Category: Small Cap

Companies that are listed on a stock exchange like the ASX can be categorized according to their size, which is most frequently measured by market capitalization, or market cap. The S&P/ASX Small Ordinaries index represents ‘small caps’, those members of the S&P/ASX 300 Index that sit outside the S&P/ASX 100 index. It is a benchmark for small cap Australian shares.

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Shares Small Cap

Oshkosh to Focus on Driving Product Innovation and Aftermarket Offering

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy and Outlook

It is alleged, Oshkosh will continue to be a leading player across its end markets. The company’s enviable competitive positioning is underpinned by its ability to produce strong performing products that exhibit high durability. Remarkably, Oshkosh has been able to replicate its brand strength in unrelated end markets, such as aerial lifts and commercial vehicles (military, fire, and emergency). Despite having very few synergies between its businesses, Oshkosh has been adept at implementing its technology across vehicle platforms. 

Going forward, it is foreseen the company’s strategy will largely be focused on driving product innovation and improving its aftermarket offering. In defense, Oshkosh has proven that it can develop innovative products for military customers. The joint light tactical vehicle, or JLTV, program is a prime example of its strength in the segment, which is essentially the replacement to the Humvee. Research and development investments allowed the company to win a lucrative contract from the U.S. Department of Defense in 2015. The contract is expected to be up for a recompete in late 2022, upon which the U.S. DOD will then reconsider alternatives. It is held, Oshkosh will win an extension given its strong product capabilities and performance. In addition, it is likely, the company is focused on growing its aftermarket business, which will help improve the profitability of its largely cyclical businesses. 

Finally, the company has exposure to end markets with near-term, attractive tailwinds. In access equipment, the recently passed infrastructure legislation will create demand for its aerial equipment over the medium term. Many of its customers are construction companies, which are direct beneficiaries of increased infrastructure spending. It is also understood, Oshkosh’s aerial equipment benefits from a replacement cycle. Rental customers typically refresh their fleet every 7-8 years, setting up strong revenue growth in the near term. It is regarded, the company’s emergency and commercial vehicle businesses will benefit from the replacement cycle. In defense, it is projected the JLTV program to drive steady sales growth, as military customers ramp up their vehicle fleet.

Financial Strength

Oshkosh maintains a sound balance sheet. Total debt at the end of 2021 stood at $819 million, which is roughly where the company’s debt balance has been over the past decade. It is unforeseen for Oshkosh to increase its debt levels, as management looks to be set on keeping its net leverage ratio under 2 times for the foreseeable future. It is often seen net leverage ratios spike when companies make large acquisitions, but in Oshkosh’s case, management will likely pursue small tuck-in deals. This will allow the company to expand its product capabilities, without stressing its balance sheet. Oshkosh’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and returns cash to shareholders. It is believed Oshkosh can generate solid free cash flow throughout the economic cycle. By midcycle year, it is projected the company to generate over $500 million in free cash flow, supporting its ability to return free cash flow to shareholders. Oshkosh’s capital allocation strategy includes both dividends and buybacks. The company began paying out a dividend in 2014 and has steadily grown it over time. With respect to repurchases, Oshkosh has returned $1.7 billion to shareholders since 2010. Looking ahead, it is anticipated more of the same from management, in addition to a greater focus on tuck-in deals to acquire new product capabilities. In terms of liquidity, it is held, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of year-end 2021 stood at just under $1 billion on its balance sheet. It is also found comfort in Oshkosh’s ability to tap into available lines of credit to meet any short-term needs. The company has access to $833 million in credit facilities. It is regarded, Oshkosh maintains a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

 Bulls Say’s

  • Increased infrastructure spending in the U.S. and emerging markets could result in more aerial equipment purchases, driving higher revenue growth for Oshkosh. 
  • The U.S. DOD elects to stay with Oshkosh’s JLTV program following the recompete process in late 2022, providing strong revenue visibility through 2030. 
  • The average fleet age of Oshkosh’s emergency and commercial vehicles could lead customers to refresh their fleet with newer models, boosting Oshkosh’s sales.

Company Profile 

Oshkosh is the top producer of access equipment, specialty vehicles, and military trucks. It serves diverse end markets, where it is typically the market share leader in North America, or, in the case of JLG aerial work platforms, a global leader. After winning the contract to make the Humvee replacement, the JLTV in 2015, Oshkosh became the largest supplier of light defense trucks to the U.S. military. The company reports four segments—access equipment (42% of revenue), defense (32%), fire & emergency (15%), commercial (12%)—and it generated $7.9 billion in revenue in 2021. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

oOh!media entire business model hinges on its portfolio of leasehold concessions

Business Strategy and Outlook

OOh!media is strongly-positioned to benefit from the positive dynamics driving the Australian (and New Zealand) outdoor advertising industry. This has seen outdoor’s share of the total advertising pie lift from 3.5% in 2009 to 5.7% prior to COVID-19. A key Achilles heel for the outdoor advertising industry was the lack of reliable audience measurement. However, with the 2010 launch of measurement of Outdoor Visibility and Exposure, or MOVE, the medium now has greater legitimacy and offers a more robust way for marketers to assess the return on money allocated to outdoor advertising. Converting a traditional outdoor advertising site to a digital one is attractive to marketers as it allows creative flexibility, immediacy and premium presentation. Digital conversion also benefits the outdoor advertising operator as it attracts new clients, allows greater inventory utilisation and offers yield management flexibility. 

Financial Strength

oOh!media’s 2021 full-year result release in February with our unchanged AUD 1.40 fair value estimate 7% below the current stock price. This is despite a 24% stock price fall from the recent high on Oct. 20, 2021, compared with an 8% fall for the S&P/ASX 200 index over the same period. Radio finished the quarter up just 10%, after increasing 6% and 14% in October and November, respectively. Even digital advertising growth is likely to have slowed to mid-teens level in the December quarter−solid but down from circa 40% growth in the first three quarters of 2021. It is forecasted that no-moat rated oOh!media to report a 17% revenue increase in 2021 to AUD 499 million, implying second-half growth of 12% to AUD 247 million. This is significantly down from the 23% recorded in the first half, and market growth of 51% in the third quarter

At the end of June 2021, net debt/EBITDA was 1.1 times, pre AASB 16. It is forecast that this to fall to 1.0 by the end of 2021, within the renegotiated 3.25 covenant limit. The current dividend payout policy is reasonably conservative at between 40% and 60% of net profits after tax but before amortisation acquired intangibles, allowing further investment in inventory digitisation. However, due to the uncertain impact of the coronavirus outbreak, there were no dividends in 2020 and resumption of just AUD 0.04 in 2022.

Bulls Say’s 

  • Outdoor advertising is a growth industry, aided by structural tailwinds such as increasing audience, more reliable measurement and conversion to digital. OOh! media has the operating expertise and the strategic nous to exploit these dynamics. 
  • Like all players in the outdoor advertising space, oOh! media’s business hinges on its portfolio of leasehold contracts with owners of sites and properties, exposing the group to periodic renewal risks. 
  • The outdoor advertising industry is both highly competitive and highly leveraged to economic conditions, marketing budgets, and consumer confidence.

Company Profile 

OOh!media operates a network of outdoor advertising sites with a commanding share of the Australian market of around 30%, and has also presence in New Zealand. It boasts a diverse portfolio of locations to service the needs of outdoor advertisers, and is particularly strong in the roadside billboard and retail (such as shopping malls) segments. OOh!media offers these services by entering into lease arrangements with owners of outdoor sites–effectively an intermediary allowing site owners to monetise their visible space in high-traffic areas. In late September 2018, the group completed the acquisition of Adshel from HT&E for AUD 570 million, a deal that cements its competitive position in the face of industry consolidation. 

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Amidst Canadian Cannabis competition, Tilray seen to surpass

Business Strategy and Outlook

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD products in the U.S. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and renaming itself Tilray in 2021.

Canada legalized recreational cannabis in October 2018. Since then, recreational sales have come to represent an increasingly larger portion of sales for producers. Historically, legacy Aphria focused initially on flower and vape before expanding into edibles. In contrast, legacy Tilray focused on an asset-light, consumer-focused business model. Although the two strategies complement each other well, Tilray faces stiff competition to develop consumer brands that can lead to meaningful pricing power. 

Legacy Aphria had an extensive international distribution business, which generated the majority of its net revenue, a far larger portion than many of its Canadian cannabis peers. Legacy Tilray had also entered the global medical market. With both companies’ international capabilities intact, Tilray looks well positioned. The global market looks lucrative given higher realized prices and growing acceptance of the medical benefits of cannabis. Exporters must pass strict regulations to enter markets, which protects early entrants. It is forecasted roughly 15% average annual growth through 2030 for the global medicinal market excluding Canada and the U.S. 

In 2020, legacy Aphria acquired SweetWater, a U.S. craft brewery. Legacy Tilray previously acquired Manitoba Harvest to distribute CBD products in the U.S. It finally secured a toehold into U.S. THC when it acquired some of MedMen’s outstanding convertible notes. Upon U.S. federal legalization, Tilray would own 21% of the U.S. multistate operator. Furthermore, Tilray paid a great price while also getting downside protection as a debtholder. 

It is contemplated the U.S. offers the fastest growth of any market globally. However, the regulatory environment is murky with individual states legalizing cannabis while it remains illegal federally. It is supposed federal law will eventually be changed to allow states to choose the legality of cannabis within their borders.

Financial Strength

At the end of its second fiscal quarter 2022, Tilray had about $747 million in total debt, excluding lease liabilities. This compares to market capitalization of about $3 billion.  In addition, Tilray had about $332 million in cash, which will allow it to fund future operations and investments. Management has been deliberate with its SG&A spending given the slow rollouts and regulatory challenges the Canadian market has faced. Legacy Aphria was the first major Canadian producer to reach positive EBITDA, with legacy Tilray reaching positive EBITDA in the quarter immediately preceding its acquisition. However, the combined company continues to generate negative free cash flow to the firm, which pressures its financial health. With most of its development costs completed, it is alleged Tilray will have moderate capital needs in the coming years. As such, it is implied debt/adjusted EBITDA to decline. It is reflected Tilray is unlikely to require significant raises of outside capital. In September 2021, the company received shareholder approval for increasing its authorized shares in order to rely on equity for future acquisitions. This bodes well for keeping its financial health strong.

Bulls Say’s

  • Legacy Aphria’s acquisition of Legacy Tilray created a giant with leading Canadian market share, expanded international capabilities, and U.S. CBD and beer operations. 
  • Tilray’s management focuses on strategic SG&A spending and running a lean business model, benefiting its financial health in the early growth stage industry. 
  • Tilray management’s careful approach to expansion has allowed it to reach profitability faster than any of its Canadian peers.

Company Profile 

Tilray is a Canadian producer that cultivates and sells medical and recreational cannabis. In 2021, legacy Aphria acquired legacy Tilray in a reverse merger and renamed itself Tilray. The bulk of its sales are in Canada and in the international medical cannabis export market. U.S. exposure consists of CBD products through Manitoba Harvest and beer through SweetWater.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Platinum Shares at discount as investors overlook its good traits

Business Strategy and Outlook

Platinum is an active manager founded in 1994, specialising in global equities. It concentrates on identifying unfashionable stocks with latent business and growth prospects. Platinum is not focused on asset allocation and pays little attention to its benchmarks. As a result, its portfolios often look little like–and returns often don’t resemble–their indexes. The firm manages about AUD 22 billion in FUM, and is one of the best known fund managers in Australia. 

Platinum eschews empire-building–such as special discounting to attract FUM, acquisitions or product proliferation–and prefers to spend most of its time managing money. Management is largely focused on minor product enhancements: clients can invest via unlisted funds, active ETFs, listed investment companies, mFunds, or investment bonds. Clients can also invest into performance fee class of funds. Moreover, the firm is making an effort to grow its client engagement and business development initiatives.

Financial Strength

Our fair value estimated to AUD 3.90 per share from AUD 4.25 after increasing the expected magnitude, and prolonging the duration, of net outflows to fiscal 2024. Platinum is in strong financial health, supported by a conservative balance sheet with no debt and a healthy cash balance. Platinum has maintained a very high dividend payout ratio since listing in 2007. An absence of debt, consistent earnings, strong cash flow conversion, and a durable balance sheet support the high dividend payout ratio target of close to 100%. High dividend payouts are a feature of the capital-light asset-management sector, delivering attractive shareholder returns while maintaining comfortable balance sheet settings.

Bulls Say’s 

  • Platinum is well known in Australian funds management. The firm may be able to take advantage of retail investors increasing allocation to global equities, if it improves medium-term performance. 
  • The long-term outlook is positive due to likely mandated increases in compulsory superannuation. However, fund underperformance, increasing competition and a trend to lower-cost passive investments are risks. 
  • Capital demands low, and free cash flow generation is strong. This supports a high dividend payout ratio and offers investors the opportunity of both growth and income returns.

Company Profile 

Platinum Asset Management is an Australian-based niche fund manager with a specialty in international equities founded in 1994. It offers region and industry-specific funds in addition to global portfolios. There is flexibility in the investment strategies at Platinum, with funds having the option to engage in short-selling, taking positions in foreign exchange markets, and derivative-based activities to manage risk and aid performance.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Bega Cheese economic moat required to sustainably generate economic profits

Business Strategy and Outlook

Bega has transformed from a dairy processor with a focus on business to business operations to a branded consumer food company with a more diversified earnings base and less exposure to volatile milk prices. While dairy will remain a key category for Bega Cheese, the focus will be on high value products such as cream cheese and infant formula. In January 2021, Bega finalised the acquisition of Lion Dairy and Drinks from Kirin Group for AUD 534 million. As part of the acquisition, Bega acquired leading brands in milk-based beverages and yoghurt, white milk, and plant-based beverages, in addition to 13 manufacturing sites and Australia’s largest national cold chain distribution network. 

Revenue from the branded segment, which includes spreads, grocery products and Lion’s Dairy and Drinks portfolio, to expand at a CAGR of 18% to fiscal 2026, underpinned by new product innovation and bolt-on acquisitions. Bega Cheese has made limited investment in its brands, particularly in Australia where Fonterra is the licensee of the Bega brand, however since acquiring the spreads and grocery business in 2018, marketing spend as proportion of revenue has increased to 3% from 1% and it is anticipated to remain the higher level.

Financial Strength

Our fair value estimate is AUD 5.20 per share. Bega’s balance sheet is sound. Leverage, measured as net debt/EBITDA improved to 2.3 at June 30, 2021, from 2.4 at the prior period and comfortably below covenants. This is a pleasing position post the major acquisition of Lion Dairy and Drinks in fiscal 2021 which was funded through AUD 267 million of new and extended debt facilities and a AUD 401 million equity raising. It is expected that further deleveraging in coming years as acquisition synergies are achieved, earnings improve and noncore assets are divested, with net debt/EBITDA falling below 2.0 by 2023. Bega has the capacity to pursue smaller acquisitions while maintaining a dividend payout ratio of 50% normalised EPS. The group’s fiscal 2022 EBITDA guidance of AUD 195 million to AUD 215 million has necessitated an 11% downgrade to our fiscal 2022 EBITDA forecast to AUD 215 million.

Bulls Say’s 

  • Bega is shifting investment to the spreads and grocery business, which we view as less commoditised and higher margin than dairy, with strong niche positions in Vegemite and peanut butter 
  • External factors outside of Bega’s control, such as the weather, can adversely impact supply and demand dynamics. This can impact commodity prices, inputs costs and the firm’s supply chain and lead to volatile earnings 
  • Changing consumer trends toward dairy-free and vegan diets could lead to declines in per-capita dairy and cheese consumption, weighing on the majority of Bega’s earnings

Company Profile 

Bega Cheese is an Australian based dairy processor and food manufacturer of well-known brands including Bega Cheese and Vegemite. Bega Cheese operates two segments: the branded segment which produces consumer packaged goods primarily sold through the supermarket and foodservice channels and the bulk segment which produces commodity dairy ingredients primarily sold through the business-to-business channel.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Bank of Queensland brings forward cost savings to offset margin pressure

Business Strategy and Outlook

Bank of Queensland is one of Australia’s top-10 largest banks, but is considerably smaller than the four major Australian banks. Preceding the global financial crisis, the bank grew aggressively via acquisitions and the rollout of its distinctive owner-manager branch franchise model. However, expanding the branch network and diversifying away from traditional residential lending came at a cost, with additional equity required to fund growth, significantly increased bad debts, and multiple banking systems, which resulted in deteriorating cost/income and returns on equity. 

The aim is to ensure the bank is more competitive, particularly in the home loan market, but this investment giving the bank any competitive edge. At best, it can narrow the gap to peers, but with the big investment budgets of the majors, those innovations are likely to be hard to keep up with. Bank of Queensland has branches owned by branch managers and corporate branches. The model has the potential for the bank to outperform its peers on customer service, with owner branch managers building relationships with local customers, and niche business lending specialists with an understanding of borrower needs and industry.

Financial Strength

The capital structure and balance sheet provide comfort that the bank can manage a large increase in loan losses associated with COVID-19, but it remains the greatest threat to the bank’s capital position. Common equity Tier 1 capital was 9.8% as at August 2021, well above APRA’s 8.5% minimum capital benchmark for standardised banks. It is expected that the bank will pay out around 60% to 65% of earnings given the credit growth outlook, elevated investment in the banking platform, and integration of ME Bank. Our fair value estimate for no-moat rated Bank of Queensland is unchanged at AUD 8.50.

With the elevated savings rate in 2020, the bank has been able to increase its share of funding from customer deposits to 70% as at Aug. 31, 2021, up from pre-COVID-19 levels of 64% as at Aug. 31, 2019. In March 2020 the RBA announced the Term Funding Facility, or TFF, which provided three-year funding at 0.25%. From Nov. 4, 2020, new drawdowns would pay 0.1%. The initial funding available via the TFF was set at 3% of the bank’s outstanding loan balance, with an additional 2% of balances announced in November.

Bulls Say’s

  • The appointment of new senior executives and a clean out of the troubled commercial loan portfolio has ensured a more risk-conscious culture. 
  • Substantial capital raisings bolstered the balance sheet, ensuring that the bank satisfies capital rules and can still fund investments in technology and expand loan balances. 
  • Productivity improvements not only lead to improved operating margins, but a more streamlined loan approval process lifts mortgage growth rates. 
  • Management extract greater cost and revenue synergies from the acquisition of ME Bank.

Company Profile 

Bank of Queensland, or BOQ, is an Australia-based bank offering home loans, personal finance, and commercial loans. BOQ operates both owner-managed and corporate branches, and is the owner of Virgin Money Australia. Its BOQ business includes the BOQ branded commercial lending activity, BOQ Finance and BOQ Specialist businesses. The division provides tailored business banking solutions including commercial lending, equipment finance and leasing, cashflow finance, foreign exchange, interest rate hedging, transaction banking, and deposit solutions for commercial customers

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Australian Small Caps Sectors Small Cap

Nufarm Ltd board declared an unfranked dividend of 4cps

Investment Thesis

  • Currents earnings headwinds are seasonal rather than structural. 
  • Recent acquisitions of European products provide growth options.
  • Ongoing focus on operational efficiency to support earnings.  
  • Undemanding valuation relative to domestic chemicals’ peer group and international players. 
  • Launch of Omega-3 canola business. 
  • Sale of its South American crop protection and seed treatment businesses to simplify business model and reduce working capital volatility.  
  • Sector consolidation could see NUF potentially engaged in corporate activity. 

Key Risks 

  • Integration risk associated with recent acquisitions.
  • Adverse movements in commodities prices. 
  • Unfavorable seasonal impacts. 
  • Competitive pressures.
  • Adverse currency movements. 
  • Regulatory / litigation risks. 
  • South America transaction fails to proceed. 

FY21 Results Key Highlights

  • Revenues of $3.2bn, was up +10%.
  • Underlying EBITDA of $370m, was up +51%, driven by improved seasonal conditions, soft commodity prices and tight supply. NUF saw growth in all business segments and especially strong demand for NUF’s crop protection and seeds products. Segment earnings breakdown are as follows: APAC AU$112m, up +47%; North America US$79m, up +25%; Europe EUR€108m, up +80%, and Seed Technologies AU$46m, up 57%.
  • Underlying NPAT was $61m versus pro-forma loss of -$73m in FY20.
  • Management highlighted NUF’s performance improvement program achieved $20m in FY21, and $25m since inception.
  • FY21 saw NUF see significantly improve net working capital and cash generation, with $257m in free cash flow at 30 September 2021 (versus -$151m in FY20).
  • NUF’s balance sheet is now in a much stronger position, with leverage(net debt/EBITDA) to 0.9x from 2.5x in FY20.
  • The Board Declared an Unfranked dividend of 4cps (versus zero payment in FY20.)

Company Profile 

Nufarm Ltd (NUF) is one of the world’s leading crop protection and specialist seeds companies. The Company produces products to assist farmers in protecting their crops against damage caused by weeds, pests and disease. The Company has manufacturing and marketing operations in Australia, New Zealand, Asia, Europe and the Americas.  

(Source: BanyanTree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Nufarm’s Fiscal 2022 Cash Conversion and working capital moves favourable

Business Strategy and Outlook

Nufarm is a major producer of crop-protection products including herbicides, fungicides, and pesticides, selling into all major world markets. The company is leveraged to growing demand for crops for biofuels, and food from rapidly industrialising markets such as China and India. Growth should come from astute brand and offshore business investments and from a customer-service-focused strategy. However, the global crop-protection markets are competitive and earnings are cyclical, given a reliance on seasonal conditions. Sumitomo Chemical’s 16% investment in Nufarm endorses the quality of its global distribution. Collaboration broadens product portfolios and adds distribution in Asia.

Nufarm has a growing presence in North America and Europe. Sound sales momentum has been evident in North America and Europe. Several Chinese companies have previously expressed interest in acquiring Nufarm, but withdrew either because of too high a price demanded by the board, or because of reduced availability of debt. In 2010, Japanese company Sumitomo Chemical bought 20% of Nufarm, subsequently increasing its stake to 23% before diluting to 16%. The resultant collaboration should boost the performance of both companies, given little product portfolio overlap.

Financial Strength

Nufarm’s balance sheet is in great shape. In early April 2020, the company received AUD 1.2 billion net sale proceeds from major shareholder Sumitomo, for the sale of its South American crop protection and seed treatment operations in Brazil, Argentina, Colombia, and Chile. This significantly bolstered the finances at a very fortuitous time, coming mid coronavirus. Prior to this in January 2020, group net debt had stood at a whopping AUD 1.6 billion. Nufarm’s under-leveraged balance sheet remains a strength. Fiscal 2021 net operating cash flow rebounded strongly from negative AUD 398 million in the pcp to positive AUD 370 million. This reflects a focus on working capital management. It sees net debt down 40% to a modest AUD 173 million, leverage (ND/(ND+E)) of just 8% and net debt/EBITDA very comfortable at 0.5. Net working capital significantly improved post sale of the Latin American business and remains a focus with improved debtor collections, reduced inventory and foreign exchange translation.

Our AUD 7.00 fair value for no-moat crop protection company Nufarm. Underlying fiscal 2021 NPAT improved to positive AUD 61 million against an underlying loss of AUD 67 million in the pcp. NPAT in the fiscal second half was negligible at just AUD 0.7 million. On a full fiscal year basis, APAC revenue enjoyed a sharp turnaround, up 52% to AUD 858 million and segment EBITDA margin nearly doubled to 12.7%. Nufarm shares plunged 8.5% on the day of profit release, a strange response given an all-important strong cash flow performance. The fall may have been in reaction to a decline in salmon demand impacting sales of Omega-3 canola. But there is a long way to run on Omega-3, still in its infancy, and we are unconcerned.

Bulls Say’s

  • Nufarm benefits from potential strength in soft commodities markets. 
  • Nufarm has well-established distribution platforms in most major global agricultural markets. 
  • Product and geographic diversification helps reduce earnings volatility.

Company Profile 

Nufarm Limited is a global crop-protection company that develops, manufactures, and sells a range of crop-protection products, including herbicides, insecticides, and fungicides. Nufarm sells its products in most of the world’s major agricultural regions, and operates primarily in the off-patent segment of the crop-protection market. Nufarm operates along two business lines: crop protection and seed technologies.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Shares Small Cap

Huon reported results as expected; however earnings dented due to impacts of Covid

Investment Thesis:

  • HUO takeover price is $3.85. The Board have announced it believes accepting the offer is in the best interest of shareholders, absent any superior offer or independent expert advice.
  • Founding/major shareholders, Frances and Peter Bender, who hold ~53% of total shares, intend on voting in favour.
  • Growing consumer preference for natural and organic products, both in Australia and abroad, may see significant increase in salmon sales and therefore higher share prices. 
  • Number two player in the domestic market. 
  • With rational behaviour around pricing, the concentrated industry could benefit. 
  • Supportive salmon prices given disruption to global salmon supply. 
  • High barriers to entry (desired temperatures and regulatory licenses difficult to obtain). 
  • Given the complex nature of salmon farming HUO is unlikely to have its dominant position as an Australian salmon farmer ever seriously threatened.

Key Risks:

  • Takeover fails to proceed. 
  • Impact to production due to adverse weather conditions and diseases. 
  • Chemical coloring in salmon may lead to further negative publicity and undermine demand for salmon.
  • Cost pressures or cost blowout could deteriorate margins significantly given the large cost base relative to earnings (EBITDA). 
  • Irrational competitive behaviour (domestic and international markets). 
  • Negative media on the sustainability of the Tasmanian salmon industry.

Key highlights:

  • On an operating basis, EBITDA of $16.7m was in line with management guidance but declined -65% on pcp due to a -10% fall in the average price, made worst by an increase in production which caused a shift in the channel mix to spot export sales at materially increased freight costs.
  • NPAT decline of -$128.1m was a significant deterioration from $4.9m in the pcp.
  • Cash flow from operations was -$3.0m reflecting higher working capital requirements as freight costs doubled on pcp to $66m.
  • The two main contributors were the -12% fall in the average international salmon price in FY2021 compared to the previous year and the significant increase in freight charges due to limited access to international flights.
  • The impact of these were amplified by the commencement of Huon’s ramp up in production as part of its five-year strategy to expand capacity to meet future growth in domestic demand
  • The shut-down of international commercial flights was a major impediment to gaining access to the markets Huon needed to sell 44% of its FY2021 harvest.
  • HUON also announced on 6 August 2021, a takeover offer at $3.85 per share which is a +38% premium to the Huon share price of $2.79 on the prior trading day’s close.

Company Description: 

Huon Aquaculture (HUO) is a vertically integrated salmon producer in Australia. Its operations span all aspects of the supply chain, from hatcheries and marine farming to harvesting and processing, as well as sales and marketing. HUO’s marine farms are located in the cool, pristine waters of Tasmania, with the Company’s logistics infrastructure delivering salmon efficiently to the major fish markets around Australia. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Expert Insights Shares Small Cap

Rail Congestion a Headwind, but Robust Contract Pricing Driving Impressive EBIT Growth for Hub Group

In its flagship intermodal division, Hub contracts with the Class I railroads for the line-haul movement of its containers. It operates the second-largest fleet in the industry, with exclusive access to more than 30,000 containers, and enjoys an approximate 10% market share. By gross revenue, J.B. Hunt is the largest intermodal marketing company, followed by Hub and the intermodal divisions of Schneider National, XPO Logistics, and Knight Swift.

Hub has constructed intermodal and truck brokerage networks of sufficient scale to be attractive to customers (shippers) and suppliers, both of which benefit from using a larger intermediary. Sophisticated IT systems and market know-how enable customers to outsource intermodal shipping to an expert specialist, while Hub’s large volume of loads and significant control of containers make it an attractive customer to the Class I railroads. The company’s primary rail carriers are Norfolk Southern in the East and Union Pacific in the West.

Financial strength

Hub Group’s balance sheet is healthy, and the firm is not overly leveraged. At the end of 2020, Hub held a manageable amount of amount of debt, which is normally used to help finance equipment purchases as well as tuck-in acquisitions like the 2020 NonStopDelivery deal. Total debt came in near $270 million in 2020, including minimal capital lease obligations. Debt/EBITDA stood at a comfortable 1.1 times versus 1.0 times in 2019 and a five-year average near 1.4 times. The firm held roughly $125 million in cash at year-end 2020 versus $169 million in 2019. Historically, Hub’s model generated decent free cash flow in years when it wasn’t acquiring intermodal containers. Overall, free cash flow averaged 1.7% of gross revenue over the past five years, with capital expenditures approximating 3% of sales (3.2% in 2020). Capital expenditures will likely come in near 4% of sales in 2021 due in part to investment in additional intermodal containers to capitalize on growth opportunities.

Bulls Say’s

  • Spiking consumer goods spending and heavy retailer restocking are driving incredibly strong freight demand, tight trucking market capacity, and favorable pricing conditions for all of Hub’s operations in 2021.
  • Intermodal shipping enjoys positive long-term trends, particularly secular constraints on truckload capacity growth and shippers’ efforts to minimize transportation costs through mode conversions (truck to rail).
  • Intermodal market share in the Eastern U.S. still has runway for growth as rising rail service levels support incremental truck to rail conversion activity.

Company Profile 

Hub Group ranks among the largest asset-light providers of rail intermodal service. Following the August 2018 divestiture of logistics provider Mode, which was run separately, its core operating units are intermodal, which uses the Class I rail carriers for the underlying line-haul movement of containers (60% of sales); highway brokerage (12%); Unyson Logistics, which provides outsourced transportation management services (20%); and Hub Dedicated (8%), an asset-based full-truckload carrier.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.