Economic soft patch could bring glum company outlook
MaxiTrans Industries
The truck trailer manufacturer has shot the lights out in recent times, with earnings rocketing and the share price climbing 761 per cent from a low of 18¢ in May 2011 to a recent high of $1.545 in March 2013.
In the past three months, though, the stock has peeled off and now sits at $1.17 a share. The company has a top-shelf managing director in Michael Brockhoff. However, it is acutely exposed to the machinations of the economy.
MaxiTrans booked a net profit of $12.8 million, or 6.97¢ a share, for the six months to December 2012. At the time the company said its order book was strong right through to June 2013 and as a result it was looking to double the stellar first-half result. If it achieves the full-year forecast the company would earn just under 14¢ a share, placing it on an attractive 2013 price-to-earnings (P/E) ratio of 8.5 times.
MaxiTrans has a stable parts business but the bulk of earnings are generated from the supply of trailers to the resources, agricultural and food industries. All of these areas can quickly change their capital expenditure budgets. Even if the company can manage to avoid lowering its estimates for the year to June 2013, the uncertain economic conditions reduce the likelihood it can repeat the 14¢ a share.
Saunders
International
The industrial tank builder bucked the trend this week and announced some pleasing profit numbers in its June update. The company said it expected to earn a net profit of about $5.6 million for the year to June 30. This represents a 24 per cent increase on the previous year on the back of a 30 per cent jump in revenue.
This all sounds positive. However, the $5.6 million net profit includes an $800,000 net gain from the settlement of a legal dispute. So the actual net profit number for 2013 is $4.8 million, representing a more modest 7 per cent growth. The picture gets less rosy again if we acknowledge that in 2012 the net profit number was understated because of one-off legal expenses. So we are looking at a company that has 30 per cent revenue growth in 2013 and no earnings growth.
So what does that mean for Saunders? The company has a market value of $54 million. Once you take into account the $14 million of cash on the balance sheet then you are paying $40 million for the operating business. If the company can retain its hard-fought revenue growth and stabilise profit margin in 2014 then the company is trading on a P/E multiple of about 8.5 times. This could create a buying opportunity if it gives a positive outlook statement when it reports its full-year result.
AVJennings
One area of the market that remains attractive is the residential property development market. We have previously talked about Sunland, Villa World and Devine as looking attractive. Another one in this category is Melbourne-based AVJennings.
In April, AVJ raised fresh equity through a rights issue at a big discount to stated net asset backing (NTA). The $41 million issue diluted the NTA from 90¢ a share to just 74¢ a share. The shares are now trading at 44¢ a share, a 40 per cent discount to the new NTA.
Hardly the stuff shareholders want to hear. However, the capital raising was accompanied by a new banking facility that provides the company with the firepower to dramatically escalate the development of its property lots.
We can also assume the Victorian property market, after two dreadful years, might be finding a bottom as mortgage rates fall. In this environment I can see AVJ trading up to 60¢ a share, a discount of about 20 per cent to its NTA.
matthewjkidman@gmail.com
Fairfax Media takes no responsibility for stock tips.
Frequently Asked Questions about this Article…
The article says Australia’s domestic economy has hit a soft patch ahead of the federal election, which has already led to a long list of earnings downgrades across sectors. For everyday investors that usually means companies may give a ‘glum’ outlook when they report full‑year results in August, as weaker demand can translate into lower revenue, squeezed margins or cuts to capital expenditure plans.
MaxiTrans saw a dramatic run-up from 18¢ in May 2011 to a high of $1.545 in March 2013 (about a 761% increase), but the stock has since pulled back to around $1.17. It reported a net profit of $12.8 million (6.97¢ per share) for the six months to December 2012, and at the time said its order book looked strong through June 2013 with a full‑year forecast of just under 14¢ per share (implying roughly an 8.5x P/E for 2013).
MaxiTrans earns the bulk of its profits from supplying trailers to cyclical sectors — resources, agriculture and food — so it's highly exposed to changes in those industries’ capital‑expenditure budgets. Even with a strong order book and experienced management, the current economic uncertainty reduces the likelihood it can repeat prior growth, so investors should watch order flows, backlog and any revisions to guidance.
Saunders announced an expected net profit around $5.6 million for the year to June 30, a headline 24% increase driven by a $800,000 legal settlement. Excluding that one‑off gain the underlying net profit is about $4.8 million — roughly 7% growth. Revenue was up 30%, but earnings growth looks modest once one‑offs are stripped out. Investors should focus on whether revenue growth converts into sustainable margin improvement and how management frames outlook and margins for 2014.
The article notes Saunders had a market value of about $54 million and $14 million of cash on the balance sheet, which implies you’re effectively paying around $40 million for the operating business. If Saunders can retain revenue growth and stabilise margins, it is trading at roughly an 8.5x P/E — a metric the article suggests could make it an attractive buying opportunity if management gives a positive outlook.
AVJennings raised $41 million in April through a rights issue priced at a significant discount to the stated NTA. That capital raising diluted NTA from 90¢ to 74¢ per share, and the shares were trading around 44¢ — roughly a 40% discount to the new NTA. The raise also came with a new banking facility intended to accelerate property development, which could support a recovery in value if the Victorian housing market improves.
The article suggests AVJennings could trade up to about 60¢ a share if the Victorian property market finds a bottom and mortgage rates continue to fall. The key drivers would be successful execution of accelerated developments funded by the new banking facility, improved housing market conditions in Victoria, and positive guidance from management — all of which could narrow the discount to NTA.
According to the article, investors should look for the companies’ outlook statements and any guidance changes, updates on order books or backlog, revenue growth versus margin trends, one‑off items (like legal settlements), cash on the balance sheet, and whether management expects capital‑expenditure demand from cyclical customers to hold up. Those items help you assess whether a company’s reported profit is sustainable or driven by temporary factors.
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