In our published article on November 10 we discussed why we thought the market had badly overreacted to the first-half guidance of Azure Healthcare. We rated the stock a strong “buy” at 24 cents with expectations that the uncertainty would be cleared up at the AGM.
Since this time the stock has bounced around 50% to 35 cents, with management providing a very clear and thorough presentation of the company’s growth opportunity.
So far for those who didn’t panic and topped up their holdings, it is proving to be a very good entry point.
It also needs to be remembered that when the share price was in the mid-30’s in April the company received an initial takeover approach. If the price remains in the 30’s we see ongoing risk of another opportunistic takeover bid.
The following is a list of key points from the AGM:
- Management has taken on board the feedback from shareholders for more detailed disclosure of operations.
- The US growth story is continuing as expected with increases in revenue, gross margins and profitability.
- The new manufacturing facility has been successfully commissioned in Irving Texas.
- Leading edge Tacera Nurse call system has gained both FDA registration and UL1069 certification.
- Management will invest and manage the business for the long term rather than trying to prop up short term profits.
- Usually there is a first-half seasonality to earnings due to more working days in the first half, but for the first time in recent years the second half will be stronger.
- Sales are increasing, as is gross margins due to a higher proportion of software sales.
- First-half guidance includes expansion costs that are all expensed. Includes $500,000 for extra staff at the US facility, and $650,000 for additional R&D expenditure
- Conservatively all costs will continue to be expensed – including fixed asset capital expenditure! Therefore underlying earnings are actually higher than what is reported.
- With the US facility running at full single shift capacity, management has decided to increase floor space by 65%.
- Extra capacity will enable growth in the US, Canada and South American markets with reduced tariffs, shipping costs and lead times.
- No working capital required.
- Not in a position to forecast full year profit, but note the first half weakness is not due to lost work and rather work that will be completed in the next 6-18 months.
Earnings forecast changes for 2014-15
- Slightly lower revenue (down 3%)
- Additional expansion costs of $500,000
- Higher tax rate to 25%
- Net Profit from $5.24 million to $3.65 million
- Discounted cash flow valuation downgraded from 55 cents to 46 cents
We maintain our “buy” recommendation with a reduced 46 cents target price.
To see Azure Healthcare's forecasts and financial summary, click here.
Netcomm Wireless (NTC)
Since we last wrote on Netcomm on October 13 the share price has fallen away from 59 cents to 50 cents.
In our view the recent weakness is due to the market's lack of patience in waiting for a contract from Ausnet Services (AST). They recently confirmed they will be spending the additional money to fix the smart meters that one of NTC’s competitors incorrectly installed. But we are still waiting for confirmation that NTC will get the job.
The other catalyst the market is waiting for is confirmation from NBN Co. of an expanded and fast-tracked use of fixed wireless as per the independent recommendation earlier in the year.
Despite still waiting for these catalysts there are no changes to our prior forecasts or “buy” recommendation with a 90 cents valuation.
To see Netcomm Wireless's forecasts and financial summary, click here.
Ridley Corp (RIC)
Ridley Corp has increased to 97 cents from 85 cents when we recommended the stock as a “buy” on October 27.
Since this time the company has announced exclusive negotiations are underway for the redevelopment of the company-owned land at Moolap.
Management also announced that they have received government funding to build a new feedmill on its site at North East Geelong.
But trumping both those announcements is the new free trade agreement (FTA) between Australia and China. The agreement expands the tariff free trade for commodities to also include agriculture and services. As Alan Kohler described in his weekend briefing, the new agreement is a significant positive for the domestic agriculture sector, and Ridley (RIC) is one way of gaining exposure.
No change to our prior “buy” recommendation and upside risk to our $1.05 valuation.
Global Health (GLH)
Our speculative “buy” recommendation for Global Health (GLH) has not gone in our favour with the current price at 38 cents versus 55 cents at our initial recommendation.
Late on Friday the company announced that its earnings will be negatively affected by the conclusion of a contract with the South Australian government in March 2015. This has been known for some time with the US-based software company Allscripts due to roll out the state’s electronic patient administration system (EPAS).
In an interesting turn of events GLH went into a trading halt this morning, due to a claim that the South Australian government contacted them over the weekend in an attempt to renegotiate the contract with GLH past March 2015.
It is too early to determine what the outcome will be, but there are some recent media articles suggesting Allscripts may not have been ready to meet their contract requirements.
We will be attending the Global Health (GLH) AGM on Wednesday and will provide an update post this meeting.
Our recommendation is under review with the company in a trading halt.