Daily notes

Daily Notes – GRB, PME, AXL, FNP, EHL

In this post we discuss GRB, PME, AXL, FNP and EHL.

Gage Road Brewing (GRB) – Growth

Q3 quarterly update showed the business on-track to deliver on earnings targets for FY18. Stock responded well, pushing back up above 90c and well back into the base being established since January. Investment thesis revolves around sales growth and margin improvement resulting from increased sales of proprietary brands and a reduced reliance on contract manufacturing.

Sales of Gage Roads’ brands comprise 39% of overall sales mix, up from 34% during the first half. Management believe that they are on track for 8m litres of proprietary brand, representing 70% of the sales mix and $1 EBITDA per litre (up from $0.41 currently) by 2020. Stock looks cheap if they’re able to deliver on this strategy, especially with no debt and current capacity of 17m litres. Time will tell.

Pro Medicus (PME) – Growth

Signed an additional deal with I-Med Radiology to standardize on Visage RIS across all 200 practices. New sites will add $1.4m in revenue per annum with additional upside as I-Med continues to grow. Not an insubstantial deal with total PME revenue of $32m in FY17. Stock back up above the 50-day moving average but this type of deal is well within expectations for the market therefore caused no major excitement (or expectation revisions).

Axsesstoday (AXL) – Growth

Settled $200m securitization warehouse facility. The SWF has a revolving term of 12 months and is comprised of $200m in senior bank funding provided by Macquarie, supplemented by subordinated mezzanine and equity notes held by Axsesstoday. The SWF’s total funding capacity is approximately $280m. The company expects to build the balance to approximately $200m through new originations over the next 6 months as the Company’s market share expands in the core hospitality and transport segments and has refinanced its corporate debt facility limit from $175m to $65m. The company’s offering seems to be resonating strongly with the market as is evidenced by the rapid growth in their receivables book. The SWF combined with the recently completed $20m equity capital raising gives them the ability to continue on their growth trajectory.

Freedom Foods (FNP) – Growth

Announced $29m capex program to increase total dairy milk processing capacity to 500m litres per annum, from the current processing capability of approximately 300m litres p.a. The company has spent over $300m on its manufacturing infrastructure over the last few years. Sales have grown from ~$90m in FY14 to ~$300m in the LTM however margins and returns on capital have been woeful.

The company is in the ‘scale’ phase of their development curve and will now need to start showing that some of this heavy investment can be turned into actual earnings and cashflow. Stock looks very expensive based off current earnings however it’s difficult to get a sense for how margins will expand as revenue grows. The brand creation and category expansion that’s taken place over the last few years will only need to be done once (provided its been done well), meaning that as sales volume grows from here (assuming of course that this actually happens), margins should begin to scale, but where they end up is hard to predict.

Emeco (EHL) – Restructure

Announced another acquisition and capital raising. Raising capital at 7.5x EBITDA to fund acquisition being made at ~3.5x EBITDA. Classic public market arbitrage. That being said, rationale looks sound with tightening market for equipment and improving utilization and rates across the business and industry.

Group combined run-rate operating EBITDA of $188m with margins trending back towards the 40% level, where they were in FY13 before they fell off a cliff. EHL has rarely traded above 5x EBITDA and probably shouldn’t today but it’s impossible to predict where EBITDA will settle, especially if they continue to make smart acquisitions and industry conditions continue to improve.

By Danny Sandler

Founder of Ocean Asset Management.