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