Equities

We recap some of the profit reporting season highlights from this week including Corporate Travel Management, Uniti Group and Galaxy Resources. Full reports are available below via links.

Corporate Travel Management (CTD)

CTD reported a solid FY19 result with an underlying NPAT of $96.9m (vs BPe $102.1m). Underlying EBITDA was up 20% to $150.1m (vs BPe $150.4m), meeting the top-end of the $144-$150m guidance range. TTV growth was strong up 30% to $6.458m (vs BPe $6.572m) and revenues of $449.5m were up 21% YoY (vs BPe $455.1m). Stripping out the benefits from both M&A ($5m) and favourable currency movements ($7.3m), CTD achieved c.10% organic growth YoY, slowing from c.12% in 1H19 to c.8% in 2H19 due to a challenging macro backdrop (US/China trade tensions/HK protests/Brexit). Questions around the cash flow were answered, with operating cash flow up 41% YoY to $133.5m (113% conversion). The net cash (excluding client cash) position was also strong, up $43.7m to $56.7m.

Excluding all M & A, management have guided to FY20 underlying EBITDA of b/w $165-$175m, representing b/w 10-17% growth. Global macro conditions will dictate where CTD falls within this range. We are currently forecasting FY20 EBITDA of $170m via multiple growth levers (FX tailwinds/cost synergies/organic growth).

We have downgraded our underlying earnings by 9-10% across the forecast period (FY20-FY21). Driven by more conservative organic growth assumptions in Asia and Europe, higher D & A charges and an increase to the effective tax rate from 22% to 25%. Our updated DCF and PT is $24.00 (prev. $29.50).

We have upgraded our CTD recommendation to Buy. The recent share price reaction looks overdone in our view, with CTD trading on FY20e PE of c.17x and EPS CAGR of 12.6%, the valuation looks undemanding with downside risks more than priced in.

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Uniti Group (UWL)

Pro forma FY19 revenue and EBITDA of $23.4m and $2.0m were in line with or ahead of both our and the prospectus forecasts of $23.1m and $2.0m. The net loss, however, was much greater than our forecast due ($6.0m vs BP $1.6m) due to much higher D&A than we had forecast ($5.8m vs BP $2.5m) as well as an impairment of $1.4m on right-of-use-assets (ROUA) which we had not forecast. Net cash at year end including contingent consideration but excluding ROUA assets was $7.5m but this was before the acquisition of LBN Co and the associated capital raising.

Uniti provided a pro forma FY20 EBITDA forecast of $16.6m which comprised $6.5m from the existing Uniti business (including acquisitions made in FY19) and $10.1m from LBNCo (which will be acquired this month). The forecast does not, however, include three recent acquisitions by LBNCo of private networks or businesses which combined are expected to generate >$1m EBITDA in FY20.

We have updated our forecasts for the four recent acquisitions (including LBNCo) and the result is significant upgrades in our FY20 and FY21 EBITDA forecasts of 103% and 74%. We now forecast pro forma FY20 EBITDA of $18.1m which is ahead of the company’s forecast of $16.6m but note we include an additional $1.5m pro forma contribution from the three other acquisitions which were not included in the forecast.

We have updated each valuation we use in the determination of our price target for the earnings changes as well as market movements and time creep. We have also reduced the premium we apply in the relative valuations from 75% to 15% given the accretive acquisitions we were anticipating have now largely occurred through LBNCo (though we still anticipate more). The net result is still an 18% increase in our PT to $1.65 which is a 23% premium to the share price so we upgrade from HOLD to BUY.

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Galaxy Resources (GXY)

Big impairments in 1H 2019 result reflect weak lithium markets GXY’s underlying 1H 2019 financial result was estimated to have been a loss of US$34.8m, reflecting the impact of the ongoing weakness in lithium markets and more particularly the weakness in spodumene prices. The company’s reported result was a loss of US$171.9m, well above our estimate as it included impairment charges totalling US$137.1m reflecting the weakness in lithium pricing and a large tax provision. With the well-publicised deferral of the majority of its spodumene concentrate sales to 2H 2019 and the need to pay income tax on the gain from the POSCO sale, GXY had an operating cash outflow in 1H 2019 of US$77.5m although Mt Cattlin’s performance was improved with unit cash operating costs declining by 30% from 2H 2018 to US$387/t. Capex of US$17.3m was down 63% on 2H 2018. The company was debtfree at 30 June 2019 with cash of US$176.3m but it had finance leases of US$27.9m for effective net cash of US$148.4m (approximately A$220.7m).

Lithium prices generally, and spodumene prices in particular, are continuing to fall as the relatively small lithium market suffers from excess spodumene supply and weak near term demand, causing inventory build but we see this nearing a pricing bottom.

Although not responsible for flooding the market with the huge volumes of spodumene like other Australian producers have, GXY is suffering the same fallout from that with excess supply and soft near term demand for spodumene resulting in weaker pricing and inventory build. Mt Cattlin is focused on productivity improvements, ongoing cost reductions and optimisation. We still regard the longer term thematic of much stronger lithium demand as valid so we see merit in the company continuing its Sal de Vida and James Bay development projects. We have revised our forecasts for GXY reflecting the latest result and further reductions to our lithium price forecasts. The net impact of this is a sizeable loss for 2019 and modest losses for 2020 and 2021. Our target price is reduced by 7% to $2.05/share. Our Buy recommendation is retained.

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