There was no shortage of activity during the recent August reporting season. In today’s weekly video, Forager Australian Shares Fund Senior Analysts Alex Shevelev and Gaston Amoros share a few of the highlights relevant to the Fund.
Insurance industry software provider Fineos (ASX:FCL) upgraded revenue growth expectations for the next financial year. Existing customers are expected to drive much of this near-term growth, while new customer wins are expected to add further to growth in the 2022 calendar year.
One stock that showed off its stellar results is motorcycle dealer Motorcycle Holdings (ASX:MTO). With travel restrictions kicking in last year, the business benefited from consumer spending being diverted from overseas holidays towards motorcycles. Hear more about what could happen to growth as travel picks up in the future.
Results for integrated services company Downer (ASX:DOW) were in line with expectations and, with a period devoid of negative surprises, it was exactly what the company needed. Highlights for the stock included positive cash generation, low levels of debt, and margin improvement across its three core divisions – telcos, utilities, and transport. Find out why the stock is still relatively cheap.
Watch now to find out more about the stocks that made our highlight list.
Read full interview now
Hi everybody this is Alex Shevelev here on Forager’s weekly video and today with me I’ve got Gaston who works with me as Senior Analyst on the Australian Shares Fund. So today we’re going to be talking about the most recently completed reporting season and it just recently wrapped up. We’ve got four highlights to share today and I’ll let you kick off Gaston.
Thank you. I think the first one of my favourites is FINEOS. FINEOS is a provider of software systems to the life insurance industry. They gave us a very nice fy21 update. So fy21 numbers were as expected but the highlight was they upgraded the view for revenue growth in fy22 next year by 10 percentage points. That’s quite a lot. So they’re saying they’re going to grow the subscription side by 30% which is quite pleasing and they’re going to do that mostly with contracts and relationships that they have with existing clients.
That was an interesting part of the result right Gaston because there had been some questions around, well we can’t see them announcing any new contract wins so how are we actually going to grow revenue here? But they confirmed that they can actually do that through their existing client set.
That’s right if you look at the share price it did nothing for like nine months there was a lot of despair from people just saying, oh why are they not announcing any contracts? What’s happening here is revenue momentum stalling and and so on and and basically this result proved that you can grow 30 percent quite substantially from one year to the next basically with your existing customer base.
So to the extent that you sign new logos or new companies that is incremental to the growth opportunity that you already have at hand so that was quite pleasing. Also if you look at where FINEOS is trading in terms of valuation it’s creating a fraction of what their peers in the US trade at. By peers I’m talking about Duck Creek and Guidewire, those guys they trade at like two to four times the EB revenue multiple of FINEOS. So quite exciting and last but not least there were some question marks because they’re burning cash. It’s an early stage company and they’re growing quite fast. There was a question mark about the balance sheet but those questions have now just been put to rest because the company raised 70 million dollars practically overnight and are very well subscribed.
Interesting in that one Gaston is the actual main shareholder here. It looked like he was selling down but actually he was actually buying more shares.
Correct, he’s buying shares from his co-founder, a guy who I think he owned three or four percent of the company, he’s buying him out essentially. So the CEO is, if anything, is slightly increasing his stake in the company so it’s always a good sign and the CEO owns 54 or 55% of the company so it’s a pretty good alignment of interest.
So maybe over to you what do you think are some of the highlights?
So I might start with Motorcycle Holdings. It’s one we’ve talked about a little bit in the quarterly report. Motorcycle Holdings is a retailer of motorcycles, it’s a wholesaler of accessories and it’s also got some retail outlets for motorcycles and accessories. So it’s really across the motorcycle ecosystem. It’s been a good place to be the last 12 to 18 months, really COVID was an initial hit but then very quickly money started being diverted away from overseas holidays towards motorcycles and a lot of the government stimulus was helpful for them as well in terms of driving demand for the motorcycles.
So the last year’s result which we got about a week ago from the company was stellar and it was at the top end even of an upgraded range that they had actually continually upgraded throughout the year. Importantly I think they talked about the sustainability of the demand conditions that they see outside of the shorter term impact of lockdowns that they currently are experiencing and they also talked importantly about the margins being quite strong over that period again once lockdown finishes.
I have two questions for you on that one. First is the revenue going back at some point in the near term as we all start traveling and you know maybe we buy less cars and houses or sofas? And the other one is about the sustainability of those strong margins that you mentioned.
I think both of those are fair points Gaston. You have had a really extraordinary environment and you probably get a slight reduction in revenue and probably a larger reduction in margin going forward and that is what the expectation is for a lot of sell side analysts who cover the stock. However there are some offsetting factors there, they will have contributions from further acquisitions. It’s been a business that’s acquired dealerships over time and they’ll continue to do that and they’ve got an insurance subsidiary that is going from a loss-making position to a profitable one. In any case the volumes that we saw were not dramatically different to the ones that we would have seen two or three years ago so we think that they will stabilize at a lower level than currently but then from that level can actually continue to grow. Let’s turn that around a little bit and let’s talk about Downer Gaston, another highlight.
Yes, another highlight was Downer. They reported that result which was in line with expectations but that’s exactly what the stock needed, pd without any negative surprises now that they have cleaned the business and simplified the business and they got rid of the mining and laundry divisions which were more capital intensive and volatile, the business showed good margin improvement across the three core divisions good cash generation and lower levels of debt. As a result of that the stock is now up 20 percent.
That’s a good place to maybe just pause and talk about those margins they were up in that year but there’s been a little bit of concern around a whole heap of industries around labor cost inflation. Can you just talk a bit about how they’re exposed to that?
Well they employ a lot of people across Australia and across the three divisions tail cost, utilities and transport so they of course are exposed to wage inflation but they’re no more exposed than any other company in Australia. So I don’t think it’s a big issue for them. There was a slide in the presentation addressing that point and they make it very clear that though most of their contracts have clauses to recover any wage increases from their customers be it in three months, six months or twelve months.
But you do have protections from that point of view so i don’t think it’s a big issue for them. Look after reporting an in line result the stock got rewarded with a higher multiple start now 20%. But even after that it’s still trading relatively cheap 16 times pe fy22 compared to the market trading in the low 20s for similar type of eps growth so a good result. Maybe back to you Shev any other highlights from the season so far?
Well there’s another one to highlight and it was a pretty big contributor for us in August. ReadyTech is the business, it’s a provider of enterprise software across education and payroll software. It’s a business that has had a bit of a quiet start to listed life it hasn’t been on the radar of many investors and I think this result which was pretty much in line with what was expected, really helped to cement the fact that they are actually doing what they said they would do, growing revenue organically in the mid-teen range which is a very healthy growth rate and complementing that with acquisitions. One of those acquisitions actually looks to be performing a little bit better than they had expected earlier. It’s worth pointing out that unlike a lot of other reasonably quickly growing tech businesses this one actually makes money and there’s a margin on that revenue of about 28 percent of the ebit line and that might not grow too dramatically but it’s still a good starting point.
How much do you pay for that growth and how long lasting is the growth?
So the companies put out some really interesting not guidance per se, but statements around where they would like to be in 10 years time. That looks to compound their revenue organically at a rate of about 15 percent which is what they have been doing the last couple of years. So it’s not a dramatic increase or decrease but it’s good that they’ve confirmed that they feel they can do that over a longer time period and you pay a high teens multiple for it. Now it was low when we were buying the stock six months ago. But that number is still a fair way below for example TechnologyOne. Now this business has a long way to run before it’s anywhere near the size, liquidity and diversity of a TechnologyOne but it is showing some similar characteristics and it is a 10,15, 20 pe point difference to that stock.
Excellent thank you.
All right so that’s the reporting season wrap up with the Forager Australian Shares Fund team. We’ll see you again next time.
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