JUNO INVESTING ©Comment

Stocks On The Move

JUNO INVESTING ©Comment
Stocks On The Move

 

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SPRING 2017

By Chris Bainbridge and Mark Devcich

Chris Bainbridge and Mark Devcich provide a backdrop to the rises and falls of four stocks on the Australian and New Zealand exchanges. 

SMALL CAP
Pepper Group Limited [ASX: PEP]

Business description

Pepper is a non-bank financial lender and mortgage-servicing business with operations in Australia, Asia, and Europe.

Movement

During July 2017, Pepper received a takeover offer from KKR, a US private equity firm. Before the bid, speculation in the press about a takeover offer saw Pepper’s share price increase by more than 25 per cent. This forced Pepper to confirm that it had received a preliminary non-binding proposal from KKR at AU$3.60.  

What’s happened?

Since then, Pepper announced it has acquired Portuguese consumer bank Banco Primus for AU$95 million, subject to regulatory approval. The acquisition could subsequently allow Pepper to take deposits in Spain and Portugal. 

What next?

In another development, the Australian Treasury released some draft legislation for consultation,  giving the Australian Prudential Regulatory Authority (APRA) new powers to regulate non-bank lenders. This may mean that non-bank lenders in Australia will have lending restrictions imposed, similar to those that apply to deposit-taking banks. It’s too early to know how this will affect Pepper in its domestic market.

As the directors own a substantial number of Pepper shares, it’ll also be interesting to see whether they tender their shares into the takeover offer, or choose to partner with KKR and remain as shareholders.

 

SMALL CAP
Bingo Industries Limited [ASX: BIN]

Business description 

Bingo Industries is a waste-management and recycling company, based in New South Wales (NSW). 

It operates a network of 10 well-located resource-recovery and recycling centres, mainly across metropolitan and greater Sydney. The centres are supplied with building, demolition, commercial, and industrial solid waste from both its own fleet of 180 vehicles and 17,000-plus bins, and resources from a number of competitors in the collections industry.

Movement

Bingo listed on the Australian Stock Exchange in May 2017 at AU$1.80 and has performed well, closing at AU$2.06 on 28 July 2017, up 14 per cent. 

What’s happened?

The company is in a good position to benefit from increasing environmental concerns, population density, and strict NSW-regulated recycling targets.

The industry remains highly fragmented and unsophisticated, which has allowed Bingo to grow by acquiring rivals and taking market share. It achieved a compound annual growth rate (in EBITDA) of 61 per cent, over three financial years (2015 to 2017). 

Forecasts for 2018 don’t include any wins in volume growth arising from collections, acquisitions, inter-state expansion, or reprocessing.

What next?

The market will be watching closely to see whether Bingo achieves its 2017 financial year prospectus forecasts, and its outlook statement for 2018.

 

MICRO CAP
Mitula Group Limited [ASX: MUA]

Business description

Mitula is a Spanish-based company that is listed in Australia. It operates search engines and portals for real estate, used cars, fashion, and job advertisements globally under different brands. Mitula’s main focus is real estate and it also runs a number of its own property sites in Asia. 

Mitula earns commission every time someone clicks on, for example, a real-estate listing and is directed through to the original website where it appears, such as TradeMe. Its second revenue source is from advertising on its own websites. It receives a commission from Google each time someone clicks on an ad.

Movement

Mitula suffered a profit downgrade in July 2017. It projected adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) of between AU$12 million and AU$13 million. This was down on the previous forecast of AU$17 million to AU$19 million.

What’s happened?

The decrease was due to slower growth than expected in visits to the Mitula-branded specialist (vertical) search sites, especially in the second quarter. Its websites were penalised by Google for loading slowly, which meant they appeared further down the search results.

On the day of the downgrade, the share price dropped 45 per cent, but it has since recovered slightly. 

What next?

The market will be looking at Mitula’s half-year results, which will be reported in August, to determine how much contribution will be needed in the second half of the year to achieve the full-year forecasts. 

Longer term, the experience shows how vulnerable Mitula’s business model is to changes in Google’s search algorithms. The company relies heavily on Google to keep traffic coming to its websites.

 

MICRO CAP
Decmil Group Limited [ASX: DCG]

Business description

Decmil Group Limited provides design, engineering, and construction services to the oil and gas, resources, government, and infrastructure sectors in Australia and internationally. 

Movement

Decmil closed at AU$0.76 on 28 July 2017, down 19 per cent during the month, after it downgraded its forecasts for the 2017 financial year.

What’s happened?

The reasons given for the downgrade were delays to both construction start-dates on key projects and the award of new tenders in the second half of 2017. The company has also had to write-down the values of its Homeground worker accommodation and
SC Holdings, the telecommunications services business that it acquired last year.

Decmil’s 2017 results were expected to be messy. The new guidance of a break-even EBITDA result (before the Homeground write-down) is less than the market previously expected, but the important question is whether Decmil can stage a turnaround in 2018.

What next?

Fundamental to any recovery is Decmil finishing the 2017 financial year in a solid net-cash position. And if strong tendering activity converts to revenue growth in the next 12 months, the company could be well placed.

 

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