Global Health (GLH)
The small eHealth company reported a poor result with a decline in revenue, margins and profit.
The numbers flatter the company due to an aggressive accounting policy. The half-year profit after tax of $533,500 and full-year guidance of $1 million to $1.2 million is overstated. This is because, for the half-year, there was $459,900 of “software development expenses” that were capitalised on the balance sheet as intangible assets.
Further, an R&D grant from the government of $530k is included as part of the $2.3 million revenue.
If the company employed Azure Healthcare’s (AZV) accounting policy of expensing everything (the company is also in today’s edition) to the profit and loss statement, then the company would have only just made a profit for the half year. With this in mind, the price-earnings multiple of 10 times doesn’t look so cheap.
We also have some concern around inconsistencies from management. Over the past year or so the message was that the risk profile of the business was dramatically improving due to a more diversified customer base. Despite this, the company unfortunately announced in November the loss of a major contract with the South Australian department of health, worth about one third of their revenue.
The contract was the company’s CHIRON PAS software system used in regional hospitals across South Australia. The contract is due to end March 31, and all other customers had previously upgraded the outdated CHIRON system to the MasterCare ePAS software system.
Management has guided towards returning to growth in the next few months due to new product developments, a pipeline of overseas opportunities, and broadening the client base.
Full-year earnings guidance is for similar revenue to last year at $5 million to $5.5 million, and NPAT of $1 million to $1.2 million (EPS of 3 to 4 cents).
Given the disappointment of the loss of the South Australian health department contract, we need to see more evidence that the company can return to growth in FY16 and beyond.
We maintain our “sell” recommendation with a 20 cents price target.
Energy Action (EAX)
The Energy Action result was particularly disappointing with 30 per cent revenue growth not able to translate into profit growth.
Despite management commentary that the integration of Energy Advice and Exergy is tracking to plan, it is certainly not reflected in the numbers. Full year operational net profit guidance of $4.2 million to $4.8 million is disappointing, and would suggest that the much talked about customer acquisition opportunity is not going to materially benefit the company this year.
With a majority of target small businesses due to re-new energy contracts in 2015, management increased costs by 20 per cent last year to position for this opportunity. With this in mind, the lack of growth in the full year guidance is particularly disappointing.
Further, when and if the two acquisitions will assist the company’s operating leverage remains to be seen.
The 30 per cent reported revenue growth is comprised of 12 per cent like-for-like growth, which is materially lower than expectations.
One reason given for the disappointing guidance was the longer than expected gap between winning new Activ8 customers and then receiving the revenues.
Chief executive Scott Wooldridge is yet to prove himself and the business model appears to have some weaknesses. Either the market has changed or management has not done a good enough job looking after customers.
The business model includes an online reverse auction for energy contracts. This is used as a customer acquisition tool. There is also a contract management division that produces most of the revenue and an energy sustainability division.
Last year Energy Action was finding it more difficult to maintain large customers. Energy Advice has a similar business model and it appears that the main motivation for the acquisition was to take out a competitor who was doing a better job at looking after customers.
We have downgraded our forecasts with a significantly reduced $2.50 valuation and target price. Our recommendation is reduced from "buy" to "hold".
Ridley Corporation (RIC)
Ridley reported a strong first half result above expectations. Revenue was up 5 per cent to $465 million and net profit was up 12 per cent to $11.1 million.
Ridley supplies livestock food producers mainly in dairy, poultry, pig and aquaculture. There has also been two key rendering business acquisitions in Victoria and NSW.
The AgriProducts result was especially good with earnings before interest an tax (EBIT) up 24 per cent to $25.6 million. On the negative side there were continued costs associated with realising the value from the property portfolio. The Dry Creek sale process is progressing well with binding offers due in the second half of 2015.
The other property development opportunities at Moolap (3km from Geelong) and Lara (adjacent to Avalon airport) are also making progress.
After the sale of Cheetham Salt and with the benefits of the new management’s strategy, Ridley is well placed to continue growing.
There is continued opportunity to improve efficiency from the mill renewal program.
Management stated that they will continue to pursue acquisitions and invest in R&D projects such as Novacq. There are also new technologies including high protein concentrates to extract greater value and move up the value chain.
The diversified end market exposure and long term global growth for protein also provides a supportive backdrop.
Guidance included commentary that the second half should achieve the same year on year improvement, whilst also highlighting that the first half is traditionally stronger.
We have upgraded our FY15 and FY16 forecasts by an average 10 per cent. Despite this we are moving to a "hold" recommendation due to the 30 per cent price appreciation since our initial "buy" recommendation at 85 cents. Our valuation and target price has increased from $1.05 to $1.12.