Forge Group (ASX:FGE) founding directors exercised their $5.60 put options yesterday - delivering Clough (ASX:CLO) 3.25m additional shares. I had mentioned this upcoming decision previously.

The move effectively reduces the founders' personal holdings to very little and paves the way for their planned exit from the company. Not being privy to internal conversations, it's difficult to work out why the options were exercised more than a month before expiry. My speculative take is Clough has told the founders one of two things:

1. Clough is not intending to make a move on Forge. The directors feeling that the share price will not move above $5.60 in the near term and have decided to take profits.
2. Clough intends to wrap up the rest of Forge with an equivalent offer of $5.60/share or less.

If directors had hung tough holding their stock past expiry, it would have been a very bullish posture - with this result, not so much. Along with the current macro environment for commodities, I've now decided to sit on the sidelines on this one.

FGE last traded at $5.13

After a busy interim reporting season, I've decided to put down a few companies that have caught my attention during this period. A few of these companies have had comprehensive articles written, so I'm not going to be writing about things that have already been well covered. Below is a quick summary, with more comprehensive followups likely in the future.

Delta SBD (ASX:DSB)

• Mining services company that specialises in underground coal mines in NSW and QLD.
• Growing and with a substantial amount of orders locked in for the next few years.
• 29% Return on NTA, 12.5% ROE, and on track to make NPAT $6.3m or 13.24cps for FY12.
• Lots have been written of late from Ord Minnett, Leon of ASXValue, The Boat Fund and Roger Montgomery (Eureka Report subscription).
• Last traded at $0.91 with a market cap of $43m.

Supply Network (ASX:SNL)

• Ultra boring company that's into supplying truck and bus parts.
• Last few years the company has been growing organically with new branches and hitting growth targets ahead of schedule.
• Strong management, minimal debt, strong track record, 24% ROE, P/E around 8.
• Last traded at $0.83 with a market cap of $28m.

Energy Action Ltd (ASX:EAX)

• Energy auction procurement and energy management services.
• Growing company within a growing industry, especially since the advent of the carbon tax.
• 41% ROE, minimal debts, growing and with a P/E of under 12.
• Good writeup of the company over at The Boat Fund.
• Last traded at $1.95 with a market cap of $49m.

Allmine Group (ASX:AZG)

• Mining services company with some serious connections with some large Chinese engineering firms.
• Trading at a P/E of 6.3 when taking into account the management incentives over the next few years (using a conservative 450m shares on issue).
• Some massive contacts in the pipeline and has tremendous upside - should they deliver on them. But execution risk is high.
• Harley Grosser has written the most comprehensive take of the situation on both Roger Montgomery's Blog and The Boat Fund
• Last traded at $0.215 with a market cap of $59m

 

Disclosure: At the time of publishing, I own shares in all four companies mentioned.

Reminder: I'm not a licensed financial adviser and nothing on this site constitutes financial advice.

Just some quick comments on Structural Systems' (ASX:STS) half yearly results released Wednesday 29th February.

• The result was solid with the company posting a NPAT of $4.87m (7.62cps), coming at the top of the guidance provided during the AGM in November
• Revenues strong, increasing by 35% over the previous corresponding period (pcp), interim dividend up 33% to 2.0 cps.
  
• Mining services division ROCK Australia appears to be doing well. Although profits declined 22% pcp, its the year-on-year result is expected to be higher than last year.
• Concreting business back to profitability as expected. Middle East of declining importance but still profitable.
• Increased capex spend this half of $10.35m, most of it going into new drill rigs for ROCK.
• The company, as stated during the AGM, is no longer reporting on the losses incurred by the Eastern Treatment Plant project. This does make it difficult to measure improvements of the continuing business.
• The company has improved nevertheless with a 12% improvement in NPAT over last year's "continuing operations" result.

The biggest positive was the significant increase in revenue across the company although this wasn't proportionally translated down to the bottom line. Currently, the company is tracking at my pessimistic FY12 forecast of NPAT $10m or 15.7cps. Judging by the positive remarks made on all the divisions within the company, I feel the lack of a higher NPAT may be due to the continuation of significant losses ($1m+ NPAT per half) on the Eastern Treatment Plant project. Without commentary from management, we may never know. The project is due to be completed by the end of CY12, so hopefully it's wrapped up quickly within the next two halves and further profits can start shining through.

Cashflow statement is still not the prettiest, partly due to increased investment in equipment, and something that one needs to keep an eye on. Management are again tight lipped on an outlook statement other than expecting to deliver "an improved result for the full year" - which doesn't disclose much at all.

The things going for this company outlined in previous posts still exist today. It's a turnaround story, with the impacts of past mistakes slowly eroding and with the increasingly important mining services division coming to the fore, the future remains bright. Having an estimated FY12 P/E of 5.5, a significant margin of safety is currently present.

STS last traded at $0.875 (recently ex-div 2c fully franked)

I don't have a lot to say about this one. Half yearly is out and earnings are up 9% against previous corresponding period - on track to grow revenue by 20% for the year. Order book is up to a record $1.4b with an average contract length of 3 years. Much of the revenue for the next few years are already contracted, so any additional wins in the near term will see further revenue growth.

However I've sold up of late - came out with a single-digit percentage gain, so the trade has been only so-so. Just not too sure about this one, so decided best to sit on the sidelines for the time being. There's probably 3 reasons why I've done this, none of them particularly strong reasons.

1. The earnings growth do not fit the profile that I'm after. Though with a P/E of around 10, it's still inexpensive.
2. Directors are selling.
3. Increased capital expenditure. Last year they did $34m. For the first half FY12 they've ready done $51.3m. With another $25.5m committed after the reporting period, they're definitely on the way to double the capex spending and then some. I understand that they are ramping up for some of the new contract wins, but it does appear to be on the high side. Something to keep an eye out on.

MLD last traded at $2.34

A lacklustre half yearly result from Forge Group (ASX:FGE) on Thursday:

• Revenue up 12% on the previous corresponding period to $227.8m
• NPAT remain unchanged at $21.2m (25.4 cps)
• Dividend up 50% to 6cps

Some may say the result is even disappointing. But I feel that they are clearly gearing up for growth over the next few years. A major driver of the growth will come from the recent acquisition of CTEC. Here's a summary of the deal at hand:

• Acquisition cost is up to $38.6m. $16m up front, the other $22.6m is dependent on NPBT performance in FY12 and FY13 and will be funded entirely from the profit contributions of CTEC (~50% NPBT).
• Funded by existing cash reserves.
• It's likely to contribute $200-250m of annual revenues and $15-20m EBITDA in the first full year of ownership.
• What Forge receives is exposure to the energy and utilities sectors, a footing in Queensland and a $600m order book to be billed over the next 30 months.
• What CTEC gets, apart from the cash, is someone to provide bank guarantees or insurance bonds required by a few projects to a maximum tune of $25m.

With the acquisition, the additional order book is a big factor. It essentially doubles the outstanding work for the company to a massive $1.2 billion. The order book from CTEC will comprise mainly of low-risk low-margin EPCM work especially in the power generation area. The kicker in the deal is that a substantial portion of this will be sub-contracted to Forge's subsidiaries as higher margin EPC work. This will allow Forge to extract more from the acquisition while enhancing the reputation of its subsidiaries in the energy and utilities sectors.

Management will bring out more details in the not too distant future, including likely earnings implications. I'm going to have a bit of fun and come up with some guesstimates, based on the following assumptions:

• Management stated that CTEC will contribute $15-20m EBITDA per annum. Assume that as the order book decreases, there will be an amortisation charge of $3m/annum and that the full tax rate of 30% will be applied. The midpoint of the range is $9.25m NPAT/annum.
• The net profit margin for FGE subsidiaries Cimeco and Abesque is 10.12%. This is based on figures from page 16 of the recent half yearly report. With the assumption that all intersegment revenues and profits are between these two divisions and the full 30% tax rate is applied.
• Management have stated that $35m of subcontracts have been awarded to Cimeco from CTEC and that the expectation is that that number will increase to over $100m over the next 12-18 months. My assumption will be that $100m of internal revenue per annum is going to be passed from CTEC to Cimeco and Abesque. At a 10.12% NPAT margin this will result in an NPAT contribution of $10.12m.

So with all the assumptions above, my guesstimate for the CTEC acquisition contribution is $19.37m per annum. This will essentially increase FGE's earnings by 50% in the coming years. The company's order book, excluding CTEC, is currently $600m which in itself is double the size for the previous corresponding period of $275m. All this, along with the FGE/CLO JV being in the box seat for the $500m+ Roy Hill Package 3 works, bodes well for a bright future.

FGE last traded at $5.53, down over 5% since the release of the half yearly.

For those interested, I made a comprehensive post in relation to Structural Systems (ASX:STS) on The Boat Fund site.

The company reports the half yearly in less than two weeks and will make for an interesting read. As stated in the post, my current pessimistic full year FY12 NPAT forecast is $10m or 15.7cps.

STS last traded at $0.84

Credit Corp Group (ASX:CCP) reported on Thursday. The following are the highlights compared to the previous comparable half:

• Collections up 12% to $115.6m
• Revenues up 12% to $63.8m
• NPAT up 23% to $13.0m
• EPS up 21% to 28 cents
• Interim Dividend (fully franked) up 30% to 13 cents/share

Three months ago when I wrote about the last profit upgrade I mentioned that another upgrade was likely:

If the improvement in EPS for the first four months is extrapolated over the full year, we're looking at around 60cps - so the guidance is still on the conservative side. Further guidance upgrades between now and the final result (bar impacts of the current legal proceedings) should not be entirely unexpected.

• PDL acquisitions: $75 - $85m (previously $50 - $65m)
• NPAT: $25 - $27m ($23 - $25m)
• EPS: 55 - 59 cents (50 - 55 cents)

Judging by their historical collections splits and the first half performance, the guidance range is no longer conservative and is likely to be an accurate representation of their final result. I wouldn't expect further upgrades from here.

During the half the company also conditionally settled the class action case with negligible impacts due to insurance, commenced a consumer lending business and further reduced their debt. If the current cashflow trend continues, it is expected that CCP will be debt free by the end of the financial year. The company has also started an expansion into US debt purchasing. This makes sense especially with the consumer debt market in Australia contracting at present. Its Philippines collections centre may very well give the company a competitive advantage in these new markets.

So yeah, Credit Corp continues its excellent performance and is nearly debt free. With a forward P/E of 9, it's still cheap for a company displaying high earnings growth and remains an obvious opportunity even after its recent price jumps.

CCP last traded at $5.11. Disclosure: I own stock in the company.

 

Ponder, ponder...

I've mentioned a few times in the past that for debt collection companies, the amortisation rates of debt ledgers require some investigation as they have major impacts on the reported profits. The cashflow statement provides some insight whether the company is aggressive or lax with writing down the value of ledgers.

Credit Corp's operating cashflow for the half is higher than their reported profit ($15.9m vs 13m), This included ledger acquisitions of $48m, which is just about as much as they've ever purchased in a half so it does no favours for cashflow. And they paid $8m in tax while the tax liability for the half was $5.6m. If you can imagine that the company only paid the tax it incurred for the reporting period, the operating cash flow would be $18.3m. I understand the figures are very rough and what I'm posing next is based on multiple assumptions. Here's the big question: Could Credit Corp be possibly using an overly aggressive amortisation rate and thus under-reporting profits by 40% or even more?

Since we last spoke on Forge Group (ASX:FGE), both the employment contracts for two of the founding directors and the final date to exercise the $5.60 put options have been pushed out to 31st July and 30th June respectively. This gives Clough (ASX:CLO) effectively six more months to decide on what appears to be an imminent takeover.

Again it's important to keep an eye out on what the directors do with the put options. Should they exercise early then it's a signal that a takeover offer of over $5.60 is unlikely.

At this stage, my take is that the offer will eventuate before June 30 and will likely be above $5.60. Especially with comments such as these from the current managing director:

The management team has confidence in where the company's going and that the share price could be significantly higher than the put price in due course.

Peter Hutchinson has reason to be confident, as there seems to be a near term catalyst in the works. The last ASX announcement stated that the company is "currently in negotiations to make a significant acquisition of a new business" with negotiations "at an advanced stage". Forge currently holds $70m+ in cash and have no gearing. All the required ingredients are present for a high impact acquisition for this $400m market cap company.

FGE last traded at: $4.92

The Australian Financial Review published an article yesterday about the likelihood of Clough Limited (ASX:CLO) bidding for the rest of Forge Group (ASX:FGE). I guess the market is excited about the possibility and the share price has been sharply up over the last couple of days.

There's a few dates that may be worth keeping an eye on for shareholders:

• 31 Dec 2011: Contracts expire for two founding directors. Will they continue on or part ways?
• 2-6 Jan 2012: Founding directors hold put options to offload 2.5 million of shares/options to Clough with an exercise price of $5.60 which are exercisable between these dates. This is around 3% of the total outstanding stock and the majority of the directors' holdings.
• 23-27 April 2012: A further 0.75 million shares/options can be potentially offloaded - same conditions as above.

What does this all mean?

Directors have the choice of exiting very soon at $5.60/share. 2-6 January is of importance here. If they do decide to sell up, and Clough decide to launch a full takeover quickly thereafter, the offer will unlikely be over $5.60. I can't see shareholders getting a better deal than the founding directors.

Wait and see shall we?

I did end up purchasing some stock since my last post on the company. The winning of $200m FMG's Solomon Hub contract was a biggie and potential $250m+ share of the Roy Hill project adds a lot of excitement.

FGE was up over 5% today to $4.85

A few pieces of news have come up during the AGM held on Thursday 24th November.

The main noteworthy item is the NPAT forecast of $4.5m - $4.9m (EPS 7.0 - 7.7cps) for the first half of FY12. Although the company is in line to double last year's bottom line earnings, it's tracking behind my full year's guesstimate of a $13.2m or 20.7c EPS. Of course it's very difficult to judge at this stage. It's only one half of the year, the business is still in the process of returning Meridian, the concreting business, back to profitability and seasonalities have not been taken into account.. The second half may very well improve.

Management has also decided to move the losses incurred from the previous formwork division from discontinued to continuing operations "given the passage on time that has past since the sale". I don't have a real opinion on this, though it does reduce visibility on the losses incurred. Hopefully management will clarify this matter by providing some splits or commentary when the half yearly comes around.

With a bit of cash coming in now, the company has decided to embark on a share buyback. With the mandate to buy up to 10% (6.39m or ~$5.1m) of the outstanding issue starting from 12th December for a year. With the stock price trading less than a P/E of 6, the price is right and now is a good time as any. Can't really fault this decision at all.

Overall the news is a bit mixed and the closure of the final formwork project (Eastern Treatment Plant) is still an ongoing concern. Otherwise the company is trucking along and starting to bear fruits after a few difficult years. The cash coming into the coffers will be put to use in a share buyback which is a positive in the current circumstances.

Share price closed yesterday at $0.80.