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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Wesfarmers’ Offer for API Still Appears the Most Likely

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It then extended the brand to the Priceline Pharmacy franchise network as Australia prevents community pharmacies having corporate ownership. Priceline contributes around one quarter of API’s revenue but over 40% of gross profit. While the conversion of stores to include a pharmacy is beneficial for distribution volumes, these stores dilute margin due to more PBS sales, and consequently have contributed to a decline in operating margin since fiscal 2017. Offsetting this is often higher foot traffic and sales. Nonetheless, as guided by management, this conversion process has played out and we expect no margin drag going forward.

Priceline’s key growth strategies are increasing its contribution from online sales and leveraging its loyalty scheme, the Sister Club. However, we have concerns regarding these endeavours. Market statistics suggest the Australian health and beauty retail market is growing at a mid-single-digit pace, which provides an attractive opportunity for API at first blush.

Company’s Future Outlook

API is in a strong financial position with net debt/adjusted EBITDA of 0.2 times at fiscal 2020. We forecast the company to hold a net cash position through fiscal 2025 and comfortably afford a 70% dividend payout ratio and continue to expand its retail footprint. We project API to open roughly 10 net new Priceline stores and five net Clear Skincare clinics per year. We forecast a total of AUD 225 million in capital expenditures over the next five years, including AUD 50 million for a new distribution centre in New South Wales, and also factor in the final AUD 32.9 million payment for Clear Skincare still outstanding. Working capital management has improved over a number of years, effectively having the net investment in working capital to 4.4% of sales over the five years to fiscal 2020. We forecast investment to be roughly maintained at an average of 4.7% of sales.

Bulls Say’s

  • The Priceline and Clear Skincare offerings are relatively high-margin segments and pitched in the beauty and personal-care market which is growing at a mid-single-digit pace.
  • API’s Corporate Priceline stores offers higher margin and more product opportunity than the purely franchise business model of peers Sigma and EBOS.
  • Management has demonstrated that it is opportunistic and having deleveraged the balance sheet, is looking to invest for growth. Value-additive acquisitions could present upside to our fair value estimate.

Company Profile 

Australian Pharmaceutical Industries, or API, is a major Australian pharmaceutical wholesaler and distributor. In addition, it is the franchisor of the Priceline Pharmacy network and directly owns and operates stand-alone Priceline stores which sell personal care and beauty products. In an effort to diversify away from the highly regulated low growth and low margin pharma distribution business which contributes 74% of revenue, API is actively growing a consumer brands portfolio and also acquired Clear Skincare, a skin treatment chain. These two emerging businesses each contribute approximately 1% of revenue but are higher margin than the core distribution segment.

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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Praemium Ltd balance sheet remains strong with cash reserves of $26.7m

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Investment Thesis

  • Merger with powerwrap creates a much better capitalized and resourced competitor in the market, with significant opportunities for synergies.
  • Increase diversification via geography and product offering.
  • Increase competition amongst platform providers such as HUB24, Wealth O2, BT panorama, Netwealth, North Platform, etc.
  • Very attractive Australian industry dynamics – Australian superannuation assets expected to grow at 8.1% p.a to A$9.5 trillion by 2035.
  • Disruptive technology and hold a leading position to grow funds under advice via SMAs.
  • The fallout from the Royal Commission into Australian banking has led to increased inquiries for PPS’ product/services.
  • Growing and maturing SMSF market = more SMSF demand for tailored and specific solutions.
  • Both-on acquisitions to supplement organic growth.
  • Further consolidation in the sector could benefit PPS.

Key Risks

  • Execution risk – delivering on PPS’s strategy or acquisition.
  • Contract or key client loss.
  • Competitive platform/offering.
  • Associated risks in relation to system, technology and software.
  • Operational risks related to service levels and the potential for breaches.
  • Regulatory changes within the wealth management industry.
  • Increased competition from major banks and financial institutions.

FY21 Results Summary

  • Australian business segment delivered revenue growth of +37% over pcp to $53.1m, driven by Platform revenue increase of+73% to $36.5m with Powerwrap revenue of $16.3m amid strong underlying growth from record platform inflows and Portfolio services revenue increase of +6% to $16.1m with VMAAS revenue up +40% from continued portfolio on-boarding. EBITDA declined -2% to $19m, primarily due to the transition of the Powerwrap cost base and some cost expansion to support growth and service across sales, marketing and operations (EBITDA margins declined -14% to 36%), however, management forecast growth investments and scale benefits from Powerwrap synergies will drive improved earnings into FY22.
  • International net revenue (net of product commissions) increased +6% over pcp to $12.5m, driven by Platform revenue growth of +30% to $8.1m from record inflows driving International platform FUA to $5bn (up+ 55%), partially offset by declines in the Smartfund range of managed funds, with fund revenue down -47% to $1.5m. Expenses were up +2% to $16.4m from operational capability to support growth, partially offset by continued cost management. EBITDA loss declined -7% to $3.9m, comprising UK’s EBITDA loss of $1.4m (27% improvement), Asia’s EBITDA loss of $0.9m (1% increase) and the inclusion of Dubai’s cost centre of $1.6m (up 17%).

Company Profile 

Praemium Limited (PPS) is an Australian fintech company which provides portfolio administration, investment platforms and financial planning tools to the wealth management industry.

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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Super Retail’s attractive loyalty program with 8 million member

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Investment Thesis

  • Trading below our valuation and on attractive trading multiples and dividend yield. 
  • Strong tailwinds/fundamentals in SUL’s four core segment. For instance, sales for vehicle aftermarket continue to remain strong (with increase in secondhand vehicle sales (Supercheap); travelers seeking social distancing and hencemoving away from public transport (Supercheap); with Covid lockdown measures in forced, more people are spending their holidays domestically (BCF; macpac), utilising their vehicles (Supercheap); growing awareness of fit and healthy lifestyles (rebel). 
  • Solid capital position. 
  • Strong brands in BCF, macppac, rebel and Supercheap with solid industry positions in largely oligopolies and solid store network. 
  • Transitioning to an omni-channel business. Whilst previously the business has been modeled on like-to-like store numbers, management now thinks of business metrics based on club members and has been able to grow the active club membership much faster than store numbers (store numbers in last 5 years have grown +2% CAGR vs active club members at +10% CAGR), providing it with an opportunity to expand customer base and therefore revenue base without significant capex for investment in stores (most of the customers are omni channel). 
  • Management continues to push towards expanding its online sales (Covid-19 added to this tailwind), with online sales penetration of ~13-15% of total sales currently and expected to reach 20-25% over the next 5 years. 
  • Attractive loyalty members program, with over 8 million members.

Key Risks

  • Rising competitive pressures.des 
  • Any issues with supply chain,especially as a result of the impact of Covid-19 on logistics which affects earnings. 
  • Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures). 
  • Disappointing earnings update or failing to achieve growth rates expected by the market could see the stock price significantly re-rate lower.

FY21 Results Highlights

  • Total Group sales of $3.45bn, up +22% (Group like-for-like sales growth of +23%).Online sales of $415.6m, up +43% and nowaccounts for ~12% of total sales. On the impact of Covid -19 lockdowns, management noted its “omni-retail capability enabled it to pivot to online channels to meet consumer demand through both Click & Collect and home delivery”.
  • Segment EBIT of $476.8m was up +80%. 
  • Segment normalised PBT of $435.8m, up +108%.
  • Normalised NPAT up +107% to $306.8m. Basic EPS up +139% to 133.4cps.
  • The Board declared a fully franked final dividend of 55.0cps, bringing the full year dividend to 88.0cps, significantly higher than 19.5cps in FY20. Dividend equates to 65%, which is in line with SUL’s 65% payout ratio policy.
  • Management guided capex in FY22 of $125m to fund expanded store development and investment in omni and digital capability.

Company Profile 

Super Retail Group (SUL) is one of Australasia’s Top 10 retailers. SUL comprises four core segments. (1) BCF: Australia’s largest outdoor retailer focused on selling Boating, Camping and Fishing products. (2) macpac: retailer of apparel and equipment with their own designs focused on outdoor adventurers. (3) rebel: retailer of branded sporting and leisure goods and equipment for casual and serious fitness enthusiast. (4) Supercheap Auto: specialty retail business which specialises in automotive parts and accessories. 

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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Baby Bunting FY21 results show group revenue surged by 15.6%

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Investment Thesis

  • Mandatory product safety standards for baby goods in Australia limit supply sources and provide barriers to entry to international competitors.
  • BBN has the largest presence in Australia amongst specialty baby goods retailers.
  • Low risk that online sales threaten high service business model of brick-and- mortar stores to showcase goods and in-store advice.
  • Solid growth story via new store openings (targeting 100+ stores network).
  • Strong market shares (currently sits at 30% in a highly fragmented market).

Key Risks

  • Retail environment and general economic conditions in addressable markets may deteriorate.
  • Competition may intensify especially from online retailers such as Amazon, specialty retailers, department stores, and discounted department stores.
  • Customer buying habits/trends may change. Rapid changes in customer buying habits and preferences may make it difficult for the Company to keep up with and respond to customer demands.
  • Higher operating and occupancy costs. Any increase in operating costs especially labour costs will affect the Company’s profitability.
  • Poor inventory control and product sourcing may be disrupted.
  • Management performance risks such as poor execution of store rollout especially into ex-metro areas.

FY21 Results Highlights 

  • Sales of $468.4m were up +15.6%, with same-store comparable sales up +11.3%. Online sales grew by +54.2% and now make up 19.4% of total sales (vs 14.5% in pcp).
  • Gross profit of $173.7m was up +18.3% on pcp, with GP margin up +83bps to 37.1%. Cost of doing business (CODB) as a percentage of sales improved 14bps to 27.8%, aided by store expense leverage and warehouse volume leverage (cost fractionalization).
  • Operating earnings (EBITDA) were up +29.2% to $43.5m (with EBITDA margin up +100bps to 9.3%) and NPAT was up +34.8% to $26.0m.
  • Operating cash flow was weaker versus previous corresponding period (pcp), driven by higher working capital – driven by an increase in inventories and also cycling particularly low levels in the pcp.
  • The Company declared a final dividend of 8.3cps, taking the full year dividend to 14.1cps (up +34.1% on pcp). The Board continues to target a payout ratio in the range of 70-100% pro forma NPAT.
  • Private label sales were up +31.1% vs pcp and now make up 41.4% of group sales (vs 36.5% in FY20). The Company remains on target to achieve 50% of sales from private sales.

Company Profile 

Baby Bunting Group Limited (BBN) is Australia’s largest nursery retailer and one-stop-baby shop with 42 stores across Australia. The company is aspecialist retailer catering to parents with children from newborn to 3 years of age. Products include Prams, Car Seats, Carriers, Furniture, Nursery, Safety, Babywear, Manchester, Changing, Toys, Feedingand others.

(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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Costa Group completes 2PH citrus acquisition after successful offering of $190m fund

Investment Thesis

  • Positive thematic play on food supply for a growing global and domestic population.
  • Berries, Mushrooms, Citrus, Tomato and Avocado are five major categories who leads market Positions via the recent acquisition.
  • Near term challenges could persist a little while longer (e.g extreme weather and drought).
  • Balance sheet risk has been removed with the recent capital raising. 
  • Continuation of execution of domestic berry growth program while china berry expansion is gaining momentum.
  • Given the number of downgrades, management will likely need to rebuild trust with its guidance and execution.

Key Risks

  • Weather conditions continue to deteriorate, putting pressure on earnings.
  • Earnings could deteriorate further, putting the balance risk at risk once more.
  • Weather-related crop damage or any significant increase in insurance costs. This risk is mitigated by CGC’s crop insurance (hail, wind, and fire) and structure insurance.
  • Any power outage resulting in crop destruction per incident.
  • Any significant increase in power costs, affecting earnings.
  • Any operational disruption caused by health and safety issues.
  • Any disruptions or problems with water, irrigation, or water recycling.
  • Negotiations with supermarkets giants cole (wesfarmers), Woolworths and independent grocers results in erosion of margins.
  • Increased costs due to lower water allocations.
  • Pricing pressures arising from either competitors or insufficient demand. 

1H21 Results Highlights

  • Revenue of $612.4m was in line with the pcp (or up +1.7 percent in constant currency), driven by International sales, which were up +25 percent due to improved pricing and yield in both regions, offset by Produce revenue, which was down -6.9 percent due to negative impacts in Citrus (Colignan hailstorm damage) and lower Mushroom and Tomato production.
  • EBITDA-S of $124.4 million increased by +4.3 percent. EBITDA-S increased by 9.7 percent in constant currency. Domestic berries outperformed the pcp, but this was offset by poor performance in Citrus, Tomato, and Mushroom, which was hampered by weather/production issues. Avocado performance fell short of expectations due to weak pricing following strong industry volumes.
  • RNPAT-S of $44.4m increased by 3.0% (or 13% in constant currency). Interest costs fell by 13% due to lower base rates and average debt, but were offset by higher D&A (up 2%). CGC also recognised $2.5 million in direct Covid-19 costs.
  • NPAT-S of $44.4m increased by 3.0% (or 13.0% in constant currency). Interest costs fell by 13% due to lower base rates and average debt, but were offset by higher D&A (up 2%). CGC also recognised $2.5 million in direct Covid-19 costs.
  • Declared interim dividend of 4.0cps. Statutory NPAT of $37.5 million.

Company Profile 

Costa Group Holdings Ltd (CGC) grows and markets fruit and vegetables and supplies them to supermarket chains and independent grocers globally. CGC has leading market positions in five core categories of Berries (Blueberries, strawberries and raspberries), Mushrooms, Citrus, Tomato and Avocado via the recent acquisition.

(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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AUB Group Earnings remain resilient as ever despite uncertainty

AUB brokers derive revenue from commissions paid by insurers, based on gross written premiums. AUB owns or has equity stakes in each broking business within the network.

A key value proposition over smaller brokers is AUB’s ability to negotiate more favourable policy wording and pricing. Scale also provides the capacity to spend more on technology, which helps facilitate greater analytical and processing capabilities, and marketing to help attract and retain customers. Other services such as claims support and premium funding support the value proposition. AUB’s underwriting agencies distribute insurance products but take no underwriting risk. Underwriting agencies act on behalf of insurers to design, develop, and provide specialised insurance products and services.

The earnings outlook is positive. Further insurance price rise is expected by the analysts over the medium term as insurers seek to cover claims inflation and weak investment income. This follows a weak pricing environment due to excess global reinsurance capacity, soft economic conditions, and elevated competition.

Financial Strength:
AUB is in sound financial health. It has strong cash flow generation with a high conversion of earnings to operating cash flow and a relatively high dividend payout ratio. Gearing ratio is reasonable, at 28.5% and below the firm’s maximum 45% ratio. AUB holds AUD 90 million in cash, which when included lowers gearing further. This is excluding customer cash for premium held by AUB but payable to insurers. EBITDA interest covers of over 16 times and the nature of its businesses being relatively low-risk. As per the analysts, AUB would be using operating cash flows to fund increased positions in existing broker partners, with provision to fund small acquisitions from cash on hand.

Bulls Say:
AUB’s scale and expertise in insurance products and services leave it well placed to benefit from higher insurance pricing.
BizCover and the Kelly+ Partners partnership see AUB placed to take market share in the smaller end of the SME market.
The firm’s acquisition strategy, both new investments and increased equity stakes, would boost EPS growth.

Company Profile:
AUB Group is the second-largest general insurance broker network in Australia and New Zealand. It has an ownership in 55 brokerage businesses, which collectively write over AUD 3 billion in premiums. It also owns equity stakes in 27 underwriting agencies. AUB derives revenue from commissions (from insurers, ultimately paid for by AUB’s customers) based on gross written premium, or GWP, from agencies it owns, and a share of profits from associates and joint ventures. GWP is split between personal (6%), small to medium enterprises (68%), and corporates (26%).

(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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Nanosonics achieved a strong FY21 performance

Investment Thesis

  • Ultrasound disinfection is required. To avoid cross-infection, ultrasound transducers must be disinfected between patients. Trophon EPR outperforms traditional methods (soak, spray, wipe, or other manual reprocessing/disinfection methods). Traditional soaking, for example, takes 25 minutes, whereas Trophon disinfects ultrasound probes in 7-8 minutes.
  • Potential addressable installed base of 120,000 Trophon EPR units worldwide (40,000 each in the US, Europe, and the Rest of the World).
  • Higher level disinfection required to reinforce the drive path for new guidelines and regulations. New Guidelines in Australia and New Zealand for example, establish Trophon as the gold standard in high-level disinfection.
  • Trophon become standard of care and direct sales team driven for strong adoption as its continuous growing in North America.
  • With the demand for safety inventory, GE Healthcare has retained a large and credible distribution partner.
  • In the United Kingdom, the Managed Equipment Service (MES) business model is overcoming client capital budget constraints.
  • Progress is being made in terms of geographic expansion.
  • A strong balance sheet will help to support the growth strategy.

Key Risks

  • Increased competition as new entrance entered the market. 
  • Non-receptive markets where NAN’s product is regarded as excessive when compared to traditional disinfection methods such as using sterile wipes.
  • Key customer risk, as one of NAN’s largest customers
  • Product flaws or incidents that necessitate recalls.
  • Unfavorable foreign currency movements in the AUD/USD.
  • Poor R&D execution with no progress.
  • Because of the nature of the business, it is prone to quickly reaching a natural penetration rate, where growth becomes subdued.

FY21 results highlights

  • Revenue of $103.1m, up +3.0 percent (or +12 percent in constant currency), driven by recovery in 2H21 with revenue of $60.0m, up +39 percent (or +50 percent in CC) compared to 1H21.
  • NAN’s global installed base of 26,750 units increased by +13 percent or 3,030 units (with 2H new installed base increasing by +20 percent compared to 1H21 with 1,650 units installed).
  • Revenue of $76.4m, up +9% from 1H21 revenue of $42.7m, up +27% from 1H21, driven by a recovery in ultrasound procedure volume to pre-Covid-19 levels.
  • Operating profit before tax of $11.0m was -11 percent lower than the $12.4 m pcp, driven by 2H21 profit before tax $10.8m which grew as total revenue increase +39% in 2H21 versus 1H21.
  • NAN retained a strong balance sheet position to fund growth initiative with net cash position improving $4.2 to $96.0m.
  • Revenue of $26.7 million was down -11 percent, but 2H revenue of $17.3 million was up +84 percent compared to 1H21, with installed base growth recovering and GE Healthcare capital purchases increasing.
  • EBIT of $10.8 million fell -7 percent. Operating expenses increased by 12% to $70.8 million, primarily due to $20.3 million in 4Q expenses as NAN returned to its intended investment run rate.
  • The $5.9 million in free cash flow was driven by $8.3 million in 2H free cash flow, which offset a $2.4 million net cash outflow in 2H21.

Company Profile 

Nanosonics Ltd (NAN) is an ASX-listed company which focuses on developing and commercialising infection control devices. NAN’s first device, the trophon® EPR is a proprietary automated device for low temperature, high level disinfection of ultrasound probes. The device is approved for sale across major markets including, Australia and New Zealand, US, Europe, Japan, Hong Kong, and South Korea. The trophon® EPR is sold through distributors including GE Healthcare, Philips, Samsung, Siemens Toshiba and Miele Professional.

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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InvoCare Headwinds with the Return of Funeral Restrictions Immaterial to FVE

The company boasts well-known, highly respected brands and cost advantages over the long tail of smaller players in the highly fragmented death care industry, underpinning our wide economic moat rating. Death is one of few certainties in life, supporting steady demand for InvoCare’s services. Death rates can fluctuate from year to year. For instance, social distancing and increased hygiene focus in the wake of the COVID-19 pandemic led to a virtually non-existent flu season and significantly lower mortality rates in calendar 2020. However, death rates are very consistent over the long run.

While the program created some near-term disruption as venues closed or were otherwise impaired while undergoing refurbishments, InvoCare to capture an increasingly large portion of market share, given its dominant position, brand strength, and refreshed service offering following the venue refurbishments. Customers, typically the family of the deceased, are relatively price-insensitive, given the highly emotional context surrounding death care. 

Financial Strength 

InvoCare’s balance sheet is in a strong position following the AUD 274 million equity raising in calendar 2020. Leverage, measured as net debt/adjusted EBITDA, improved to 1.3 at fiscal year-end 2020, from 2.4 in fiscal 2019, comfortably below covenant levels of around 3.5. As earnings improve, net debt to fall below 1.0 times EBITDA by fiscal 2022. Underlying operating income lifted 46% on the coronavirus-ravaged prior corresponding period, or PCP, to AUD 39 million, still around 10% below the first half of fiscal 2019. Pricing bounced back during the period as restrictions on funeral attendances eased and pricing recovered—a demonstration of the strength of the underlying business.

Australia’s hardline approach to minimising COVID-19 cases with social distancing, lockdowns, and an increased focus on hygiene is leading to the second consecutive year of virtually no flu. InvoCare’s Australian funeral volumes in the first half were flat on the prior corresponding period and down approximately 3% on the prepandemic first half of fiscal 2019. The number of deaths to grow at an average CAGR of around 3% per year for the next decade, accelerating beyond 2030 due to demographics. The last traded price of Invocare Ltd was 12.15 AUD while it’s Fair Value Estimate 15.30 AUD which shows that InvoCare has potential to Grow.

Bulls Say’s

  • InvoCare consistently generates return on invested capital above its weighted average cost of capital, reflective of its pricing power due to its market position, reputation, and strong brand equity.
  • Industry volumes are immune to economic factors and will steadily grow as the population increases.
  • Prepaid funerals effectively lock in future sales and provide InvoCare with a low-cost source of funding.

Company Profile 

InvoCare is the largest funeral, cemetery, and crematorium operator in Australia and New Zealand. We estimate InvoCare enjoys over a third of revenue share in Australia, and around a fifth in New Zealand, and is the number one player in both countries. Australia contributes the vast majority of consolidated earnings. InvoCare owns a portfolio of over 60 brands, including three flagship national Australian brands: White Lady, Simplicity Funerals, and Value Cremations, and owns and operates 290 funeral homes, along with 16 cemeteries and crematoria. 

(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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SkyCity’s Business to Sit on the Sidelines Amid Travel Restrictions

buoyed by the recovery from current coronavirus-induced lows and solid performance from its core assets in Auckland and Adelaide. SkyCity’s Auckland and Adelaide properties underpin the firm’s narrow economic moat. SkyCity is the monopoly operator in both jurisdictions, with long-dated licences (exclusive licence for Auckland expires in 2048, and Adelaide licence expires in 2085 with exclusivity guaranteed until 2035). The quality of these assets, particularly SkyCity Auckland, has helped build the firm’s VIP gaming business.

SkyCity’s exposure to the volatile VIP gaming market is smaller than that of Australian rivals Crown Resorts and Star Entertainment. VIP revenue typically represents over 20% of Crown’s and Star’s sales, compared with SkyCity’s typical 10%-15%. While high rollers have no alternatives when in Auckland or Adelaide, SkyCity effectively competes as a destination casino on a global scale against locations such as The Star in Sydney and Crown Melbourne. This includes a NZD 750 million upgrade to SkyCity Auckland to be completed by the end of calendar 2024 and a AUD 330 million expansion for SkyCity Adelaide, a transformational project completed in fiscal 2021.

Financial Strength 

Despite near-term earnings weakness, SkyCity’s balance sheet remains robust, bolstered by a NZD 230 million capital raise completed at the end of fiscal 2020 and extensions to new and existing debt facilities. As expected, SkyCity declared a final dividend in the second half of fiscal 2021, following the June 30, 2021 covenant testing date. We expect SkyCity’s balance sheet to continue to improve over coming years as earnings recover, with net debt/EBITDA dropping below 1.0 in fiscal 2024 as expansionary projects roll off and earnings recover. 

Our fair value for SkyCity to NZD 3.80, from NZD 3.50, following the release of fiscal 2021 results. The raise on our fair value estimate is principally due to a more positive outlook on capital expenditure as SkyCity’s major expansion projects roll off and insurance payments are set to cover the majority of growth expenditure earmarked for the next three years. Despite New Zealand recently shifting back into stage 4 lockdown, SkyCity’s longdated and exclusive licences in Auckland and Adelaide create a regulatory barrier to entry, underpinning the firm’s narrow moat, and position the business well to participate in the recovery as restrictions ease. 

The payout ratio is well-supported by SkyCity’s balance sheet. The completion of the NZD 330 million Adelaide expansion in fiscal 2021 takes some pressure off cash flows, and of the further NZD 500 million in capital expenditure flagged for the NZICC project, around NZD 380 million will be funded by insurance payments to be received following the NZICC fire. The NZD 750 million NZICC/Horizon Hotel project (which helped secure licensed exclusivity at the core Auckland casino) has been delayed by a fire, with completion now expected in late calendar 2024.

Bulls Say’s 

  • Long-dated exclusive licences to operate the only casino in Auckland and Adelaide allow SkyCity to enjoy economic returns in a regulated environment.
  • We expect transformative capital expenditure at SkyCity’s Auckland and Adelaide casinos will lead to a sizable step-up in earnings.
  • SkyCity is well positioned to benefit from the emerging middle and upper class in China.

Company Profile 

SkyCity Entertainment operates a number of casino-hotel complexes across Australia and New Zealand. The flagship property is SkyCity Auckland, the holder and operator of an exclusive casino licence (expiring in 2048) in New Zealand’s most populous city. The company also owns smaller casinos in Hamilton and Queenstown. In Australia, the company operates SkyCity Adelaide (exclusive licence expiring in 2035).

(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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Improvements in occupancy to be the major driver for driving up G8 revenues

Investment Thesis

  • Trading at a discount to our valuation.
  • With a growing population, the long-term outlook for childcare demand remains positive (organic and net immigration).
  • Increased emphasis on both organic and acquired growth.
  • Increasing exposure to international markets (Asia).
  • Strategic investor China First Capital Group (12.45% stake in GEM) may see a collaborative expansion into the Chinese market.
  • The Company’s national footprint enables it to scale more effectively than competitors and mom and pop shops.
  • A global operator could be interested in acquiring the company.
  • Improve occupancy levels by leveraging – (rough estimates) A 1% increase in occupancy equates to $10-11 million in revenue and a $3 million EBIT benefit.

Key Risks 

  • The company faces execution risk in meeting its FY19 earnings per share (EPS) target.
  • Pricing pressure is being exerted as a result of increased competition.
  • Increased supply in some areas has resulted in lower occupancy rates.
  • Acquisition with a negative impact on value (s).
  • Execution risk associated with offshore expansion.
  • Childcare funding cuts or adverse regulatory changes
  • Australia is experiencing a recession.
  • Dividend reduction

FY21 Result Highlights

  • Revenue of $421.5 million (vs. $308.2 million in CY20 H1 and $429.9 million in CY19 H1) reflects occupancy recovery and the effects of greenfield growth, Victorian Government Covid-19 payments, and the February fee review, offset by divestments.
  • GEM saw an increase in national Core average occupancy to 68.0 percent (from 65.1 percent in CY20 H1), but it remains below pre-Covid levels of 70.4 percent in CY19 H1.
  • Operating EBIT (after lease interest) of $38.9m was up from $19.7m in CY20 H1 (restated) and in line with $38.8m in CY19 H1 (restated), owing to the “benefits of the Improvement Process, February fee review, and greenfield growth being invested in increasing system support and quality.” 
  • The statutory NPAT of $25.1 million was an improvement over the net loss after tax of $244 million.
  • GEM’s balance sheet remains strong, with a net cash position.
  • GEM did not pay an interim dividend, but the Board “expects dividend payments to resume with a full-year CY21 dividend to be paid in CY22.”
  • GEM’s employee remediation programme is well-advanced, with a provision of $80 million pre-tax ($57 million after tax), less costs incurred to date.

Company Profile 

G8 Education Limited (GEM) owns and operates care and education services in Australia and Singapore through a range of brands. The Company initially listed on the ASX in December 2007 under the name of Early Learning Services, but later merged with Payce Child Care to become G8 Education.

(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.