We recap some of the profit reporting season highlights from the past week including Afterpay Touch Group, QBE Insurance Group, Mesoblast, Ellex Medical Lasers, Pacific Smile Group, Elixinol Global and PWR Holdings. Full reports are available below via links.
Afterpay Touch Group (APT)
Following APT’s 1H19 result, we have upgraded our underlying active customer estimates by between 2.6% - 21.8% over the forward estimates, while we have downgraded our FY19 underlying EPS from positive 3.7cps to -4.0cps (primarily driven by an additional $10m investment to accelerate growth), and downgraded FY20 EPS by -12.1% (similar reason). There is an increase in our FY21 underlying EPS of 5.2% as the customer growth kicks in. We note that our CLV valuation methodology prioritises customer growth, particularly where gross margin and retention rates are healthy. Following these changes our revised price target is $28.02 per share (previously $25.04), with our Buy recommendation remaining unchanged.
QBE Insurance Group (QBE)
QBE’s 2018 result components are: (1) GWP US$13.7bn (BP US$14.1bn), +2.5% pcp; (2) NEP US$11.6bn (BP US$11.4bn); (3) COR 95.9% or 95.7% on a continuing basis (BP 95.5%, guidance 95.0-97.0%); (4) net investment yield 2.2% (BP 2.4%, guidance 2.25-2.75%); (5) reported insurance margin 7.1% (BP 7.7%); (6) cash NPAT US$715m (BP US$760m, consensus US$718m); (7) cash EPS US$0.53 (BP US$0.56); (8) final ordinary dividend 28A¢ (BP 31A¢), 60% franked; (9) cash ROE ~8.0% (BP 8.1%); and (10) PCA multiple 1.78x (BP 1.69x, target 1.6-1.8x).
We have lowered QBE’s cost of equity from 11.0% to 10.5% given its strong capital position and good progress in de-risking its portfolio of businesses. In line with rising surplus capital and a strengthened operating outlook in 2019, we have also increased the value of its float. Together with valuation time creep, we have increased the price target by 10% to $13.20. We maintain our Buy rating based on a 12-month expected TSR of ~15%.
MSB’s underlying net loss of US$47.7m was higher than BPe of US$34.5m and was impacted by MSB deferring revenue of US$10m from Tasly and higher manufacturing commercialisation expense in preparation for BLA filing for its GvHD product in the US. MSB reduced its operating cash flows by 50% in 1H19 vs. pcp. Proforma cash of US$92m provides runway into 4QCY19, with another US$35m available through existing financing agreements.
Following changes to our model, the net result is an increase in our net loss forecasts for FY19, FY20 and FY21 forecasts by 19%, 12% and 7%. FY20 and FY21. Revisions were driven by an increase in our opex forecasts. For FY19 it was driven by both reduced revenue (owing to US$10m from Tasly being treated as deferred consideration on balance sheet) and an increase in our opex forecasts. The short term NPAT adjustments were partially offset by rolling forward of our DCF model. Our valuation for MSB is largely unchanged at A$3.97/sh (was A$4.03/sh). We maintain our Buy (Speculative) recommendation.
Ellex Medical Lasers (ELX)
ELX’s revenue of $41.6m was in-line with our forecast and up 9.3% on pcp, with Fx favourably impacting the result. Underlying EBITDA loss of $1.6m, increased over pcp and was higher than our forecast of $0.5m, with higher opex offsetting the marked improvement seen in gross margin for both the CLU business and the iTrack business. ELX had a net cash position of $4.4m. We expect 2HFY19 result to be stronger than 1HFY19, with increased overall group sales driven by growth across all segments, with an improved EBITDA result (driven by strong EBITDA growth in CLU business, reduced EBITDA loss in the iTrack business and modest increase in EBITDA loss in 2RT). The EBITDA result would be driven by improved gross margin and better cost management.
The short term NPAT adjustments and recent market movements which have affected our relative valuations, has led to a modest reduction in our valuation for ELX. Our price target reduced to $1.41 (was $1.47). We retain our Buy rating.
Pacific Smiles Group (PSQ)
PSQ’s underlying NPAT of $4.5m (down 8.3% y/y) was 2.5% below our forecast of $4.6m, with the miss driven by lower gross margin, increase in opex and D&A costs. 1H19 revenue of $59.8m (up 18.5% y/y) and patient fees of $92.0m (up 14% y/y) were better than our forecasts. Same centre patient fees growth of +9% was higher than pcp (+3.3%) driven by 16% growth in younger centres and stabilising of the ex ahm centres. Both EBITDA margin and EBITDA to patient fees margin were below pcp and our forecasts, impacted by higher telco costs and lower fees/appointment. Interim dividend of 2.30cps (flat over pcp) fully franked was ahead of our forecast of 2.10cps.
Our price target has reduced to $1.40 (was $1.46) and we retain our Hold rating. We continue to be positive on the long term outlook for the company, however margin expansion is still a few years away recommendation.
Elixinol Global (EXL)
EXL’s revenue grew by 125% over FY17, at $37.1m. Underlying EBITDA was $0.7m relative to breakeven in FY17 and our forecast EBITDA profit of $3.3m. The key driver of the modestly weaker than expected EBITDA result was gross profit margin shrinkage from 64% in FY17 to 54% in FY18. A shift in channel mix to a greater proportion of private label sales cause this margin contraction.
Our valuation is amended to $3.39 from $3.36. The forecast EBITDA for FY19 modestly lowered following a revision to the expected gross profit margin. FY20/FY21 earnings are upgraded by 5% and 15% respectively. We maintain our Hold (Speculative) recommendation.
PWR Holdings (PWH)
PWH’s 1HFY19 NPAT grew 53% to $3.1m but was 12% below our forecast of $3.6m. The miss was driven by a much lower EBITDA margin than we were expecting (20.3% vs 26.2%) while revenue was actually higher than our forecast ($24.8m vs BP $23.6m). Gross cash flow was up a strong 55% to $3.7m which was c.73% of EBITDA so cash flow conversion was reasonable. The interim dividend of 1.6c was slightly ahead of our forecast of 1.5c.
There are no changes in the key assumptions we apply in each valuation which are a 50% premium in the relative valuations and a 10.0% WACC and 4.5% terminal growth rate in the DCF. The net result, however, is no change in our price target of $4.50 which is a 30% premium to the current share price so we maintain the Buy recommendation.