Technology One Limited (TNE) On Track For Growth

Technology One (TNE) is an end-to-end software solutions provider, catering for a number of industries including government, education, financial services, health and community, utilities, and managed services such as mining, property and media.

Diversified product base

TNE is diversified across a number of different products in that it is able to tailor software solutions to meet the needs of its various clients. For example, TechnologyOne Financials offers solutions that can more easily interpret accounting and financial information.

Because it generates revenue from multiple streams including business and non-business, TNE is not as sensitive to the economic cycle as some other tech companies.

Strong operating metrics

TNE has a history of earnings and revenue growth. Revenue has increased at a compound annual rate of 14% per annum since 2003, with net profit growing at 10%.

Moreover, the group’s EBITDA margin has hovered around 20% over the past five six-month reporting periods. TNE derives the bulk of its revenue from software licensing and consulting fees. The company receives an initial licensing fee for each of its software, which is supplemented by annual licensing fees and consulting service fees.

In 1H12, TNE’s annual licensing fees grew 18% due to high customer retention and satisfaction rates. Although R&D expenses jumped 11% on-year, the Connected Intelligence (Ci) enterprise suite has enjoyed a positive reception thus far. Ci is the group’s flagship suite of products.

TNE’s R&D spend is being ploughed into the next generation Ci, and we would expect the product improvement to be a key driver of sales going forward.

Future is in the cloud

TNE is currently in the process of building its own cloud product, TechnologyOne Cloud. The aim is to offer the Ci enterprise suite through the TechnologyOne cloud.

Cloud computing is the process of storing applications and other data on web-based servers, enabling end users to access the centrally-stored information from multiple locations.

The cloud’s key benefit for TNE’s clients is that they don’t have to install software on all of their computers and devices, which significantly reduces the cost of doing business.

The tech industry is only beginning to scratch the surface with cloud services. Apple released their own version of the cloud with the iPhone 4S, known as the iCloud, late last year.

TNE’s version is currently in the trial phase, but we would expect strong demand for this service once it is up and running after the next few years.

Outlook

TNE has enjoyed solid growth since 2003 due to the quality of its product and service offering. The software industry has low barriers to entry, so there has to be a continual focus on maintaining higher customer satisfaction levels and investing in future technology.

The 18% growth in 1H12 annual licensing fees demonstrates TNE’s customer focus, whilst its investment in TechnologyOne cloud is expected to reap long-term benefits.

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Whitehaven Coal Limited (WHC) Outlook White Cold

Whitehaven Coal Limited (WHC) mines and sells metallurgical and thermal coal to the global steel power generation and metallurgical industries.

The company is a coal producer in the Gunnedah Basin and has an interest in tenements covering the Gunnedah, Werris and Ashford Coal Basins of New South Wales.

Earlier this year WHC completed a merger with Aston Resources and Boardwalk Resources, which made it Australia’s largest independent coal company.

The group has been in the headlines as of late, after largest shareholder Nathan Tinkler failed to have company directors ousted.

FY12 results

WHC’s FY12 results were not good, but not exactly a surprise given the well publicised weakness in the coal industry.

Revenue over the year slipped 1% to $618.1 million, whilst NPAT before significant items dropped 21.1% to 57.8 million.

The most worrying part of the results was the significant increase in average cash cost of sales, which rose 15.6% to $69.93 per ton.

This saw EBITDA margin contract from 41% to 33%, which is obviously not a good sign as the company attempts to ramp up production.

Coal prices

Coal prices have endured a dramatic fall since the start of the year.

The price has fallen from a little under $120 a ton to now be trading around the $85 mark. This represented a 36.3% decline.

If the trend continues WHC could face continued pressure and the possibility of some of their planned ramp-ups becoming economically unviable.

The International Energy Agency (IEA) this week said in its World Energy Outlook that although coal would remain the world's leading fuel for power generation in the next two decades, its share would drop.

The IEA also outlined another scenario which could see coal’s share of global energy crash to 16%, from its current 30%.

This scenario could occur in the next 10 years if the demands by current climate change scientists are met that there be no more than 450 parts per million of carbon dioxide in the atmosphere.

Outlook

WHC FY12 results were disappointing, but besides form the fall in profit it was the increase in the average cash cost of sales that was the most alarming factor.

The report by IEA this week did not provide a good outlook for the coal market especially if the more unlikely climate change scenario comes into play.

Overall we see further declines in the coal price and we see this translating into further share price deterioration for WHC.

Tabcorp Holdings Limited (TAH) Stock To Sell

Tabcorp Holdings Limited (TAH) is a gambling and entertainment group involved in a combination of wagering and media activities across Australia.

The company is divided into four main segments: Wagering, which includes totalisator and fixed odds betting; Media & International, including Sky Racing and Sky Sports Radio; Gaming, which includes a variety of Tabaret venues across Victoria; and Keno, which mostly operates in NSW and QLD clubs and hotels.

Back in June 2011, TAH successfully completed the demerger of its Casino business into the Echo Entertainment Group.

Promotional spend hurts margins

TAH’s FY12 core net profit rose 12.7% to $340 million. Revenue was up 3.1% as growth in Fixed Odds offset declines in totaliser revenues. Wagering costs climbed as TAH invested in technology and expanded its promotion and sponsorship activities.

This meant EBITDA margin fell sharply from 37.6% in FY11 to 23.2% in FY12.

Competitive pressures

The concerning aspect of the promotional activities expense was that TAH felt the need to boost its profile from increased competition. The explosion in online betting over the past few years has intensified competition in the wagering industry.

TAH has recognised this change and part of the reason behind its FY12 margin contraction was the amount of money it is being forced to spend on technology upgrades at its Trackside, Fixed Odds and self-service terminals.

Highlighting the competitive threat, Bet365, UNiTAB and Tom Waterhouse Betting have begun making their presence known in the past six months by ramping up advertising.

To boost its own profile, TAH needs to increase technological and advertising spending, which is going to be detrimental to margins in the short-term.

Outlook

Unfortunately for TAH, FY13 has got off to a shaky start.  1Q13 wagering revenue fell 2.4% on-year, with the result hurt by the changes to the Victorian Wagering and Betting Licence terms.

TAH was awarded a 12 year wagering and betting license by the Victorian government in July 2011 for $410 million. A tough trading environment in the Victorian and club network contributed to the fall in wagering revenue.

In our view a continuation of the weak trading conditions will limit revenue growth in FY13, putting further pressure on already strained profit margins.

Tox Free Solutions: Growth Prospects

Tox Free Solutions (TOX) is a hazardous and toxic waste disposal company focusing on the recovery and recycling of hydrocarbons and other waste streams.

The company implements technologies for the remediation of contaminated soils recovery and recycling of waste oils, treatment of oil contaminated water, treatment of acids and alkalies and separation of hazardous waste.

TOX operates in three main segments: Waste Services, Hazardous Waste Services, Industrials Services

The group has operations throughout Australia with a growing presence on the east coast via recent acquisitions.

FY12 results

TOX’s FY12 results continued to impress especially given the current environment. FY12 revenue was $207.9 million, a massive 45% increase on the prior year’s result.

Over the year NPAT grew 31% to 17.2 million, whilst EPS increased 15% to 16.3 cents a share. The company also managed to increase its dividend over the period by 33% to 4 cents a share, fully franked.

The group’s gearing ratio rose from 11% to 30%, but that was largely due to the acquisition of DoloMatrix earlier in the year. Despite the rise in gearing TOX’s balance sheet remained healthy, with free cash flow increasing from $63.4 million in FY11 to $142.5 million in FY12.

Diversification and growth

The above graph shows the diversity of TOX’s earnings stream. The segments we would consider to be most at risk are oil and gas, and mining.

TOX’s client base in these areas include Woodside Petroleum, Fortescue Metals and Origin Energy, all of which are less likely to cut TOX’s services than the smaller commodity players.

The acquisition of DoloMatrix, which was completed in February, only contributed about a quarter’s worth of revenue in FY12 and as such we see it being a major contributor to growth in FY13.

The synergy benefits of the acquisition should begin to come through in the coming year, and are likely to fully materialise following the acquisition’s successful integration.

Outlook

TOX’s FY12 results represented another year of stellar growth. We are expecting another strong year from the company, with the DoloMatrix acquisition likely to spur growth in the current period.

We see this growth translating to further share price gains in the near-to-medium term.

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Origin Energy Limited (ORG) Stock To Sell

Origin Energy (ORG) is involved in gas and oil exploration and production, power generation and energy retailing.

As a leading Australasian integrated energy company, ORG participates in most segments of the energy supply chain, including natural gas and oil exploration and production, electricity generation, and energy retailing.

The group has significant operations in New Zealand through its 52.8% interest in Contact Energy, New Zealand’s largest energy provider. ORG and Conoco Phillips each hold a 37.5% stake in the Australia Pacific LNG Project (APLNG), which supplies gas to power stations in South East Queensland.

ORG also has a 42.5% stake in the Victorian BassGass project (AWE owns 57.5%), which supplies gas to Victoria from the Yolla gas field in Bass Strait.

Weak start to FY13

It was a disappointing September quarter for ORG, which reported a 3% year-on-year on fall in revenue to $224.5 million.  This was despite a rise in average selling prices.

Production of 33.1 petajoules (pj) was 10% lower than the same period the year before as BassGass was shut down due to the Yolla Mid Life Enhancement project.

Whilst BassGass has come back on line, it has been a major headache for ORG.  The project’s cost has blown out from the original $345 million estimate in 2009 to up to $580 million.

The September quarter production numbers followed a solid FY12 result that included a 33% lift in underlying profit to $893 million. The Energy Markets business experienced strong 33% growth in underlying EBITDA, with electricity volumes rising 26% following the acquisition of NSW’s power assets.

Offsetting this, however, gas volumes in Victoria and NSW fell during the year due to mild weather.  Also, ORG was forced to pay more for natural gas and electricity, which impacted gross margins.

Poor FY13 guidance

ORG’s FY13 guidance was disappointing to say the least. The group forecast no growth in underlying profit, citing fewer new capital investments, volatile commodity prices, regulatory uncertainty and changing demand patterns in Australia.

Capital spending plans have been curtailed, with ORG instead focussed on the delivery of APLNG. As a result of this change in strategy, ORG recorded significant impairment of projects in FY12 including Transform Solar, wind and geothermal developments and other upstream assets.

ORG’s share of APLNG underlying EBITDA fell 25% on-year, driven by the group’s sell-down of its stake to 37.5% following an agreement with Sinopec, which upped its share from 15% to 25%.

ORG failed to provide clarity on the timeframe for the remaining divestiture of its APLNG stake.

Outlook

For ORG, the significant scale back of its capital spending plans signals a diminished growth outlook. Sentiment towards ORG has worsened considerably since the FY12 profit release in late August, with investors taken aback by the weak FY13 outlook.

We expect the negative sentiment to continue in the near-to-medium term, which is likely to further weigh on the stock price.

Bradken Limited (BKN) Stock To Sell

Bradken Limited (BKN) manufactures and supplies industrial products and maintenance services to the mining minerals processing rail and industrial markets.

The company's products include ground engaging tools, mill liners, crusher liners, freight wagons, bogies wear plates, crawler systems, along with mining services and rail maintenance. BKN’s five divisions are mining products, rail, power and cement, engineered products and industrial.

FY12 results

BKN’s FY12 results did not really surprise the market too much given it downgraded guidance in late April. NPAT for FY12 was $100.5 million, a 15% climb on the FY11 result.

Sales over the 12-month period jumped by 26% to $1.45 billion. Earnings per share actually decreased over the year from 60.7 cents, to 60.5 cents, as the company expanded its capital base.

The most worrying aspect about BKN’s results was the decline in margins. EBITDA margin decreased from 17.07% to 14.93%, a significant move and the first contraction since 2009.

Commodity prices and the mining industry

The above chart shows the Commodity Price Index (CRB Index), which comprises 19 different commodities and represents broad commodity price trends.

The CRB index clearly shows a decline in commodity prices over the last six weeks. How does this affect BKN? In FY12, 78.2% of the company’s sales came from resources related companies.

As commodity prices decrease new mining projects and expansion plans become less viable, which in turn leads to less capital expenditure, which ultimately hurts BKN.

The correlation between BKN (green line) and the CRB index (white line) is evident in the above chart.

Outlook

BKN’s FY12 results may not have looked bad on the surface, but were beginning to show some worrying signs.

Declining margins are a real concern especially in the current environment where increased competition is likely to lead to all contractors having to lower their bid prices to get any work.

The group reframed from giving qualitative or quantitative FY13 guidance during the release of its FY12 results or at its AGM.

This is usually a worrying sign, because if they had good results they would be inclined to mention them either with specific numbers, or at least comment on whether the results would be similar to the previous period.

The correlation between the CRB index and BKN is unmistakable; and given the future uncertainty surrounding the US elections and the US ‘fiscal cliff’, we see more commodity price weakness on the horizon and thus a further deterioration in the BKN share price.

This article was distributed to our members on November 1st, if you would like further information you can sign up for FREE 7day recommendations and access all our research files on not only Bradken but all our current trading ideas. Simply click here and starting trading today.

Macquarie Group Limited (MQG) Stock To Buy

Macquarie Group (MQG) is Australia’s leading listed Investment bank and has offices all around the globe.

The company is well diversified with six different operating groups which include:

- Macquarie Capital: Which includes corporate advisory, equity, debt and private capital markets businesses, and undertakes principal investing

- Macquarie Securities: Activities include institutional and retail derivatives, structured equity finance, arbitrage trading, synthetic products, capital management, collateral management and securities borrowing and lending

- Fixed Income: Currencies and Commodities: Provides a variety of trading, research, sales and financing services across the world with an underlying specialisation in interest rates, commodities or foreign exchange

- Macquarie Funds Group: Full-service asset manager

- Banking and Financial Services: The primary relationship manager for Macquarie Group’s retail client base

- Corporate and Asset Finance Group: The lending and leasing business of Macquarie Group

1H13 Results

Today MQG reported its 1H13 results with its first-half dividend and pre-tax profit beating market expectations.

The company’s 1H13 net profit was $361 million, up 18% on the prior corresponding period. This actually missed consensus earnings by 3%.

Operating income dropped to $3.1 billion, a 5% fall on 1H12.

What impressed was MQG’s ability to adjust for the loss of income with a 9% reduction in operating expense, showing its focus on cost savings.

Return on equity (ROE) increased from 5.7% in 1H12 to 6.6% in 1H13, highlighting a more profitable deployment of shareholder funds.

The group’s EPS grew by 22% on the prior corresponding half to $1.06. As the above shows, this is the company’s first half of positive EPS growth in more than five years and with think this could be the turnaround for the company’s fortunes.

Another item we found impressive with the results was the dividend payment. It climbed $0.10 from the 1H12 payment, to $0.75.

Outlook

MQG’s 1H13 results were impressive to say the least.

Out of all the figures released today the numbers we liked the most were the reduction in operating expenses, the increased dividend payment, and the return to EPS growth.

All the above mentioned figures show us that MQG has turned a corner and we believe this will lead to continued share price appreciation.

Crown Limited (CWN) FY12 Results Impress

Crown (CWN) manages a variety of gaming and entertainment facilities, including, bars, restaurants, nightclubs, cinemas and retail outlets. It also develops hotels and conference center facilities.

The company wholly owns and operates two integrated resorts; the Crown Entertainment Complex in Melbourne and Burswood Entertainment Complex in Perth. Mr James Packer currently owns a 48.1% stake in the group.

CWN also has an interest in several different projects including: 33.6% interest in Melco Crown entertainment, which is based in Macau, 50% interest in online gambling site Betfair, 24.5% interest in Cannery Casino Resorts in the US, 50% interest in Aspers Holdings (UK) which operates three regional casinos in Newcastle Swansea and Northampton, 10% interest in Echo Entertainment.

FY12 Results

CWN’s FY12 results continued to impress against the backdrop of a challenging consumer environment. The company reported normalised FY12 NPAT of $415.0 million, which was an increase of 22% on the prior corresponding year.

CWN’s Australian casinos reported revenue growth of 8.9% to $2,630.1 million, with normalised EBITDA up 5.1% to $736.9 million. A breakdown of the two main facilities showed that Crown Melbourne’s normalised EBITDA grew 1% to $510.6 million, whilst Burswood EBITDA gained 15.9% to $226.3 million.

The company declared a final dividend of 19 cents, which equates to a healthy yield of over 3.5%.

Six-star hotel

Today CWN announced that it had had received stage one approval from the NSW government to build a new $1 billion six-star hotel resort with VIP-only gaming facilities at Sydney’s Barangaroo.

This is stage one of a three stage process and if approved would be Australia’s first six-star Casino. This is an interesting move for CWN as it had been previously thought that it would try to take over Sydney’s Echo Entertainment (EGP).

The whole development faces an uphill battle, with EGP currently holding the only casino licence in Sydney, and an exclusivity agreement in place until November 14, 2019.

CWN will have a casino business in Sydney, Mr Packer has made this abundantly clear in the past. The questions that remain are when it will happen and whether it will be a takeover of EGP or a new complex all together.

The new complex won’t happen until the exclusivity agreement expires as the project would be unviable without at least a VIP gaming facility.

Outlook

CWN”s results speak for themselves, they were able to grow earnings in a tough consumer environment. The purchase of EGP could still be CWN’s ultimate plan, as it has applied to increase its stake in the company to 25%.

Whilst a new gaming facility may be a longer-term plan for CWN, we see it more as a back-up if it can’t acquire EGP. There is also a possibility that the whole plan is a move to scare EGP into selling as the increased completion in the VIP segment may be too damaging to EGP’s earnings.

Overall we see any move that CWN makes into the Sydney’s casino market as good one.