Written by Mike Ross, Investment Analyst
Hard work paid off
August was a busy month for the Australasian investment team, with most of our holdings reporting FY17 results to the market. Overall we were pleased with the results. Approximately 80% of our holdings reported results in-line or ahead of our expectations. While we try not to focus on short-term performance, this translated to positive monthly performance for the majority of our funds.
Kind to investors
Looking at the overall market, JP Morgan published some interesting analysis which suggested the reporting season has been kinder to investors than some high-level indicators would suggest. As of 28 August, 123 stocks within the ASX 200 were in positive territory for the month, the best performance in five years. This was the case despite a lower ratio of companies beating expectations (30% compared to 38% in February) and net negative earnings revisions. This might suggest there was a fair amount of negativity priced into stocks heading into reporting season.
Searching in Sydney
The Australasian investment team are headed to Sydney in early September to meet with a number of our existing holdings and potential investee companies. We hope to update you in the coming months on some new investments.
Monthly gains
Positive contributors for the month included EML Payments, Helloworld Travel, MNF Group and Noni B. Detractors included CBL Corporation and iSelect.
Noni B, a women’s apparel and accessories brand,reported a strong result almost 10% ahead of its guidance. They also boast a highly capable and aligned CEO. While encouraging, our investment thesis is primarily based on significant earnings growth in FY18 driven by gross margin expansion in the recently acquired Pretty Girl business and cost out initiatives.
Helloworld Travel reported a result marginally above the top-end of its guidance, which was largely expected. Helloworld is led by a highly motivated aligned CEO and the business is leveraged to an uptick in airfares and has capacity for acquisitions.
Written by Chris Bainbridge, Senior Investment Analyst and Portfolio Manager
Macquarie Telecom ticks the boxes
We look for companies with the potential for strong earnings growth, operating in an industry which is itself growing, a clean balance sheet, and management who are founders or have considerable skin in the game. We then like to buy those companies at attractive prices. The Growth and Dividend funds have recently taken a position in Macquarie Telecom Group Limited (ASX:MAQ), a company which we believe to have all these characteristics. Macquarie provides telecommunication and hosting services to corporate and government customers in Australia. Telco has been relatively flat, but hosting continues to experience strong growth driven by the mega trends of cyber security and cloud services.
Industry tailwinds and strong earnings growth
In 2016, the Australian public cloud market increased 14.4%1. This growth is forecast to continue, with Australian data centre revenues forecast to increase at a CAGR of 12% until 20212. Importantly, there is forecast to be a supply deficit in Australia in the next three years with new DC capacity in Sydney and Melbourne of 200MW vs. estimated hyper-scale cloud demand of 200 – 305MW 3.
Macquarie has invested over $230 million of capex over the last six years in new data centre capacity providing it with considerable operating leverage. For example, in FY17, hosting revenue was up 21% on pcp to $77.5 million with EBITDA up 55% on pcp to $21.6 million as hosting margins increased from 21% to 28%.
Clean balance sheet and quality management
The growth in earnings generated operating cashflow in FY17 of $41.4 million and allowed MAQ to increase its cash position to $31 million (no debt) despite reinvesting over $38 million in the business during the year.
Having founded the company in 1992, brothers Aidan and David Tudehope remain highly engaged in the business and lead the company as CEO and MD of hosting respectively, retaining 61% of MAQ with a personal holding worth $189 million.
We believe that MAQ is trading 6x-7x FY18 EV/EBITDA, which means the market does not appear to be placing any value on MAQ’s unutilised hosting capacity. Other data centres operators (e.g. ASX:NXT) are trading well above this level and, on this basis, we consider that MAQ is presently undervalued.
MAQ doesn’t have any covered research, so it flies off the radar of the broader investment community. However, given the potential for strong growth, latent earnings capacity and disparity in valuation to listed peers, we believe that it’s only a matter of time until MAQ is re-rated.
1) Frost & Sullivan (Mar 17)
2) Frost & Sullivan Report : Australian Data Cere Services Market 2016
3) RBC Capital Markets (Mar17)
Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser.