Daily notes

Daily Notes – WTC, GRB, KMD, API, HUB, AXL

Wisetech Global (WTC) – Another acquisition… Gage Road Brewing (GRB) – Acquisition and capital raising… Kathmandu (KMD) – Earnings upgrade… Australian Pharmaceutical Industries – Adding growth and Amazon!.. HUB24 (HUB) – Earnings below expectations… Axsesstoday – Bond issue

Wisetech Global (WTC) – Another acquisition

Wisetech announced another acquisition, one of the largest they’ve done, this time buying Pierbridge, Inc. for $59.4m. The consideration comprises of $37m upfront with a further earn-out potential of up to $22.4m related to business and product integration and revenue performance. Pierbridge reported $9.3m in annual revenue in 2017.

The company has long flagged their intention to continue making new acquisitions, including foothold and adjacency acquisitions. Expect larger adjacency acquisitions going forward due to the need for scale in new verticals in order for the company to be immediately relevant and competitive. The $100m institutional raising completed last month with the Capital Group was done in order to fund this ongoing acquisition program as well as the R&D spending.

Gage Road Brewing (GRB) – Acquisition and capital raising

Acquired Matso’s Broome Brewing Pty Ltd for $13.25m plus deferred consideration of up to an additional $2.8m in cash or scrip subject to the achievement of performance criteria over a 3-year period. Funding via a $10m placement to institutional shareholders and a $2m share purchase plan, both at 8.5c per share.

The Matso’s brands currently generate $2.5m EBITDA per annum. The acquisition is intended to accelerate the 5-year proprietary brands strategy – improved margins and sustained earnings growth through a shift in sales mix towards higher-margin Gage Roads owned products:

Kathmandu (KMD) – Earnings upgrade

Kathmandu sales year to date are 7.7% above last year. In addition, Kathmandu gross margin is 240 bps above last year due to improved full price sell through, and a higher average selling price. Full year EBIT is now expected to be in the range of $72 to $77m (last year $57m).

Australia has experienced double digit same store sales growth of 13.8% during H2 and 7.7% YTD. The Autumn season and the start of the winter promotion have delivered higher sales and profit than planned. NZ has produced SSSG of 4% for H2 and -1.5% YTD.

The strength of the Australian market during H2 was the real surprise given H1 produced SSSG of just 1.9%. Also, the significant gross margin expansion being produced is nothing short of exceptional given gross margins have been largely stagnant for the last 5 years.

Australian Pharmaceutical Industries – Adding growth and Amazon!

Announced the acquisition of Clearskincare Clinics. Looks like a smart acquisition for API – high growth adjacent market opportunity with a common customer and common suppliers that extends APIs presence in service based retail and fits with APIs experience with health professionals, franchising and regulated markets.

Transaction metrics look reasonable at 8.9x FY19 EBITDA. Acquisition adds some growth to what is currently a mature business operating in a difficult market. FY19 contribution to revenue and EBITDA expected to be $48m and $14m respectively (based on a 100% contribution) ~29% margin. Current API businesses generate ~$4b in revenue and ~$100m EBITDA, ~2.5% margin.

In other pharma news overnight Amazon announced the acquisition of online pharmacy startup PillPack in the US. No signs yet of an entry into the Australian market, but Amazon in any market is obviously a threat that should not be taken lightly.

HUB24 (HUB) – Earnings below expectations

Hub24 updated the market with FY18 EBITDA guidance of $11.8m, which was below expectations. FUM grew to $8.3b, which was inline with expectations. Only explanation for the shortfall is that HUB are having to give away margin in order to continue growth in FUM.

When a stock is priced for perfection, nothing short of perfection will do. Accordingly, the stock is down 25% on heavy volume. Not a good sign.

Axsesstoday – Bond issue

AXL are considering an issue of ASX listed bonds to raise a minimum of $50m to help diversify the company’s capital structure and fund growth. To date the company has financed itself though a combination of senior debt, corporate bonds, equity and a recently established $200m securitization warehouse facility.

The business is growing fast and obviously working hard to diversify and secure financing lines in advance of growth. Capital is inventory for this business and without it, growth will slow. So far they’ve done a good job keeping ahead of the curve.

The listed bond issue will be an interesting litmus test for the strength of the market and for investor appetite for this type of offering. There are a number of other listed companies I can think of that could make use of this type of retail financing if it proves itself available.

By Danny Sandler

Founder of Ocean Asset Management.