Daily notes

Daily Notes – MVP, PNV, SFH/NBL, A2M, APT

Medical Developments (MVP) – Failure to launch… Polynova (PNV) – Follow the leader… Noni B (NBL)/ Specialty Fashion Group (SFH) – Shuffling the deck chairs… A2 Milk (A2M) – Expectations matter… Afterpay Touch – Now not providing credit in the US

Medical Developments (MVP) – Failure to launch

Trading update – despite Penthrox having been approved for sale in 15 additional countries during FY18 including Canada, Germany, Mexico, Sweden and numerous other European countries revenue for FY18 will likely be flat or slightly down on FY17. The stock was promptly sold down 14% on the day and another 10% in the following 3 days. Expectations are high very for the company and sales have so far failed to materialize.

Chairman sold 4.35m shares at $5.40 in October 2017 and another 5m shares at $7.50 in March 2018. Still holds ~9m shares (~15% of the company).

So far, the company has been guilty of spammy announcements with no delivery of actual results (i.e. sales). Trend has reversed violently and not sure where the stock will finally land when the dust settles.

Polynova (PNV) – Follow the leader

Stock is up substantially over the last 12 months. Interesting due to the fact that as David Williams (chairman of both PNV and MVP) has sold down his considerable stake in MVP, he’s been acquiring shares in PNV. The acquisitions have not been on the same scale as the disposals but interesting to note, none the less.

Noni B (NBL)/ Specialty Fashion Group (SFH) – Shuffling the deck chairs

Noni B have acquired the bulk of Specialty Fashion Groups business, including 832 stores and $642m in revenue (bad SFH). Specialty Fashion will be left with the City Chic business, which accounts for 115 stores and $134m in sales (good SFH).

Noni B are buying bad SFH for $31m, paying just over book value. The business currently makes EBITDA losses of $6.2m according to SFH, but only $1.4m according to NBL. Either way bad SFH is bad. Declining sales and ongoing losses. Noni B management are hoping to be able to sprinkle some fairy dust on these brands and generate synergies of $30m in Yr1. This would be a substantial turnaround for what’s been such a troublesome business in the hands of SFH management.

On the other hand, good SFH looks substantially profitable and growing strongly. In all dimensions the City Chic brand is comparable to some of the best retailers in the country, think Premier and Lovisa. Which begs the question – what has been going on with the rest of the business? How could management have done such a terrible job with the bulk of the brands, except one? Perhaps bad SFH is just a host of undifferentiated brands with no hope of survival in the current retail environment. Noni B don’t seem to think so. Which makes this transaction exceptionally interesting from a business strategy perspective.

A2 Milk (A2M) – Expectations matter

A2 Milk update and FY18 outlook showed continued growth across product lines and regions. However, top-line revenue growth will come in below expectations and the company is expecting to significantly ramp up marketing expenditure in the US and China. Revenue good but below expectations, margins contracting. Stock sold down ~15%.

Some back of the envelope calculations, with gross margins in line with H1 at ~49.8%, labor and distribution at ~6.7%, admin constant at $18m and marketing ramping to $59m, revenue at $475m will result in EBITDA ~$129m for the HY, down from $143m in the previous HY. Still big gains on the prior corresponding period, but quite substantially below consensus expectations. Hence the sell-down. Will be interesting to see how the market reacts in the days and weeks ahead and whether this will result in longer-term expectation revisions or just a temporary setback.

Also note sympathy stock price reactions in Bellamy’s (-10%) and Synlait (-7%).

Afterpay Touch – Now not providing credit in the US

Afterpay announced their launch in the U.S. market with Urban Outfitters, one of the largest portfolio of consumer lifestyle brands based in the U.S., with total sales volume in the order of US$3bn across stores and digital channels. This is significant, and given the product/ market fit that they’ve achieved in Australia it will certainly be interesting to see how this transfers to the US market. However, note the facetious headline that speaks to the regulatory risk facing the company in Australia and now potentially in the US.

By Danny Sandler

Founder of Ocean Asset Management.