Prospa – anything but today (PGL, APX, SIQ)

A weaker day than the futures traders were predicting this morning with the market opening around par before selling off into a midday low. While the selling lacked any real fortitude this choppy range bound market continues, strength is being sold but no one seems prepared to shuffle out of stocks into weakness. The market will break this range at some point - it seems to MM that the break will happen on the upside however second guessing the market at the index level in recent times has left plenty of egg on a few faces, ours included.

US Futures were quiet during our time zone today while Asian markets traded higher, the Hong Kong based Hang Seng bounced 1% after a torrid time of late. At a sector level, the retailers were strong thanks to a +5% move by Coca-Cola (CCL) on two broker upgrades while the Utility sector was the main drag.

Overall, the ASX 200 fell -26pts/-0.40% today to close at 6766. Dow Futures are trading flat

ASX 200 Chart

ASX 200 Chart

CATCHING MY EYE;

Prospa (PGL) –27.46%; one of the biggest deals for the ASX in 2019 saw its shares tank today on news it had missed prospectus forecasts. Prospa, the small to medium business lending specialist, revised its FY20 guidance lower blaming a premiumisation of the loan book for falling net interest income after losses. Originations were marginally better than what was posted in the offer document, but the interest rate missed markedly, coming in at 19.2% vs 19.7% advertised. As a result, EBITDA is expected to come in at $4m for the calendar year, vs $10.6m. Shares were sent to a 52-week low – or at least a new low 25-weeks after listing – as a result of the announcement but the company tried to cosy up to investors by pitching the longer term opportunity of this more ‘premium’ loan book.

The CEO Greg Moshal had this to say, “While we are experiencing some short term impacts on our forecasts, we’re confident we have the right growth strategies to deliver long term shareholder value and solve the funding challenges of small business owners across Australia and New Zealand.” Propsa’s market is high cost, higher risk lending and we would expect a declining loan book quality given the movements in the bank’s bad debt charges of late. Not one for us at this stage in the cycle.

We have no interest in PGL

Prospa (PGL) Chart

Appen (APX) +13.38%: Rocketed higher today after the company upgraded earnings guidance. They now expect full year EBITDA to be in the range of $96-$99m which is the above their previous guidance of the upper end of the $85-$90m. The market had oscillated to an expectation of ~$93m so today’s announcement equates to an upgrade versus consensus of around 5%. The language technology company’s stock was higher on open however the gains were added to throughout the day to close near session highs. APX is a net beneficiary of a lower Australian Dollar which has declined from around 74c 12 months ago. APX was on our radar below $20 however frustratingly we didn’t add it to the portfolio.

Appen (APX) Chart

Smartgroup (SIQ) -13.65%; provider of salary packaging, fleet management and a range of other employee management services, has seen its shares tumble on news the CEO Deven Billimoria would be leaving the company after 19 years with the group. The company confirmed today that Deven would exit the role in February next year but remain on the payroll as an advisor for another 12 months with another long standing employee, CFO Tim Looi, taking over the top job.

The announcement also came with FY19 NPATA guidance of circa $81m for the December year end which is bang in line with consensus expectations. The market’s concern here is not the company’s performance, or the replacement given Looi has spent 10years working with Deven, but the overhang of stock – Deven unlikely to hold shares, or at least such a significant portion, after his departure. Deven has accumulated shares over his time in charge and currently owns 3.3m, or 2.5% of the company making him the 6th largest shareholder - that’s a big overhang of stock potentially up for sale. We are pondering SIQ.

Smartgroup (SIQ) Chart

Broker moves;

· Virgin Australia Raised to Neutral at UBS

· AP Eagers Raised to Buy at Bell Potter; PT A$12

· Coca-Cola Amatil Raised to Neutral at Macquarie; PT A$11.20

· Coca-Cola Amatil Rated New Buy at Jefferies; PT A$12.10

· Qantas Raised to Outperform at Macquarie; PT A$7.90

· Bluescope Cut to Equal-Weight at Morgan Stanley; PT A$13.50

· Star Entertainment Rated New Sell at Citi; PT A$4.30

· Crown Resorts Rated New Neutral at Citi; PT A$12.80

· Independence Group Raised to Hold at Morningstar

· Metals X Cut to Neutral at Hartleys Ltd; PT 18 Australian cents

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