Investor Wag Informal Investment Insights

Colour me successful integration?

Colorpak Limited (ASX: CKL) is an Australian company offering product packaging solutions - folding cartons, paper cups and lids, printed leaflets, printed blister and lidding foils, printed self-adhesive labels, sachets and point-of-sale displays.

In March 2011, the $50-odd million market cap company spent $5m to acquire Carter Holt Harvey's folding carton business. The acquisition would more than double Colorpak's revenue (to ~$210m pa) and to place the company on an equal footing with Amcor (ASX:AMC) in the folding carton space with a market share of around 30%. However the profitability of the new acquisition was marginal at best. For FY12, the company incurred $15.3m worth of restructuring costs mainly associated with the consolidation of manufacturing facilities and employee redundancies.

Fast forward to today. All up, Colorpak has spent around $11.5m on the CHH acquisition and its integration, including "profit made" from paying under NTA. The annual revenue has more than doubled but underlying NPAT hasn't been up nearly as much, increasing 20% from $6.4m (7.9 cps) in FY10 to $7.7m (9.4 cps) in FY12. FY13 profit is expected to be in line with that of FY12's result.

So why Colorpak? Macros aren't too good - manufacturing packaging is a mature, competitive, low-margin business. A return of equity of around 11.5% is also nothing to write home about. And there's overseas threats, both from fellow competitors but also local companies moving overseas and in the process abandoning the use of CKL packaging for their products. Not much to get excited about.

However, beneath the surface much work has been done with integrating the CHH acquisition and rationalising of the company's operations to make it a more meaner and leaner machine. Manufacturing facilities are being rationalised, staff numbers reduced, and formerly unprofitable contacts are being re-negotiated or let go. The margins are just beginning to turn around with EBITDA margins at 11.5% for the 1st half FY13 compared to the same period last year of 10.1% (note: margins are seasonally higher in the 1st half). In fact, management have started that the company has "seen the peak of the debt cycle and bottom of the margin cycle associated with the CHH acquisition".

I believe that Colorpak has completed the major portion of the hard yards associated with the CHH integration, and will start to reap the benefits of expanding margins in the coming years. The company's EBITDA margin fell from over 18% to 8.7% in FY12 post acquisition. One could make a guesstimate that in a couple of years revenues may decline 10% due to the cutting of unprofitable contacts while EBITDA margins may improve to 12%. This will result in an earnings increase of around 45%. Any additional margin improvements on top of this would just be adding rocket fuel to the fire. Not too bad for a company trading at an income-tax adjusted P/E of around 9, a history of growth and strong cash flows.

For further reading, there's a whole bunch of broker reports on the Colorpak website.

CKL last traded at $0.70.

Disclosure: At the time of publishing I own shares in CKL.

Failure to disclose

Cash Converter's (ASX:CCV) share price has received a battering over the past couple of weeks. It was only after a reverse speeding ticket from the ASX did they come clean.

Due to the  new Consumer Credit Legislation Amendment (Enhancements) Bill 2012 which commenced 1st March, applying for cash advances have gotten more complicated process wise for both consumers and staff. As a result, cash advances are down 2.4%, 26.3%, 12.6% over the past three month against the average. Short term profit is impacted, longer term management thinks personal loans will make up for the dip. Read the full announcement here.

Being one of my larger holdings, I'm somewhat peeved. Not so much for these circumstances, but management's failure to fulfill their continuous disclosure requirements. It's quite evident that they were aware of the 20%+ drop in cash advances for April more than a month in advance. Yet they waited until the news trickled out, the share price slumped, and for the ASX to come knocking before giving a yelp.

All this will probably end up just being a short-term impact to profitability, but it leaves a undeniable bitter taste. Certainly not the most transparent management team around.

CCV last traded at $0.99, at one stage hitting a low of $0.82.

Disclosure: At the time of publishing I own shares in CCV.

Credit Corp Group (ASX:CCP) May 2013 Update

Thursday saw another positive update from Credit Corp Group (ASX:CCP), pushing revised targets to the upper end of the previous guidance in from December.

Now December 2012
PDL acquisitions $125-130m $105-$125m
Earnings underlying $28-29m (61-63cps) $27-29m (59-63cps)
Earnings Reported $30-31m (65-67cps) $29-31m (63-67cps)

One thing to keep an eye on is the progress of the startup business in the US. After a slow start, it's starting to gain traction with recent purchases in line with pro-forma returns. Things are ramping up with employees growing from 30 to 40, and PDLs from $4m to $5m since the start of the year. This is the future growth engine of Credit Corp and reaching a state of acceptable returns is a big achievement which may see the expansion accelerate.

The quarterly breakdowns of revenues is also looking good, so they may be some slight upside for the final FY13 result.

CCP last traded at $9.67.

Disclosure: At the time of publishing I own shares in CCP

Beyond International Limited (ASX:BYI)

Beyond International is into TV program production, TV/film distribution (mostly in-house productions), home entertainment (i.e. DVDs)  and digital marketing.

The home entertainment division is shrinking, both in revenue and staff. Digital marketing is only break-even at this point and in a midst of a restructuring that could take some time.

The core of Beyond is making TV programs and distributing them for both local and international markets. Some of the better known productions include MythBusters, Deadly Women and Hot Property. Most of the shows produced are in the "factural" genre with a sprinkling of children programming.

Around 30% of the group's revenue is USD denominated. While some currency hedging are in place, the strengthening of the Australian dollar against USD will generally have a negative impact on revenue and profits.

What's good

  • Balance sheet and cash flows look strong. Low debt, ROE 23%.
  • Management is forecasting EPS to grow by 10-15% in FY13. I personally like when management use and quote EPS as the vital statistic too!
  • It's inexpensive. The trailing P/E is a tad under 10 (EPS 13.80cps). Forward P/E can be as low as 8.25 based on FY13 guidance numbers (EPS 15.18 - 15.87cps).
  • Strong history of earnings growth and profitability improvements over the past 10 years.
  • Founding chairman just recently added a sizable stack of shares (~$2.3m) to his collection. The chairman and managing director hold approximately 40% of the outstanding stock of this $80m market cap company.

What's bad

  • Strong headwinds in the home entertainment division with the decreasing demand for TV and film on physical media.
  • Digital media division. it's still up in the air if they can make a fist of this one.

What's up for consideration

  • The changing landscape for content producers to navigate. On the one hand traditional TV is struggling with reduced advertising dollars. On the other, subscription TV is strong and digital offerings are emerging in a major way.  How Beyond and the rest of the content industry will navigate this I'm not too sure. With players such as HBO and Netflix driving hard for original content, my gut feel at this stage is that things may work out favourably.

BYI last traded at $1.31.

Disclosure: At the time of publishing I own shares in BYI

Half Yearly FY13 one liners

Half yearly reports are rolling out and I'm having a read like everyone else. There's not much for me to elaborate on, apart from some quick one liners on a few companies I took notice...

Cash Converters (ASX:CCV) - $1.30
Booming. Great result across the board and putting raised funds to new store acquisitions - which will offset dilution and then some. A quality company that is still displaying value.

Credit Corp Group (ASX:CCP) - $9.60
Workman like. Chugging away. Increased ledger purchases will underpin FY14/15. Though US business is slow, profitability should be kicking in around then also.

Forge Group (ASX:FGE) - $6.18
Stunning. Though visibility of future order book and revenue seem to be less clear than previous years.

Energy Action (ASX: EAX) - $3.23
Underwhelming. Top line growth, but increased in costs made the result flat. And dilution make EPS negative. Not cheap either. Have sold.

Ecosave (ASX:ECV) - $1.39
Lumpy. From an outsider it looks as though there is a possibility of missing the bullish prospectus forecasts. Have since decided to watch from the sidelines.

Disclosure: At the time of publishing, I own shares in CCV and CCP.

Empired Ltd (ASX:EPD)

The IT consulting landscape in Australia is changing. It's probably a combination of an in-sourcing trend, cuts in government spending, a reduction of non-core customisations/development work (eg. intranets) and a shift to cloud services. Consulting firms that have been previous star performers, such as DWS (ASX:DWS), Oakton (ASX:OKN), SMS (ASX:SMX) and ASG Group (ASX:ASZ) have seen growth stall.

But with change comes opportunities, and one company that is doing well in this challenging environment is WA based Empired Ltd (ASX:EPD). They’re a company with the usual array of enterprise applications, managed services and IT consulting. What stands out for me is the company’s sales momentum. Having secured the services of key ASG Group personnel around this time last year, Empired has been winning contracts hand over fist.

Looking forward to the half yearly results in a few week’s time.

RXP Services Limited (ASX:RXP) is also another momentum building small-cap IT company that may be worth the look. Though its acquisition heavy strategy may be off-putting for some.

EPD closed today at an all-time high of $0.46.

Disclosure: At the time of publishing, I own shares in EPD.

Ecosave Holdings (ASX:ECV) IPO

According to the Australian Bureau of Statistics, energy costs for manufacturing and households have increased by 61% and 72% respectively since 2007, outstripping inflation by nearly 5 fold. This is mainly due to an increase in network costs and to a lesser extent the carbon tax. With the escalating costs of energy, businesses are putting increased emphasis on energy costs. Companies that assist in this area such as Energy Action (ASX:EAX) has benefited with its share price more than tripling since listing a little over a year ago.

Ecosave Holdings (ASX:ECV) is a company that help reduce the energy consumption, and consequently the energy costs, of large corporates and businesses. The process begins with a review of the client's energy consumption, then a proposal is put together and upon execution Ecosave will order the required equipment and arrange installation. The energy savings outlined in the proposal are guaranteed and backed with an Energy Performance Contact (EPC). In many cases these projects have a short payback period making them "no brainers" for cost conscience businesses.

ECV is scheduled to list on the ASX on Tuesday 15th January at 11am. They've successfully raised the maximum target of $5m and will list at $1.00 with a market cap of $25.7m. The listing price will put the shares at 8.5x earnings against the FY13 NPAT guidance excluding listing costs. raised money will go towards working capital. According to the CEO, the company has been unable to keep up with demand in recent years, and the additional cash will help with the expansion of the business through additional hires. You can catch an interview with the CEO by Sky Business News' Switzer below.

[youtube http://youtube.com/w/?v=4ctCLJgbfkc]

While the Ecosave is not as easily scalable, won't have has as high ROE or have as much recurring revenue as a company many will compare it to in Energy Action (ASX:EAX) - it is a company that is well positioned in a rapidly growing sector. You get the feeling that the company is only just beginning to click into gear and this IPO with the raised funds will provide a significant boost into its next phase. It's also well priced with management keeping a majority stake. Looking forward to the listing on Tuesday!

Disclosure: I've been allocated stock in the IPO.

Update on three "poverty" companies

Credit Corp Group (ASX:CCP)
The AGM came and went. I was expecting a profit upgrade, but it didn't eventuate. However the guidance for PDL purchases in FY13 was upgraded to $70m - $90m (previously $50m - $70m). While conditions are tough with PDL prices at elevated levels, the collections run rate for the the first 4 months of the financial year is at record levels. And the US debt collection business and consumer lending business are due to contribute earnings in FY14. Though still one of my largest holdings, I've since sold a portion hoping to get back in at a lower price - an opportunity that perhaps already came and went...

After the market close on Friday, a time traditionally for bad news, the company again updated FY13 PDL purchasing by $35m to the range of $105m - $130m as well as a once-off $2m NPAT increase. Again upside surprise and along with the impeding profitability of the US and consumer operations, FY14-15 are now looking increasingly strong. You can do much worse than buying stock in a company with good ROE, minimal debt, highly cashflow positive and with a history of upside surprise.

CCP is current trading at $8.10.

Cash Converters Limited (ASX:CCV)

The 20/4 payday loan bill has passed and will take affect in July 2013. The company states that this will have minimal profit impact and "more than offset by volume growth". With this large distraction behind them, management can continue focusing on growing the company.

The company is establishing new corporate stores and expanding the personal loans business with haste. The growth in the UK and margin improvements have happening so quickly that it may have taken some by surprise. Outlook looks strong. With the recent capital raising at 85c, the kitty is flush with funds for continued expansion.

CCV is current trading at $1.125.

Thorn Group (ASX:TGA)
Half yearly report was out late November for the 6 months ending 30th September. All divisions growing well but a once off GST expense pushed NPAT down slightly past a flat result.

The rental business has reached maturity and will be stagnant into the foreseeable future. Furniture is growing strongly but is largely offset by the falls in computing and TVs. NCML (debt collections), was a bad acquisition no matter how you look at it, and one feels management would just be happy managing profitability going forward. Cashfirst (personal loans) and especially Thorn Equipment Finance (TEF) are drivers for the future and growing rapidly. As stated a few times in the half yearly presentation, its transformation into a financial services company will see management taking on more balance sheet leverage.

Thorn Group is now reasonably priced. As I see Credit Corp and Cash Converters to be better plays, I've since sold my holding in TGA.

TGA is currently trading at $1.99 - went ex-div on Thursday just past.

Disclosure: At the time of publishing, I own shares in CCP and CCV.

Revisited: Battle of the debt collectors

A year has gone by since I last did a peer comparison between Credit Corp Group (ASX:CCP) and Collection House Limited (ASX:CLH) - go read it if interested, much of it remains relevant today. The two companies have had share price appreciation of over 40% since, so certainly very happy shareholders from both camps.

There are some key differences in important fundamental indicators such as cashflow, debt levels and return on equity. But what I wanted to highlight today is how Purchased Debt Ledgers (PDLs) values differ between the two companies' balance sheets. These are debt collection companies - purchasing debt ledgers and writing them off (amortise) as debt is recovered is a big part of what they do. How they value and amortise these assets have a large bearing on reported profits.

Here are some figures and derived ratios from the FY12 report of both companies:

Collection House Limited

PDL collections: $78.04m to $88.73m (+13.69% year-on-year)
PDL amortisation: $33.07m $37.34m (+12.91%)
PDL purchasing: $49.00m to $61.00m (+24.49%)
Average PDL carry value: $154.07m to $173.34m (+12.50%)
Commission collections: $31.86m to $37.43m (+17.48%)
NPAT: $10.13m to $12.68m (+25.35%)

PDL Amortisation : PDL Collections from 0.4238 to 0.4209 (-0.68%)
PDL Collections : PDL Carry Value from 0.5065 to 0.5119 (+1.05%)
PDL Amortisation : PDL Carry Value from 0.2147 to 0.2154 (+0.36%)

Credit Corp Group

PDL collections: $205.29m to $230.40m (+12.23%)
PDL amortisation: $93.13m to $108.40 (+16.40%)
PDL purchasing: $92.60m to $91.50m (-1.19%)
Average PDL carry value: $147.21m to $137.60 (-6.53%)
Commission collections: nil
NPAT: $21.02m to $26.59m (+26.42%)

PDL Amortisation : PDL Collections from 0.45 to 0.47 (+3.71%)
PDL Collections : PDL Carry Value from 1.39 to 1.67 (+20.08%)
PDL Amortisation : PDL Carry Value from 0.63 to 0.79 (+24.54%)

Two things I've noticed:

  1. CLH have maintained PDL ratios while CCP have tightened further.
  2. There remains a large discrepancy between the two with ratios involving PDL carry values.

I'm of the opinion that Credit Corp has been sandbagging the bottom line over the last couple of years and even more so this year. By writing down the PDL carry value more aggressively, the company is essentially "storing" profits away. This may allow the company to continue to report reasonable profit growth over the next few years even while the Australian debt market is stagnating and overseas operations yet to make a positive contribution.

Interesting thought exercise. Question: How would you match the above PDL ratios between the two companies? Answer: By re-valuing the PDL carry value on the balance sheet. For CLH to match CCP's ratios they'll have to write down $120m from PDL assets - $185m to $65m. Likewise for CCP to match CLH's ratios, a $300m appreciation of PDL assets is required, taking it from $130m to $430m! Interesting isn't it? That's as much as I'm going to say.

Credit Corp's annual general meeting is on 8th November. The company has a history of announcing upward profit revisions during this event in prior years, so something to keep an eye on for interested parties.

Current Prices - CCP: $6.20, CLH: $1.02

Disclosure: At the time of publishing, I own shares in CCP.

Brief thoughts on a few FY12 results

Supply Network Limited (ASX:SNL)

A strong result was posted with revenue and profit up 20.3% and 57.8% respective. NPAT coming in at $3.95m or 11.58cps and the annual dividend is up 40% to 7cps. As mentioned previously, the major strength for this truck and bus parts company is its management. The ability to plan and execute medium to long term strategies and deliver for shareholders. Management has once again delivered in spades.

A new three year business plan has been put forward targeting compound revenue growth of 10% per year (i.e. $60m to $80m) and a minimum 10% EBIT margin by year 3 (i.e. EBIT from $6m today to $8m+ in year 3). However this strategy will require significant investment and as a result EBIT is expected to remain flat in FY13.

While this company has been an excellent performer in recent years, I do need to remind myself that its business is cyclical with ties to the mining-boom. With a P/E of around 10 and flat earnings forecast for the current year, perhaps it's not a bad time to put the cue back in the rack on this one.

SNL is currently trading at $1.24

Structural Systems Limited (ASX:STS)

The company had revenue up 18% to $280m and net profit up 79% to $8m or 12.5cps. While the numbers appear good, it was an ordinary result. If one normalised the NPAT figures by excluding the losses incurred from discontinued operations, earnings only grew by 3% year-on-year. This while the concreting division turned around a $6.4m loss in FY11 to past break-even this year.

It's mining services division (ROCK), what used to be the jewel in the crown for this company, is putting a dampener on profits. ROCK is at the very pointy end of the mining boom by being in the business of drilling. With the current cycle having already seemingly peaked, greenfield projects are being pulled and ROCK is seeing under utilisation of its drilling rigs.

Although with a P/E of 6, it's cheap and pays a good 6.75% fully franked dividend - there's a glut of cheap construction and mining services companies on the ASX at present. Whether one would want to dip into these is another matter, but you'd say Structural Systems would have a hard time in making it onto the shortlist.

STS is current trading at $0.745

Delta SBD (ASX:DSB)

All things considering, underground coal mining services company Delta SBD did pretty well for the year posting 43% increase in revenue and 20% increase in NPAT (normalised with 30% tax: $5.61m or 11.8cps). It appears to be a year of keeping on - incrementally winning more work and delivering on those contracts.

The outlook is positive and management is expecting further growth in the current year. With FY13's portion of the order book already exceeding FY12's revenues and margins expecting to revert back to FY11 levels, they should have a good year. Of course the macro environment is all important here. Should coal prices start following iron ore prices off a cliff, and coal mines start shutting down - not even a sizable order book will halt a landslide.

DSB is currently trading at $0.80

Disclosure: At the time of publishing, I own shares in DSB and STS although I have reduced holdings in the latter. I no longer own shares in SNL.