Daily notes

Daily Notes – PHK, GTK, SIG, CAJ, MNY, RBL

Phoslock Water Solutions (PHK) – Funding for China growth… Gentrack (GTK) – Capital reload… Sigma Healthcare (SIG) – Chemist Warehouse contract lost… Capitol Health (CAJ) – More acquisitions… Money3 (MNY) – Ray Malone appointed exec chairman… Redbubble (RBL) – Founder retiring

Phoslock Water Solutions (PHK) – Funding for China growth

Capital raising undertaken to raise $5.5m at 36c per share. Funds to provide working capital for the expansion of the Chinese business, which undertakes design, engineering, and implementation using remediation materials for rivers, canals, reservoirs and lakes along with construction of wetland areas in China.

The China business, started in 2017, is a significant broadening of the historical PHK business and enables it to undertake a greater array of projects in China and elsewhere, supplying both services and materials.

In the first 12 months of operation, China has generated over $20m of sales contracts, with roughly half completed in FY18, with the balance to be completed in current Financial Year. This is significant, especially when contrasted with the $3.8m in total revenue generated in FY17.

Gentrack (GTK) – Capital reload

Gentrack undertaking a fully underwritten entitlement offer to raise NZ$90m.

In June Gentrack announced the acquisition of Evolve for NZ$44.2m and upon completion increased Gentrack’s drawn debt to approximately NZ$90m. Proceeds raised will be used to pay down this bank debt and replenish borrowing capacity for future debt funded acquisition and growth opportunities.

Gentrack has completed four strategic acquisitions since March 2017 for a total consideration of NZ$138m (excluding earn-out payments) across both its Utilities and Airports divisions:

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Sigma Healthcare (SIG) – Chemist Warehouse contract lost

Sigma announced that they had lost the contract to supply My Chemist/ Chemist Warehouse Group at the expiration of the current contract in June 2019. This is a big deal, and will result in EBIT falling from $75m this FY to between $40m and $50m for FY20.

The loss of the contract will also result in $300m in capital currently invested in servicing the contract being released as the contract winds down. Management have spun the loss as a pivot point from which the business will be able to reassess its operating and fixed cost base and expedite the strategy to diversify with a broader healthcare focus – i.e. acquisitions. This is interesting given the recently announced transaction by API.

A lost contract is better than one won on uneconomical terms. Still, this just proves to highlight how competitive this business is.

Capitol Health (CAJ) – More acquisitions

More acquisitions, this time of 6 clinics in Perth and 3 clinics in Melbourne from 4 independent vendors.

Aggregate acquisition consideration is $17m upfront and up to an additional $3.3m payable under earn-out to the vendors over the first year of ownership (based on performance).

The new clinics are expected to contribute $16.5m in revenue and $3.1m in EBITDA. The purchase price represents an EBITDA multiple of 5.5 rising to 6.5 if all earn-out conditions are met.

These acquisitions are Capitol’s entry into the Perth market. The initial 6 clinics will provide critical mass to grow through additional capital investment, recruitment and growth in the doctor group, and further acquisitions with several smaller bolt on opportunities in the pipeline.

Much of the same.

Money3 (MNY) – Ray Malone appointed exec chairman

Ray Malone appointed exec chairman. Base annual fee of $300k p.a. + 3% of the improvement in annual EBITDA on a normalised basis. Positive news for the company given that he is a formidable executive.

Ray is still executive chairman and CEO of AMA Group. Bold to be taking on 2 serious executive positions at 2 very different companies. One theory is that Ray is setting himself up for life after AMA.

Blackstone were rebuffed by the ATO in June when they tried to acquire AMA’s panel repair business. Would not be too much of a surprise to see Blackstone return with another offer for the company, potentially leaving Ray out of a job.

Redbubble (RBL) – Founder retiring

Announced that Martin Hosking, founder and CEO will be retiring. Martin still owns 24% of the company and will stay on as a non-exec director. He will be succeeded by Barry Newstead, currently Redbubble’s COO, having served in that role for the last 5 years.

The business has achieved strong revenue growth over the last few years and looks to be reasonably well funded for the next few. However, with the business technically still in the startup phase of it’s life cycle having not earned a dime in profit to date and bleeding cash, these transitions can be tricky.

By Danny Sandler

Founder of Ocean Asset Management.