Tag Archives: Other Industrials

article 3 months old

Qube Facing Complex Outlook

The outlook for Qube Holdings is gaining complexity, with the recent contract loss for its Patrick division, while substantial, not considered significant in the longer term.

-Despite contract loss management is expected to improve service levels at Patrick
-Macquarie believes value is now emerging in the stock
-Morgan Stanley suspects logistics weakness could be more broad based
 

By Eva Brocklehurst

The Patrick division of Qube Holdings ((QUB)) has lost its contract with the Asia Australia consortium, which Macquarie calculates to represent 225,000 containers annually. The loss of the contract may not be material for the group in FY17 but represents a material loss to Patrick.

The loss of the contract reflects the uncertainty over the ownership and a lack of direction that has plagued Patrick over the last 12 months, Citi contends, flagging operational improvements at competitor DP World and aggressive pricing from Hutchison.

The broker suggests management at Patrick needs to make changes to operations over the next few months to improve service levels to shipping customers, in order to better its prospects of increasing market share.

Citi estimates market share loss for Patrick is 3.5%. The impact is less for FY17 as the current contract is expected to run to the end of October. Pricing pressure is expected to increase and revenue per lift to decline by an average of 2.1% over the next three years. Nevertheless, Citi is confident management can increase efficiencies and improve service levels.

The broker's investment view is not fundamentally changed by the loss of the contract and the size of the Moorebank, Sydney, development is expected to provide attractive economics that will accelerate the modal shift to rail. The Moorebank intermodal will include a large freight hub and a rail shuttle to Port Botany.

Macquarie believes Qube Holdings is facing a mixed outlook, but growth should return once the effects of the cessation of contracts in ports & bulks and the re-negotiation of the Atlas Iron ((AGO)) contract are cycled. The broker envisages longer term upside from Moorebank.

FY17 logistics growth should be driven by the stabilisation of existing volumes and new business. Since its financial results the stock has drifted down 14% and the broker believes this negates further downside risk, with value now emerging. While not currently expecting earnings-per-share (EPS) growth, the broker takes the opportunity to upgrade to Outperform from Neutral.

Diesel fuel data suggests there are volume challenges which are widespread and growing with Morgan Stanley using monthly sales figures as a a rough proxy for industrial demand in logistics and bulks. The broker finds the data sober news.

Diesel volumes fell 7% in July 2016 and the three-month rolling basis also suggests a decline (4%), indicating this is more than a one off. Morgan Stanley analyses other data in the container business, which affects 65% of Qube's business either directly or indirectly, and finds the weakness could be more broad based than previously appreciated.

The broker considers there are better entry points ahead for the stock and continues to like the options around strategic assets such as Moorebank, with the first half result offering the first opportunity to assess the severity of the unwinding of volumes and prices.

Earlier this month UBS upgraded the stock to Buy from Neutral, noting Qube Holdings has a simple strategy but the financial journey is complex. The broker does not expect Moorebank to make a meaningful contribution to earnings until FY20, suggesting that while the stock's price/earnings ratio of 24x for the next two years appears stretched this will descend to 17x in FY21.

UBS continues to like the company's strategy of leveraging infrastructure-like assets in the import-export freight chain but does not expect EPS will recover to FY15 levels over the next two years, reflecting the step down in mining-related earnings and dilution from the investment in Patrick and Moorebank.

Consensus expectations appear to be 10% above the broker's forecasts for the next few years and UBS interprets this as a lack of understanding of the financial implications of the Patrick and Moorebank investments. There is the possibility the company may do better if it wins contracts in operating divisions, or makes accretive acquisitions, but the broker suggests the market is taking a subdued view of near-term earnings.

There are some negatives dragging on profitability in FY16-18, which limit the ability for earnings to recover, but the winding down of four major contracts in ports & bulks (UBS made this note ahead of the latest contract loss from Patrick) also signal a permanent step down in the broker's opinion.

FNArena's database shows three Buy ratings and three Hold for Qube. The consensus target is $2.65, suggesting 14.6% upside to the last share price. Targets range from $2.40 to $2.90.
 

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article 3 months old

Consolidation Prospects Make Nufarm Appealing

Herbicide and pesticide producer Nufarm has a strong outlook for FY17, supported by cost savings and a better upcoming cropping season in Australia.

-Sustainable returns dependent on the market but further savings expected
-Acquisitions on the cards as plans to diversify continue
-Corporate appeal also noted, given key stake holders in the stock
 

By Eva Brocklehurst

Strong growth is expected for herbicide and pesticide producer Nufarm ((NUF)) in FY17, underpinned by cost savings, a better outlook in Australia, improvement in South America and lower FX losses. The company performed on cost reduction targets in FY16 with a very strong second half in South America. Nufarm reported an underlying net profit of $108.9m in the 12 months to July, down 7%.

Favourable seasonal conditions in Australia and a little self help should set up another year of profitable growth, in Citi's view. The broker remains a holder of the stock given the benefits of improving cash flows and earnings quality, as well as support from sector consolidation underway.

Citi considers the FY16 outperformance was mostly about timing and the measures to date are largely in the area of costs so sustainable returns are, to some extent, dependent on the market. Still, the broker is confident further savings can be generated beyond FY18.

Deutsche Bank was disappointed with the net operating cash flow in FY16 and, while the company's outlook lines up with its views, retains a Sell rating on the stock, which is trading at a 39% premium to the broker's valuation. The broker reduces FY17 earnings forecasts by 4-10% to reflect the net impact of lower earnings in Australia, Europe, seeds and higher net interest expense. This reduction is partly offset by higher earnings in the Americas and Asia as well as lower corporate costs.

The results trigger an upgrade to Add from Hold for Morgans. The broker considers the stock attractively priced for its growth profile. The first decent summer cropping season in four years is in progress in Australia while South America is also set for a bigger season. Hence, forecasts are upgraded.

The company remains on the look-out for consolidation opportunities to strengthen its product portfolio and also warrants corporate appeal, in the broker's view. Morgans highlights the fact that the chairman of Fuhua, one of China's glyphosate producers, has a 6.2% shareholding in Nufarm while Sumitomo Chemical owns 22.6%.

Consolidation prospects provide a supportive background, Macquarie agrees, and the potential for acquisitions or mergers is more relevant than ever. The broker suspects Sumitomo's blocking stake may be void at any bid above $11.65, well ahead of current share price levels. A third party approach that includes a reasonable premium could be relevant at current price levels.

On the other side of the coin, the company intends to participate in M&A in a targeted manner should appropriate acquisitions present. Macquarie finds it difficult to gain visibility on specific opportunities but notes the company has stated its intent to diversify in specific regions and crops.

The opportunities in industry consolidation are one of the reasons Credit Suisse upgrades to Outperform from Neutral. The broker adds $1 per share in value, assuming Nufarm can acquire an asset at good value. The broker observes there is $1.8bn in available credit but peak debt may reach $1.3bn. On that measure the company could have around $500m in debt-funded acquisition capacity. Nufarm has also indicated it is willing to partner to get the right deal.

Macquarie suspects the market was not keen on factoring in all the targeted savings but, with this result, believes expectations should now approach all management's targets. The broker forecasts $20m in incremental savings in FY17 and FY18. The result also suggests to Macquarie that the focus on higher returning products affected volumes, to the extent that a lack of fixed cost recovery meant margins declined.

Several brokers contend that management needs to seek a better balance of high-value, low-volume sales versus high-volume commodity sales in Australia. Macquarie believes a favourable seasonal backdrop should help in this regard.

Ord Minnett is one broker which notes the company has intentionally focused on higher margin products, and believes fine tuning of margins versus volumes needs to be done to lift utilisation rates and ensure profitability is maximised. The broker incorporates the full FY18 targeted savings of $116m into its model and includes a further $10m uplift in FY19, because of timing. On the broker's estimates management's key performance target of 16% return on funds employed should be reached by FY18.

The initiatives around improved performance, reduced costs and cash flow conversion are mostly sustainable and this underpins the stock's re-rating over the past 12 months, UBS believes. Execution on the strategy with seeds and expected cost reductions provide potential upside to the broker's forecasts in the near term.

UBS has a three-stage residual income model which indicates that the market is ascribing around 35% of the stock's value to medium-long term growth, in line with the industrials sector, ex financials. This is despite Nufarm having a better earnings outlook. The broker believes the Omega-3 strategy in seeds and greater depth in crop treatments are not captured in current valuation multiples.

FNArena's database shows four Buy ratings, two Hold and one Sell (Deutsche Bank). The consensus target is $9.02, signalling 0.8% in downside to the last share price. This compares with $8.06 ahead of the results. Targets range from $6.25 (Deutsche Bank) to $10.00 (UBS).
 

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article 3 months old

Brokers Welcome Pact’s Expansion Into Pharma Packaging

Packaging producer Pact Group is expanding, moving into the manufacture of tablets and capsules with the acquisition of Australian Pharmaceutical Manufacturers.

-Advances Pact's co-manufacturing operations and complements Jalco acquisition
-Pharma/neutraceuticals end market considered one of the few positive areas of growth
-De-stocking in the vitamin segment could continue for remainder of 2016
 

By Eva Brocklehurst

Packaging producer Pact Group ((PGH)) continues with its strategy of expanding in adjacent categories of contract manufacturing, with its latest acquisition being Australian Pharmaceutical Manufacturers (APM) for $90m.

Brokers welcome the transaction, as the APM business is one of the largest providers of packaging solutions for nutraceuticals in Australia and specialises in manufacturing and packaging tablets, hard gel capsules and powders. Facilities are located in Keysborough, Victoria.

The price is reasonable, the transaction accretive and should generate a pre-tax return on capital in excess of the company's hurdle rate of 20% by year three, Deutsche Bank calculates. The business complements the existing co-manufacturing operations of Pact's Jalco business. The acquisition will be funded via $75m in bank debt and a $15m share issue.

The transaction furthers Pact Group's advance into co-manufacturing, Macquarie agrees, extending the position established with last year's acquisition of Jalco. Jalco was considered a beachhead in the contract filling market and, while Macquarie expected further acquisitions, this particular one now takes Pact into the pharmaceutical area. The broker also notes it is positive for margin mix.

The company has stated that there is a significant overlap in customer portfolios and Macquarie understands Blackmores ((BKL)) is a customer of both Jalco and APM. Health and personal care accounted for 12% of Pact's revenue in 2016 and the pharmaceutical/neutraceutical end market is considered one of the few positive areas of growth.

CLSA believes this acquisition, in conjunction with stable, but not stellar, organic growth, should ensure Pact Group sustains double digit earnings growth. The stock is attractive to the broker, trading at a discount to both market multiples and its peers.

One area of concern in the near term is the fact that the vitamin segment is experiencing an inventory build up and de-stocking could persist through the rest of this year. While this may negatively affect near term earnings, CLSA is confident that the risk is captured in the price and the medium-term demand outlook remains strong. The broker, not one of the eight monitored daily on the FNArena database, has a Buy rating with a $7.75 target.

Customer volume is underpinned by a surge in demand for vitamins and supplements from Chinese consumers and APM supplies some large and successful brands such as Swisse, Credit Suisse notes. While capacity in the tablet industry had expanded to meet demand from China, more recently that demand has slowed as excess inventory carried by retailers and distributors in Australia affects brand sales. Credit Suisse suspects that upstream manufacturers such as APM could soon be affected by this build up, although the headwinds are expected to be short term.

On the subject of Pact's capacity for further acquisitions, the broker also believes the company's ability to fund these through debt is nearing its limit for FY17. The ratio of net debt to EBITDA is around 3.0 and management has previously stated the comfortable upper end is around 2.8-3.2. Hence, the broker anticipates high gearing may constrain further acquisition upside.

Morgans is attracted to Pact's dominant position in its markets in Australasia, and the high margins, with exposure to the faster-growing rigid plastics market. The broker calculates the acquisition will be accretive by 3% in FY17 and 5% in FY18.

Morgans believes the trend towards greater emphasis on health and well being means there is solid growth potential in the acquisition and the deal will also diversify Pact's revenue base away from food, dairy and beverages. Nevertheless, the broker believes the stock is fairly valued and retains a Hold rating, given the limited organic growth and overall upside largely driven by acquisitions.

The database shows two Buy, two Hold and one Sell (UBS, yet to comment on the acquisition) for Pact. The consensus target is $6.34, signalling 2.3% in downside to the last share price. Targets range from $5.60 (UBS) to $6.80 (Deutsche Bank).
 

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article 3 months old

Amcor Gets Diversifed

Packaging container business Amcor has increased its diversified products exposure, prompting mixed responses from brokers.

-Projected returns below the company's stated targets by FY20
-Is Amcor investing its way out of potential challenges?
-Deal expected to enhance scale, capabilities and product
 

By Eva Brocklehurst

Packaging container business Amcor ((AMC)) is taking the bull by the horns when it comes to acquisitions, with the latest being Sonoco's North American rigid plastics moulding business for US$280m. Including synergies, pre-tax profit is expected to be US$50m after the third full year of ownership.

This business comprises six production sites in the US and one in Canada. Two thirds of the operations in North America are leveraged to polypropylene and polyethylene products and the balance to PET plastic. Nevertheless, brokers calculate that by year three (FY20) pre-tax returns from the business will reach around 17%, which is below Amcor's stated target of return on funds employed (ROFE) of 20%.

Ord Minnett defends the target as only including cost synergies, and flags the opportunities that exist to cross-sell the new speciality container products to existing customers of Amcor, and across geographies, which could help push returns towards 20% beyond FY20. The company will also breach its debt leverage range but Ord Minnett considers this a temporary issue.

Morgan Stanley differs, suspecting the aggressive actions from the company mean there could be underlying challenges to its targets. The broker suggests Amcor may feel an urgent need to invest its way out of potential challenges. The broker accepts the acquisition provides more evidence of the company's ability to supplement growth by drawing on the strength of its cash flow and capacity to gear up the balance sheet.

While the purchase may make strategic sense, from a pure financial perspective Morgan Stanley finds the deal less than compelling. Projected returns are below the three-year hurdle from this deal and in the last six months Amcor has announced a total of US$935m in acquisitions and a US$200m restructuring, which the broker believes signals an aggressive shift in growth capital allocation. Hence, conditions may be getting tougher, and thus require a shift in behaviour to reach pre-established targets for value creation.

Deutsche Bank does not have the same misgivings and raises its rating to Buy from Hold as the stock is now trading at a 9% discount to the broker's revised valuation. The broker estimates the dividend yield in FY17 at 3.8% and free cash flow yield at 5.1%. The acquisition is expected to be complementary to the existing business and enhance the scale, capabilities and product platform for Amcor.

The acquisition has particular strengths in extrusion blow moulding, multi-layering and decorating and, as with Ord Minnett, Deutsche Bank notes there are opportunities across procurement, and operational improvements to be had in the manufacturing footprint. Deutsche Bank expects strong earnings growth for the next 2-3 years, with benefits to come from acquisitions and the flexibles restructuring initiatives.

Citi upgrades to Buy from Neutral as well, because of the much-needed scale the acquisition provides for Amcor's diversified products divisions. Credit Suisse also views the acquisition in a similar light, as the company's diversified products business now has US$750m in sales, of which 90% is in North America and 10% in South America.

The acquisition increases Amcor's exposure and capability in plastic resins other than PET. While net debt is likely to exceed the range of 2.25-2.75 times EBITDA in the first half, Credit Suisse estimates de-leveraging to around 2.1 times by FY20, and concludes that achieving the 20% ROFE target by FY20 is not unrealistic.

The broker also notes the procurement and footprint savings – there is a geographical overlap in manufacturing capacity - are not only in terms of the Sonoco business but will also aid Amcor's nascent diversified product operations. For example, a large amount of procurement involves the purchase of polyethylene and polypropylene where Amcor is only buying small volumes currently.

Macquarie considers Amcor has confirmed its defensiveness at the recent results and management is well able to navigate the subdued operating environment. The broker believes the stock deserves to trade at a premium to its global peers given its track record of delivery and superior returns, free cash flow and dividend profile.

FNArena's database shows four Buy, three Hold and one Sell (Morgan Stanley). The consensus target is $16.38, suggesting 0.8% upside to the last share price. Targets range from $12.20 (Morgan Stanley) to $17.95 (Citi).
 

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article 3 months old

Growth Opportunities Abound For Xenith

Intellectual property services company Xenith IP outperformed its prospectus in FY16 and brokers suggest growth opportunities abound.

-Increased scale and improvements in IT seen driving fee margins higher
-Attractive for yield players in terms of cash generation and low capital intensity
-Strategic merit and greater market share with Watermark acquisition
 

By Eva Brocklehurst

Intellectual property (IP) services business Xenith IP ((XIP)) outperformed its prospectus in FY16, supported in large part by positive legislative changes in the US and in Australian patent examinations, as well as favourable movements in the Australian dollar against its US counterpart.

The company's margins expanded to 39% from 20% in FY15, driven, Morgans maintains, by an ability to leverage its fixed cost base. A maiden dividend of 7c for the second half was in line with expectations and the company maintains a pay-out ratio of 70-90%. No specific guidance was provided for FY17 but management is driving its Southeast Asian strategy on the back of recent acquisitions.

Improvements in IT platforms and increased scale are driving up professional fee margins, Morgans observes. The company has acquired Watermark which is expected to expand market share to 10% domestically.

The acquisition price was $19.5m and Watermark, which currently has a 4% market share, is expected to contribute $12-13m in earnings (EBITDA) on a full-year basis. The acquisition will be funded by a $9.5m placement to Watermark principals with shares escrowed for two years. An additional $9.5m will be funded by way of a capital raising and existing debt facilities.

Morgans incorporates the acquisition and rolls forward FX estimates, upgrading its recommendation to Add from Hold. The broker assumes Watermark's top line will grow in line with market trends and also assumes Xenith can extract a higher margins over time. The broker remains attracted to the strong cash flow and ability to consolidate the fragmented IP market. The main risks to forecasts include regulatory changes, adverse FX and economic conditions which impact on innovation.

Shaw and Partners observes the move to US dollar pricing for a large number of clients introduces some volatility into the revenue base although a hedging policy is in place. The broker is bearish on the Australian dollar so envisages revenue upside from US dollar pricing in the medium to longer term.

The broker envisages plenty of opportunities to grow via acquisitions as, with only $6.6m in bank debt following the Watermark deal, financial flexibility is high. The broker believes cash generation and low capital intensity make the business attractive to yield players and, moreover, the company can continue to grow both organically and via acquisitions, so it represents an attractive balance of yield and growth.

Shaw and Partners, not one of the eight stockbrokers monitored daily on the FNArena database, retains a Buy rating and $5.00 target. After revenue growth of 19% in FY16 the broker expects a more “normal” 6.5% growth rate in future, comprising 3.6% growth in patent volumes and some nominal price inflation. The long term nature of client relationships and tenure of key staff mean the broker is confident in the sustainability of revenues amid favourable IP dynamics.

The broker expects margins to increase over time but remains uncertain whether they will approach the level of peer IPH Ltd ((IPH)), given the Watermark business is somewhat independent and, thus, not all synergy benefits that normally are associated with a professional services merger will easily be achieved. The broker does envisage scope for margins to move closer to IPH's 45%.

The acquisition of Watermark has strategic merit, Bell Potter contends. There are diversification benefits, operational scalability and increased geographical reach. The company is engaged with additional prospects in both Australia and Asia and successful execution on any transaction will present significant upside in the broker's opinion.

Bell Potter, not one of the eight monitored on the database, has a Buy rating and $4.80 target predicated on the company's blue-chip client base, growth opportunities and attractive industry fundamentals.

Xenith IP owns entities which provide specialist IP services including identification, registration, commercialisation and enforcement of IP rights for a range of clients.
 

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article 3 months old

Cleanaway Extracting Value From Waste

Cleanaway Waste Management guides to improvement in FY17 across all divisions and flags the potential for bolt-on acquisitions.

-Collections to benefit from recent landfill acquisition in Melbourne
-Path cleared for focus on day-to-day operations and cost control
-Improvement expected following closure of Clayton landfills
 

By Eva Brocklehurst

Cleanaway Waste Management ((CWY)) is garnering efficiencies and implementing on its growth initiatives, noting early signs of improvement in customer churn rates.

The company guides to an improved outcome in FY17 across all its divisions, with no expected change in market conditions, and also flags the potential for bolt-on acquisitions. Volumes were mixed in FY16 with non- hazardous liquids increasing and hazardous liquids declining. The company also notes continued price pressure from competition.

Morgans has no fears regarding the outlook and asserts that, despite the rally in the share price, there is more upside to come. The broker believes the margins in the second half, the small scale acquisitions and the contract wins all support an improved outlook and makes material upgrades to forecasts.

Forecast upgrades to the liquids & industrials segment reflect strong margin improvement and Morgans calculates the wins such as the Rio Tinto Yarwun contract will offset oil price pressures. The broker cites a staff publication that indicates this is a three-year contract which is expected to contribute $17m per year for the provision of industrial services and waste management.

Morgans estimates that the Melbourne Regional Landfill (MRL) acquisition could have added $58m in revenue in FY16. All Clayton landfills are now expected to close at the end of 2017, resulting in the establishment of a new transfer station in south east Melbourne.

Earnings (EBIT) are expected to increase following the closure of Clayton, which Morgans understands is mainly because of the transporting of SE Melbourne volumes to the MRL and a cessation of Clayton’s large depreciation expense.

Acquisition opportunities are expected to be mostly small players with the company believing real synergies are available in depot rationalisation, insurance and asset utilisation. In July the company acquired Waste 2 Resources for $8.5m, a waste collection service operating in south east Queensland. It also acquired the non-controlling interest in Cleanaway refiners for $2.6m having previously held a 50% controlling interest.

Morgans expects Cleanaway to deploy its balance sheet into alternative waste treatment in Sydney, given the NSW government’s landfill levy incentive. The company believes it has the collection infrastructure for waste feedstock already but has no plans to be a pioneer of technology.

Nevertheless, it expects to evolve from a waste management business to a material management and industrial service and considers extracting value from waste will be critical to the future.

Cleanaway has a credible strategy, Macquarie believes, and collections should benefit from the recent landfill acquisition in Melbourne and the associated volume transfer. The broker also expects the industrial division to improve because of cost reductions but that this will remain challenged by economic conditions and lower oil prices.

The company’s uncommitted volume in the Sydney market could become an asset, Macquarie contends, given Sydney is the most likely market where alternatives to landfill would be economic. Sydney’s landfill levy is over $100/t more than the nearby Queensland market, the broker notes, and this is affecting competitive outcomes at the small end of the collections market.

UBS wonders whether the company is at the start of an upgrade cycle and expects, based on the initiatives being undertaken across the company’s various segments, an increase in operational earnings should be forthcoming in FY17.

With management in the past having dealt with a number of significant strategic issues the path is now clear for current management to focus on the day-to-day operations and deliver cost-reduction benefits to shareholders, UBS asserts, acknowledging some of the cost reduction benefits will be mitigated by competition.

Despite the stock appearing expensive on a headline multiple basis, the broker expects momentum should allow it to outperform. Revenue is expected to grow at a 5.6% compound rate over FY16-19.

Ord Minnett also considers the risk for the stock is to the upside, given the focus on capital allocation and customer engagement, and with a number of restructuring projects in train. The hardest task will be growing the top line, the broker maintains, and arresting the loss of market share suffered over the past couple of years.

FNArena’s database has four Buy ratings and one Hold (Deutsche Bank). The consensus target is $1.10, suggesting 2.3% upside to the last share price. This compares with 85c ahead of the results. Targets range from $1.00 (Deutsche Bank) to $1.15 (UBS).
 

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article 3 months old

IPH Advancing On Acquisition Targets

Patent services and intellectual property business, IPH Ltd, is expanding its global position, with several acquisition targets in sight.

-Impact of America Invest Act to abate in the current half year
-Sale facility for escrowed shares being considered
-Potential of Practice Insight not being reflected in current share price


By Eva Brocklehurst

Patent services and intellectual property (IP) business, IPH Ltd ((IPH))  remains intent on expanding its position in the global marketplace, with several acquisition targets in its sights.

Brokers note there are several probable deals that should provide not only geographical diversification but an entry into markets where IPH’s services are currently limited. The company has indicated it is engaged in sourcing a number of potential acquisitions and hopes to execute on a significant transaction by the end of the year. 

Over 41% of the company’s shares will be released from escrow in November this year with a share sale facility being considered for escrowed principals to aid orderly trading.

IPH did not provide quantitative FY17 guidance with its result but did indicate it expected its Australian and Asian business to grow in line with market trends. FY17 is expected to benefit from the contributions from previous acquisitions as well as the new offices which have opened in Asia.

Earnings were biased towards the first half of FY16, because of a pulling forward of filings caused by the America Invest Act. This seems particularly pronounced in Asia, Bell Potter observes, where  all constant currency growth is estimated to have occurred in the first half. The broker expects the impact will start to abate in the current half year.

The weaker Asian results in FY16 caused a miss to Deutsche Bank’s expectations but the broker notes cash flow conversion remains reasonable and the company is well situated, offering upside potential given significant cash on the balance sheet. Deutsche Bank has a Buy rating and $7.00 target.

Bell Potter believes that with a strong record of generating cash flow and a net cash position on a rising trend, the company is well able to undertake substantial acquisitions. The broker factors in some further expense for FY17 and FY18 in the Practice Insight business, where management is particularly upbeat about the long-term growth potential.

Investment in software development and marketing is expected to mean this business operates at a $3-4m loss in FY17 and Bell Potter is not allowing for any long-term growth as yet. That said, the broker believes the company remains well placed to expand across the Asia Pacific region and into new secondary markets. Bell Potter has a Buy rating and $8.15 target.

Morgans, while also refraining from factoring in long-term growth prospects for Practice Insight, believes potential is not being reflected in the current share price. The broker contends that a positive outcome from this division could have material upside for FY19 and annuity style revenue streams exist if the company can execute on its strategy.

Morgans does not include unannounced acquisitions in forecasts but notes there is $59m in cash on hand and a considerable debt facility. The broker maintains an Add rating with a target of $7.47, and believes a number of catalysts exist to drive growth, including the acquisitions, removal of the escrow overhang and potential FX weakness.

Morgans maintains that IPH not only has a first mover advantage in consolidating a highly fragmented market but should also benefit from its ability to extract significant synergies though its systems and offshore operations.

Macquarie is looking forward to Asian expansion in FY17 and continues to be attracted to the company's business model. The broker's Neutral rating reflects the overhang provided by the escrowed stock.

There are two Buy and one Hold (or equivalent) ratings for IPH on the FNArena database. A consensus target of $71.2 suggests 25% upside.
 

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article 3 months old

Chance To Add Scale Abounds For SG Fleet

Vehicle leasing and fleet management service, SG Fleet, expects to maintain strong momentum in its core business while actively pursuing further acquisitions.

-Gains substantial contract from NSW government
-Synergies still be be gained from recent acquisitions
-Opportunities abound in fragmented UK market
 

By Eva Brocklehurst

Vehicle leasing and fleet management service, SG Fleet ((SGF)), expects to sustain momentum in its core business while pursuing further acquisitions. FY16 results were in line with expectations, being pre-announced with the recent Fleet Hire acquisition.

The company observes business activity is picking up in Australia and the UK business is stabilising. Brokers welcome the strong result, delivered while business sentiment remains cautious and increased competition is exerting pressure on margins.

Excluding the seven months contribution from NLC, Citi estimates Australian revenue grew more than 3% while New Zealand achieved a maiden full year profit. The UK continues to be loss-making. The company is also expected to realise $6-8m in synergies from the NLC business over the three years.

Three were some disruptions in the second half from the long lead-up to the federal election but a contract with Westpac was signed at the end of the financial year and other potential wins have been pushed into FY17.

The company has now gained a substantial contract from the NSW government, winning 95% of the state fleet, has indicated the tender pipeline remains considerable, and is confident it can leverage its success with the NSW win.

Citi is watching out for more acquisitions, given the company’s appetite for growth and the fact it is actively exploring options. The broker estimates the company could fully fund a $155m acquisition via debt, observing the recent NLC acquisition cost $154m and materially transforms the company’s financials.

With a largely fixed cost base in the leasing business, scale benefits from such M&A could be meaningful, the broker contends, notwithstanding the fact the same situation exists for competitors and an acquisition of considerable scale may be contested. The broker envisages either the UK or Australia is the most likely geographic sector where a deal could be done.

Citi also observes that increased exposure to the UK via the Fleet Hire acquisition has coincided with the UK government undertaking an analysis of the cost of salary sacrifice benefits. The government intends to implement the outcome of its consultation in the market in April 2017. However, the focus is not just on cars but a wide range of benefits included in salary sacrifice.

The UK represents around 12% of revenue for SG Fleet in FY17, not currently a major driver but one which Citi suspects, with the UK salary sacrifice segment being highly fragmented, is likely to increase in importance for SG Fleet over time.

Macquarie expects earnings to grow around 33% in FY17, driven by the contribution from NLC, Fleet Hire and the NSW government contract. SG Fleet now has 130,964 vehicles under management, up 45% on FY15 levels.

The broker estimates there was only 0.2% growth in the corporate fleet in FY16, which masks a 2% fall in the managed fleet offset by a 3% gain in the operating lease fleet. This demonstrates that the company has been successful in cross-selling products to existing customers even in a relatively flat year. NSW could be a long term growth driver, Macquarie contends, should SG Fleet be able to sell additional products over the medium term.

Macquarie also notes electric vehicles are being supplied to NZ customers and the take up of products such as telematics is generating benefits for customers and leading to additional revenue sources.

Morgan Stanley finds synergies are still to be gained from recent acquisitions and, in the UK, there are many small opportunities that should provide scale in that country. Meanwhile, the main risk from potential changes to fringe benefit tax regulation in Australia remains low in the near term.

There are three Buy ratings on FNArena’s database with a consensus target of $4.78 that suggests 3.2% upside to the last share price.

See also, SG Fleet Drives Growth Potential In UK on August 8 2016.
 

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article 3 months old

Orora Packages A Perfect Outlook

After a strong FY16, brokers laud the outlook for packaging company Orora, which is targeting organic growth as well as further investment in innovation and acquisitions.

-IntegraColor providing opportunities in US PoP market and vertical integration
-Australasian cost benefits on track, with lower AUD delivering tailwinds
-US target market fragmented, with small bolt-on acquisitions more likely
 

By Eva Brocklehurst

Orora ((ORA)) has deftly packaged broker confidence in its outlook, with FY16 results that were driven by strong organic growth, cost reductions and the contributions from recent acquisitions. FY17 earnings are forecast to be higher, with the company targeting organic growth as well as further investment in innovation.

North American acquisitions contributed heavily to the result, providing market share gains and margin expansion, while Australasia benefitted from improved volumes and cost improvements despite generally flat conditions. The company established two new distribution centres in the US and increased its glass forming line capacity in South Australia. The acquisitions of Jakait, IntegraColor and a Californian supplier of flexible packaging were also completed.

UBS believes there is further upside potential for the company, expecting Orora should deliver around 10% growth per annum over the next two years with reasonable confidence. Scope to pursue its acquisition-led strategy in North America also continues, as net debt is expected to moderate to 1.4 times earnings by the end of FY17. The broker expects that deploying capital in North America will create long-term shareholder value.

While the market may have largely factored in muted organic growth for the domestic business, UBS envisages potential margin accretion over time, underpinned by a duopoly industry structure in fibre and glass industries and a sustained lower Australian dollar providing tailwinds for domestic exports such as wine.

In North America, the broker envisages IntegraColor is more than just a printing business but will provide an entry point and further exposure to the fast-growing convenience channel. Over time UBS believes IntegraColor provides an opportunity to vertically integrate the entire packaging value chain, from design to procurement to logistics and marketing.

Morgans is increasingly confident in the company’s ability to drive organic growth, extract operational efficiencies and execute on acquisitions. The stock is not cheap, hence a Hold rating, but the broker believes it deserves a premium multiple given its defensive characteristics and strong market position.

Citi also remains a holder of the stock because of the benefits of the robust earnings outlook, attractive cash flow and highly regarded management. The broker considers the stock’s multiples already reflect this to a large extent so upside from current levels may be driven by events.

The results were almost faultless, Ord Minnett contends, expecting the delivery of top line synergies and further acquisitions, particularly in the point-of-purchase (PoP) area, which offers scope for earnings upside. Given the share price spike in the wake of the results the broker reduces its recommendation to Accumulate from Buy.

North America delivered underlying revenue growth of 6.0% and management remains confident in its ability to deliver growth at a rate of twice GDP. Ord Minnett notes further investment will be required to achieve this growth but, with cost increases tracking below revenue growth, this paves the way for margin expansion. Ord Minnett now assumes North America reaches a peak margin of 6.0% by FY22.

In Australasia, while the company is on track to deliver the benefits of its cost savings from the B9 paper mill, Ord Minnett notes electricity, gas and soda ash input costs will likely experience continued pressures into FY17. Earnings growth will therefore depend on organic sales and operating efficiencies. The Australasian business margin is expected to gradually improve to 11.3% by FY22.

Macquarie was also impressed with the results. The broker has run a re-investment scenario to quantify the potential earnings impact from the balance sheet options. Management envisages $100-150m per annum in deployable capital. Assuming targeted returns of 20% are delivered over three years the broker calculates there is 10-21% in theoretical upside to profit forecasts by years four to five.

Macquarie also notes the acquisition of IntegraColor has strengthened the company’s offering and improved its ability to participate across the customer value chain. The company has stated IntegraColor provides a new path for growth in PoP and targets are being developed, with the next stage being to expand the US geographic footprint from its current holding in Texas.

Credit Suisse observes the company may have US$300-400m of firepower for acquisitions, which could potentially add over 10% to earnings, but there are few targets which could consume that capacity. IntegraColor holds a 1% market share in a fragmented US$10bn market, the broker notes, with the top four holding just 20% of the market. All up, Credit Suisse believes Orora may need to string together several small acquisitions rather than make a “transformational” deal and the earnings contribution from each would only be modest.

FNArena’s database has five Buy ratings and three Hold. The consensus target is $3.08, suggesting 2.8% downside to the last share price. Targets range from $2.75 (Deutsche Bank) to $3.40 (UBS).
 

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article 3 months old

Ansell On An Improving Trend

Ansell beat low expectations in its FY16 results and its outlook for FY17 has re-ignited confidence, demonstrating some positive growth trends.

-Reviewing options for sexual wellness business and M&A opportunities
-Emerging markets stabilising and medical expected to return to growth
-Portfolio optimisation provides capital management potential


By Eva Brocklehurst

Ansell ((ANN)) beat low broker expectations for FY16, with the issues that drove a downgrade back in February appearing transient and largely attributable to manufacturing problems at the Malaysian facilities that are now fixed.

Guidance has built broker confidence in the FY17 outlook, with indications conditions are improving in the US and Europe and emerging markets are stabilising. That said, brokers note organic sales continued to contract, although management expects a return to modest growth as the impact from the offloading of legacy products diminishes.

The company has hired an investment bank to review the options on the sexual wellness business as well as opportunities to enhance its position in the industrial and medical spheres. The sexual wellness division was the best performer in FY16, with sales growth of 8.2%. The single-use division grew strongly at the earnings line but sales growth was non existent because of the passing on of raw material price increases and the exit of non-core product lines.

Macquarie observes organic sales declined for the third straight half but notes management is aiming to deliver organic growth of 2-4% in FY17, supported by a stabilising of emerging market exposures and a return to growth in the medical division, which was the weakest performer in FY16. Sales in Russia were affected by the falling oil price and currency while Brazil was also weak from macro economic issues in FY16. Excluding the two, emerging market growth was 7.7%.

While the outlook may be improving the broker believes, with the stock rallying around 18% after the results and significant uncertainty still surrounding the operating environment, much of the upside is now captured in the price. Macquarie's rating is downgraded to Neutral from Outperform.

The broker expects a sale of the sexual wellness business could free up capital for some larger acquisitions or capital management in FY17, while noting that M&A opportunities have improved globally. Given the company has historically relied on acquisitions to drive growth, this is considered positive news. Meanwhile, global manufacturing activity is seen improving and considered important given around 50% of earnings are derived from the sale of protective equipment.

The sale of the sexual wellness division makes strategic sense to Ord Minnett, if a premium price can be achieved. Management has indicated a preference for further acquisitions versus returning funds to shareholders. The broker’s analysis indicates that Ansell, ex sexual wellness, is trading near fair value after the recent move up in the share price. Ord Minnett suggests FY17 guidance, which implies earnings growth of 2-17% and sales growth of 2-4%, is wide ranging to reflect the board’s cautious outlook.

Credit Suisse maintains the upper end of the guidance range is realistic and suspects the potential divestment of the sexual wellness division would be well received, assuming, too, that a favourable sales price is achieved, and that the capital is invested in accretive acquisitions.

The broker also notes management’s comment that the company’s end customers are largely business and not consumers and, thus, a review of the sexual wellness division makes sense. That said, given the division generates the highest returns of Ansell’s four operating divisions a divestment would only be logical at the appropriate price, the broker warns.

UBS calculates the divestment, at an enterprise value to earnings ratio of 17 could add around $1.60 per share to the target price. The broker ‘s outlook suggests a stronger US market recovery than guidance implies and that Ansell is on the cusp of improvement, having moved through a 12-18 month period of headwinds for currency and operations. UBS envisages upside risk to FY17 guidance and retains a Buy rating.

The worst is behind the company, Morgan Stanley agrees, although recent competitor and distributor results signal operating conditions remain challenging. With FY17 guidance now to hand the broker suspects the stock could re-rate, as the results provide confidence on execution and demonstrate some positive growth trends. In addition there is now potential for portfolio optimisation and this could lead to further capital management.

Citi remains the more pessimistic broker on FNArena’s database, believing the outlook for the industrial business is weak, based on feedback from key customers, and this represents downside risk for the stock.

Morgans believes growth needs to come from areas other than acquisitions. The broker highlights the growth via acquisition strategy is compromised by the need to constantly rationalise overlapping products, and weighs on the company’s ability to drive organic growth across the entire portfolio. Hence, any sign this trend is slowing is to be welcomed. Furthermore, upside requires execution across a number of fronts in the face of continuing weak conditions.

The database has two Buy ratings, five Hold and one Sell (Citi) for Ansell. The consensus target is $21.66, suggesting 3.0% downside to the last share price. This compares with $19.27 ahead of the report. Targets range from $16.50 (Deutsche Bank, yet to update on the results) to $24.50 (Ord Minnett, UBS).
 

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