIT of $2.3m (+90%). Joyce reported KWB’s normalised earnings grew in FY15 over 300% on the corresponding period, driven by the strategic investment in the retail kitchen showrooms, the additional depth in back end customer service management and the expansion of the core product range. Joyce noted they expect that further significant improvements can be obtained. The founding KWB management team remain as 49% shareholders and continue to lead KWB. Together with Joyce they are focused on driving further growth, and sharing in the rewards of the growth as meaningful shareholders in the business. On the numbers reported, Joyce is certainly succeeding in its initial aim to grow the KWB business to reach its potential. The business would appear to have good momentum, with significant opportunity to expand both its products, and geographically into other regions/states. KWB could potentially achieve EBIT of up to $5m for the full year – applying a 5x multiple generates an enterprise value close to $25m (versus the $1m JYC investment for 51%).
Future partnerships
Following the settlement of the non-core industrial property in late 2015, Joyce now has the balance sheet strength to deploy capital into new opportunities. Such an opportunity may be a high performing business centered in a particular region, which has the potential for expansion into other regions, but the current owners/managers lack the capital and know-how to go about this. Joyce can bring its capital, its contacts, its experience, its back office systems and its leadership to do just that. It is not difficult to see Joyce in the not too distant future with say four or five solid, profitable, scalable and growing national businesses that they have partnered with, and with a national network of sales far in excess of the current $125m. In the meantime, for the current $30m market cap, one gets:
- a substantial cash balance
- a substantial unencumbered property asset with significant development potential
- around $2m of after tax, after minorities, earnings for FY16
- 9%+ fully franked dividend
- potential upside from earnings growth of 2 national businesses – one of which is very fast growing
- potential upside from new acquisitions
- an experienced management team, with a proven ability to execute.
The TAMIM Australian Equity Small Cap Portfolio is an investor in Joyce. This is a strong example of the types of investment we look for in our portfolio. Strong cash balances, earnings, real assets and strong growth potential – not to mention a dividend yield that would make the bank envious. If you would like more information on this portfolio and the services we offer to clients please contact us for a conversation with one of our Directors.
Happy Investing,
The team at TAMIM
by Amy | Aug 3, 2016 | Stock Insight
Stock Picking – JP Morgan
Robert Swift – Head of Global Equity Strategies
by Amy | Aug 3, 2016 | Stock Insight
The Australian smaller companies universe is home to a number of companies which are building global leadership positions in their respective niche markets, and yet somewhat surprisingly remain largely unrecognised in the local investment community. Identifying these types of businesses is both the passion of and the bread and butter of the manager of the TAMIM Australian Equity Small Cap IMA.
The Australian smaller companies universe is home to a number of companies which are building global leadership positions in their respective niche markets, and yet somewhat surprisingly remain largely unrecognised in the local investment community. Identifying these types of businesses is both the passion and the bread and butter of the manager of the TAMIM Australian Equity Small Cap IMA. We will be revealing 6 companies which are achieving great success on a global scale and yet trade on very low valuations in the coming months. Watch this space and read on as the first emerging global leader is revealed in this weeks Stock Picking report.
Stock Picking – Gale Pacific Ltd (ASX:GAP)
The first emerging global leader to be discussed is Gale Pacific Limited (ASX:GAP), a leading global marketer and manufacturer of screening and shading products for domestic, commercial and industrial applications. Way back in the 1970s, GAP invented knitted shade-cloth, and today from their low cost manufacturing facilities in China, the company is one of the world’s largest producers of technical fabrics. The company’s products are extremely durable, do not react to dirt and moisture, and do not rot (like canvas). It seems fitting to us that an Australian company should aim for global leadership in the sun shading and screening market given our position as one of the sunniest countries in the world.
WHY IS GALE PACIFIC TRADING UNDER THE RADAR?
After a period of aggressive, and ultimately unsuccessful, acquisitions during the early 2000’s, GAP has in recent years refocused strategically on its core products and has made significant improvements in its working capital management. The company has been through a period of dramatic restructuring and in our opinion has emerged much stronger and well positioned to grow. The company’s listed journey has involved a dramatic period of under-performance between 2005 and 2009, followed by gradual recovery since then.
This is an interesting backdrop in our opinion. We often find that smaller companies with patchy track records drop off most investors’ radars, even when they are undergoing meaningful restructuring. Investors’ literally forget about them. The market then fails to follow the restructuring and rerate these businesses as restructured businesses which warrant higher valuations. This is smaller company market inefficiency in action. As a result GAP, which is an emerging global leader with excellent growth prospects, is valued at a market cap of under $100m (which implies a very low valuation on all metrics), with a very limited market following. If the broader market were more aware of GAP’s restructuring and post restructuring success, the stock would be trading at a far higher valuation in our opinion. Therein lies the compelling opportunity high quality, under-researched smaller companies present.
LOOKING FORWARD: STRONG FY16 EXPECTED AND ONGOING GROWTH
GAP should deliver revenue growth in excess of 20% for FY16. For the 6 months to 31 December 2015 total sales increased 22%, with sales in Australasia up 18% on the back of new product range wins and improved marketing campaigns. Sales in the Americas region grew 14% in local currency reflecting a broader product range offering and growing market share in both the retail and commercial sectors. Margins have improved through a focus on supply chain improvements (reducing the number of suppliers and improving supplier terms) and inventory management. Management believe there is good potential for ongoing growth in its core global markets in the Americas, Middle East / North Africa and Eurasia, particularly for GAP’s commercial fabrics as the dangers of sun exposure in regions with harsh environments become more widely appreciated. Climate change is likely to provide a tailwind for GAP’s end markets over the very long term as managing sun exposure will become a greater challenge at a global level. GAP’s commercial fabrics are also marketed for a variety of other professional uses, including architecture, horticulture, building and construction, agriculture, transport, water conservation and mining. The company has a multitude of long term growth drivers across its geographies and products.
BUNNINGS AS A MAJOR CUSTOMER: RISK AND OPPORTUNITY
In FY15, Bunnings contributed 35% of GAP’s total $148m in sales (60% of total Australian sales), thus there is an unusually high degree of customer concentration risk. However, from all accounts this relationship appears strong, with GAP taking pride in their ability to work collaboratively with all their customers, including Bunnings. These collaborative relationships provide GAP with consumer insights, new product development initiatives and improved forecasting/inventory management. In addition, Bunnings’ recent expansion into the UK through the acquisition of homewares retailer Homebase, may present an opportunity for GAP to sell product to Homebase which is not currently a GAP customer. We will be watching UK developments closely as this could present a significant opportunity.
COMPELLING VALUATION
At the time of our recent purchase GAP was trading at a discount to its book value. Based on its FY16 guidance of NPBT of over $13m, it is currently trading at around 10x expected ’15/’16 eps of 3.5c, and at 5x ’15/’16 EV/EBITDA). With a 75% payout ratio, this implies a dividend yield in excess of 7%. We view this as significantly under-valued for a business with excellent management and solid growth prospects.
OUR VIEW
GAP is a great example of a smaller company achieving global success in its chosen niche market. We believe management are doing an excellent job of managing the business and we applaud their ambitious international expansion plans. Interestingly, there are currently no brokers covering the stock, but we expect this to change as GAP grows its market capitalisation and earnings, and the company’s market following subsequently increases. If GAP can maintain its current momentum, we expect a share price re-rating driven by both multiple expansion and continued earnings growth. The upside potential is significant, and we are happy long term shareholders.
Happy Investing,
The team at TAMIM
by Amy | Jul 27, 2016 | Market Insight
As is customary, every quarter our partners on the TAMIM Global Equity Growth Individually Managed Account – Calamos Investments – publish their economic outlook.
Introduction
Entering the second half of the year, market participants find themselves facing many familiar unknowns: whether the U.S. and global economies can maintain their muted pace of growth, the potential ramifications of a strong dollar, and the extent to which monetary policy can influence the markets. The political landscape remains a source of apprehension, as investors seek to understand the implications of Brexit and more broadly, global populist sentiment. Yet investor appetite for risk assets has been on the upswing. In this environment, we believe:
- Despite signs of deceleration, near-term global economic expansion should continue. The pace is likely to be slow overall and uneven among countries.
- Even as U.S. equities have rallied to new highs, downside risk management remains important given the political crosscurrents and macro environment.
- Across asset classes, securities with higher quality attributes remain most attractive overall. Growth is likely to outperform, with select opportunities in cyclicals.
- The global and U.S. economies are not facing imminent recession, but fiscal policy decisions will be crucial in defining the way forward. It will be hard to break out of a tepid-growth environment without policies and regulations that encourage entrepreneurship and responsible risk taking.
- After years of aggressive monetary policy, central banks have limited room to maneuver effectively.
US Equities
Employment and manufacturing data, as well as signs of wage growth, support our view that the U.S. economy can continue expanding at a pace consistent with recent years, albeit at a lower rate historically seen at this point of the business cycle. The direct impact of Brexit is likely to be contained and provided the dollar doesn’t spike, the U.S. economy should be able to maintain its course. We share in the view that the Federal Reserve is likely to forestall any interest rate increases for the foreseeable future, given the potential economic impact of Brexit and other related political uncertainties. The stock market is likely to remain highly sensitive to economic releases and announcements, as participants seek to make sense both of the data itself as well as how it is likely to influence Fed policy. As the next earnings announcement season commences, guidance is likely to be cautious, especially for currency-sensitive companies. We are devoting particular focus to trends in capex spending, where the impact of euro zone uncertainties is yet to be determined. Investors’ preference for cyclical stocks has faded in the wake of Brexit, with dividend-oriented stocks leading the rebound as investors seek income. However, we are concerned that many of these “safety stocks” are trading at stretched valuations (Figure 2), without offering the long-term growth characteristics we seek. Looking forward, we believe the combination of choppy global growth and lackluster yields worldwide will lead investors to increasingly differentiate between growth versus value. Conditions should support a sustained period of outperformance for U.S. growth stocks with quality attributes, albeit with opportunities for select cyclicals.
Global and International Equities
As we noted, we are not calling for a global recession, but do believe that risk management will be especially important in this environment. Although central banks remain committed to monetary policy as required, the efficacy of their actions has become increasingly uncertain. Global yield curves have become much more flat, if not inverted (Figure 3) and absolute yields continue to come down with negative yields for Japan and German 10-year sovereigns.
Meanwhile, muted world trade points to lower global growth (Figure 4). While Brexit is not shaping up to be the catalyst for a global financial crisis, we remain vigilant to a potential snowball effect of populist sentiment. These include already-scheduled elections and referendums, as well as calls for exit referendums in a number of other euro zone members.
However, the results of Spain’s postBrexit election suggest that populist momentum may be less than markets originally anticipated following the Brexit result, while the growing near-term economic concerns facing the UK may serve as a further deterrent. Additionally, we may see increased openness to compromises among euro zone members that give periphery countries more latitude. While we are concerned that conversations about the Italian banks haven’t gone particularly well, we are optimistic that an acceptable solution can still be reached. Our strategy in Europe has lately focused on companies with higher quality attributes, such as strong balance sheets and good returns on invested capital. While we have pared exposure to the UK and euro zone more broadly, we continue to identify opportunities in both, including technology, consumer and health care companies with well-recognized global brands and geographically diversified revenue streams. We’re more cautious on UK and euro zone companies that are more dependent on cyclical tailwinds to drive earnings growth, and those that would be more vulnerable to declining business and consumer confidence. We are maintaining exposure to European financials, but are generally underweight in banks, instead preferring beneficiaries of a low interest rate environment, such as real estate names.
In regard to Japan, economic surprises have been on the downtrend over recent months, and a strong yen is a headwind for an export-oriented economy. However, the potential for further monetary policy could help support export industries and beneficiaries of reflation, and we are more likely to see the fiscal policy we believe is essential for sustainable growth. Since the mid-February low, we have become marginally more bullish on emerging markets. Economies with lower-quality fundamentals have continued to perform well, but we remain concerned about the downside associated countries such as Russia and Brazil. We are maintaining our emphasis on countries that are less tied to commodity prices and those which are moving toward higher levels of economic freedoms. Prospects look relatively good in Indonesia and India, both of which have cut interest rates. We are also watching the Philippines with great interest, as new leadership looks set to continue with economic reforms. In regard to China, we continue to believe the government has the tools and levers it needs to prevent a hard landing in the near term. Our focus in China remains on technology and consumption, areas that we believe can benefit from the country’s transition to a more balanced consumer-driven economy.
Alternative Strategies
Volatility during the first half of the year affirmed the potential benefits of strategies that utilize complex volatility trades. For example, options-based strategies provided us with opportunities to capitalize on the conditions that the markets gave us. Given our view of continued volatility, we believe the return profiles of select alternative approaches (such as market neutral and covered call) may be compelling substitutes for traditional fixed income investments, where risk/return profiles give pause. Even though yields are low globally, interest rate risk exists in all environments, which we believe supports the case for strategies structured to avoid duration risk. Elsewhere in the alternative spectrum, long/short approaches may further overall diversification, without the associated risks of the most duration sensitive bonds.
Conclusion
We’ve seen U.S. markets reach new highs over recent days and believe there are continued opportunities for risk assets, globally. Even so, investors should remain selective and prepared for volatility. As we have observed in the past, periods of ebullience can give way to brisker sell-offs when sentiment falters. Whether markets are rising or falling, we encourage investors to let discipline, not emotion, guide decisions. By collaborating and drawing on our range of specialties, we believe our teams are well positioned to identify opportunities and manage the risks in the global economy.
