Thursday, March 8th, 2018
Reporting season has mostly been kind to Clime with strong results, earnings beats (relative to consensus) and/or guidance upgrades from CSL, Computershare, Flight Centre, Jumbo Interactive and Hansen Technologies, among many others. Every portfolio stock due to report has now done so – this means we now know all of our dividend income receivable in coming months. In today’s report we cover the results from these 5 companies.
CSL has delivered some of the best large-cap capital returns this reporting season, surging 19% from the low of $138.92 on 9 February. The result, dividend and guidance surprised above consensus expectations, which goes to the power of this business model, the staff and management team, the R&D program, CSL’s market leadership and the growth available in CSL’s end markets. Here is a summary of this extraordinary result:
- NPAT up 35% or 31% in constant currency (cc)
- EPS up 36% or 32% cc
- Revenue up 11% cc but EBIT 31% higher cc, indicating strong EBIT margin expansion from 30% to 36%
- Interim dividend up 23%
- Increasing market dominance across most products
- IG was always going to have a tough comparative after 22% growth in the pcp, so sales growth of 7.4% this time contradicts CSL’s original communication the IG volume growth of 1H17 was “atypical” and again goes to the competitive advantage CSL developed during 2015 and 2016 when it expanded its plasma collection network while competitors fell behind. It seems to be taking longer than expected for competitors to catch up
- Sales of Hemophilia B treatment Idelvion were up 300% on pcp with strong uptake; hereditary angioedema treatment Haegarda also ramped up impressively with strong patient adoption, and sales of specialty products including Kcentra for post-operative bleeding rose 20% as US hospitals increased usage
- Albumin was the only negative as no rebound in growth following the disappointing 2H17.
Figure 1. Solid, diversified growth in 1H18 CSL Behring revenue
Figure 2. Rapid uptake of CSL’s Hemophilia B treatment Idelvion
Figure 3. Upside margin surprise as the diversified portfolio delivers
Management upgraded FY18 NPAT cc growth guidance from 11-16% to 16%-20% but even this seems overly conservative because it still assumes the flu vaccine business Seqirus only breaks even in FY18 after just reporting $185m EBIT for 1H18, itself way above expectations. The forecast $185m EBIT loss for the 2H seems inexplicable. Management weakly explained this as the result of “returns” of unused vaccines despite record demand in the US during its worst modern flu season on record. Perhaps the flu business is still volatile even in a bumper year and has more moving parts than the market understands. This result Seqirus revenue jumped 26% due to increased sales of seasonal flu vaccines and quadrivalent in particular. There were manufacturing improvements and cost efficiencies, validating the acquisition and its turnaround strategy.
The surge in the share price includes the guidance upgrade and PER expansion. CSL now trades on a super-premium 34 times FY19 consensus EPS of $4.80. The combination of high ROE and reinvestment in the mid- to high teens sees value compound to the $180s in FY19, though this equity multiple valuation is sensitive to adopted NROE and RI. Interpolating between our 30/06/18 intrinsic value of $146.72 and 30/06/19 IV of $185.10, the stock is worth ~$172 a year from now, implying a shareholder return of 4%, before dividends, on our upgraded valuation. This leaves us neutral on the stock and we would not be surprised to see consolidation at current or lower levels.
As a high-PE stock CSL is vulnerable to rising bond yields. The valuation is also sensitive to USD/AUD.
CPU delivered a strong 1H18 result some 2% ahead of consensus expectations at the NPAT line and again upgraded guidance as corporate actions activity lifted, mortgage services profitability improved and interest margin income benefited from higher interest rates and transactional cash balances. The average yield on cash balances was 92bp, compared with 80bp in the pcp and 83bp in 2H17.
Management EPS for FY18 is now forecast 12.5% higher than FY17 in constant currency terms, with a “positive bias”. This is an upgrade from the former 10%. Following the result and what again appears to be conservative guidance, consensus FY18 EPS has been upgraded by ~4%. We also upgraded our own adopted NROE and RI – see our discussion of the result and our valuation under Analyst Comments.
Recent favourable trends in mortgage services growth, margin income and corporate actions are likely to continue in the near-term. CPU is nicely leveraged to the current investing macro of buoyant equity markets and corporate actions with rising interest rates.
The market’s attention will now shift to Stage 3 of the cost efficiency program to be announced in April. The premium 21 times earnings multiple already captures much of this, so we are neutral at current prices.
Figure 4. CPU’s increasing exposure to rising interest rates
Figure 5. CPU’s exposure to rising interest rates, quantified
Large-Cap Sub-Portfolio Manager
FLT was the standout result in the mid-cap sub-portfolio, reporting profit before tax growth of 23% on the prior corresponding period. With the benefit of a lower tax rate, earnings per share increased by 37%. This result was 9% above the mid-point of management’s guidance range and beat consensus expectations by a similar amount. The stock has consequently gained 15% since the result at the time of writing.
The second half of the financial year will cycle a stronger corresponding period, so full year profit before tax growth is expected to be up 9-17%, after 23% for the first half. More importantly, management has retained 3-5 year targets for 7% per annum total transaction value growth and a return to a 2% PBT margin. This TTV target would represent a continuation of the consistent growth achieved over the past 8 years, as illustrated below.
Figure 6. Trend growth in FLT’s total transaction value
The 2% PBT margin target compares to 1.6% achieved in the 2017 financial year, implying just over a 20% uplift to earnings if achieved. These management targets remain ahead of consensus expectations, providing scope for upgrades on continued successful execution of the strategy.
Mid-Cap Sub-Portfolio Manager
The updates have continued thick and fast in recent weeks, with dozens of interesting small caps reporting their half year results. Today, we will focus our efforts on Jumbo Interactive (ASX: JIN) and Hansen Technologies (ASX: HSN).
Jonathan Wilson subsequently covered off the key result details in a recent article. To summarise, we believe JIN is an attractive investment proposition for several reasons.
Firstly, we believe JIN is an easily understood business with bright prospects. Over many years, JIN has built a substantial database of verified accounts, one that continues to grow.
Concurrently, the company has developed a high quality online platform. With much of that investment largely complete, we are only now starting to see significant operating leverage. As a result, each new incremental dollar of revenue is flowing through more potently to the bottom line. Put another way, we expect to see further margin expansion in the periods to come.
JIN now presents as a capital light business whose profitability, as measured by normalised return on equity (NROE), should continue to trend higher in the coming years. As we have articulated previously, JIN is also in the healthy position of having substantial excess cash reserves, no debt and an abundance of franking credits.
Management have suggested that the business only requires approximately $10m for the business to operate comfortably. We estimate that JIN’s company cash balance will grow from the $34m noted as at 31 December 2017 to approximately $45m by 30 June 2018. This reflects not only the cash we expect the company to generate in the second half, but also, the expected cash injection from Tabcorp (TAH) exercising its remaining 3.7 million options by 12 May 2018.
In aggregate, we believe the above will provide significant impetus for management to declare a meaningful fully franked special dividend over the coming months. In our view, this could well equate to a further $0.20 to $0.30 of fully franked income to flow out of the business (in addition to the ordinary dividend income declared) before 30 June.
Our FY2019 valuation for JIN is $4.42 per share. When coupled with the expected returns from dividend income, we believe JIN offers the potential for a reasonable return given our initial entry point of $3.85 per share.
One of the significant bright spots of the small cap reporting season has been that of Hansen Technologies (ASX: HSN), whose result was ahead of expectations on all key metrics. For those unfamiliar with the company, HSN is a leader in mission critical billing software on a global basis. HSN’s billing software is crucial to the operations of its customers, primarily those operating in the energy, water, telecommunications and Pay TV sectors. As a result, customer churn is extremely low while the degree of recurring revenue is high.
Established in 1971 by Ken Hansen, and later listed on the ASX in 2000, we believe HSN is a high-quality business guided by a talented and aligned management team. HSN’s growing global footprint is impressive and encompasses a large, diversified client base of nearly 600, spread across 80+ countries and serviced by 20 offices in various geographical locations.
Figure 7. HSN’s Global Footprint
Turning to the first half result, revenue was up 36% to $118.4m, EBITDA was up 41% to $33.8m while NPATA was up 47% to $22.7m. Given the recent acquisition of the market leading Nordic business Enoro was partially equity funded, earnings growth on a per share basis was comparatively lower, up 37% to 11.7cps.
As has so often been the case throughout HSN’s history, operating cash flow was sound at $26.9m, which in turn afforded management scope to swiftly repay a reasonable amount of debt during the half. Net debt closed the period at just $17.2m, suggesting HSN may again be back in a net cash position within six to nine months.
Looking ahead, we believe the company is well placed to deliver double-digit growth in per share earnings and cash flow over the next two to three years. If achieved, this will build on the strong track record of growth, largely self-funded, delivered over the past decade.
Figure 8. HSN EBITDA, NPAT, Dividends and Cash Flow Per Share, FY2006 – FY2020F
Source: HSN, Clime forecasts
Small-Cap Sub-Portfolio Manager