In the final edition of our results coverage, we hear from three contributors about their stand-out results for the period. Responses come from Simon Shields, Monash Investors; Alex Shevelev, Forager Funds; and Romano Sala-Tenna, Katana Asset Management.
Results have now wrapped up for financial year 2017 and it was a mixed across the ASX. Of the 300 stocks covered in the FNArena Reporting Season Monitor, the ‘beats’ outnumbered the ‘misses’ by just one results, and the average broker target increased by 1.7%. This week, we hear about two mining services companies that are on the road to recovery and a small-cap financial with growth and yield.
Australian Finance Group ticks all the boxes
Romano Sala-Tenna, Katana Asset Management
During the recently completed reporting season, the standout results from our portfolios included The A2 Milk Company (A2M), MNF Group (MNF), Santos (STO), Regis Resources (RRL) and Janus Henderson Group (JHG). More importantly, the companies with the best outlook statements were clearly Pioneer Credit (PNC) - which is forecasting ‘at least’ 48% profit growth - and Mineral Resources (MIN), which is expected to grow its profit by 20%+.
The single best result was Australian Finance Group (AFG), which delivered a 33% increase in underlying NPAT and a 15% increase in dividend. AFG is the largest mortgage originator in Australia and now writes nearly 20% of all loans originated through a broker. The result was driven by strong growth in its white label products (where it earns 10x the margin) along with strong growth in broker numbers and its 3rd party mortgage book.
The market would appear to be undervaluing AFG given it is trading on 11x with a 6.2% fully franked yield. Looking forward, AFG has indicated that white label sales are up 50% in July, and they are about to rollout a step-change SME/Commercial lending platform.
Emeco digs itself out of a deep hole
Simon Shields, Monash Investors
Emeco (EHL) leases heavy earthmoving equipment to mining companies and their contractors. It is the largest company of its type in Australia. With mining activity beginning to pick up again, the demand for “yellow” trucks, diggers, and dozers is picking up. There are now limited numbers of vehicles available for sale and the time lag to get new vehicles has blown out. Emeco’s full year result has seen the utilization of its fleet picking up and lease rates are beginning to improve too.
The mining vehicle leasing business is highly cyclical, and has both operational and financial leverage. Following the resources cycle bust, mining contractors handed back their vehicles and there was a glut. Lease rates collapsed and fleets had low levels of utilization. The price of second hand vehicles collapsed too, leading to large write downs.
It was a near death experience for Emeco and its competitors, who went into losses. Emeco’s stock price collapsed. Four years later, there has been debt for equity swaps, industry consolidation and the glut of vehicles is no more.
In the next couple of years, Emeco’s fleet utilization and lease rates will return to levels that are more normal. With its balance sheet now on the path to recovery, and facing a less competitive environment, Emeco will see its profitability soar from the current depressed levels. It is a great exposure to a recovery in mining services because unlike mining contactors it doesn’t carry project execution risk.
Is Macmahon finally on the cusp of delivering?
Alex Shevelev, Forager Funds
If you were buying Macmahon based on its latest result, you wouldn’t pay a cent for it. Revenue was $360 million, 15% higher than last year. But the business lost $2 million at the earnings before interest and tax (EBIT) line and, in total, $23 million of shareholders’ money.
For those who like to look at the charts however, 2017 looked like a wonderful year. The share price has doubled and, unusually for Forager, our cautiously optimistic view is that the chart tells you more than the balance sheet.
New CEO Mick Finnegan has been busy since his appointment in October last year. Out of an opportunistic takeover bid by CIMIC in January came a silver lining: a deal with Indonesian miner AMNT, owner of the Batu Hijau mine in Indonesia. This is a world class copper and gold mine where Macmahon expects to generate revenue of US$2.9 billion over the next 14 years.
The full year run-rate of this contract is likely to be more than $500 million a year. The management team also seems confident of turning the problematic Telfer contract around well before then (we will believe it when we see it) and has a new coal mining contract almost inked.
Guidance for the current year, at $40 to $50 million of EBIT, is not yet representative of Macmahon’s full potential. The following year’s EBIT, with a full run-rate of contracts, should be closer to $85 million. If management can deliver numbers like that, the implied price/earnings ratio of about 7 times will start looking very cheap.
Macmahon is still a large shareholding for Forager, though we ceased to be a substantial holder last week. At close to 11% of our Australian fund the position was getting too big and we have chosen to reduce it to a more manageable weighting. There are plenty of reasons to be optimistic, but risks remain. Macmahon will need to show good contract execution from here to deliver on its full potential.
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