EML was one of the standout results of reporting season. The company exceeded guidance at both the revenue and profit line. Key take aways included:
- Revenue was up 37% to $97m and underlying EBTDA was up 43% to $30.2m (excluding one off costs).
- Operating cash flow conversion of 75% met expectations.
- Balance sheet finished the period at approximately $20m net cash.
More importantly the 2H19 annualized run rate provides a starting base of $33m EBTDA for FY20. Based on minimal organic growth, benefit of acquisitions and contract wins we expect $45m of EBTDA this year on revenues of around $130m.
EML is at an inflection point. Business momentum is accelerating and Gross Debit Volume (GDV) monthly numbers for June/July 2019 provide a strong start to the new financial year. As an example, in FY18 GDV processed was $7bn, in FY19 it was $9.3bn and we estimate FY20 GDV of $14.5bn. All divisions are growing strongly. With market consensus sitting at $40.5m EBTDA this year we feel that EML is due an upgrade. The AGM and EMLcon investor days in November should provide a further share price catalyst, with guidance and a potential announcement of a dividend policy. EML is our largest holding and we value it at about $5.50.
The Noni B result was solid and as expected. Sales came in at $864m with EBITDA of $45m. Guidance of $75m EBITDA this financial year was also reiterated. The positive surprise from the result was the balance sheet sitting in a net cash position ($7m) and the higher dividend which brings FY19 to 14.5 cents fully franked (ff). Online sales are now 10% of group sales and should continue to increase. The company has confirmed that they expect profit growth in FY21.
A new store opening strategy was also announced and should mean 100 new stores annually for the next three years. Management has also indicated that, with a huge database of customers, they are trying to capture additional share of wallet by launching new online stores in beauty, luggage and other accessories. These stores will white label other online retailers which means no risk or working capital drag for NBL. We expect any positive like for like (LFL) sales growth or improved gross margin updates for FY20 to help prompt a re-rating of the stock. We are expecting $80m EBITDA this year with dividends of 25-30 cents ff which bodes well when the shares are at $2.90. NBL is worth closer to $4.50 by our maths.
Resimac is one of the largest non-bank mortgage originators in Australia. From the results, points of note include:
- FY19 saw strong asset growth of 19% with principally funded loans growing to $10.2bn;
- Interest income was up 15% to $118m; and
- NPAT was up 19% to $31m.
With cost to income continuing to reduce, RMC is leading to margin expansion. More importantly half on half growth in earnings has now continued for six consecutive halves. This is a key metric for any growth company. Management has also indicated that it is looking to expand into other lending segments.
Due to the recurring interest income from the loan book, most of the growth came in Q4 which did not fully benefit FY19 income but should provide a strong start to FY20. In addition, funding costs have decreased significantly in 2H19 and we expect this to also benefit earnings this year. Overall, we expect 30-40% earnings growth this year, taking it to 10-11 cents EPS. RMC’s share price has rewarded us since buying in at 50 cents but is still undervalued. For a company growing at 20-30% p.a., it is trading on an undemanding 9x PE with a 3% fully franked dividend yield. The sector is trading on 13x and we see RMC’s multiple catching up over time, most likely quite quickly. We now value the business at approximately $1.35.
PPE reported a quality result and is experiencing strong industry tailwinds. Worth noting was:
- Revenue was up 27% to $278m and NPATA was up 55% to $12m;
- Cash flow conversion was strong and dividends for full year were well up to 9 cents ff;
- EBITDA margin at 6.4% is tracking upwards to company target of 8% over the long term. These are world best margins for a staffing business.
Health and Community services is now 50% of revenues and management is targeting 70% over the next few years. This provides the company with higher margins, better pricing power as the current market leader, and a defensive earnings stream. FY20 guidance is for 25 cents cash EPS and we see further acquisitions coming in 2H20. The balance sheet has capacity for $20M+ of deals before needing to come back to investors for more equity. We value PPE at ~$4.50.
Collection House was sold off heading into reporting season as the company received some negative publicity in August due to the escalation in bankruptcy proceedings against some of their customers. In addition, their listed peer, Pioneer Credit (PNC), is currently suspended for accounting audit issues. Combine that with their largest shareholder selling out and a stretched balance sheet, and there is not a lot to get excited about here.
CLH’s results basically met company guidance but the quality of the result wasn’t great with many one offs and accounting adjustments to get there. Cash collections did not improve in 2H19 as expected although FY20 forecast is for substantial improvement. The company will need that improvement as capacity to borrow further is quite limited. We question management’s rationale for increasing dividends and some of their investments this year. Heading into the reporting season we had sold down our holding on these concerns and completely exited the stock in the wake of their results. Past mistakes have taught us to be more risk averse in these situations.
