4 Year Investment Update (22/02/2018)

Please note: The performance figure is quoted net of any fees and expenses, but before taxes. The performance figure is annaulised.

Pleasingly, my personal fund has produced a positive return of +29.83% p.a. since inception (22/02/14). Every stock had a positive contribution to performance over the past year except for a very small position in Pacific Smiles (ASX:PSQ). While the management team have done a great job at growing the business since it was founded, they are yet to prove themselves as a public business. The unit economics of the dental centres are attractive, but their growth strategy is one that will continually require cash flow to be reinvested and so shareholders won’t receive the cash for a while. Given their growth trajectory and high payout ratio, it is also one that requires external capital to help fund its growth. Moreover, the business model requires time for the attractive unit economics to kick in, which is not an issue, but when combined with the fact that they’re having issues with some of their newer centres, it is taking longer than anticipated. Given that the stock already trades at a relatively high multiple of earnings, multiple expansion is hard to envisage. As a result, it will require earnings growth to come through. None of these points are problematic in of themselves, but when pieced together, it doesn’t paint a picture of a stock that will go up in the medium term in my view. Longer term it will pay dividends, but I have decided to sell out as the position was negligible in size and I have found more attractive risk-adjusted opportunities. 

On the other hand, all other positions had a positive contribution to performance. Key contributions came from Redhill Education (ASX:RDH), Afterpay Touch Group (ASX:APT), Origin Energy (ASX:ORG), Macquarie Telecom (ASX:MAQ), and CSG (ASX:CSV) among others. While most of my companies are yet to post their 1H18 results, three key ones have reported being Redhill Education, MNF Group (ASX:MNF), and Afterpay Touch. 

Redhill continues to execute on their strategy of growing organically, expanding geographically, and expanding their range of courses. The deferred revenue balance continues to grow, demonstrating robust revenue visibility and growth. The recent expansion into Melbourne has already paid dividends and they will require more space. As expected, the cash generation for the half was strong and despite paying a final dividend, it has ended the half with a healthy net cash balance.  

On the other hand, MNF reported what in my view was a good result, but the market had a different view. Earnings came in at around the guidance levels on an organic basis, however, recent expansion initiatives has meant that reported earnings will be below previous guidance levels for FY18. This is one of the issues I talk about before with PSQ, but the difference here is that MNF have stated that their $3.5m investment will have a payback of less than 3 years and generate ~$8m EBITDA in FY20. Worst case, the downside of this initiative is limited as the maximum loss on this investment is estimated to be approximately $6m. MNF trades on about 14x EV/EBITDA based on FY18 earnings, but with the potential to double the EBITDA figure in 3 years. Given the recurring nature of MNF’s revenues, the strong organic profit growth, the potential for an annual contribution of ~$8m from the Pennytel initiative, and a CEO who hasn’t put a foot wrong, the stock remains attractively priced in my view.

Thanks for reading,

Chadd Knights


This article is general advice and is not intended to be personal advice. Before making any decisions, consult a licensed professional.