APN Outdoor
APO reported very strong growth in its core Billboards division and negative comps in its other divisions. The result was in line with market expectations.
Financial highlights:

Figure 1. APO 1H17 result
Source: APO

  • Overall, revenue growth at 8% was solid with some benefit from acquisitions made in 2016 (not disclosed how much, could be as high as 3-4%)
  • Margin contraction was surprising but operating costs should decelerate in 2018 and EBITDA margins should then improve
  • Higher depreciation due to higher capital expenditure from the rollout of digital. Debt on the balance sheet has also risen to fund this rollout.

Divisional split:

Figure 2. APO 1H17 result divisional split
Source: APO

  • Billboards were clearly the standout at +20%, benefiting from continued digital rollout and very strong market growth in New Zealand (+28.6%)
  • Transit continues to lose incremental market share to street furniture (Adshel) and billboards but is consuming very little capex and is still earning an adequate return
  • Rail was down 10% – this appears to be a timing matter
  • Classic holding revenue was a positive. If sustained this would exceed expectations
  • Digital was the clear driver, with a 3-5x revenue uplift per conversion driving very strong revenue growth of 27%.

Investment View:

  • This was a mixed result with billboards very strong but other divisions were much weaker
  • There is margin upside over the next 12-18 months as APO cycles the step change in costs
  • Yields (revenue per board) are holding according to management, which is positive given the extra inventory placed on the market over the last 12 months
  • Risks remain over contract renewals over the next six months but APO remains in a good position to renew all major contracts. Upside if APO wins entirety of Yarra Trams (currently 50/50 with Adshel)
  • Transit expected to return to growth in 3Q
  • EBITDA guidance of $90-95m is in line with our existing estimates
  • With a forward valuation of $5.73 the stock remains a hold.

Citadel Group
CGL delivered a strong 2H to drive a FY17 result above expectations on all key metrics. We have a preliminary forward valuation of $5.88, which compares to the current market price below $5.50, so we will hold.
Key details from the result:

  • Group revenue up 28% to $98.8m
  • Group EBITDA up 48% to $30.1m. EBITDA margin expansion of ~3ppts to 30.5%
  • Group NPAT up 81% to $15.4m
  • Operating cash flow of $24.9m, with 2H cash generation a standout given 1H OCF of $0.5m
  • Net cash of $20.9m – strong balance sheet
  • Final dividend of eight cents well ahead of expectations for 5-6 cents
  • All key contracts for Technology locked in for 2018, with no renewals due until FY19; this underwrites another positive year ahead. FY18 will benefit from a full period of contribution from new contracts won in FY17. To date CGL has never lost a contract
  • The FY18 PER at current prices of 16.1 times is not demanding
  • Expansion of customer base: CGL retains its strong core government customer base, particularly in defence. The customer base is expanding to include health, utilities, police, local government and education with universities a significant opportunity.

Slides of interest from the presentation:

Figure 3. CGL major contract timing
Source: CGL

Figure 4. CGL’s growing government customer base
Source: CGL

Figure 5. CGL outlook
Source: CGL

Figure 6. CGL summary and outlook
Source: CGL
IPH reported FY17 results 0.5% below previous guidance due to FX headwinds and 2% below consensus. Growth in FY17 was unusually subdued as IPH cycled unusually high comparable numbers inflated by volumes pulled forward into FY16, stemming from the passing of the America Invents Act (AIA).
Result highlights:

Figure 7. IPH FY17 result
Source: IPH

Figure 8. IPH underlying results
Source: IPH

  • Revenue growth of 18% is strong and reflects acquisitions. Underlying revenue growth was -1%, as explained above
  • Margin compression during the period is attributed to 1) -$2.6m investment in Practice Insights; 2) FX headwinds; 3) step change in head office costs
  • Some EPS dilution from equity component of deferred consideration payments and directly from Ella Cheong acquisition
  • Balance sheet remains clear with net cash of $24.4m
  • Cash conversion was again excellent, improving to 95% of EBITDA (128% of underlying NPAT).


  • Revenue growth to return to through the cycle industry growth rates of ~6% across the group
  • EBITDA growth will exceed revenue growth as continued improvements to back office (IT, automation) are pushed through
  • This should amount to NPAT growth of ~8% without acquisitions
  • Management expects a -$3m detraction from Practice Insights in FY18 with breakeven in FY19 or FY20.

Investment View:

  • This was an average result for IPH and is unlikely to materially alter the market’s view of the stock
  • A number of headwinds in FY17 will come off in FY18. FX effects will diminish and AIA no longer has to be cycled
  • Through the cycle revenue growth has been 4.5% in Australia and ~8% in SE Asia (ex-China). This reflects 4% volume growth in Australia with few price increases and 5-6% volume growth in SE Asia with 2-3% in price rises. This has been complicated by acquisitions and FX movements through IPH’s listed life.
  • The market continues to attribute no value to Practice Insights or acquisition potential, which are free options as a result.

Re-cap of thesis:
IPH is a quality business with a modest organic growth profile (~6%) but an ability to supplement growth with incremental cost savings, acquisitions and expansion into adjacent markets. Our view is unchanged and we expect the business will shift its earnings mix to higher growth regions in Asia over time. In the meantime it has a stable core business producing a 70% franked, 5.5-6% yield. We have a forward valuation of $5.28 and remain holders.
Qube Holdings
QUB reported a solid but messy result, with a 10-month contribution from Patrick, consolidation of AAT shifting earnings around and lumpy Moorebank cashflows all playing havoc with comparable number comparisons. That being said, underlying growth in the core divisions (Logistics, Ports & Bulk) was strong and the announcement of the first Moorebank tenant was an important validation of the project’s attractiveness to major Australian businesses.
Group highlights:

Figure 9. QUB FY17 result highlights
Source: QUB

  • Good revenue growth of 14.7%, which reflects solid organic growth in the Logistics and Ports & Bulk businesses following a soft FY16
  • Consolidation of AAT following QUB’s movement to 100% ownership reduced EBITDA and NPATA margins but the latter was more than offset by the additional 50% interest in Patrick
  • Patrick’s earnings are recognised as share of income from associates and interest income from investor loans. Dividends from Patrick will accrue after the investor loans have been repaid
  • Gearing at 18% net debt/enterprise value remains well below the group’s 30-40% target range and implies headroom of up to $680m for acquisitions
  • Cashflow conversion was very strong at 97% of EBITDA.


  • Growth was supported by increased volumes nationally within the existing customer base, as well as market share gains across a number of sectors including agriculture, retail and resources
  • Revenue growth helped to offset ongoing competitive pressure on rates and hence margins
  • The Austrans acquisition (April 2017) contributed around $12.7m in revenue for FY17
  • $2.2m detraction from Port Botany industrial dispute (non-recurring item).

Ports & Bulk

  • A return to growth coincided with higher commodity export volumes
  • Solid volume growth in non-mining products such as fertiliser, forestry products, grains, scrap, and vehicles
  • Oil and gas activity remains subdued.

Strategic Assets

  • Revenues up 34.5% due to the consolidation of AAT
  • EBITA down 54.6% due to substantial property rental income in the pcp and a one-off lease termination payment for Moorebank
  • Minto is generating stable rental income with temporary disruption from tenant movements.


  • Revenue was slightly ahead of our expectations, which implies better rental income from warehousing
  • Good news as Target Australia became the first tenant, with QUB to develop 80,000 sqm of warehousing and facilities for Target, which has signed a 10-year lease plus a 5-year logistics contract covering the transport of freight by rail from Port Botany to Moorebank
  • Further tenant signings throughout FY18 are potential share price catalysts.

Investment View

  • QUB bounced back in FY17 after a weak year in FY16. Ports & Bulk benefited materially from higher activity in resources and energy, and logistics continued its slow grind upwards
  • It was good to see Moorebank sign its first major tenant. This goes some way to validating the attractiveness of the project to major businesses
  • Balance sheet capacity is strong and given QUB’s commentary around its most recent capital raising, we could see another acquisition within a year
  • QUB continues to build a uniquely deep logistics capability that cannot be replicated by any single player in Australia. As Moorebank becomes fully operational, QUB’s offering should translate to larger and more complex contracts covering more of the supply chain
  • The stock is trading below intrinsic value of $2.78, so we will hold. There is incremental upside over the year ahead from Moorebank tenancy agreements and M&A.

RCG Corporation
RCG’S FY17 result was 5-10% above broker estimates and higher than our own forecasts. The stock has rerated about 5% since the result. The highlights:

Figure 10. RCG FY17 result highlights
Source: RCG

Figure 11. RCG FY17 result details
Source: RCG

  • The result was clearly carried by Accent, as all other brands and divisions were forced to discount to varying degrees to clear inventory and push through sales. This can be seen in the volatile EBITDA numbers compared to what was middling revenue growth
  • The store count at year end was in line with previous guidance and updated FY18 guidance was in line with our own expectations
  • There was a large step up in depreciation and amortisation, which requires further investigation. This is why NPAT growth of 21% lagged EBITDA
  • Hype DC has been rolled into the Accent division but had a disappointing year, with same-store sales down 1% and impairments to the Hype brand of $9.7m or 32% of the carrying value
  • The 78% payout ratio is in line with the company’s target range of 75-80%.


Figure 12. RCG FY17 divisional result details
Source: RCG

  • Accent continues to be the focus of the group, with most of the store rollout focused on Skechers and Platypus
  • The inclusion of Hype in this division will have diluted what would have been solid same-store sales growth.
  • Accent should now be considered the core of the business, with the best portfolio of brands and driving the lion’s share of growth.

The Athlete’s Foot

Figure 13. Athlete’s Foot FY17 result details
Source: RCG

  • TAF sales were up 1.6%, an okay result in what remains a very patchy environment
  • EBITDA was down 8% however, implying discounting within the division in order to push through sales
  • Would expect a degree of mean reversion within the next couple of periods as retail conditions improve
  • Ongoing conversion of stores to new ‘performance’ format with >30 to be converted by the end of FY18.

RCG Brands

Figure 14. RCG Brands result details
Source: RCG

  • RCG Brands was the worst performing division of the group, with same-store sales contraction of 2.6%. Heavy discounting saw EBITDA down 62% to $3.0m. As also mentioned, FX was a headwind.
  • Would again expect margin mean reversion higher in FY18, though conditions do remain challenging.

In summary:

  • This was a better than expected result given the retail downturn, with sales generally holding up okay
  • But Hype disappointed and it is becoming clear the acquisition was not value accretive. The writedown means RCG overpaid
  • Expect a better year in FY18. Same-store sales over the first two months of FY18 grew
  • Much commentary about RCG’s ‘omni-channel’ where management sees potential for competitive advantage in an increasingly digital marketplace
  • We value the stock at 98 cents and will continue to hold.

Speedcast International
SDA’s 1H17 result and FY EBITDA guidance were in line with market expectations. The stock closed marginally higher today on a down day for the market – a good sign.
This was a predictably messy result complicated by the acquisition of Caprock, with key results as follows:

Figure 15. SDA 1H17 underlying results
Source: SDA

  • Revenue up 143% implies organic growth of -2%, with Caprock revenues falling 15-20% as previously flagged.
    • Commentary suggests Maritime grew strongly – as fast as 15% in some service streams
    • Emerging Markets revenues declined in 1H17, mainly due to a timing gap that will close in 2H17
  • EBITDA grew 210%, with margins expanding 4.7% to 21.4%. SDA expects margins to return to ~25% as synergies are realised and the integration is completed
    • Organic EBITDA growth was >5% though it is difficult to say how much of this is synergy benefits from past acquisitions
  • Much higher finance costs given proportionately higher debt
  • Very high depreciation expected to revert from current levels (~8%) to historical 5-6% over the next few periods
  • Long term tax rate still expected to be 25%
  • As a result, NPATA growth should realign with EBITDA growth and eventually surpass it as debt is paid down
  • Net debt/FY17 EBITDA is forecast at 2.5x excluding the Ultisat acquisition and 2.8x inclusive. This is fairly high and ND/EBITDA <2x by the end of FY18 would be welcome
  • Very high free cash flow generation at 55% of EBITDA
  • Overall, market conditions remained challenging in 1H17 as expected:
    • While onshore energy activities have been booming, the larger offshore sector has been slow to recover
    • The shipping sector is still recovering from a very tough FY16 but bullish about the future
    • Mining has not yet returned to significant growth
    • Pricing pressures have been constant.


Figure 16. SDA 2H17 result composition
Source: SDA

  • Guidance for FY17 EBITDA of $122m, in line with consensus. Assumes growth continues at June run rate throughout 2H17, with synergy benefits and other miscellaneous effects contributing ~$9m. There is some risk to this forecast but ultimately we expect it will prove conservative
  • Customers increasingly seek partners with scale and global reach, placing SDA in an ideal position to continue to take market share
  • Automation and digitisation are driving growth in connectivity, which is expected to strengthen. This is a key theme underpinning SDA’s long term growth
  • Growth momentum is accelerating in the US government market, supported by larger budgets and greater connectivity needs to operate drones and other unmanned vehicles. Bandwidth needs are increasing again in military hotspots like the Middle East and parts of Asia
  • We value SDA at $4.33 and will continue to hold. Management needs to deliver on promises of driving organic growth off rebased Caprock earnings in 2H17 and beyond.

VRS reported a solid FY17 result was marginally ahead of expectations and driven by a particularly strong 2H. We have a preliminary valuation of $0.21, which broadly aligns with equity per share and compares to current prices around $0.17. We are comfortable holding our existing position.
To recap, VRS continues to transition from what was a lumpier contract construction business dependent on resources capex to a professional services (surveying) firm. The main end-market exposures are now infrastructure, property (commercial and residential) and resources on a national basis. Key result details look and are messy, though this largely reflects the construction business in run-off concurrent with a considerable ramp up in surveying operations. Exposure to the growing east coast infrastructure pipeline is a positive.
Key result details:

  • Revenue $107.9m vs $120.9m pcp. Surveying revenue up 40% to $66.8m, construction revenue down 44% to $41.1m
  • Group EBITDA of $9.8m, reflecting:
    • Surveying division EBITDA up 16% to $9.4m, with operational momentum building and 1H acquisitions contributing for full half year period in 2H
      • A substantial half on half EBITDA improvement, predicted by management, was delivered: 1H $3.5m, 2H $5.9m
      • EBITDA Margins improving: 1H 12% while FY was 14% with management guiding to 17% margins for FY18
      • Management said the surveying division has strong earnings momentum in early FY18.
    • Construction EBITDA down 66% to $4.2m because this business is in run-off
    • Corporate costs are likely to trend marginally with the exit from construction
  • NSW and Victoria are particularly strong drivers and have robust pipelines, while WA looks to have “bottomed”
  • The balance sheet is improving, with net cash of $3m likely to improve further in coming months
  • Operating cash flow was sound at $6.4m and a flat final dividend of half a cent was declared. Cash conversion should improve
  • Depreciation should trend lower, reflecting the transition towards a more capital-light business model
  • VRS’s amortisation policy is conservative: the CFO aggressively amortises customer relationship intangibles and is intent on removing intangibles from the balance sheet as soon as possible. This is impressive.

Slides of interest from the presentation:

Figure 17. VRS growing in surveying and walking away from construction
Source: VRS

Figure 18. VRS’s strong 2H17 result
Source: VRS