This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below. You should consider your financial situation and goals before making investment decisions.
This article covers $TAH (Buy), $NEC (Buy), $HUB (Lighten), $A2B (Hold) and $DUR (Lighten).
As with all my writing, the primary focus is on the methodology instead of a conclusion to buy/hold/sell.
Mid-cap companies
$TAH – Probably not a multi-bagger, but compelling value medium-term
$TAH share price fell to near 52-week lows following a week trading update (which provided only top-line data)
Factually there are plenty of things wrong with $TAH
Investment thesis requires wagering levies to normalize with their peers, however, the timing and probability are difficult to know with local govs.
The trajectory of online wagering is weak albeit stabilising
Management is targeting a reduction in opex to c.A$600m by FY25 (via staffing and ad spending). Whilst I have no doubt that is possible; rarely does this happen with nil impact on sales & is likely baked-in to the price
There is understandable social pressure to legislate to limit the amount of
However, factually it is trading on 6x forward OpCF and 10x forward CF
$TAH is not the highest quality business or management team, but it really is not expensive at this entry point. Consensus estimates are c.$290m of OpCF and $130m of FCF next year mainly via the unwind of costs from the merger. I do not expect large growth beyond FY24 however, there are plausible opex savings, and an embedded “lottery” ticket for online wagering and the Vic gaming market.
$NEC- Under-earning on a few fronts; but obviously FTAs are obviously dying
Whilst no one gets excited about Nine Entertainment, there are a few short-term "free lunches" here:
DHG is cycling high working capital for Domain. Normalisation = more CF for Nine
Stan is surprisingly resilient thanks to key sports (namely soccer, tennis)
9Now is cycling higher downloads; probably driven by NRL
Coopers Investors recently decided to buy a 5% stake in $NEC
Conclusion - Whilst the low growth for $NEC is an issue; I think the chances of adverse earnings in the short term are reduced. Unlike $TAH I cannot see an earnings catalyst beyond the transition to 9Now for this business so there is a finite period I would hold this company (i.e. once buybacks cease & under-earning stops)
$HUB – I missed this one sadly. From here it's not a "short" but I feel they are over-earning on a historically lower multiple
I can remember when I first did some work valuing the $HUB business back in 2014 and I can recall thinking to myself -
"Hub this is trading on a really low multiple compared to international peers. However, who will win the 'war on wraps'' in Aus? Surely IOOF or Macquarie? Besides Praemium has had trouble growing..."
Given that huge mistake I made, take my advice here with a grain of salt. The only point I would make here is:
$HUB takes a huge spread on cash (c.1.7% on some accounts) and whilst it is loved by Wealth Managers for term deposits, however, surely money-market ETFs or exchange-traded bonds will reduce
Softening labour market means they experienced positive jaws (i.e. favourable operating leverage)
I do not think a share buy-back is a particularly appealing prospect for a company trading on a 2-3% FCF yield and P/E which is 1.8x index
Class ($CL1.AX) was an expensive acquisition and this business continues to capitalise a lot of its capex with capex being >25% of OpCF
So whilst I consider the fact that $HUB is trading at a historically low p/e, the market knows that the quality of earnings is reduced at the moment since a) Class has a lot of capitalised costs and b) some of the favourable operating leverage will unwind and c) I don't understand their product is appealing for a growing fixed income space.
Small caps
A2B - Would 'buy' the turnaround but it would need to either have (a) top-line momentum or (b) a dirt cheap price
There are some interesting aspects about the A2B business
A2B has recently appointed Mark Bayliss as the Executive Chairman who has a favourable reputation in retail, QSR and capital allocation
FY24 guide of $22m EBITDA really implies c.20% growth net of the $2m increase in occupancy costs (following their building sale)
They have actively pursued asset sales, which will result in a one-off dividend
The business hit $200m of revenue in 2013 and has not got back this level since then (albeit they have recently revised profitability substantially)
Fleet seasonality is much stronger than you would expect
The biggest reason why I am not on the sidelines here is:
It is not a screamingly cheap entry multiple despite the clearly low-quality of business
Conclusion - Given the historical quality of this business, I don't think that the entry multiple is adequately low. I would rather see demonstrable growth in processing value (and fleet) to a point where 14x seems reasonable.
DUR - Credit to Sohra Peak for bringing this on my radar. It's doubled from there & now key people are taking a little off the table
For any that have followed $DUR, they have risen meteorically of late (150% gain in the year). Whilst I do not think this unwarranted, it is very easy to forget they are a cyclical with the following characterisitics:
$DUR is still heavily reliant upon DoD (>35% of GP) which is not a deal-breaker. However, there is a graveyard of small service providers who misprice risk to win a tender with DoD
Whilst $DUR have identified themselves as lower risk & lower margin (i.e. focussing on remediation and asset management) the business has some components of risk attached to their order book:
Not all of their revenue is under MSA (i.e. where they do have to re-tender)
Whilst they are in the front seat for re-tendering on known clients (e.g. Building and Mining tenders) they are likely to price risk differently at different points of the cycle and depending upon the commodity of focus
So whilst there is no reason to offload $DUR on a multiple basis (16x trailing), there are some small changes in the business which concern me.
Major shareholders trimming their stakes & the recent resignation of CFO
Whilst the founders have been through market cycles; $DUR as a company has not been through weak market cycles. So I have less faith that their mid-management can price risk in those cycles
$DUR continues to win DoD contracts (sometimes via JV with Ertech) and I envisage the GP Margin will compress a bit as Mining/Construction is a smaller component of their earinings
Conclusion - My small punt on $DUR has gone well and whilst I do not consider myself an expert on their contract book, I think a 16x multiple is top-range for this type of business. Importantly, any sell-down of management should see a softening of the share price (which has not happened). The business is far from broken but it is heavily cyclical and I would be very wary of new money here.
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