So far, so good: that’s the prognosis for the interim profit-reporting season as it heads into the final stretch. More than half of companies have beaten market expectations and, collectively, suggested the bears got too excited earlier this year.
Here are three recent profit results or earnings upgrades that caught my attention:
1. Silver Chef
The hospitality equipment financier beat market expectations for the first half of FY16. Revenue rose 21 per cent to $100 million over the same period last year, and net profit leapt 45 per cent to $10.3 million. Silver Chef jumped 10 per cent on the result.
The growth is somewhat tempered by accounting changes that have made profit comparisons harder at Silver Chef. But it was still a cracking result. The asset base of the GoGetta business, which rents equipment to industries outside of hospitality, grew by 36 per cent and should provide good earnings momentum in the next 12 months.
The hospitality asset base grew 15 per cent, which was ahead of the company’s expectations. Silver Chef has a good mix: the more mature hospitality financing business that is still growing at double-digit rates, and the faster-growing GoGetta business that is acquiring assets.
The main risk is rising funding costs: Silver Chef locks in pricing with customers and has mostly variable funding costs. But significant margin deterioration from higher funding costs in the next few years seems unlikely given expected interest-rate settings.
Silver Chef expects continued strong growth in the GoGetta lending book as it builds market share in the transportation and light commercial sectors. It is also seeing encouraging growth in the hospitality sector and potential to grow faster than the industry average as it takes market share.
Two broking firms that cover Silver Chef have a hold recommendation and three have a hold. A median price target of $9, based on this small consensus, suggests the company is fully valued at the current price of $9.40. Macquarie Equities Research has a 12-month target of $10.11 and upgraded its recommendation this week to outperform. Stick with the bulls on this one.
Chart 1: Silver Chef
Source: The Bull
The ship builder was smashed late last year after announcing schedule and margin pressure on the Littoral Combat Ships (LCS), of which Austal is the prime contractor. On some broker estimates, the lower margins were worth around $10 million in lost earnings.
Austal, featured in this column in April 2015, had rallied from $1.84 then to a 52-week high of $2.86. The LCS margin shock saw the stock plunge to 98 cents before recovering to $1.29.
The extent of the sell-off looks overdone given Austal’s long-term prospects. It reported underlying earnings of $41.8 million for the first half of FY16, down 9 per cent on the same period last year. US shipbuilding margins of 5.5 per cent met market expectations.
Although disappointing, the margin news does not affect Austal’s long-term prospects, which were outlined in my April column for The Bull. I wrote: “Austal products are creating higher interest in the US and internationally. Winning contracts from the US Navy takes great skill and once secured, typically leads to significant recurring work in maintenance and vessel upgrades”.
The prospect of recurring, annuity-style maintenance work appeals, as does Austal’s potential to secure a second Navy as a client in coming years.
Three broking firms that cover Austal have a buy recommendation and the median price target is $2. Never read too much into a small consensus of analyst forecasts, but there is enough to suggest the market has over-reacted to Austal’s bad news given the latest interim profit result.
As an occasionally volatile small-cap stock, Austal suits experienced investors who can tolerate higher risk and hold it for 3-5 years, depending on price.
Chart 2: Austal
Source: The Bull
The producer and distributor of crop-protection products soared from a 52-week low of $6.20 to a high of $8.86 as the market re-rated its turnaround prospects. Then it fell to $6.81 this year amid the market sell-off and as profit-takers moved in.
Pleasingly, Nufarm upgraded it earnings guidance this week as part of a portfolio review: it expects underlying earnings (EBIT) growth of 8-13 per cent after previously expecting a flat outcome – a good result given challenges in its key market of Brazil. The shares jumped almost 5 per cent on the news. More will be known when Nufarm releases its full half-year results on March 23.
I like the look of Nufarm. It is always a good sign when companies outperform in tough market conditions, for it shows management is capable of growing profits in up and down markets and positioning the business for stronger growth when headwinds turn into tailwinds.
Significant corporate restructuring over the past few years has made Nufarm leaner, more agile and focused. It is clearly a well-run business.
Nufarm has a challenging outlook as the slowdown in emerging-market economies weighs on demand for its crop-protection products in the short term. But the long-term story of a rising global population and boom in middle-class consumption in emerging markets is strongly intact.
Crop-protection products that boost food productivity will be in stronger demand and Nufarm looks superbly positioned to supply them over the coming decade.
Chart 3: Nufarm
Source: The Bull
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at February 25, 2016.