“An insight into some of the leading emerging Microcap Companies on the ASX”
by MicroEQUITIES
2nd Issue April 2012
PG/ COMPANY INDUSTRY MARKET CAP Content
3 BIGAIR GROUP ABOUT THE Telecom $60.5 m (ASX BGL) microcapBOOK s
11 CALLIDEN GROUP Insurance $24.9 m The microcapBOOK is a (ASX CIX) twice-a-year publication developed by Microequities’ analyst 23 CASH CONVERTERS Consumer $227.9 m team. It provides (ASX CVC) Finance descriptive, analytical and value-adding information 34 CLOVER CORPORATION Healthcare $62.8 m for investors interested in (ASX CLV) equipment the Australian Microcap
space. The publication is Information $14.5 m 41 iPERNICA released in October and Technology (ASX IPR) April every year.
50 ISS GROUP Mining Software $26.2 m ABOUT (ASX ISS) MICROEQUITIES
Microequities was 60 MONTEZUMA RESOURCES Resources $20.6 m established in 2005 as (ASX MZM) Australia’s only
independent research Resources $23.1 m 70 RADAR IRON house specialized in
(ASX RAD) Microcaps. Microequities’ investment managers and 79 VIRALYTICS Biotechnology $26.4 m analysts operate uniquely (ASX VLA ) within the Microcap asset class, and seek to find investment opportunities 88 VOCUS COMMUNICATIONS Telecom $115.9 m in companies they believe (ASX VOC) hold a superior investment
case. 99 XRF SCIENTIFIC Mining Software $33.5 m (ASX XRF)
Disclaimer: The information in this publication is general advice and does not constitute personal advice. Microequities has not taken into account the investment objectives, financial situation or particular needs of individual investors. Microequities strongly recommends that potential investors seek independent professional advice as to the financial, taxation and other implications of investing.
April 2012 www.microequities.com.au MICROCAP COMPANY RESEARCH
April 2012 BUSINESS BigAir Group Limited
GICS Sub-Industry: Information Technology– Telecommunication Services
Research Overview Business Description ASX :BGL
BigAir Group [ASX:BGL] is a telecommunication carrier that Last traded A$ 0.40 owns and operates Australia’s largest metropolitan fixed Market Cap A$’’m 60.5 WiMax broadband network. BigAir provides near blanket Nº of Shares m 151.2 coverage across major metropolitan areas including Sydney, 2011A EPS ¢ 1.2 2011 PE x 33.3 Melbourne, Brisbane, Gold Coast, Adelaide and Perth. BigAir 2011 EV/EBITDA x 10.6 distributes its services through direct sales to businesses and DPS 2011A ¢ 0.00 governments as well through partnerships with other IT Diiv Yiielld 2011A % 0.00% resellers and ISP’s. Revenue 2011A m 15.5 EBITDA 2011A m 5.4 Event NPAT 2011A m 1.5
OVERVIEW . 1H12 results: BigAir is on track to meet management’s FY12 EBITDA guidance of $9.0m. First half EBITDA was Share Price | 1 Year up 161% to $4.57m and NPAT was up 211% to $1.97m on the back of a 115% rise in revenue to $10.97m.
. Strong growth all round: Fixed Wireless division showed 8.8% half-on-half revenue growth (excluding Clever) and Community Broadband grew its top line by 11.4% compared to 2H11.
. Further Acquisitions: Management has flagged potential acquisitions in the community broadband division.
. Recent Acquisitions to deliver in FY12: FY12 will mark a
significant milestone in the company’s operational developments and forecast significant uplifts in EBITDA and NPAT. Further cost and revenue synergies will be realised from recent acquisitions in the remainder of Investor Queries FY12 and FY13.
research . Dividend policy initiated: At the November AGM, the Jason Ashton board put in place a dividend policy equating to 33% of BigAir Group- CEO full year EPS subject to a NPAT hurdle of $4.0m +61 2 9993 1300 [email protected] [email protected]
Important disclosure information at the end of this report
BGL | RESEARCH OVERVIEW
BUSINESS DESCRIPTION BigAir Group owns and operates Australia’s largest metropolitan fixed WiMAX broadband network. Founded in 2002 by Jason Ashton and Patrick Choi, BigAir specialises in providing fixed “on-net” broadband wireless communications services to the SME market and ISP services to the tertiary student accommodation sector.
BOARD OF DIRECTORS & MANAGEMENT TEAM
Paul Tyler | Non-Executive Independent Chairman B.Eng, MBA. Over 18 years international experience in the Telecommunications industry holding executive roles in Nokia Siemens Networks, Nokia and Alcatel. Currently Head of the Asia Pacific Region at Nokia Siemens Networks and previously Managing Director of Nokia Siemens Networks for Australia, New Zealand and the Pacific Islands. Chairman of Nomination and Remuneration Committee and Audit Committee.
Jason Ashton | CEO and Managing Director B.Sc, M. Comm. Co-founded BigAir in 2002. Previously co-founded business ISP Magna Data in 1993, which was acquired by Davnet Limited in 1999 for $20m. Also served as CEO of DavTel Pty Ltd, Australian subsidiary of NTT Communications (Japan).
Nigel Jeffries | Non-Executive Director B. Comm. New Zealand based investor and substantial shareholder of BigAir. CEO of Propertyiq NZ Ltd, a joint venture company of RP Data Pty Ltd and QV Ltd. 20 years’ experience in senior positions in Information and Technology sector. Holds a Commerce degree from Massey University. Member of Nomination and Remuneration.
Vivian Stewart | Non-Executive Director B.A., MBA. Extensive background in IT&T industry, venture capital and corporate advisory. Co-founded two IT&T companies and currently a director of Hall Capital specialising in capital raisings and corporate strategy. Member of Nomination and Remuneration Committee and Audit Committee.
Charles Chapman | CFO and Company Secretary Chartered Accountant (CA), Certified Information Systems Auditor (CISA) and a member of the Project Management Institute. Extensive experience working in senior executive roles providing operational and strategic leadership to both listed and private unlisted companies. Long service with PricewaterhouseCoopers, leading the provision of audit services for some of the firm's flagship clients. Driving force behind online share trading in South Africa with the listed PSG Group. Currently Chief Financial Officer of the Group.
MAJOR SHAREHOLDERS
BGL - Top 20 Shareholders as at 30 June 2011.
NUMBER PERCENTAGE
1. Microequities Asset Management Pty Limited 10,679,200 7,083
2. Jmas Pty Ltd 9,579,718 6.354
3. Custodial Services Limited 8,000,000 5.306
4. Vorpal Pty Limited 7,361,704 4.883
5. HSBC Custody Nominees (Australia) Limited- A/C 2 5,105,482 3.386
6. Cullingral Pty Limited 4,733,982 3.140
7. Mr Ivan Tanner & Mrs Felicity Tanner 3,535,000 2.345
8. Livwat Pty Ltd 3,326,346 2.206
9. Aus Executor Trustees NSW Ltd 3,299,185 2.188
10. Moat Investments Pty Ltd 3,033,401 2.012
11. Symmall Pty Ltd 3,000,000 1.990
12. Zygonaut Pty Ltd 2,512,563 1.666
13. Benchmark Trading Pty Ltd 2,489,907 1.651
14. Rocken Pty Ltd 2,001,933 1.328
15. LJ Catelan Superannuation Fund Pty Ltd 1,949,037 1.293
16. ML Catelan Superannuation Fund Pty Ltd 1,949,037 1.293
17. Old Fletcher & Partners Pty Ltd 1,543,600 1.024
18. Emico Pty Ltd 1,464,421 0.971
19. Mr Patrick Choi 1,402,225 0.930
20. Equitas Nominees Pty LImited 1,301,409 0.863
TOTAL FOR TOP 20 SHAREHOLDERS: 78,268,150 51.911
April 2012 www.microequities.com.au
BGL | RESEARCH OVERVIEW
BUSINESS SEGMENTS
HISTORICAL HALF YEAR REVENUE BY DIVISION 12.0
10.0
8.0
6.0
4.0
2.0
- 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 On-net 1588 1927 2208 2437 2932 3809 4264 8136 8416 Community 84 68 153 194 363 346 829 2291 2558 Off-net 2654 1941 1332 141 72 59 0 0 0
SOURCE COMPANY DATA
Fixed Wireless BigAir specialises in providing fixed wireless services to SMEs and tertiary education institutions that require premium grade symmetrical speed data communications. The acquisition of Clever Communications, completed in early 2011, a key competitor in the fixed wireless market, allows BigAir to realise significant cost and revenue synergies as Clever’s network is integrated into BigAir’s fixed wireless backhaul. The BigAir network now has near blanket coverage across nine cities around Australia following further investment in network expansion in the first half. Strong organic growth is expected to continue with increasing demand for higher speed internet access and redundancy requirements.
Revenue from this division rose 110% to $8.95m with EBITDA up 135% to $4.0m. This result reflected revenue and earnings contributions from the Clever Communications acquisition for the entire period. Our estimates also indicates that organic revenue growth excluding the Clever contributions, was circa 8.8% half-on-half (1H12 v 2H11).
Community Broadband BigAir Group’s recent acquisition of AccessPlus continues its push into the highly lucrative student accommodation sector. The increasing investment by universities to expand on-campus student accommodation is the underlying driver for BigAir to increase its user base and drive revenue growth. Expansion into new sites and potential acquisition opportunities in the second half remain the key focus for management. We also believe there are significant cost efficiencies to be realised from the integration of AccessPlus and BigAir Universe Broadband.
The community broadband division also showed strong organic growth in 1H12, with revenue rising 208% to $2.56m and EBITDA up 195% to $0.56m. Organic growth was strong with half-on-half revenue growth of circa 11.4% (1H12 v 2H11).
April 2012 www.microequities.com.au
BGL | RESEARCH OVERVIEW
1H12 RESULTS SUMMARY
. BigAir delivered a strong first half result with revenue rising 115% to $10.97m and NPAT up 211% to $1.97m, driven by organic growth, recent acquisitions and synergies. EBITDA was 161% higher at $4.57m, outpacing revenue growth, a sign of improved margins following investment in network equipment and cost savings from acquisitions.
. EBITDA margin was up to 41.6% for 1H12, compared to 35% in FY11, 36% in the 1Q12 and 40% in 1Q12. Management has flagged a further $0.4m in cost synergies to be realised in 2H12.
. Operating cash flow performance was up 57% to $3.78m. Capex ($2.44m in 1H12) was associated with the integration of Clever Communications’ customers onto the BigAir backhaul network and network expansion.
. Strong organic growth was recorded in the fixed wireless business in 1H12 after stripping out the impact of the Clever Communications acquisition with growth of around 8.8% half on half. Community broadband grew 11.4% half on half.
FY08 FY09 FY10 FY11 1H12
Figures in A$’mn
EBITDA -$1.7 $2.2 $3.3 $5.4 $4.6
EBITDA MARGIN -20% 34% 43% 35% 42%
EBITDA Growth YOY - 233% 48% 66% -
NPAT -2.4 1.0 1.5 1.5 2.0
NPAT Margin -28% 16% 20% 9.9% 18%
ROE -56% 19% 21% 7.5% -
Debt-to-equity 0% 0% 0% 0% 0%
SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATE
FY12 OUTLOOK
. FY12 will mark a significant milestone in the company’s operational developments with a significant uplift in EBITDA and NPAT in FY12 as a full year contribution from recent acquisitions is delivered and further cost synergies is realised.
. Management expects acquisitions in the student accommodation sector in the second half.
. Management guidance of $9.0m EBITDA for FY12 is highly conservative. We would expect an earnings upgrade closer to the reporting date.
. Organic growth in community broadband is likely to show similar half on half growth trajectory in the 2H12. We would also expect strong performance from the fixed wireless division as management efforts turns to driving revenue growth.
. We believe BGL will pay a maiden dividend of 1.0c after management initiated a 33% dividend payout policy at the November AGM.
April 2012 www.microequities.com.au
THOUGHTS ON THE SALE OF BGL | RESEARCH OVERVIEW VIVIDWIRELESS TO OPTUS:
“It will have little to no impact. As MANAGEMENTQ&A with other mobile solutions, the vividwireless solution, in its Jason Ashton current form, is not capable of delivering symmetrical bandwidth CEO (equal down and upload speeds).
Students on our network enjoy the What cost synergies remain to be symmetrical nature of our
extracted from the Clever acquisition bandwidth.”
and when does management expect these to be completed? The remaining material synergy is the lease on the old Melbourne premises that will end during April 2012 as we are migrating to new premises.
Can you comment on the performance of the Clever Communications “We have plans to since the acquisition? Has it tracked in line with management’s expand into all Capital expectations? Yes, we have worked diligently on the integration work since we acquired the cities and large regional company and now that the integration is almost complete we can start to change centres” our focus to delivering new services to our expanded customer bases.
With regards to the fixed wireless business, are there other large regional centres that the network can be expanded into? Yes, we have plans to expand into all Capital cities and also large regional centres.
Management has mentioned potential acquisitions in the student accommodation sector. How advanced is the company in terms of making an acquisition? Can we expect something in the 2nd half of FY12? We remain committed to growing our student accommodation business organically and by acquisition.
Is there still scope to expand organically into new student accommodation sites? Yes, we are seeing increased demand for new sites towards the end of calendar year 2012 and into 2013.
The community broadband business showed quite strong organic growth half on half. Can we expect similar growth for the 2nd half of FY12? Has the high Australian dollar had any impacts on the student accommodation business with many universities and private education colleges reporting significantly lower overseas student enrolments? Growth for 2nd half of FY12 will be under pressure from the high Australian dollar as well as the previous tightening of VISA requirements. Early indications are that this is expected to ease going into FY13.
In terms of EBITDA margins for the community broadband business, what sort of improvements can we expect once all sites transition off 3rd party networks in mid-2013? The EBITDA margin improvement will occur in the fixed wireless business. The fixed wireless business supplies the community broadband business with the necessary network and bandwidth at agreed rates. The exact margin improvement is difficult to predict as capacity will have to be re-assessed as sites transition onto the BigAir network.
April 2012 www.microequities.com.au
BGL | RESEARCH OVERVIEW
What is management’s thoughts on the sale of vividwireless to Optus and how does this impact on the student accommodation business? It will have little to no impact as with other mobile solutions the vividwireless solution, in its current form, is not capable of delivering symmetrical bandwidth (equal down and upload speeds). Students on our network enjoy the symmetrical nature of our bandwidth.
BGL have reiterated its FY12 EBITDA target of $9m. Considering the company did around $4.6m EBITDA in the first half, does management expect to upgrade guidance before the full year result? Yes we do, we plan to update the guidance in the first week of May 2012.
Can you detail BigAir’s dividend policy, which was announced at the AGM? The amount of dividends paid to shareholders will be at the directors’ discretion whilst using the following guidelines:
(1) The minimum level of NPAT before a dividend payment is to be considered is $4 million (excluding any unusual, non-trading or one-off impacts); (2) A dividend payout ratio of 33% to be applied to the earnings per share and distributed as dividends; and
(3) Dividends are to be distributed to all shareholders equally.
Management have previously flagged potential expansion into other vertical markets such as defence and aged care. How far away are these aspirations? The defence vertical is in early stages with no commitments as yet. No work has commenced on the aged care vertical.
April 2012 www.microequities.com.au
BGL | RESEARCH OVERVIEW
FINANCIAL SUMMARY
INCOME STATEMENT KEY RATIOS Year to June 2009A 2010A 2011A Year to June 2009A 2010A 2011A Revenue 6.5 7.6 15.5 Sales 6.5 6.6 15.5 Cost of Good Sold 1.7 1.5 4.6 % Chg YoY -0.2 2% 136% Op. Expenses 2.6 2.8 8.7 Price/Sales 9.4 9.2 3.9 EBITDA 2.2 3.3 5.4 EPS (cents) 1.2 1.7 1.2 % Change 233% 48% 1.4 % Chg YoY 9487% 42% -29% % of Revenue 34% 43.2% 0.3 P/E 33.3 23.5 33.3 Depreciation & Amortisation 0.9 1.1 2.5 Enterprise Value 58.4 58.4 57.8 EBIT 1.4 2.3 2.3 EV/EBIT 43.3 46.8 24.6 % of Revenue 21% 30% 0.2 EV/EBITDA 26.4 25.8 10.6 Net Interest Income (Expense) 0.1 0.1 0.1 DPS 0.0 0.0 0.00 EBT 1.3 2.2 2.3 Dividend Yield 0.0 0.0 0.0% Tax -0.3 -0.7 -0.8 ROE 19% 7% 7% Net Profit 1.0 1.5 1.5 Debt to Assets 0% 0% 0% Debt to Equity 0% 0% 0% BALANCE SHEET CASH FLOW STAMENT
Year to June 2009A 2010A 2011A Year to June 2009A 2010A 2011A Cash & cash equivalents 2.0 2.1 2.8 Receipts from customers 6.9 7.8 17.4 Receivables 0.1 0.6 0.9 Payment to suppliers -5.3 -4.9 -12.4 Inventories 0.0 0.0 0.0 Net Interest 0.1 0.1 0.1 Other Assets 0.0 0.1 0.4 Dividend received 0.0 0.0 0.0 Total Current Assets 2.2 2.7 4.1 Tax Paid 0.0 0.0 0.0 Trade and other receivables 0.0 0.0 0.1 Other Op. Cash items 0.0 0.0 0.0 Property, Plant & Equipment 2.5 4.7 7.8 Cash from Operations 1.7 2.9 5.1 Deferred tax assets 1.6 1.0 1.0
Goodwill 0.0 0 11.3 Payments for PPE 1.3 2.9 3.2 Other intangible assets 0.1 0.9 2.2 Payment for acquisitions 0.0 0.0 2.7 Payment for intangible Total Non-Current Assets 4.3 6.5 22.4 0.0 0.0 0.4 assets TOTAL ASSETS 6.5 9.2 26.5 Invested in listed shares 0.0 0.0 0.0 Trade and other payables 1.1 1.8 3.6 Loan to subsidiary 0.0 0.0 0.0 Provisions 0.1 0.1 0.3 Cash from Investing -1.4 -2.9 -6.3 Income received in advance 0.0 0.0 0.4
Interest bearing borrowings 0.0 0.0 0.0 Incr/(Decr) in Equity 0.0 0.0 2.0 Current tax liabilities 0.0 0.0 0.2 Incr/(Decr) in Debt 0.0 0.0 -0.1 Total Current Liabilities 1.3 2.0 4.5 Dividends paid 0.0 0.0 0.0 Trade and other payables 1.4 Cash from Financing 0.0 0.0 1.9
Long Term Provisions 0.0 0.1 0.1 Net Cash 0.4 0.1 0.7 Total Non-Current Liabilities 0.0 0.1 1.4
TOTAL LIABILITIES 1.3 2.0 5.9
NET ASSETS 5.2 7.2 20.5
April 2012 www.microequities.com.au
BGL | RESEARCH OVERVIEW
IMPORTANT DISCLOSURE INFORMATION: Produced by Microequities Pty Ltd in accordance with section 949A of the Corporations Act 2001. Any recipient of the information contained in this document should note that the information is general advice in respect of a financial product and is not personal advice. Accordingly, the recipient should note that a) the advice has been prepared withou t taking into account the recipient’s objectives, financial situation or need; and b) as a corollary, the recipient should, before acting o n the advice, consider the appropriateness of the advice, having regard to the recipient’s objectives, financial situ ation and needs. Although Microequities Pty Ltd (Microequities) considers the advice and information contained in the document to be accurate and reliable, Microequities has not independently verified the information contained in the document which is derived from publicly available sources. Microequities assumes no responsibility for updating any advice or recommendation contained in this document or for correcting any error or admission, which may become apparent after the document has been issued. Microequities does not give any warranty as to the accuracy, reliability or completeness of advice or information contained in this document. Except in the case where liability under any statute cannot be excluded, Microequities, its employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Microequities, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Act 2001 may receive remuneration from transactions involving financial products referred to in this document. Microequities and its associates (as defined in Chapter 7 of the Corporations Law), officers, directors, employees and agents, companies to which this document refers and may trade in the securities mentioned either as principal or as agent . Furthermore, the trading by its associates may not necessarily correspond to the recommendation been provided in this document.
ADDITIONAL VOLUNTARY DISCLOSURE BY MICROEQUITIES* Analyst Equity Stake Disclosure to Business Investment Banking Staff Interest personal By Microequities Company Relationship Interest Associates
NO NO
* To promote transparency, Microequities voluntarily discloses potential conflict of interests covered by this research document.
**Microequities Asset Management and its associates are currently a substantial shareholders of BigAir Group Limited (ASX:BGL).
April 2012 www.microequities.com.au
MICROCAP COMPANY RESEARCH
Calliden Group Limited April 2012
GICS Sub-Industry: Financial Services– Insurance
Research Overview Business Description ASX :CIX
Calliden Group Limited [ASX:CIX] is a specialist insurer Last trade A$ 0.115 focusing on insurance solutions in the SME sector by Market Cap A$’’m 26.1 providing customised products and services. Calliden Nº of Shares m 226.7 distributes its products through insurance intermediaries, 2011A EPS ¢ (4.5) 2011 PE x direct and online platforms. Its main differentiating factor is its - DPS 2011A ¢ - focus on specialist niche categories such as specialist motor, Diiv Yiielld 2011A % - farm, construction and strata. It also competes in the general GWP 2011A m 245.7 Insurance profiit home and business insurance market. m 2011A (14.4)
Event NPAT 2010A m (10.2)
. FY11 Result: Strong growth in FY11 gross written
premiums was unable to counteract the increased OVERVIEW frequencies and severity of catastrophe events. Full year Share Price | 1 Year
loss of $10.2m compared to a $10.1m profit in FY10. The full year result also included a $8.3m profit on the sale of CSA Ltd. . Losses from catastrophe events: Since 2007, average annual losses from catastrophe events in Australia have been well above the 20-year average. Although history show losses from natural disasters occur in cycles, the average losses have trended up over time in the last two
decades.
. Shift to managing agency: Calliden announced a strategic alliance with Great Lakes Australia (GLA), a Investor Queries branch of GLA UK plc, which is a wholly owned research subsidiary of Munich Re. Calliden will switch to a Nick Kirk managing agency model (MGA) for commercial packages CEO- Calliden Group
in FY12 with further managing agency agreements likely + 61 (2) 9551 1111 [email protected] to be announced. Management aims to underwrite 50%
of the insurance book under a MGA model by the end of FY12. Earnings volatility should reduce with management
aiming to return the group back to a profitable, dividend paying company.
Important disclosure information at the end of this report CIX | RESEARCH OVERVIEW
BUSINESS DESCRIPTION Calliden Group Limited [ASX:CIX], formerly, Reinsurance Australia Corporation Ltd. (RAC) is a general provider of insurance products for small to medium enterprises (SMEs) and personal customers through Calliden Insurance Limited. The group utilises three main distribution channels in professional intermediaries, alliances or corporate partners, and direct to the consumer. Calliden’s focus is in the specialist niche insurance markets (56% of FY11 GWP) of construction, specialist motor, farm, sports & entertainment and strata and standard market segments (44% of FY10 GWP) of home and business. Calliden’s differentiating factor is its core strategy of targeting SME’s and personal customers in niche markets through professional intermediaries. In FY12, Calliden will transition its commercial pack portfolio
BOARD OF DIRECTORS & MANAGEMENT TEAM
Nicholas George Kirk | Chief Executive Director Nick Kirk has more than 25 years of experience in the Australian, continental Europe and UK insurance industries. He was previously with Vero where he held a number of General Management roles most latterly responsible for their Specialty Businesses in Australia. Prior to Vero, he held a number of Senior Underwriting Management roles internationally with the Royal & Sun Alliance Group. He is also an Associate of the Chartered Insurance Institute and Chartered Insurer (UK).
Richard James Hill | Chairman and Independent Non-Executive Director Richard Hill has extensive investment banking and management experience. He was a founding partner of Hill Young & Associates and formerly held a number of senior executive positions in Hong Kong and New York with Wardley Holdings Limited, a wholly owned subsidiary of Hong Kong & Shanghai Banking Corporation. He was admitted as an attorney in New York State, USA and registered by the US Securities and Exchange Commission and the Ontario Securities Commission. He is the Chairman of Sirtex Medical Limited (since August 2006) and a director of Pelorus Property Group Ltd (since July 2006) and Biota Holdings Limited (since November 2008).
Maurice William Loomes | Independent Non-Executive Director Maurice Loomes has an extensive background in investment analysis and strategy, and for a number of years was a senior executive with Guinness Peat Group Plc. He is Chairman of Canberra Investment Corporation Limited (director since September 1994). He is also a director of Ariadne Australia Limited (since May 2004). He is a former director of Tower Limited.
Anthony Vincent Connon | Non-Executive Director Tony Connon is a chartered accountant with over 30 years experience in various industries, having held senior finance and administration positions with PriceWaterhouse, Grindlays Australia Limited, Elders Finance Group and The Australian Wheat Board. Since 1995, he has been the Chief Financial Officer of Australian Unity Limited and is an Executive Director of all its operating subsidiaries. He is the honorary treasurer of Friendly Societies Australia Inc. and a member of the board of the Lord Mayor’s Charitable Foundation.
Jack Theseus Lowenstein | Non-Executive Director Jack Lowenstein has extensive experience in funds management. He is a director of Hunter Hall International Limited (ASX:HHL) (director since March 2004) and a director of Hunter Hall Global Value Limited (ASX: HHV) (since December 2003). He is also Chairman of Kontiki Capital Limited, a Fiji-based regional investment bank.
John Ian Messenger | Independent Non-Executive Director John Messenger has extensive insurance, property and risk management experience. He was previously the Managing Director of MLC Insurance Limited and Chief Executive Officer of Corporate Risk Management for the Lend Lease Group (ASX:LLC). He is a director of Territory Insurance Office (since February 2002). He is a former director of Investa Properties Group Limited.
Gordon Geoffrey Marsden Smith | Independent Non-Executive Director Gordon Smith has an extensive background in the financial services industry in New Zealand and more recently Australia, with involvement in banking, insurance and the rural sector. He is currently a director of Doubleshot Group Limited a New Zealand financial services company and a member of a Taskforce reviewing the New Zealand Accident Compensation Commission . He was formerly Chief Executive Officer of Farmers Mutual Group in New Zealand and a director of eight related Group companies including Farmers Mutual Insurance Limited in Australia and the Insurance Council of New Zealand.
April 2012 www.microequities.com.au
CIX | RESEARCH OVERVIEW
MAJOR SHAREHOLDERS
CIX – Top 20 Shareholders as at 15 March 2011.
SHARES HELD ISSUED CAPITAL
1. JP Morgan Nominees Australia Limited 70,389,353 31.00%
2. Australian Unity Strategic Holdings Pty Ltd 30,142,850 13.27%
3. HSBC Custody Nominees (Australia) Limited 12,014,153 5.29%
4. Citicorp Nominees Pty Ltd (CFSIL Cwlth Small Co 7) 7,166,971 3.16%
5. JP Morgan Nominees Australia Limited (Cash Income A/C) 7,073,426 3.12%
6. Citicorp Nominees Pty Limited 6,427,160 2.83%
7. Citicorp Nominees Pty Ltd (CFSIL Cwlth Small Cos 1 A/C) 3,553,355 1.56%
8. Chembank Pty Ltd (Cabac Super Fund A/C) 3,000,000 1.32%
9. CPU Share Plans Pty Limited (CIX-LTI Control Account) 2,468,165 1.09%
10. Bell Potter Nominees Ltd (BB Nominees A/C) 2,000,000 0.88%
11. Hillmorton Custodians Pty Ltd (The Lennox Unit A/C) 1,324,000 0.58%
12. Chembank Pty Ltd (Philandron Account) 1,200,000 0.53%
13. Cossey Investments Pty Ltd (Cossey Investment A/C) 1,109,213 0.49%
14. Jagen Pty Ltd 1,100,000 0.48%
15. Mr Anthony Woolley (Woolley Kencian S/Fund A/C) 1,080,000 0.48%
16. UBS Wealth Management Australian Nominees Pty Ltd 1,017,000 0.45%
17. Tusa Pty Limited 1,000,000 0.44%
18. Mr Geoffrey William Vines & Mrs Wendy Margaret Vines (Vines Family Super 1,000,000 0.44% Fund A/C)
19. Invia Custodian Pty Limited (NLC Pty Ltd A/C) 840,000 0.37%
20. Wheelmar Distributors Pty Ltd 750,000 0.33%
TOTAL FOR TOP 20 SHAREHOLDERS: 154,655,666 68.11%
*Nick Kirk (CEO) owns 1.567 million shares as of 30 June 2011.
Substantial Shareholders as at Date of Last Notice to Company SHARES HELD ISSUED CAPITAL
1. Hunter Hall Investment Management Limited and related parties 46,199,097 20.35%
2. Australian Unity Strategic Holdings Pty Ltd 30,142,850 13.27%
3. Celeste Funds Management Limited 18,464,216 8.13%
4. Challenger Financial Services Group Limited and related parties 15,213,239 6.70%
5. Greencape Capital Pty Ltd 11,590,771 5.10%
TOTAL 121,610,173 53.55%
April 2012 www.microequities.com.au
CIX | RESEARCH OVERVIEW
SALE OF CLAIMS SERVICES AUSTRALIA Calliden has sold its 50% stake in Claims Services Australia Pty Ltd to Innovation Group plc for $10m in cash, representing a gain on sale of $8.3m. There are is no operational impact with Calliden signing a five-year claims service agreement with CSA earlier in the year. Proceeds from the sale will be applied to Calliden’s investment portfolio.
TRANSITION TO MANAGING AGENCY STRUCTURE IN FY12 Management have set the company in a new strategic direction with the announcement in September 2011 of a strategic alliance with Great Lakes Australia (GLA), a branch of GLA UK plc and a wholly owned subsidiary of global insurance giant Munich Re. As part of the alliance Calliden will underwrite its commercial package portfolio from 2Q12 onwards as an agent on behalf of GLA. The alliance allows Munich Re to utilise Calliden’s existing distribution network. Munich Re has a stronger ability to access cheaper capital and utilise its reinsurance capabilities. Calliden will receive a commission income based on premiums written and we believe the transition to an agency/commission model will also significantly lessen the volatility in underwriting results from claims. Other products including home, motor and business written through specialist agencies will continue to be insured by Calliden including commercial packages distributed through Calliden supported agencies. Commission received from underwriting commercial packages will be recorded in ‘Other Income’ in the FY12 income statement. Gross written premiums are also likely to be lower in FY12 as the managing agency agreement (MGA) takes effect.
Calliden has indicated around 30% of the groups FY12 premiums will be from the GLA agency structure and other similar deals with Lloyds of London and the NSW Government. Calliden has indicated they are working on further MGA type structures with a goal of having 50% of its premiums written to be under an agency/commission model. This change in strategy is positive, with a reduction in earnings volatility and regulatory capital requirements.
DIFFERENCES IN THE OPERATING MODEL
Agency Model Insurance Model
Capital intensive and high levels of Alliance with 3rd party insurers regulations
Profit is a factor of: Underwriting Commission revenue performance and investment on funds backing insurance
Reliant on attaining and retaining Dependent on reinsurance 3rd party capital protection
Complex accounting and actuarial Less complex processes
Higher volatility in earnings (higher Less volatile earnings profits and higher losses)
SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATES
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CIX | RESEARCH OVERVIEW
REINSURANCE Calliden is covered by both proportional and excess of loss reinsurance. Calliden has made a number of changes to its FY12 reinsurance program, including: Proportional reinsurance: Increase in the amount of premiums ceded to reinsurers under its proportional reinsurance program from 40% to 60%. An additional 25% of unearned premiums will be ceded to reinsurers. Excess of loss: We believe catastrophe reinsurance premiums have risen around 20-25% in FY12. Net retention for each catastrophe event will increase from $2.5m up to $4.0m per event. Calliden move to greater proportional reinsurance cover has reduced its reliance on the more expensive catastrophe reinsurance.
INVESTMENT PORTFOLIO Calliden’s 2011 investment income decline slightly to $6.7m from $6.9m in 2010 despite an increase in annualised percentage return from 5.8% to 6.4%. The entirety of the portfolio remains in terms deposits and cash at call. Considering the subdued outlook for interest rates in FY12, there is potential for some of the funds to be reallocated to equities or fixed interest securities. Readers should note that the size of the investment portfolio will be reduced as Calliden shifts to a managing agency model (effectively acting as a broker).
INDUSTRY OUTLOOK Between 2007 and 2011, the general insurance industry exhibited a revenue CAGR of -0.1%. Going forward, the industry is forecast to grow revenue to $52.1bn by 2016-17 representing a 1.6% CAGR. Most of the revenue growth is expected in the next two years with industry in a rebuilding phase after being hit by both the global financial crisis, a record number of catastrophic losses, and rising reinsurance costs.
Natural disasters were the primary reason for the deterioration in performance in FY11 for Calliden and the industry in general. Australia is currently in a La Nina weather pattern with higher than average rainfall and tropical storm activities. Catastrophe frequencies have remained elevated since 2007 with total claims above the last two-decade average. Whether we are to see another year of high catastrophe losses is unknown, but history would show that losses appear to be cyclical.
TOTAL AUSTRALIAN CLAIM COSTS FROM CATASTROPHE EVENTS
6000 Catastrophe losses (2011 normalised cost) in millions $ Overall average (1990-2011) 5000 2007-2011 average
4000
3000
2000
1000
0
SOURCE: INSURANCE COUNCIL OF AUSTRALIA, MICROEQUITIES ESTIMATES
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CIX | RESEARCH OVERVIEW
HISTORICAL FINANCIALS
HISTORICAL FINANCIALS
FY08 FY09 FY10 FY11
Figures in A$’mn (unless otherwise stated
Gross Written Premium 200.0 217.8 211.6 245.7 GWP Growth YOY % 60.8% 8.9% (2.8%) 16.1% Net Premium Revenue 105.8 101.0 116.8 126.1 Underwriting profit (2.3) (2.6) 6.6 (20.7) Insurance profit 6.6 1.4 11.5 (14.4) Insurance profit growth YOY % 1078% (78.3%) 360.4% - NPAT 9.1 (0.4) 10.1 (10.2) Insurance Margin % 7% 2% 12% (14%) ROE % 8.8% (0.0%) 9.5% (10.9%) Debt-to-equity % 24% 25% 5% 0% SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATE
$'m 300.0
250.0
200.0
150.0 245.7 100.0 200.0 217.8 211.6 124.4 126.1 50.0 105.8 101.0 116.8 59.5 0.0 0.1 0.1 0.0 FY07 FY08 FY09 (0.0) FY10 FY11 (10.2) (50.0) GWP Net premium revenue NPAT
SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATE FY11 RESULTS
. FY11 loss of $10.2m (FY10 NPAT of $10.1m) due to the unprecedented record number of catastrophe events and associated costs. The deterioration in the second half resulted from $3m net cost from Melbourne hailstorm on Christmas Day; increase in catastrophe reinsurance and retention costs resulting in a LAT provision of $3.9m; claims reserves increased by $1.2m; reduction in the discount rate in calculating reserves for future claims ($2m increase); large loss activity in Q4 over budget of $5.0m and $0.5m in restructuring costs associated with the transition to a managing agency model.
. GWP rose 16% in FY11 from pcp after significant price increases were put through in the home and motor and commercial short tail parts of insurance book.
. Gain on sale of $8.3m on the sale of Calliden’s 50% stake in CSA Pty Ltd cushioned some of the losses in FY11.
. Transition to a managing agency agreement in 2012 after signing an alliance with Great Lakes Australia.
. No dividend was declared considering catastrophe events and pressures on its regulatory capital.
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CIX | RESEARCH OVERVIEW
1H11 RESULTS
. 1H11 loss of $4.3m due to the unprecedented record number of catastrophe events. Net loss of around $10.4m was incurred from these catastrophe events including other associated costs and additional backup cover bought. Calliden also incurred higher individual risk claims in 2Q11 from large fire damage claims. This resulted in a net cost of $4.8m, $3.6m more than expected for the 2nd quarter.
. GWP rose 11.1% in 1H11 from pcp (16.4% excluding the NSW Home Warranty business). Strong premium price increases have been passed through across the personal lines in response to unprecedented catastrophe events, and an expected jump in reinsurance premiums in FY12. Pricing remains weak in the commercial insurance market.
. Investment portfolio returned an annualised 6.3% in 1H11, down from 8.0% in pcp. This resulted from the switch to 100% term deposits in 1H11 and a reduction in the portfolio size due to the payout of claims.
April 2012 www.microequities.com.au
TRANSITION OF PART OF THE CIX | RESEARCH OVERVIEW PORTFOLIO TO A MANAGING AGENCY MODEL: “The arrangement with Great Lakes MANAGEMENTQ&A Australia relates to our commercial package portfolio and means that
Nick Kirk over 30% of our portfolio will be CEO written on behalf of alternative capital providers. Our intention is to
Calliden announced a loss of $4.3m in the first have a lower volatile, more homogenous, less capital intensive half of FY11 with a further deterioration in the portfolio of risks in our Insurance second half, bring the total loss for FY11 to Company that suits the sort of capital $10.2m. Other than non-cash adjustments, base that we have, and the sort of what was the reason behind this outcome? company that we are.” The principle reasons for the overall loss in 2011 relate to the deterioration in the second half of the year and include:
a) A continuation of the unprecedented 2011 catastrophe activity with the 25 December 2011 hail storm in Melbourne costing $3M net. “We are in b) An increase in 2012 catastrophe reinsurance costs and retentions following discussions with a the recent Asia Pacific industry experience. This resulted in an increase in number of potential the Liability Adequacy Test provision of $3.9M partners primarily for c) Reduction in the discount rate applied to our reserves for future claims to our home portfolio 3.4% as a result of the fall in Australian Government bond yields (despite which is the biggest our current returns of 6.4% from Australian bank deposits) requiring an increase in our claims reserves of $2M driver of catastrophe d) Strengthening our claims reserves by $1.2M reflecting changed actuarial exposure and assumptions therefore e) Higher than expected large loss activity in the 4th quarter of $5M reinsurance costs f) Restructuring costs of $0.5M relating to our transition to the Managing and to some extent General Agency (MGA) model the volatility around In terms of “cash” items a) and e) were the relevant items. the weather” Calliden experienced higher than budgeted large loss claims. What was the reason behind this? In the second and fourth quarters of 2011 we experienced a number of larger property losses above our $100k large loss threshold. We have undertaken analysis of the large losses and while there is a certain degree of randomness, there were elements of economically related losses and the use of accelerants. We recognise that more difficult economic times correlate with larger losses with arson as the proximate cause, and we have addressed this through tighter underwriting guidelines and controls around both new and renewal business.
Calliden announced the transition of a portion of it insurance portfolio to a managing agency model (MGA) with Great Lakes Australia. Which segments of the portfolio does this relate to and what was the rationale behind this move? Calliden already operates as an agent of Lloyds of London (in relation to our mansions portfolio) and the NSW government (in relation to NSW home warranty). The arrangement with GLA relates to our commercial package portfolio and means that over 30% of our portfolio will be written on behalf of alternative capital providers. Our intention is to have a lower volatile, more homogenous, less capital intensive portfolio of risks in our Insurance Company that suits the sort of capital base that we have and the sort of company that we are.
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CIX | RESEARCH OVERVIEW
How does the MGA model affect your regulatory capital? As we increase our focus on the managing general agency side of the business, as each month goes by our requirement for capital is going to be coming down. The increase in proportional reinsurance from 40% to 60% as at 1 January, will also flow through the book and any further portfolios that we put on to an agency basis before year end (either wholly or in part) will also have an impact on that capital. So, subject to the profitability of our business the required regulatory capital will reduce during the year.
Management has cited further MGA deals are likely in FY12. How advanced are these negotiations and which parts of Calliden’s insurance portfolio are likely to be affected? We are in discussions with a number of potential partners primarily for our home portfolio which is the biggest driver of catastrophe exposure and therefore reinsurance costs and to some extent the volatility around the weather.
As Calliden transitions to a MGA model, what changes can we expect in terms of insurance ratios and items on the financial statements? The first thing that you will see is a reduction in the Gross Written Premium through the insurance company. However it is worth noting that the change to an agency basis through the deal with Great Lakes will take place from May 15 onwards, so the reduction in the first half will not be so marked. Up until May the business will continue be written by Calliden Insurance Limited (CIL) but the risk is effectively reinsured out.
The Expense Ratio in the insurance company will have to be redistributed between what is effectively the insurance company and the agency part of the business. So that ratio will change. We don’t currently report two expense ratios but as the agency part of the business becomes a greater proportion of the overall Calliden business, then we will start reporting the insurance and agency business expense ratios separately.
The movement of different portfolios will also have an impact on the Acquisition Ratio. This effectively represents the commission we pay our agents so what is likely to happen is that the Ratio will come down slightly. That is because the commercial business pack part of our business operated with a relatively high Acquisition Ratio.
With the exception of the Loss Ratio, which will continue to be influenced by the portfolios that we continue to underwrite (excluding those where we operate as an agent), the Expense Ratio, the Acquisition Ratio and the absolute level of premium will all be impacted by our move to an agency business. Some of those impacts will only be known once we’ve done further agency deals and the Great Lakes implementation takes place from May 15 onwards.
In terms of premiums growth, which segments of the portfolio do you foresee the most growth for FY12? We have budgeted for growth in a number of segments/markets including: commercial packages, specialist motor and casualty particularly sport, entertaining and events.
A number of changes have been made to the reinsurance program for FY12. Can you briefly outline the main changes and what effect this has on regulatory capital? The structure of the program, which is a combination of proportional and excess of loss coverage, has not changed significantly. The principal change is an increased emphasis on the proportional coverage. We have increased the proportional (or quota share) treaty to 60% from 40% in 2011. In addition, we placed an additional proportional treaty for unexpired risks. This increases the coverage on unexpired policies as at 31.12.11 to approximately the same as the 2012 treaty.
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CIX | RESEARCH OVERVIEW
It is the catastrophe excess of loss treaty which was subject to premium increases and also an increase in our net retention. This was a result of the recent Australasian losses and to an extent, regional experience.
The shift to increased proportional is therefore cost effective and also provides capital relief. The unexpired risk quota share also has the effect of reducing the net retention for catastrophe losses to $2.6M in January, rising to $4.0M at year end as it runs off.
Calliden maintains its entire investment portfolio in term deposits and cash at call. Considering the softer interest rate environment, does management plan to move some of the funds into fixed interest or equities? At the present time the Group has no plans to change its investment strategy. Our decision to move into bank deposits (and therefore not having to mark to market gains and losses in the way we would do on bonds or equities) has to some extent introduced some volatility around the discount rate. Despite this using bank deposits is the best strategy for Calliden at the present time.
FY12 is a transitional year for Calliden. Assuming no major or high number of catastrophe events, has management set a NPAT target for FY12? How has trading been in the first few months and has Calliden been affected by the recent floods in NSW, QLD and VIC? We are planning to provide a market update on progress by mid-April. Given we have not announced anything as yet you can assume business as usual.
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CIX | RESEARCH OVERVIEW
FINANCIAL SUMMARY
PROFIT & LOSS SUMMAR Y ( $ m ) PROFITABILITY RATIOS
Year Ending June 2009A 2010A 2011A Year Ending June 2009A 2010A 2011A
Gross Written Premium 217.8 211.6 245.7 Sales 217.8 211.6 245.7 Net Premium revenue 101.0 116.8 126.1 % Chg YoY 9% (3%) 16% Net claims incurred (55.6) (58.4) (85.7) Priice/Salles 0.1x 0.1x 0.1x Net acquisition costs (18.3) (23.8) (31.4) EPS (cents) (0.17) 4.45 (4.52) Underwriting expenses (30.5) (28.1) (29.6) % Chg YoY -% -% -% UNDERWRITING PROFIT (3.4) 6.6 (20.7) P/E - x 2.6x - x Insurance profit/(loss) 0.6 11.5 (14.4) Enterpriise Vallue 37.7 20.8 (14.1) Profit before Tax (0.5) 8.5 (10.2) EV/EBIT 46.1x 2.1x - x Income tax 0.1 1.6 0.0 DPS 1.00¢ 1.00¢ - ¢ NPAT (0.4) 10.1 (10.2) Diiviidend Yiielld 8.7% 8.7% -% ROE (0%) 9% (11%) Debt to Assets 6% 1% -% Debt to Equiity 25% 5% -% Priice to NTA 0.52x 0.46x 0.59x
B A L A N C E SHEET SUMMARY ($ m ) CASH FLOW SUMMARY ($ m )
Year Ending June 2009A 2010A 2011A Year Ending June 2009A 2010A 2011A Cash held for operational 13.4 10.3 40.1 Underwriting result (7.7) 5.2 (6.8) purposes Investments 116.7 105.5 80.0 Income tax paid 0.0 (0.1) 0.0 Trade and other receivables 59.8 54.5 65.7 Management fees 0.0 0.0 0.0 Reinsurance and other 87.3 69.8 84.8 Net interest received 7.0 5.6 6.0 recoveries receivables Prepayments 0.7 0.8 0.9 Dividend received from JV 1.5 1.4 1.1 Deferred levies and charges 11.8 9.5 11.5 Fee income received 0.0 1.3 4.2 Deferred reinsurance expense 53.0 41.7 50.3 Other operating expenses (0.5) (1.4) 0.0 Deferred acquisition costs 30.8 28.2 31.0 Other operating income 0.0 0.0 0.3 Deferred tax assets 2.1 3.8 3.8 Cash from Operations 0.3 11.9 4.7 Net proceeds from sale of Plant, property & equipment 3.7 2.8 2.5 5.4 11.1 25.4 investments Investment accounted for using 2.8 2.6 0.4 Net proceeds from PPE (0.6) (0.0) (0.2) the equity method Other financial assets 0.0 0.0 0.0 Intangibles acquired (3.6) (4.1) (3.3) Investment in controlled Intangible assets 49.8 50.9 50.2 (0.3) 0.0 0.0 entities, net of cash acquired TOTAL ASSETS 431.7 380.3 421.1 Net investment in JVs (0.2) 1.2 10.0 Trade and other payables 28.1 12.4 15.7 Cash Flow From Investing 0.8 8.1 31.9 Borrowings 25.0 5.0 0.0 Dividend paid (2.9) (2.3) (2.3) Employee entitlements 1.3 0.9 1.1 Share redemption (0.0) (1.0) (0.1) Repayment of loan provided to Unearned premium liability 114.4 106.5 128.2 0.6 0.2 0.4 JVs Unearned reinsurance 19.9 14.5 17.5 Return of capital from JVs 0.0 0.0 0.2 commission Proceeds of loan from Outstanding claims 143.0 133.8 164.2 0.0 0.0 0.0 subsidiaries TOTAL LIABILITIES 331.6 273.2 326.7 Repayment of borrowings 0.0 (20.0) (5.0) Outlays for purchase of NET ASSETS 100.1 107.0 94.5 (0.3) (0.1) 0.0 treasury shares Cash Flow From Fin (2.6) (23.1) (6.8) Net Incr/(Dcr) in cash (1.6) (3.1) 29.8
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CIX | RESEARCH OVERVIEW
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MICROCAP COMPANY RESEARCH
April 2012 BUSINESS Cash Converters Intl.
GICS Sub-Industry: Diversified Financials– Consumer Finance
Research Overview Business Description ASX :CCV
Cash Converters [ASX:CCV] is engaged in the franchising Last traded A$ 0.60 of second hand goods and financial services stores. The Market Cap A$’’m 227.9 Company provides both secured and unsecured personal Nº of Shares m 379.8 loans, pawn broking loans and cash advances. It is also 2011A EPS ¢ 7.3 2011 PE x 8.2 the operator of a number of corporate stores operating 2011 EV/EBIT x 5.9 under the Cash Converters brand. DPS 2011A ¢ 3.50 Event Diiv Yiielld 2011A % 5.8% Revenue 2011A m 15.5 EBITDA 2011A m 187.6 . 1H12 Results: Underlying NPAT rose 7% to $15.3m on NPAT 2011A m 27.6 the back of a 28.2% jump in revenue to $111.7m. An interim dividend of 1.75c was declared, representing around 50% of half year EPS.
OVERVIEW Financial Services: Financial services was the main . Share Price | 1 Year driver of underlying earnings growth in the half. Personal loans before tax profit was 32.8% higher and 11.1% higher for financial administration. Margins were squeezed due to rising bad debt in the UK loan book.
. Credit reforms review: The Australian Government have put forward proposals for interest rate and fee caps on payday loans. Parliamentary committee review suggested changes should be made to the proposed reforms. . FY11 Results: NPAT rose 27.5% to $27.6m on the back of a 47.6% jump in sales to $186.1m. A final dividend of 1.75c was declared taking the full year payout to 3.5c,
representing a payout ratio of 48%.
. UK business ramping up: Strong FY11 result follows Investor Queries
the continued expansion of financial services products research into UK stores and store acquisitions. Peter Cumins Managing Director Cash Converters
+61 8 9221 9111 [email protected] [email protected]
Important disclosure information at the end of this report
CCV | RESEARCH OVERVIEW
BUSINESS DESCRIPTION Cash Converters International's [ASX:CCV] main business is the provision of consumer finance, pawn broking services and second hand goods retailing. Since 2005, CCV has been working on enhancing their business model, and at present time has been increasingly active in the lending services sector, which has been becoming a substantial part of CCV’s revenue. CCV’s operations have also grown due to store rollout and acquisition of established franchise stores. CCV currently operates a total of 97 corporate owned stores and 522 franchise stores, located in Australia, United Kingdom and internationally. Further store expansions and franchise store acquisitions are expected.
BOARD OF DIRECTORS & MANAGEMENT TEAM
Reginald Webb | Non-Executive Chairman Mr Webb was appointed Chairman in January 2006 after serving as a non-executive director for many years. He is a Fellow of the Institute of Chartered Accountants of Australia and was for many years a Partner of PwC. In that position, he worked in North America and Europe as well as Australia. He was a partner for 20 years and served on the Policy Board of that firm. He is currently a Director of D’Orsogna Limited.
Peter Cumins | Managing Director Mr Cumins joined the group in August 1990 as Finance and Administration Manager when the Company had just 23 stores, becoming General Manager in March 1992. He became Group Managing Director in April 1995. Mr Cumins is a qualified accountant, and has overseen the major growth in the number of franchisees in Australia as well as the international development of the Cash Converters franchise system. His experience in the management of large organizations has included senior executive positions in the government health sector, specifically with the Fremantle Hospital Group, where he was Finance and Human Resources Manager.
John Yeudall | Non-Executive Director Mr Yeudall is a Chartered Engineer and member of the Australian Institute of Company Directors. He was founder of the IKEA franchise in Western Australia. Mr Yeudall was previously Australia’s senior Trade Commissioner in the Middle East and Consul General for Dubai. He joined the board in 2002.
William Love | Non-Executive Director Mr Love has served as an independent director of EZCORP since October 2008 and has served as chairman of the Audit Committee of the EZCORP board of directors since November 2009. He joined the board of Cash Converters International Limited in 2009. Mr Love is a licensed Certified Public Accountant and a Certified Valuation Analyst, and since January 1993 has practised public accounting in the Austin, Texas based William C Love accounting firm. From 1972 to 1993, Mr Love worked with the accounting firm KPMG Peat Marwick and its predecessors, including appointments as Partner in Charge of Audit, Partner in Charge of Tax and Managing Partner of its Austin, Texas office.
Joseph Beal | Non-Executive Director Mr Beal has served as an independent director of EZCORP since August 2009 and serves on the Compensation Committee. Mr Beal also joined the Cash Converters International Limited Board in 2009. Until his retirement in January 2008, Mr Beal was the General Manager and Chief Executive Officer of the Lower Colorado River Authority, a Texas conservation and reclamation district with over $1 billion in annual revenues, over $3 billion in assets and more than 2,200 employees. Mr Beal joined LCRA in 1995 to lead its Water Services Division and was appointed by the LCRA board in January 2000 to become its eighth General Manager and Chief Executive Officer. Before joining LCRA, Mr Beal was Senior Vice President and Chief Operating Officer at Espey Huston & Associates, an international engineering and environmental consulting firm based on Austin.
April 2012 www.microequities.com.au
CCV | RESEARCH OVERVIEW
MAJOR SHAREHOLDERS CCV – Top 20 Shareholders as at 13 September 2011
SHARES HELD ISSUED CAPITAL
1. EZCORP Inc 124,418,000 32.76%
2. JP Morgan Nominees Australia Limited 21,227,307 5.59%
3. HSBC Custody Nominees (Australia) Ltd 19,558,996 5.15%
4. National Nominees Limited 13,091,752 3.45%
5. Alli Nominees Pty Ltd
6. Benos Nominees Pty Ltd 10,915,870 2.87%
7. Hosking Financial Investments Pty Ltd
8. Fawngrove Pty Ltd
9. Mrs Diana Kathryn Cumins
10. Mrs Heather Janette Hubbard + Russell Leonard Tyrrell
11. Australian Executor Trustees Limited
12. Merrill Lynch (Australia) Nominees Pty Limited 4,178,478 1.10%
13. Mrs Merle Cooke
14. Citicorp Nominees Pty Ltd 2,734,255 0.72%
15. Riolane Holdings Pty Ltd
16. RBC Dexia Investor Services Australia Nominees Pty Limited 2,246,100 0.59%
17. Michael Edward Constable 2,233,801 0.59%
18. CS Fourth Nominees Pty Ltd
19. Mrs Andreana Debra Groom 1,666,971 0.44%
20. Toscana Holdings Pty Ltd
TOTAL FOR TOP 20 SHAREHOLDERS: 255,482,895 67.27%
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CCV | RESEARCH OVERVIEW
BUSINESS SEGMENTS
CASH CONVERTERS BUSINESS DIVISIONS
Cash Converters International Ltd.
Retail Stores Financial Services
MON-E Franchise stores (cash advance)
Corporate owned Safrock stores (personal loan)
SOURCE: COMPANY DATA
Australia The Australian operations consist of around 148 stores with 43 corporate owned stores and 105 franchise stores. Stores are represented in most states with the largest number in QLD. NSW is under-represented with only 17 stores. Further store expansion in NSW presents a lucrative opportunity going forward due to the greater population concentration. The overall strategy for Cash Converters is to acquire well-established and profitable franchise stores going forward. Product mix changes and greater promotion of finance products will enhance store profitability.
UK The UK operations include circa 208 stores of which 54 are corporate owned and 154 franchise stores. Management expects to continue acquiring well-established and profitable franchise stores, consistent with the domestic acquisition strategy.
International
CCV has expanded its franchise operations internationally with 301 stores. Despite the large number of stores, revenue contribution is only minimal with operators given sub-franchisee licenses in return for a passive royalty revenue stream.
Pawn Broking
Pawn broking involves taking personal items such as jewellery as collateral for small amount loans. A high percentage interest rate is charged on the loans to reflect the administrative costs in the provisioning of small nominal value. Personal items taken as security are normally sold if the customer defaults on the loan. Loan terms are typically one to three months in Australian stores and 6months in UK stores.
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CCV | RESEARCH OVERVIEW
Retail Store Operations
Franchisees pay between $50,000 upfront to CCV to establish the business with weekly fees and charges. Cash Converters franchisees pay a fixed weekly amount (irrespective of turnover) in addition to a fixed contracted amount on every anniversary of the store opening. The Company also generates revenue via royalty payments from sub- franchisors, franchise renewal fee and support service fees from its franchisee network. There are currently around 657 Cash Converter stores in 18 countries with around 97 corporate owned stores in Australia (43) and the UK (54). FY11 turnover from franchise operations was $27.4m, contributing circa 13.8% of total revenue (FY10: 18.2%).
CASH CONVERTER’S RETAIL STORE COMPARISON
UK store operations Australian store operations
154 105 No. of franchise stores
54 43 No. of corporate owned stores
10 franchise stores per annum 1 franchise store per month 4 corporate stores expected in Store rollout plans 2 corporate stores per month FY12 annum
SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATES
A franchise system was adopted to allow the Group to expand internationally and manage cultural and commercial differences around the world. Under the franchise agreement, Cash Converters provides each franchisee with the right to use the Cash Converters trademark, training system and business systems including inventory management, finance and advertising.
Australian franchise stores trade in second hand household goods, jewellery and personal items. It also provides pawn broking loans, cash advances personal unsecured and secured loans. UK franchise stores also trades in second hand goods, provides pawn broking loans, salary advance loans and cheque cashing services.
In the recent years, CCV has been acquiring established and profitable franchisee stores, and concentrated on increasing operating margin. Going forward, CCV has indicated further store acquisitions and potentially expanding its corporate owned store network into other international regions such as parts of Europe.
Key strategies include: Expanding the Cash Converter brand into new geographies and in existing markets Continue the acquisition of franchised stores and rollout of cash advance and personal loan products into its UK stores.
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CCV | RESEARCH OVERVIEW
Financial Services
Cash Converters also provides micro-lending, short-term lending (payday lending) and pawn broking services. This is an alternative source of credit for subprime borrowers. The company has continued to grow its loan book as banks
tighten up on their lending after the global financial crisis.
Financial Services – Administration
Cash Converters provide pawn broking, cheque cashing (in the UK), 'Western Union' money transfers, short-term loans and cash advances. Cash advances are secured against a person's pay or salary (subject to it being paid into a bank
account). Total principal loaned in the cash advance business (MON-E) was $204.6m in Australia and £10.5m in the UK in FY11.
Financial Services – Personal Loans
CCV’s personal loans division (Safrock) includes the provisioning of both secured and unsecured personal loans. Acquired in 2006 the Safrock loan book has grown to circa $52.7m in Australia and £5.0m in the UK at the end of FY11.
Key drivers of the financing business unit include: Interest rate: the interest rate charged by the pawn broking industry in general is under review by respective legislative authorities. Critical Mass of Loans: profitability of the business relies on a critical mass of loans made given the low average loan size. Average loan or cash advance value: the average personal loan is currently $1,500 whilst average cash advances are currently around $300. Loan turnover rates: the turnover rate is critical in determining the amount of total loans written in a given period and upfront establishment fees received. Alternative financing: Availability of finance such as credit cards and personal loans from traditional banks.
CASH CONVERTER’S FINANCIAL PRODUCTS
Safrock MON-E Safrock (secured) Pawn broking (unsecured)
Pawn broking Pay day loan Personal loan Personal loan Type loan
Unsecured Secured Unsecured Secured Security
Australia: $303 Average size of $2000-$5000 Average $1500 Average $90 UK: £104 loan
Average length of 4 weeks 12-24 months 4-7 months 1-3 months loan
Credit Check No Yes Yes N/A
Loan Capital Franchisee Cash Converters Cash Converters Franchisee provider
SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATES
April 2012 www.microequities.com.au
CCV | RESEARCH OVERVIEW
FY11 RESULTS SUMMARY
. FY11 NPAT was up 27.5% from pcp to $27.6m on the back of a 47.6% jump in sales to $186.1m. EBITDA of $41.7m showed a 25.4% improvement from pcp. A final dividend of 1.75c was declared taking the full year payout to 3.5c, representing a payout ratio of 48%. . Driving the growth in revenue was a rise in personal loan interest revenue, establishment fees, corporate store revenue and financial services commission.
1H12 RESULTS SUMMARY
. Cash Converters reported revenue growth in personal loans (+$14.0m), corporate stores (+$12.5m) and financial services administration fees (+$1.4m) were major contributors to the 28.2% rise in first half revenues to $111.7m. Headline NPAT was down 7.5% to $13.2m with first half EPS of 3.5c, down 7.9% from pcp (1H11: 3.8c). Excluding one-offs, underlying NPAT was 7% higher at $15.3m, from $14.3m previously. A fully franked interim dividend of 1.75c was declared. . One off expenses incurred during the period include store acquisition costs, IT review expenses, earn out payments, legal and professional fees and redundancy costs. In total, they had a $2.1m negative impact to NPAT. Higher marketing, support staff, share based payments and interest expenses also increased 1H12 expenses by around $2.5m.
SEGMENT REVENUE AND RESULTS
FY09 FY10 FY11 1H12
Figures in A$’mn
Franchise Operations revenue $24.4 $23.0 $27.4 $12.3
EBIT $8.6 $7.0 $6.5 $2.9
EBIT Margin 35.4% 30.6% 23.7% 23.3%
Store Operations revenue $45.8 $62.5 $100.9 $60.8
EBIT $5.4 $6.9 $8.6 $4.3
EBIT Margin 11.8% 11.0% 8.5% 7.0%
Administration revenue $9.5 $10.2 $13.9 $8.0
EBIT $7.5 $9.1 $12.3 $6.6
EBIT Margin 78.9% 88.6% 88.8% 83.1%
Personal Loans revenue $20.6 $35.9 $56.6 $38.0
EBIT $9.8 $15.4 $24.4 $14.1 EBIT Margin 47.4% 42.9% 43.1% 37.2% SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATE
FY12 OUTLOOK
. Regulatory changes for the Australian payday lending industry are expected to be announced.
. Further greenfield store openings and acquisitions and continued rollout of financial services into UK stores.
. Growth trajectory for cash advance in the UK is expected to continue. Personal loan book growth recorded in the fist half is set to continue for the second half.
April 2012 www.microequities.com.au
CCV | RESEARCH OVERVIEW FUTURE OF STRATEGIC ALLIANCES WITH EZCORP:
“EZCORP are committed to a MANAGEMENTQ&A continued alliance as demonstrated by their acquisition Peter Cumins of the CCV Licence for Canada and Managing Director the purchase of 7 CCV stores in America, which included the Cash Converter’s share price has faced Licenses for Virginia, strong headwind from proposed changes Pennsylvania and Florida” to legislation on the payday lending industry. What are the proposed legislative changes that will affect Cash Converters in its Australian operations? The proposed rate cap is the change which would have the most effect.
Since the findings of the parliamentary committee, has management had indications of when the final decision from the Federal government will be announced? And when can we expect this new legislation to take effect? “The Company's long The Minister's office met with the Company and Industry in February and term goal is to buy back indicated that an announcement would be made in April with the Bill back to the Country Licence Parliament in May. rights of the most successful networks so Have there been any similar legislative proposals on payday lending in the that those Countries UK? would operate as No. The Office of Fair Trading is currently researching the lending practices of 50 wholly owned pay day lenders in the UK to determine if there is a need for further regulation. subsidiaries like Cash Converters is one of those lenders and we are fully supportive of further Australia and the UK” regulation that improves protection to credit consumers.
The interest charged on personal loans and cash advances are much higher than interest rate on credit cards or personal loans through a typical high street bank. Who is Cash Converters main target market for financial services products and why do you get a lot of repeat customers considering the high percentage interest rate charged on the loans? Short term unsecured lending is high cost, for 2 reasons: It is high risk, and the establishment costs of the loan cannot be recouped over the term of the loan like a traditional loan and therefore need to paid up-front. Customers like the convenience of these loans, the simple fee structure and the lack of any alternative.
The company has a large franchise network outside of the UK and Australia with only franchise fees earned by Cash Converters. What is the company’s intention for these stores going forward? The Company's long term goal is to buy back the Country Licence rights of the most successful networks so that those Countries would operate as wholly owned subsidiaries like Australia and the UK.
What is the current store numbers (both franchise and corporate owned) in Australia, the UK and rest of the world? Which region offers the most store expansion opportunities and what is the management plans for store expansion in the next few years (both greenfield and store acquisitions)?
April 2012 www.microequities.com.au
CCV | RESEARCH OVERVIEW
UK: 54 corporate stores & 154 franchised. Australia: 43 corporate stores and 103 franchised & 303 franchised International stores. Greenfield stores: UK 10 per year & Australia 4 per year Store acquisitions: 10 per year in total between the UK & Australia
EZCORP remains the largest shareholder in Cash Converters. Have they given any indication of their intentions with their shareholding and whether they are still interested in pursuing strategic alliances in the future? Yes, EZCORP are committed to a continued alliance as demonstrated by their acquisition of the CCV Licence for Canada and the purchase of 7 CCV stores in America which included the Licenses for Virginia, Pennsylvania and Florida.
Is management concerned about the jump in bad debt levels on its UK loan book? What initiatives have been put in place to address this issue? No. The UK personal loan business is effectively a startup business and as such all our customers are new and therefore are at the higher risk end of the spectrum. Over time we will begin to get repeat customers which significantly reduces the risk profile. We have also introduced a telephone system designed for specifically for collections and appointed an experienced collections Manager.
April 2012 www.microequities.com.au
CCV | RESEARCH OVERVIEW
FINANCIAL SUMMARY
INCOME STATEMENT KEY RATIOS Year to June 2009A 2010A 2011A Year to June 2009A 2010A 2011A Revenue 94.8 126.6 187.6 Sales 93.9 125.9 184.6 Expense (71.5) (95.4) (148.3) % Chg YoY -% 34% 47% - Net Interest Expense 0.7 (0.3) (0.5) Price/Sales 2.4x 1.8x 1.2x + Depreciation & Amortisation 1.2 1.6 3.0 EPS (cents) 6.8 6.6 7.3 EBITDA 25.1 32.4 41.7 % Chg YoY -% (3%) 10% % Chg YoY -% 29% 29% P/E 14.1x 10.5x 8.2x EBITDA MARGIN 27% 25.6% 22.3% Enterprise Value 237.8 191.0 227.0 Depreciation & Amortisation (1.2) (1.6) (3.0) EV/EBIT 9.9x 6.2x 5.9x EBIT 24.0 30.9 38.7 EV/EBITDA 9.5x 5.9x 5.4x EBIT Margin 25% 24.4% 20.6% DPS 3.00¢ 3.00¢ 3.50¢ Net Interest Expense (0.7) 0.3 0.5 Dividend Yield 5.0% 5.0% 5.8% Profit Before Tax 23.3 31.2 39.2 ROE 20% 13% 16% Tax (7.2) (9.5) (11.6) Debt to Assets 15% 7% 10% NPAT 16.2 21.7 27.6 Debt to Equity 21% 9% 13%
CASH FLOW BALANCE SHEET STATEMENT Year to June 2009A 2010A 2011A Year to June 2009A 2010A 2011A Cash & cash equivalents 7.0 50.7 23.5 Receipt from customers 79.1 103.3 165.0 Payment to suppliers and Trade and other receivables 6.7 8.2 9.0 (70.5) (94.9) (146.4) employees Personal loans receivable 25.1 41.6 64.2 Interest received 0.5 1.3 1.0 Interest received from Inventories 7.0 10.7 14.1 14.0 16.0 23.1 loans Net increase in personal Other assets 0.9 1.4 2.2 (7.5) (8.8) (17.0) loans Interest and costs of Total Current Assets 46.6 112.6 112.9 (1.1) (1.0) (0.9) finance paid Trade and other receivables 1.4 3.1 2.5 Income tax paid (6.6) (8.3) (10.0) Plant and equipment 4.6 6.8 13.1 Cash from Operations 7.8 7.7 14.8 Net cash paid for Deferred tax assets 1.9 2.8 4.6 (11.0) (8.0) (27.0) acquisitions Goodwill 49.9 54.3 76.9 Acquisition of intangibles - (5.8) (2.5) Other intangible assets 10.5 16.3 20.0 Purchase of PPE (1.5) (3.4) (7.0) Payment for financial Other financial assets - 1.3 2.6 - (1.3) (1.4) assets Instalment credit loans to Total Non-Current Assets 68.2 84.5 119.7 (0.5) (2.1) (0.2) franchisees Instalment credit loans TOTAL ASSETS 114.8 197.1 232.6 0.7 0.2 0.5 repaid by franchisees Trade and other payables 8.4 10.5 19.7 Cash Flow From Invst. (12.3) (20.2) (37.6) Borrowings 3.9 3.3 4.6 Dividend paid (7.2) (9.2) (12.3) Current tax payables 3.3 5.4 6.7 Incr/(Decr) in Debt 4.0 (1.9) 9.4 Capital element of Deferred establishment fees 1.3 1.8 2.9 finance lease and hire (0.2) (0.3) (0.4) purchase payments Provisions 1.1 1.4 2.1 Incr/(Decr) in equity (0.4) 68.8 - Total Current Liabilities 18.0 22.4 36.1 Share issue costs - (0.4) - Net issue of unsecured Borrowings 13.0 10.6 18.0 (0.0) (0.2) (0.2) notes Deferred tax liabilities 1.3 1.3 3.3 Cash Flow From Fin (3.8) 56.8 (3.5) Net Cash +/(-) (8.3) 44.3 (26.3)
Total Non-Current 14.2 11.9 21.3 Liabilities TOTAL LIABILITIES 32.3 34.3 57.4
NET ASSETS 82.5 162.9 175.3
April 2012 www.microequities.com.au
CCV | RESEARCH OVERVIEW
IMPORTANT DISCLOSURE INFORMATION: Produced by Microequities Pty Ltd in accordance with section 949A of the Corporations Act 2001. Any recipient of the information contained in this document should note that the information is general advice in respect of a financial product and is not personal advice. Accordingly, the recipient should note that a) the advice has been prepared without taking into account the recipient’s objectives, financial situation or need; and b) as a corollary, the recipient should, before acting o n the advice, consider the appropriateness of th e advice, having regard to the recipient’s objectives, financial situation and needs. Although Microequities Pty Ltd (Microequities) considers the advice and information contained in the document to be accurate and reliable, Microequities has not independently verified the information contained in the document which is derived from publicly available sources. Microequities assumes no responsibility for updating any advice or recommendation contained in this document or for correcting any error or admission, which may become apparent after the document has been issued. Microequities does not give any warranty as to the accur acy, reliability or completeness of advice or information contained in this document. Except in the case where liability under any statute cannot be excluded, Microequities, its employees and consultants do not accept any liability (whether arising in cont ract, in tort or negligence or otherwise) for any error or omission in this document or any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Microequities, its e mployees, consultants and its associates within the meaning of Chapter 7 of the Corporations Act 2001 may receive remuneration from transactions involving financial products referred to in this document. Microequities and its associates (as defined in Chapter 7 of the Corporations Law), officers, directors, employees and agents, companies to which this document refers and may trade in the securities mentioned either as principal or agent. Furthermore, the trading by its associates may not necessarily correspond to the recommendation been provided in this document.
ADDITIONAL VOLUNTARY DISCLOSURE BY MICROEQUITIES* Analyst Equity Stake Disclosure to Business Investment Banking Staff Interest personal By Microequities Company Relationship Interest Associates
NO NO NO NO NO
* To promote transparency, Microequities voluntarily discloses potential conflict of interests covered by this research document.
Additional disclosure: Microequities Pty Ltd has a research distribution agreement with Cash Converters
April 2012 www.microequities.com.au
MICROCAP COMPANY RESEARCH
Clover Corporation Limited April 2012
GICS Sub-Industry: Life Sciences Tools & Services
Research Overview- Update
Business Description ASX : CLV
Clover Corporation Limited [ASX:CLV] is a bioactive Last traded A$ 0.375 microencapsulation and delivery technology company. Clover Market Cap A$m 61.9 manufactures and supplies Omega3 DHA for infant and Nº of Shares m 165.2 children’s formula, foods, supplements, and pharmaceuticals 2011 EPS* ¢ 2.5 via its 100% owned subsidiary Nu-Mega Ingredients. 2012f EPS ¢ 2.7 2012f PE x 14.2 Traditionally, Clover’s main markets have been primarily in the 2012f EV/EBITDA x 7.4 Asia Pacific Region. DPS 2012f ¢ 1.75
Event Diiv Yiielld 2012f % 6.5 (grossed up) Revenue 2012f A$m 40.6 HY12 results review: EBITDA 2012f A$m 7.6 . Introduction of new higher margin products begin to gain NPAT 2012f A$m 4.4
*Normalised OVERVIEW traction following long product evaluation and shelf life *Normalised
testing period.
. Organic sales growth from existing and new customers. Share Price | 1 Year
. R&D collaboration with the CSIRO over a 3 year period with an investment of $1.2m from Clover. . Additional Capex spend of $1m in FY12 to increase production efficiencies at the Altona plant. . The company is strategically positioning itself to address the Medical market vertical, which we believe Clover will enter via licensing its technology. . Growth outlook for second half and particularly into FY13- 14 continues to be strong underpinned by product roll out of
new products to Clover’s customer base.
research Investor Queries Summary
Clover has transformed itself from being a pure-play Omega- Ian Brown 3 ingredients supplier to the Infant Food Formula industry to a Managing Director Clover Corporation bioactive microencapsulation and delivery technology company supplying ingredients for applications in Infant +61 2 9526 7893 [email protected] [email protected] Formula, Functional Foods, Medical Foods and
Pharmaceuticals. The release of these products should
provide Clover with sales growth in the years ahead.
Important disclosure information at the end of this report
CLV | RESEARCH OVERVIEW
COMPANY DESCRIPTION
Clover Corporation listed on the ASX in November 1999. Since inception, the business has focused on “improving human health through nutrition”. In the five years since the appointment of Dr Ian Brown as CEO, there has been a real resolute effort to pursue the growing market for Omega-3 DHA fatty acids. Common sources for Omega-3 are fish and algal oils. Via its 100% owned subsidiary Nu-Mega Ingredients Pty Ltd, Clover manufactures and supplies a ® ® ® range of refined Tuna Oils and Driphorm HiDHA and ThermoMAX encapsulated Omega-3 powders that are used in a wide variety of applications, such as infant and children’s formula, dairy and baked foods, beverages and snack and health bars. More recently, the company has seen a marked increase in its R&D activity to leverage its technology and intellectual property, expand its product offering, and accelerate customer innovation to deliver other bioactive ingredients to these applications.
BOARD AND MANAGEMENT TEAM
Mr Peter R. Robinson | Non-executive Chairman Mr. Robinson has held both executive and non-executive directorships for a period of 25 years. He has over 30 years’ experience at general management and chief executive officer level. Mr Robinson joined Washington H. Soul Pattinson and Company Limited (WHSP) in 1978 and was appointed an executive director of WHSP in 1984. He is also non- executive Chairman of Australian Pharmaceutical Industries Limited and is a non-executive director of New Hope Corporation Limited. He has been a director of Clover Corporation since August 1997.
Dr Ian L. Brown | Chief Executive Officer Managing Director Dr Brown brings over 30 years of international involvement in both a technical and commercial capacity in the cereal, ingredient, food and nutritional industries. He has global experience in technical, scientific, commercial and sales management. He has an international reputation for the successful discovery, development and commercialisation of nutraceutical & health related dietary components. Dr Brown maintains strong links to the research community through positions as an Adjunct Professor at Flinders University in Australia and as a Special Visiting Professor at the University of Colorado, USA. In addition he serves as the Chairman of the Cereal Chemistry Division of the Royal Australian Chemical Institute. Dr Brown has been CEO and Managing Director since June 2006.
Ms Cheryl L. Hayman | Non-executive Director Ms Hayman was formerly Marketing Director for the Baking Division of George Weston Foods (Australia/NZ) and was largely responsible for the successful launch of the Hi-DHA Tip Top Up bread range. She has extensive food industry experience in the management and development of the branding, marketing and innovation of functional foods. She has been a Director of Clover since July 2008.
Dr Merilyn J. Sleigh | Non-executive Director Dr Sleigh was formerly CEO & Managing Director of EvoGenix Limited; Dean, Faculty of Life Sciences, University of NSW; Director, Research & Development at Peptech Ltd and Scientist & Senior Manager, CSIRO. She currently serves as a director of Adalta Pty Ltd, the Rural Industries Research and Development Corporation and Relationships Australia (NSW) and advises government and life science companies and their investors on technology commercialisation. She has been a Director of Clover since July 2008.
Mr David E. Wills | Non-executive Director Mr Wills holds a B.Com and is a Chartered Accountant. He was a partner of Coopers & Lybrand and then PricewaterhouseCoopers (PwC) for 25 years. He ls is currently the Chairman of the Board of Governors of the Sir David Martin Foundation. He is a non-executive director of Souls Private Equity Limited and Washington H. Soul Pattinson and Company Limited (WHSP), Quickstep Holdings Limited together with a number of unlisted companies. He has been a Director of Clover since January 2005.
April 2012 www.microequities.com.au
CLV | RESEARCH OVERVIEW
HY12 RESULTS OVERVIEW In the first half of FY12 Clover grew sales by 16.5% on pcp to $17.9m. Sales growth continues to be experienced in the Asia Pacific region and in particular China. We remain confident that Clover can achieve our previously forecast full year FY12 sales figure of $40.2m. Gross margins continued to improve hitting a historical high of 40.6% in the period (FY11 39.1%). The increase in gross margin in part is due to Clover’s innovation strategy and the release of new higher margin products replacing older lower margin products. Clover will invest around $1.5m during FY12 to upgrade its manufacturing facilities at Altona that should drive operational efficiencies in the years ahead. The main negative during the period was the one-off cost of $0.97m associated with the property of the discontinued operations of the Future Foods Ingredients (FFI) joint venture.
INNOVATION STRATEGY TO DELIVER CLOVER PROFITABLE BIOTECH STATUS In order for Clover to grow sales and sustain high margins, it needs to develop newer products that provide more value to their customer. Clover’s microencapsulation technology allows for various bio-actives (including its traditional focus on Omega3 DHA) and in some cases multiple bio-actives to be delivered simultaneously into various applications. Clover’s technology strength allows longer shelf life, higher bio-active content delivery, and better taste in some applications. It is this technology edge that differentiates the company’s products in the market place, providing a competitive advantage, and allowing Clover to command improved gross margins.
Clover Corporation started ramping up investment in Research and Development (R&D) in 2010, and by FY13 would have invested circa $7 million developing new products. Clover will leverage its existing suite of Intellectual Property (IP) in the area of Omega3 microencapsulation in order to develop delivery technology for numerous bioactive applications for uses in Infant Formula, Functional Foods, Medical Foods and Pharmaceuticals. As part of this increased investment in R&D, Clover will collaborate with the CSIRO and will contribute $1.2m over three years. These are important initiatives in bolstering the company’s medium term growth prospects. The success of these initiatives should begin to deliver a demonstrable tangible impact into the FY13-14 periods.
Clover has begun to explore opportunities to either commercialise these new technologies directly or via suitable third party licencing arrangements. A possible licencing arrangement may involve an upfront fee or on-going royalty payments or a combination of both.
April 2012 www.microequities.com.au
SALES GROWTH FOR THE NEXT CLV | RESEARCH OVERVIEW FEW YEARS: “Clover released six new products for evaluation by customers last MANAGEMENTQ&A financial year… It is anticipated that sales of these products will
Ian Brown progressively make a significant Managing Director impact over the next 2 to 3 years. In addition, we continue to
attempt to identify products that What has contributed to Clover’s sales will enable national and regional success over the last 5 years? infant formula manufacturers in China to enhance the quality and During the past 5 years, Clover Corporation efficacy of the products that they Limited and its subsidiary Nu-Mega produce”. Ingredients Pty Ltd have focused on its strengths to help the company evolve and grow. These strengths included its proprietary nutritional bioactive delivery technology centred on encapsulation, a skilled and dedicated staff, developing value added markets including infant “Clover is increasingly formula and children’s food, fostering a culture of innovation to assist in seeking patent protection expanding our product offerings, ensuring the provision of high quality products, for the novel value added increasing geographical distribution and by providing excellent customer service. products it develops. This strategy has allowed the Clover Corporation has expanded its product range, in order to more fully utilize company to begin exploring its encapsulation technology, from including only HiDHA® tuna oil to now opportunities for licensing providing a more extensive range of important bioactive nutrients. technology for which there is a significant market but Why can it take up to 2-3 years to bring a product to market? which the company (Clover) Clover Corporation manufactures high quality products primarily for use in infant is not in a position to formula, children’s foods and medical related products. Products in these types of manufacture itself”. applications are subject to extensive customer evaluation, including stability trials
which can take up to 2 years, and potentially have to receive regulatory approval prior to sale. The extensive and detailed qualification of Clover’s products supports their long life cycle in commercial products.
Could you please explain your “six platform innovation strategy”? Clover Corporation is committed to the identification of market opportunities and the provision of differentiated proprietary products that meet the needs of manufacturers and consumers. A number of opportunities have been identified in the value added market segments involving infant formula and medical foods that required innovative technical solutions. Customer originated projects, market research of trends and advances in delivery technology have directed the development of the six technology platforms currently available which contribute to Clover maintaining a leadership position in the provision of nutrient delivery systems.
What does Clover hope to achieve out of the most recent commitment to invest $1.2m in R&D over 3 years in collaboration with the CSIRO? Clover Corporation has a long history of collaborative research and product development with the CSIRO. The recently announced Australian Growth Partnership program will allow Clover and the CSIRO to investigate how nutritional bioactives, such as essential dietary fatty acids, can be combined in formulas to improve their stability in processing and storage and to enhance their nutritional impact. Encapsulation matrices will be developed to protect the selected
April 2012 www.microequities.com.au
CLV | RESEARCH OVERVIEW bioactives, influence their absorption and bioactivity and to assist their physiological performance. This program has been developed based on identified market opportunities which require a technical solution, particularly in relation to infant formula and breast milk mimetics.
Where do you see sales growth coming from in the next 1-3 years? Clover Corporation is seeking to grow its sales organically in the strongly expanding infant formula applications, the development of new but related market opportunities, and selected medical food applications. Clover released six new products for evaluation by customers last financial year. These products represent both improvements in products for infant formula applications and a number that are targeting at new value added applications which can benefit from the application of Clover’s delivery technologies. It is anticipated that sales of these products will progressively make a significant impact over the next 2 to 3 years. In addition, we continue to attempt to identify products that will enable national and regional infant formula manufacturers in China to enhance the quality and efficacy of the products that they produce
Outside of Infant Formula, what other applications for microencapsulated bio-actives could Clover address? Clover Corporation is seeking to utilize the delivery technologies that it develops for nutritional materials in the widest possible manner. Although the principle applications of interest are in the areas of infant formula, children’s foods and medical foods it is known that some of Clover’s encapsulated products can also be used in functional foods. Clover is increasingly seeking patent protection for the novel value added products it develops. This strategy has allowed the company to begin exploring opportunities for licensing technology for which there is a significant market but which the company is not in a position to manufacture itself.
What are Clover’s plans in addressing the significant North American market? Clover Corporation has been present in the North American market for a number of years with its efforts mainly focused on the infant formula market. Sales in this market grew by more than 30% in the last financial year. Clover will continue to work directly with manufacturers of infant formula and medical foods, and it is currently negotiating with distributors who can provide appropriate and focused access for Clover’s products in the specialized functional foods market.
April 2012 www.microequities.com.au
CLV | RESEARCH OVERVIEW
FINANCIAL SUMMARY
PROFIT & LOSS SUMMAR Y ( $ m ) PROFITABILITY RATIOS
Year Ending June 2011A 2012F 2013F Year Ending June 2011A 2012F 2013F
Revenue $33.3 $40.6 $48.4 Salles $32.9 $40.2 $48.0 COGS $20.0 $24.2 $29.3 Priice/Salles 1.9 1.5 1.3 Operating Expenses $9.9 $10.7 $11.2 EPS CENTS 2.5 2.7 4.1 Depreciation & Amort $0.4 $0.6 $0.6 ESP Growth YoY 487.6% 7.4% 52.6% EBITDA $5.4 $7.6 $9.4 P/E 15.1 14.0 9.2 EBITDA MARGIN 16.3% 18.6% 19.5% Enterpriise Vallue (EV) $54.9 $54.9 $55.7 EBITDA Growth YOY -22.8% 39.5% 25.0% EV/EBIT 10.9 7.9 6.2 EBIT $5.0 $6.9 $8.8 EV/EBITDA 10.1 7.3 5.8 EBIT Margin 15.1% 17.1% 18.3% DPS Net 1.50 1.75 2.00 Net Interest Rec./(Paid) $0.5 $0.4 $0.4 DPS Gross 2.14 2.50 2.86 Share of Net loss Associate $0.0 $1.0 $0.0 Gross Diiviidend Yiielld 5.7% 6.7% 7.6% Profit Before Tax $5.6 $6.4 $9.3 ROE 15.8% 17.5% 23.1% Tax $1.5 $2.0 $2.5 ROA 12.7% 13.3% 17.7% Outside Equity interests $0.0 $0.0 $0.0 Net Profit to members $4.1 $4.4 $6.7
BALANCE SHEET SUMMAR Y ( $ m ) CASH FLOW SUMMARY ($ m )
Year Ending June 2011A 2012F 2013F Year Ending June 2011A 2012F 2013F Cash & Securiitiies $7.4 $8.5 $9.7 EBITDA $5.4 $7.6 $9.4 Rec & Prepayments $10.5 $10.5 $12.7 Dec./(Incr.) iin work. Cap -$5.2 $1.0 -$3.0 Inventoriies $8.7 $9.3 $11.0 Net Int. (Paiid)/Rec $0.5 $0.4 $0.4 Others $0.6 $0.6 $0.7 Taxes Paiid -$1.5 -$2.0 -$2.5 Total Cur. Assets $27.1 $28.9 $34.1 Incr/(decr) iin proviisiions $0.1 -$0.6 $0.1 Pllants & Equiipment $2.1 $3.3 $3.1 Other Op. Cash iitems -$0.9 -$1.0 $0.0 Intangiiblle Assets $2.0 $1.9 $1.9 Cash from Operations -$1.5 $5.3 $4.5 Deferred Tax Asset $1.1 $0.0 $0.0 CAPEX -$0.4 -$1.8 -$0.4 Receiivablles $0.0 $0.0 $0.0 Diisposalls/(Acquiisiitiions) $0.0 $0.0 $0.0 Others $0.0 -$1.0 -$1.0 Other Inv. Cash Fllows $0.0 $0.0 $0.0 Total Non Cur. Assets. $5.1 $4.2 $4.0 Loans to/from other ent. $0.0 $0.0 $0.0 Totall Assets $32.3 $33.1 $38.1 Cash Flow From Invst. -$0.4 -$1.8 -$0.4 Payablles $3.4 $5.0 $6.0 Incr/(Decr) iin Equiity $0.0 $0.0 $0.0 Proviisiions $0.4 $0.5 $0.6 Incr/(Decr) iin Debt $0.0 $0.0 $0.0 Current Tax Liiabiilliitiies $0.2 $0.2 $0.2 Ord, Diiviidend paiid -$2.1 -$2.5 -$2.9 Total Current Liabilities $4.0 $5.7 $6.8 Preferred diiviidends $0.0 $0.0 $0.0 Payablles $0.0 $0.0 $0.0 Other Fiin. Cash Fllow $0.0 $0.0 $0.0 Int. Beariing Liiabiilliitiies $0.0 $0.0 $0.0 Cash Flow From Fin -$2.1 -$2.5 -$2.9 Proviisiions $0.1 $0.2 $0.2 Net Incr/(Dcr) iin cash -$4.0 $1.1 $1.2 Deferred Tax Liiab $0.2 $0.2 $0.2 Forx & Diisc. Op. $1.0 $2.0 $3.0 Total Non Current Liab. $0.3 $0.3 $0.3 Net Inc/(Decr) Cash -$3.0 $3.1 $4.2 Totall Liiabiilliitiies $4.3 $6.0 $7.1 Net Assets $28.0 $27.1 $31.0
April 2012 www.microequities.com.au
CLV | RESEARCH OVERVIEW
IMPORTANT DISCLOSURE INFORMATION: Produced by Microequities Pty Ltd in accordance with section 949A of the Corporations Act 2001. Any recipient of the information contained in this document should note that the information is general advice in respect of a financial product and is not personal advice. Accordingly, the recipient should note that a) the advice has been prepared without taking into account the recipient’s objectives, financial situation or need; and b) as a corollary, the recipient should, before acting on the advice, consider the appropriateness of the advice, having regard to the recipient’s objectives, financial situation and needs. Although Microequities Pty Ltd (Microequities) considers the advice and information contained in the document to be accurate and reliable, Microequities has not independently verified the information contained in the document which is derived from publicly available sources. Microequities assumes no responsibility for updating any advice or recommendation contained in this document or for corr ecting any error or admission, which may become apparent after the document has been issued. Microequities does not give any warranty as to the accuracy, reliability or completeness of advice or information contained in this document. Except in the case where liability under any statute cannot be excluded, Microequities, its employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Microequities, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Act 2001 may r eceive remuneration from transactions involving financial products referred to in this document . Microequities and its associates (as defined in Chapter 7 of the Corporations Law), officers, directors, employees and agents, companies to which this document refers and may trade in the securities mentioned either as principal or agent. Furthermore, the trading by its associates may not necessarily correspond to the recommendation been provided in this document.
ADDITIONAL VOLUNTARY DISCLOSURE BY MICROEQUITIES* Analyst Equity Stake Disclosure to Business Investment Banking Staff Interest personal By Microequities Company Relationship Interest Associates
NO NO NO
* To promote transparency, Microequities voluntarily discloses potential conflict of interests covered by this research document.
Additional disclosure: Microequities Pty Ltd has a research distribution agreement with Clover Corporation
.
April 2012 www.microequities.com.au
MICROCAP COMPANY RESEARCH
April 2012 ipernica Limited GICS Sub-Industry: Information Technology – Software & Services
Research Overview- Update Business Description ASX:IPR
ipernica Limited [ASX: IPR] is a diversified technology Last traded A$ 0.05 commercialisation company involved in technology innovation Market Cap A$’’m 16.2 and the commercialisation of valuable intellectual assets, Nº of Shares m 323.1 including 100% owned subsidiary nearmap.com. 2011A EPS ¢ 0.5 2011 PE x 9.1 The newly launched nearmap.com provides high resolution 2011 EV/EBITDA x 1.1 and changing photomaps with applications for both DPS 2011A ¢ - government agencies and commercial clients. Diiv Yiielld 2011A % - Revenue 2011A m 17.1 EBITDA 2011A m 3.2 Event NPAT 2011A m 1.6
OVERVIEW OVERVIEW . 1H12 results: A net loss of $3.87m was recorded for first half Share Price | 1 Year with nearmap.com yet to turn cash flow positive and little Share Price | 1 Year
revenue contribution from the IP licensing division. This was on the back of total group of $2.91m, up 85% from pcp. . Nearmap.com driving all of the growth: Nearmap revenue contributed almost the entirety of 1H12 group revenue with strong levels of new customer sales and contract renewals. . Cash: $7.5m cash held at bank, down from $11.1m at the end of FY11 with positive operating cash flow of $2.1m in FY11.
. Appointment of Simon Crowther to group MD position:
Simon Crowther was appointed to the position of Managing
Director for ipernica following the resignation of Graham Investor Queries research research Griffiths in late 2011 to pursue other business interests. Mr. Simon Crowther Crowther was formerly the CEO of nearmap.com and brings Managing Director strong background in media, communications and digital ipernica Limited
media. + 61 8 9420 8500 [email protected]
Important disclosure information at the end of this report
IPR | RESEARCH OVERVIEW
BUSINESS DESCRIPTION ipernica Limited (“ipernica”) listed on the Australian Stock Exchange in December 2000 and engages in intellectual property (IP) licensing, with some $83 million in revenues delivered since 2007. The second arm of the business is the 100% owned subsidiary nearmap.com. In its 25-year history, ipernica has always been involved in technology innovation and the commercialisation of valuable intellectual assets. It evolved from a spin out of the University of Western Australia in the late 1980’s, with world leading telecommunications technology generating sales of over $100 million to international carriers (originally known as QPSX), to a successful intellectual property licensing company.
BOARD OF DIRECTORS & MANAGEMENT TEAM
Ross Norgard | Non-Executive Chairman Mr. Norgard is a chartered accountant and former managing partner of KMG Hungerford. He has over 30 years experience in raising venture capital and financial restructuring of businesses. He has held numerous positions on industry committees including past Chairman of WA Professional Standards Committee of the ICAA, a current member of the National Disciplinary Committee, Chairman of the Duke of Edinburgh Award Scheme and was previously a director of Ammtec Ltd. Current directorships include Non-Executive Deputy Chairman of Brockman Resources Ltd.
Simon Crowther | Managing Director Mr. Crowther was formerly the CEO of nearmap.com before his promotion to the Managing Director role of the entire ipernica group, following the resignation of Graham Griffiths. His previous experience included MD of Canada’s largest Communications Agency and Director of Copyright Promotions Group (CPG) who are Europe’s largest entertainment and sports IP/rights management agency. He was also previously the Head of Global Sales & Licensing for Granada Media (now ITV) who are the largest commercial broadcaster in the UK and one of Europe’s largest content producers. Prior to that, Simon established and sold a TV production company in the UK.
Karl-Christian Agerup | Non-Executive Director Mr. Agerup has considerable experience within the emerging ‘new media’ sector including current directorship at Schibsted ASA (listed Norwegian media group) where he provides input into that company’s media strategy and has also established a number of international multi-media and online based businesses. He is also Vice Chairman of Norfund, a Norwegian development financial institution which invests risk capital in profitable private enterprises in developing nations. He also previously co-founded Northzone Ventures, a European Venture Capital Partnership. Prior to that, he co-founded HUGIN AS, a distributor of financial information from listed European companies via the internet. He was MD and subsequently Chairman until the company was sold in 2006 to Euronext SA.
Robert Newman | Non-Executive Director Mr. Newman was previously the non-executive Chairman of nearmap.com. He has a track record of being a high technology entrepreneur in Australia and Silicon Valley. Previously, he founded and built businesses based on Australian technology and successfully entered overseas markets. He is currently also a venture capitalist and has established more than a dozen new technology ventures based on Australian technologies. He takes an active role in identifying and helping to grow companies with commercial potential, especially those addressing overseas markets.
NEARMAP.COM ADVISORY BOARD
To further support nearmap.com CEO, Simon Crowther, the Company has put in place an Advisory Board comprising four experienced digital business executives, as follows:
Stephen Langsford
• IT & Digital Media entrepreneur • Founder and Executive Chairman of Quickflix, ASX-listed online home entertainment & media company
Rob Antulov
• Media & technology advisor, executive & entrepreneur • Former Director of Strategy at Fairfax Media
Cliff Rosenberg
• International experience in the fields of management consulting, telecommunications and online media • MD of Australia & NZ LinkedIn • Former MD at Yahoo! Australia & NZ
David McGrath
• Director of Group Content for APN News & Media • Former GM - News & Sport at Telstra BigPond • Former Director of News & Information Services at Yahoo!7
April 2012 www.microequities.com.au
IPR | RESEARCH OVERVIEW
BUSINESS SEGMENTS ipernica segments its business into IP Licensing and nearmap.com. The nearmap.com service was launched in November 2009 and in FY11, $3.8m in revenue was recorded, an increase of over 2000% on pcp, with overall sales to 30 June 2011 of $8.3 million. 1H12 saw the nearmap.com division deliver $2.59m in revenue, a rise of 94.4% from pcp (1H11: $1.33m). Total revenue for 1H12 was $2.91m, up 85% from pcp (1H11: $1.57m).
OPERATING REVENUE BY SEGMENT:
SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATES nearmap.com nearmap.com is an online photomap content company producing high resolution and changing photomaps. ipernica acquired a 100% interest in the company in December 2008. A number of organisation changes have been put in place in the nearmap.com division with the appointment of Paul Cousins as vice president of sales and Wilfried Schaffner as vice president of Engineering. These two appointments reiterate ipernica’s renewed focus on driving revenue from nearmap.com content and ensure the technology remains ahead of competitors.
There have been a number of achievements in the first half of 2012 with: More than $10.0m in cumulative sales recorded within two years of the nearmap.com acquisition Subscription renewal rate for nearmap.com of more than 90% New subscription customers from all levels of government and commercial sectors Re-seller agreement with Omnilink Pty Ltd and Digital Mapping Solutions (leading supplier of Geographic Informational Systems to local governments) Launch of Nearmap first e-commerce site targeting the education sector
Its client base includes more than 70 government bodies from Commonwealth, state and local levels (including Federal Dept. of Climate Change and Energy Efficiency, various State Police, Water, Planning, and Roads departments and many Local Government authorities), and a number of ‘blue-chip’ commercial clients including QLD Gas Corporation, IAG Insurance, Sensis and RP Data. Potential applications of nearmap.com for government clients include monitoring climate change, asset management, compliance (e.g. solar panel scheme), infrastructure planning, land use and emergency response (e.g. Brisbane Floods). For commercial clients, potential applications stretch across the mining and mining exploration, telecom, real estate, insurance, agricultural and utilities industries.
Management have transformed their overall approach to a content monetising strategy from an advertising startegy. The company continues to offer nearmap.com to all commercial and government users on a subscription model. Although
April 2012 www.microequities.com.au
IPR | RESEARCH OVERVIEW nearmap.com was not profitable in FY11 and in the first half of FY12, management aims to achieve a cash flow positive result in the second half of FY12. Increased focus on direct sales, reseller agreements signed recently and appointment of a new vice president of sales, are just some of the initiatives put in place to pursue this objective. New customer sales in FY11 were around $5.1m, a rise of 21% on the previous period. As this ramp up through various sales initiatives, we believe it sets a solid base from which Ipernica can derive more annuity style revenue through contract renewals. From a longer-term perspective, the company could potentially look to expand the service internationally through strategic alliances or joint venture agreements.
IP Licensing The IP Licensing arm of the company provides IP owners with protection and seeks compensation for instances of IP (those owned by ipernica and those on behalf of clients) infringement or unpaid royalties. The majority of ipernica’s clients are small inventors, SMEs and universities. ipernica employs a low risk strategy by seeking third party funding of cases where possible and appropriate with the potential value of each case to ipernica of around 50% of the net compensation (after legal fees and expenses). Revenue from the IP Licensing segment of the business is largely dependent on the timing of negotiations and court decisions and can often be ‘lumpy’. This is evident with FY11 revenue from IP licensing of around $12.7m and only $73k in the first half of FY12.
Financial Systems Technology group, business associates of the IP licensing division commenced two new actions against Microsoft Corporation and IBM Corporation. The action against IBM and CDW Corporation relates to alleged patent infringements. The pipeline of new programs remains strong and is expected to continue to generate substantial revenues over the next 1 – 3 years.
OUTLOOK ipernica is in a transformational phase from the lumpy nature of revenue from IP licensing to a more predictable, recurring revenue stream from the nearmap.com subscription model. Management are confident of achieving a cash flow positive position for nearmap.com in the second half of FY12 on the back of a shift in strategy to monetising its contents rather than growing site usage and generating advertising income. There are also significant revenue opportunities within the commercial sectors such as mining exploration, insurance, agriculture and real estate, as well as the small to medium enterprise sector. HISTORICAL FINANCIALS
SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATES
April 2012 www.microequities.com.au
IPR | RESEARCH OVERVIEW
1H12 RESULTS REVIEW
. Total revenue was up 85% to $2.91m from $1.57m in 1H11. . A net loss of $3.87m was recorded for the half compared to a loss of $3.53m in the first half of 2011. . Operating cash flow was negative $1.1m, a slight improvement from negative $2.4m in pcp. . Cash balance fell from $11.1m to $7.5m at the end of the half with the nearmap.com division yet to achieve positive cashflow. . The top priority for nearmap.com, is to reach a cash flow positive position in FY12. . Any key focus is to win new customers and retain existing ones for its nearmap.com service, with significant revenue growth opportunities in government and various segments within the commercial market. Increased awareness, media coverage and usage of the service will drive further client growth going forward. . Total contract value of all subscriptions and on request sales to date is $8.3m with circa 69% derived from government clients. Customers to date include government agencies at Federal, State and Local level and a number of well known commercial clients (e.g. IAG, Sensis, RP Data and QGC). . nearmap.com customer retention rates at 95% with most renewals for 2 years. This underlies the substantial annuity style potentials and is a reflection of high levels of customer satisfaction and competitive advantages of the nearmap.com product.
April 2012 www.microequities.com.au
IPR | RESEARCH OVERVIEW EXPECTED DEVELOPMENT OVER THE NEXT 12 MONTHS:
MANAGEMENTQ&A “nearmap.com is targeting to become cash flow positive in the 2012 calendar year. Current revenue Simon Crowther continues to support the business Managing Director being on track to achieve its cash flow goal” ipernica has gone through a number of changes at the management and operational “nearmap.com is unique in level. What have been the changes and how does this position the that it owns the complete company to grow its Nearmap.com division? chain of technologies from At the senior management level, the major change has been the the capture, processing, and appointment of Simon Crowther as Group Managing Director of ipernica ltd. Mr Crowther was formerly the CEO of 100% owned subsidiary serving of photomaps” Nearmap Pty Ltd and his appointment to the group role reflects the strategic focus of the group on the Nearmap business. In addition to this internal change, Nearmap has recently employed two key executives as part of the development and strengthening of the Nearmap management “nearmap.com currently has team. Mr Wilfired Schaffner has been appointed VP of Engineering and is in excess of 120 responsible for all engineering and technical aspects of the Nearmap customers...The current business. Mr Paul Cousins was appointed VP Sales for Nearmap in customers include Federal, January 2012, and is responsible for all of the commercial operations of State and local governments the Nearmap business. Both of these new appointments have been as well as large corporates located in the company’s Sydney office reflecting the future focus of the such as QGC (a BG company), business and its desire to be closer to a substantial portion of its customers and to provide the company access to a larger talent base. BHP, Rio, Woodside, RP Data,
Sensis and numerous Can you explain the reseller agreement with Omnilink and Digital others.” Mapping Solutions? The reseller agreement with Omnilink is specific to the education sector. Omnilink is a long term provider of geo-spatial services to the education sector. The appointment was in conjunction with nearmap’s first e-commerce site that was targeted at the education sector. Digital Mapping Solutions (DMS) is a leading supplier of Geographic Information Systems (GIS) to Local Government Agencies (LGAs) throughout Australia. DMS have been appointed as a reseller to the Local Government market in Australia.
How many clients does Nearmap.com have and how has this grown from FY11? Which customer segment is showing the most potential? To date Nearmap’s customers have been largely obtained as a result of the company’s direct sales strategy. Nearmap currently has in excess of 120 customers primarily from this sales activity and new customers are being won continually. The current customer includes Federal, State and local governments as well as large corporates such as QGC (a BG company), BHP, Rio, Woodside, RP Data, Sensis and numerous others.
What is the level of renewals for Nearmap.com existing clients? Nearmap is currently experiencing a renewal rate in excess of 90%.
April 2012 www.microequities.com.au
IPR | RESEARCH OVERVIEW
What is the typical length of a contract? Typically, a license is for 12 months although we have entered into some agreements for longer periods. A number of deals are now being entered into for multiple year licences that will renew automatically on the anniversary date of the deal.
Has there been any changes to the pricing for Nearmap.com? No, there have not been any specific pricing changes in relation to Nearmap’s pricing. As with any new business and products, we are looking to evolve the product with a view to introducing a number of e-commerce packages together with future SaaS (Software as a Service) products.
Is there the potential to supply major sites such as Google or Bing considering the advantages of Nearmap.com photomaps? Given the value propositions of currency, clarity and change associated with Nearmap’s product, there is always potential to provide these kind of sites with our imagery. In doing so Nearmap would need to ensure that this did not in fact adversely affect our business, as the provision of our premium service for a fee is clearly central to the business model. Any potential supply to these kind of sites would need to be on the basis of minimal impact to our business model.
When does management expect Nearmap.com to achieve positive cash flow? How has trading been for Nearmap.com so far in the first two months of 2012? Nearmap is targeting to become cash flow positive in the 2012 calendar year. Current revenue continues to support the business being on track to achieve its cash flow goal.
In the IP licensing business, what opportunities are there in the pipeline for ipernica and what is the company currently working? Some broad pipeline details were provided in the Annual General Meeting presentation released to the ASX on 29 November 2011.
April 2012 www.microequities.com.au
IPR | RESEARCH OVERVIEW
FINANCIAL SUMMARY
PROFIT & LOSS KEY RATIOS
FY09A FY10A FY11A FY09A FY10A FY11A
Revenue 3.2 3.0 17.1 Sales 3.1 1.5 16.9
Expenses -8.0 -10.8 -15.4 % Chg YoY (40%) (53%) 1053%
+ Net Interest Expense -1.5 -0.5 -0.5 Price/Sales 5.2x 11.0x 1.0x
+ Depreciation & Amort. 0.3 1.4 2.1 EPS (cents) -1.6 -2.3 0.5
EBITDA -6.0 -6.9 3.2 % Chg YoY -% 47% (122%)
% Chg YoY -% 15% (147%) P/E - x - x 10.1x
EBITDA MARGIN (186%) (230%) 19% Enterprise Value -1.6 6.0 5.1
Depreciation & Amort. -0.3 -1.4 -2.1 EV/EBIT - x - x 4.3x
EBIT -5.8 -8.3 1.2 EV/EBITDA - x - x 1.6x
EBIT Margin (178%) (276%) 7% DPS 1.00¢ - ¢ - ¢
Net Interest Expense 1.5 0.5 0.5 Dividend Yield 20.0% -% -%
Profit Before Tax -4.3 -7.8 1.7 ROE (16%) (37%) 7%
Tax 0.0 0.4 -0.1 Debt to Equity 2% 1% 0%
NPAT -4.3 -7.4 1.6
BALANCE SHEET CASH FLOW STAMENT
FY09A FY10A FY11A FY09A FY10A FY11A
Cash and cash 18.2 10.5 11.1 EBITDA -6.0 -6.9 3.2 equivalents Trade and other 2.0 1.5 9.5 Decre./(Incr.) in WC -2.8 0.4 -1.7 receivables Total current assets 20.2 12.0 20.6 Net Int. (Paid)/Rec 1.7 0.5 0.5
Receivables 0.0 0.0 0.0 Taxes Paid -2.1 0.4 0.0
Other financial assets 0.0 0.0 0.0 Incr/(decr) in provisions 0.0 0.0 0.0
Available for sale 0.2 0.4 0.2 Other Op. Cash items 0.0 0.0 0.0 financial assets Plant and equipment 2.3 2.7 2.5 Cash from Operations -9.3 -5.6 2.1
Intangible assets and 9.2 9.1 8.6 CAPEX -1.6 -1.8 -1.4 goodwill Licensing program costs 1.3 2.2 1.7 Other Inv. Cash Flows -4.3 -0.2 0.1
Total non-current 13.0 14.3 13.0 Loans to other entities 0.0 0.0 0.0 assets Total assets 33.2 26.3 33.7 Cash Flow From Invst. -6.0 -2.0 -1.2
Trade and other 3.3 5.1 11.1 Incr/(Decr) in Equity 0.0 0.0 0.0 payables Provisions 1.8 0.2 0.2 Incr/(Decr) in Debt 0.0 0.0 -0.2
Borrowings 0.1 0.2 0.1 Ord, Dividend paid -2.6 0.0 0.0
Payment for share buy Current tax liability 0.0 0.0 0.1 0.0 0.0 0.0 back Total current liabilities 5.3 5.4 11.5 Cash Flow From Fin -2.6 0.0 -0.2
Provisions 1.0 1.0 0.1 Net Incr/(Dcr) in cash -17.9 -7.7 0.7
Deferred tax liability 0.0 0.0 0.0
Borrowings 0.3 0.1 0.0
Total non-current 1.3 1.1 0.1 liabilities Total liabilities 6.6 6.6 11.5
Equity 26.6 19.8 22.1
April 2012 www.microequities.com.au
IPR | RESEARCH OVERVIEW
IMPORTANT DISCLOSURE INFORMATION: Produced by Microequities Pty Ltd in accordance with section 949A of the Corporations Act 2001. Any recipient of the information contained in this document should note that the information is general advice in respect of a financial product and is not personal advice. Accordingly, the recipient should note that a) the advice has been prepared without taking into account the recipient’s objectives, financial situation or need; and b) as a corollary, the recipient should, before acting on the advice, consider the appropriateness of the advice, having regard to the recipient’s objectives, financial situation and needs. Although Microequities Pty Ltd (Microequities) considers the advice and information contained in the document to be accurate and reliable, Microequities has not independently verified the information contained in the document which is derived from publicly available sources. Microequities assumes no responsibility for updating any advice or recommendation contained in this document or for correcting any error or admission, which may become apparent after the document has been issued. Microequities does not give any warranty as to the accuracy, reliability or completeness of advice or information contained in this document. Except in the case where liability under any statute cannot be excluded, Microequities, its employees and consultants do not accept any liability (whether arising in contract , in tort or negligence or otherwise) for any error or omission in this document or any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Microequities, its emplo yees, consultants and its associates within the meaning of Chapter 7 of the Corporations Act 2001 may receive remuneration from transactions involving financial products referred to in this document . Microequities and its associates (as defined in Chapter 7 of the Corporations Law), officers, directors, employees and agents, companies to which this document refers and may trade in the securities mentioned either as principal or agent. Furthermore, the trading by its associates may not necessarily correspond to the recommendation been provided in this document.
ADDITIONAL VOLUNTARY DISCLOSURE BY MICROEQUITIES* Analyst Equity Stake Disclosure to Business Investment Banking Staff Interest personal By Microequities Company Relationship Interest Associates
NO NO NO NO NO
* To promote transparency, Microequities voluntarily discloses potential conflict of interests covered by this research document.
Additional disclosure: Microequities Pty Ltd has a research distribution agreement with ipernica Limited
April 2012 www.microequities.com.au
MICROCAP COMPANY RESEARCH
April 2012 BUSINESS ISS Group Limited
GICS Sub-Industry: Information Technology– Software & Services
Research Overview Business Description ASX :ISS
ISS Group [ASX:ISS] is a provider of enterprise wide Last traded A$ 0.2 production information systems to clients in the oil and gas, Market Cap A$’’m 27.5 metals and mining, manufacturing and FMCG sectors. Nº of Shares m 137.7 2011A EPS ¢ 0.8 Event 2011 PE x 23.3 2011 EV/EBITDA x 13.1 DPS 2011A ¢ 1.15 . 1H12 results: NPAT rose 252% to $2.67m (1H11: . Diiv Yiielld 2011A % 6.1% $0.76m) with total revenue up 15% to $11.6m. A 0.65c Revenue 2011A m 17.6 interim dividend was declared compared to 0.5c in the EBITDA 2011A m 1.5 pcp. The company’s result was also boosted by a reduction in FX losses following changes to internal NPAT 2011A m 1.1
treasury processes.
OVERVIEW . Sales focus delivering results: The stronger focus by ISS on driving sales is becoming evident with a number of new contracts announced and won since the start of Share Price | 1 Year
FY12. Licensing revenue growth was the standout, growing 33% from pcp. . FY11 results: NPAT was down 69% to $1.1m (FY10: $3.6m) with operating revenue down 6.7%. A 0.65c final dividend was declared taking the full year payout to 1.15c, an increase of 130% on pcp.
. FY11 results impacted by AUD appreciation: The appreciating Australian Dollar against the US currency dented the headline revenue figure. As 52% of sales revenue is denominated in USD, management estimates revenue was reduced by around $0.95m in FY11.
Investor Queries
research Richard Pang Managing Director and CEO ISS Group
+65 6534 0091 [email protected] [email protected]
Important disclosure information at the end of this report
ISS | RESEARCH OVERVIEW
BUSINESS DESCRIPTION
ISS Group [ASX: ISS] delivers operational management software solutions to the global oil and gas, mining, metals, minerals and manufacturing industries. The company was established in 1995 and listed on the ASX in 2004 and now have five offices in Australia, the US, Europe and Asia. ISS Group’s flagship BabelFish™ product suite comprises a number of integrated modules that enable operations to capture, validate, analyse and report against business critical data and workflows. BabelFish™ provides an efficient and integral decision-making and problem-solving environment for personnel in operations, engineering and business management. The company has developed a blue-chip client base including Chevron, BHP Billiton, Woodside, Santos, Rio Tinto, Shell, BG Group, BP, Hess Corporation, Maersk Oil, Petronas and Fortescue Metals.
BOARD OF DIRECTORS & MANAGEMENT TEAM
Evan Cross | Director - Non-Executive Chairman Appointed 8 June 2004 Mr Cross is a member of the Institute of Chartered Accountants in Australia. He has held a number of senior positions in commerce and industry with particular focus on corporate finance and has international finance experience having worked in the investment banking industry in Australia and the U.S.
Richard Pang | Managing Director Appointed 1 July 2011 Mr Pang commenced his career with ISS Group in 2002, starting as a product developer in Australia and progressed through project management, to Business Development Manager of Asia/Middle East, to Regional Manager for Asia/Middle East. After taking the Asia/Middle East branch from ‘start up’ through to the Group’s most profitable branch, Mr Pang was appointed to his current role as Group Chief Executive Officer in August 2010 and Managing Director in July 2011. Mr Pang holds a Bachelor of Computer Science degree from Edith Cowan University.
Ian Spence | Director - Independent and Non-Executive Appointed 30 July 2004 Mr Spence has been and is currently a director of a number of public and private companies in Australia and South East Asia. Mr Spence holds a Bachelor of Commerce degree and is a qualified Accountant. Other current directorships include non-executive director of IFS Construction Services Limited.
Shane Attwell | Director - Non-executive Appointed 5 April 2004 Mr Attwell founded ISS in 1995. Mr Attwell has 20 years’ experience with process plant information systems and optimisation. Seven of these years were spent abroad developing technologies in the U.S., Canada, South America, Europe, Africa and the Middle East. Mr Attwell holds a Bachelor of Engineering degree and a Graduate Diploma in Business, both from Curtin University.
Frank Zenke | Company Secretary Appointed 27 February 2008 Mr Zenke has over 25 years experience in the software industry covering private, commercial and government sectors. For the last ten years, he has been employed in senior commercial roles in the Middle East. He brings to ISS Group a wealth of knowledge in Middle Eastern affairs, international finance and the management of the corporate affairs of publicly listed companies.
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ISS | RESEARCH OVERVIEW
MAJOR SHAREHOLDERS
ISS – Top 20 Shareholders as at 5 September 2011.
SHARES HELD ISSUED CAPITAL
1. Shane Patrick Attwell 12,369,624 9.085%
2. Robyn Susanne Johnston 12,369,316 9.085%
3. Robyn Susanne Johnston (The Patacait Family A/C) 6,250,000 4.590%
4. Equitas Nominees Pty Ltd 4,253,179 3.124%
5. Microequities Asset Management Pty Ltd 4,020,668 2.953%
6. Mr Richard Pang 3,578,003 2.628%
7. Mr Grant Eggleton 2,598,950 1.909%
8. Mr Graeme Edmund Moir 2,500,000 1.836%
9. Exwere Investments Pty Ltd 2,212,760 1.625%
10. Sante Holdings Pty Ltd 2,156,314 1.584%
11. UBS Nominees Pty Ltd 2,053,800 1.508%
12. Abe Shasha Consulting Inc 2,000,001 1.469%
13. T R B Management Pty Ltd 1,800,000 1.322%
14. Mr Christopher James Kincaid 1,800,000 1.322%
15. Wal Assets Pty Ltd 1,400,000 1.028%
16. Mr Paul Mathew Brown 1,350,000 0.992%
17. Ross Asset Management Ltd 1,235,548 0.907%
18. Mr Kevin Harvey Payne & Mrs Ruth Linda Payne 1,178,472 0.866%
19. Yarandi Investments Pty Ltd 1,160,000 0.852%
20. Manhattan Investments Pty Ltd 1,075,472 0.79%
TOTAL FOR TOP 20 SHAREHOLDERS: 67,362,107 49.476%
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ISS | RESEARCH OVERVIEW
BUSINESS OVERVIEW
Software Solutions
ISS Group delivers operational management software solutions to the global Oil and Gas, Mining, Metals, Minerals and Manufacturing industries. The need for operations to continuously deliver efficiency gains and an in-depth understanding of their complex operational environment requires robust and flexible operational management solutions. Companies recognise the return on investment that operational management solutions provide and thus increase the demand for ISS Groups software solutions. The ability to manage critical business workflows, whilst providing seamless web based access to the required operational data from many disparate data repositories is a key factor in efficient operations.
ISS Group’s BabelFish product suite is an integrated modular operational management solution that together with ISS Groups world-class delivery capability provides data integration, data modelling, real time visualisation, surveillance & diagnostics, alarm/event reporting, loss and availability, data capture, validation and approval, advanced calculations and workflow based KPI's, all of which are pre-requisites for remote operations environments. Clients using the Babelfish suite are able to implement specific modules required and leverage the financial outlay in their existing operational, maintenance and enterprise solutions. This reduces cost and adds value to past investments whilst providing an end-to-end integrated operations environment.
The BabelFish product suite provides a number of web-based solutions that transgress ISS Groups core focus industries. Production Surveillance and Optimisation, Production Data Management and Asset management are the major areas of utilisation.
The BabelFish product suite includes the following solutions: Data integration, data management and real time visualisation Production reporting Data validation, data approval and publication Operations shift log data capture Production loss, deferment and utilisation accounting Operational envelope event detection, processing, notification and reporting Production plan management Asset integrity and asset health monitoring
The BabelFish product suite also provides a number of Oil and Gas specific solutions including: Well testing, well integrity and reservoir management: (e.g. allows operators and engineers to capture and analyse well test data). Hydrocarbon allocations Cargo off take planning: (e.g. manage scheduling of oil and gas shipments. Actual and planned production numbers are used to estimate when off-takes should be scheduled). Gas nominations and balancing: (e.g. managing transmission of gas to customers). Shipping data capture and off take documentation: (e.g. data is collected for oil and gas shipments and shipping documentation is produced. This report is automatically disseminated to the marketing department, JVs and other parties involved in the process).
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ISS | RESEARCH OVERVIEW
Project Services
ISS provides services in the design, implementation and post commissioning stages once a client decides to use ISS Babelfish software suite. The design stage allows the client to explain their needs and for the ISS project team to suggest specific modules and add-ons that would be suitable to meet those requirements. ISS’s strength lies in their deep understanding of the oil and gas industry and flexibility in developing software with additional functions to meet the client’s requirements. Once the software is developed, ISS provides implementation services, including training for staff.
Support & Maintenance Services
Extensive support services are provided to ISS clients allowing users to get more out of the Babelfish software suite. Services include knowledge base, forms, blogs, manuals and user guides, release notes relating to software updates and telephone and remote access technical support.
KEY CONTRACTS In May 2008, ISS signed a key distribution agreement with worldwide oilfield services company, Schlumberger. The contract provides Schlumberger with exclusive rights to market and distribute Babelfish Server module (providing data integration and visualisation functionalities) in return for periodical payments totalling $17m over five years. Further revenue opportunities arise from maintenance services provided on sales made by Schlumberger. The contract does not prevent ISS from marketing other Babelfish modules to the oil and gas industry and other vertical markets.
CONTRACTS ANNOUNCED TO DATE IN FY12
Jul 2011 Aug 2011 Jan 2012 Feb 2012
•Maersk Oil Qatar •Victorian Desalination •Chevron Gorgon •Fortescue Metals project •Tangguh LNG (BP) •Oil Search (PNG) •Maersk Oil Qatar •Newfield Exploration Co. •Tangguh LNG (BP)-support •Karara Mining Ltd. services •Others in the energy and mining industries •Other Australian and •Panoramic Resources Indian contracts •Hess (Equatorial Guinea assets)
•Karara Mining Ltd-service contract
•Major Australian miner-4 year contract extension SOURCE: COMPANY DATA REVENUE BREAKUP
ISS derives its revenue from project services, software licensing and maintenance and support services. Average contract value is around $0.3m to $0.6m (lasting 3-6 months) for new clients with larger contracts in the region of $1m to $2m (averaging 6-12 months). Maintenance contracts are normally entered in for three years, providing a recurring revenue stream.
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ISS | RESEARCH OVERVIEW
FY11 REVENUE BREAKDOWN BY TYPE
FY11 54% 25% 21%
FY10 53% 26% 21% Project Services License
FY09 56% 27% 16% Maintenance
FY08 62% 23% 16%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATES
FY11 RESULTS SUMMARY
. FY11 NPAT fell 69% to $1.1m from $3.6m with operating revenue down 6% from $18.6m in FY10 to $17.5m. EBITDA also showed a decline of 59% from pcp. . A weak first quarter in 2011 hurt performance with significant appreciation of the Australian Dollar against the US Dollar reducing revenue by $0.9m. Total expenses also increased 5.1% with foreign exchange losses of $0.95m explaining most of the increase.
Figures in A$’million FY11 FY10 1H12 1H11 Revenue 17.6 18.8 11.5 10.0 EBITDA 1.5 3.7 3.4 1.5
EBITDA Margin 8.6% 19.5% 29.2% 14.5% EBIT 1.2 3.2 3.2 1.3
EBIT Margin 6.7% 17.3% 28.0% 12.7% PBT 1.4 3.3 3.2 1.3
NPAT 1.1% 3.6 2.7 0.8
NPAT Margin 6.4% 19.4% 23.2% 7.6% SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATES 1H12 RESULTS SUMMARY
. ISS reported a 252% jump in first half NPAT to $2.67m from $0.76 in the pcp. Underpinning the result was a 15% increase in revenues to $11.6m (1H11: $10.1m) with licensing revenue up 33% from pcp. The results reflect greater focus on sales and increased contract awards in the oil and gas, metals and mining and other vertical markets. . The board also declared an interim dividend of 0.65c unfranked, an increase of 30% from pcp. . Cash holdings remain robust at $4.57m with total working capital up from $9.1m at the end of FY11 to $10.7m. The increase in current receivables and negative operating cash flow in the first half is due to a timing issue. Payments from Schlumberger and a number of other contracts are invoiced in the December quarter with cash received 60-90 days later in the March quarter.
April 2012 www.microequities.com.au
ISS | RESEARCH OVERVIEW POSITIVE TURN IN REVENUE GROWTH: “We are striving to deliver year on year revenue and profit MANAGEMENTQ&A growth. The core activities in our strategic plan are focused on Richard Pang achieving this goal. Our employer CEO of choice strategy is very important for ISS. Quality people There are a number of large global and high staff retention allows for companies offering production continuity throughout the business and ongoing knowledge visualization software. What is different creation. It is also the key to about ISS products? What are your key quality products and successful strengths? project delivery.” Firstly ISS provides production operation solutions; visualization is only one aspect of the overall operational management solution offered by ISS. A large differentiator for ISS “Our sales pipeline is is our end to end solution offering, and the fact ISS has created all of our software solid with an increased modules rather than growing our offering via acquisition. This has allowed our number of products to be tightly integrated and leverage functionality provided in the opportunities. We are foundation BabelFish Server product (such as data modeling, data integration etc.). A key strength is our agility and ability to respond to customer’s needs. Our excited by the prospects product suite has been build based on customer requirements and driven by our and a number recent customers from the very start. Our goal is to maintain this approach as it will project awards have ensure that we are aligned to the industry and the people using our solutions. given ISS Group exposure to a larger How is ISS leveraged to the increase in activity in the oil and gas sector audience within the Oil and what is the outlook for the sales pipeline? and Gas sector” Obviously the Oil and Gas sector is very active at the present time. ISS has a large number of Oil and Gas customers and an impressive list of successful project implementations. We have recently increased our sales team to enable closer account management and business development to increase our presence with existing customers and take our knowledge and experience to new customers in the sector. Our sales pipeline is solid with an increased number of opportunities. We are excited by the prospects and a number recent project awards have given ISS Group exposure to a larger audience within the Oil and Gas sector.
Which other vertical markets are ISS targeting? Our primary focus is Oil & Gas and Mining Metals Minerals. Whilst we are conducting projects in the utilities and FMCG sectors, the bulk of our experience and knowledge is in the Oil & Gas and MMM verticals. We do believe that there is a huge opportunity in other verticals, however with the current resource boom it’s important we remain focused on our core strengths and branch into other verticals when the time is right and we have the available capacity.
ISS was recently awarded a contract with Chevron at its Gorgon project. What is the significance of this contract and has this increased exposure of ISS products to other potential clients? This project has definitely increased the profile of ISS. It is a great project to be involved with, and project itself is very interesting as it leverage ISS strengths in both our products and our delivery capabilities. The contract is significant both commercially and because it has such a high exposure globally due to a number of factors (capital cost, production
April 2012 www.microequities.com.au
ISS | RESEARCH OVERVIEW volumes, location etc) and the companies involved. On a technical front, it is utilizing a wide range of powerful software products from many companies to provide the integrated operations environment required for such an asset. To be part of this solution is very pleasing and demonstrates that ISS is a leading provider of both software and services in the production operations domain.
ISS appears to have turned the corner after a few years of stagnant revenue growth. What is behind this improvement? We have focused on increasing our ability to generate revenues. The growth of our sales team has played a large part in this along with the drive for closer engagement with our existing customers. We are striving to deliver year on year revenue and profit growth. The core activities in our strategic plan are focused on achieving this goal. Our employer of choice strategy is very important for ISS. Quality people and high staff retention allows for continuity throughout the business and ongoing knowledge creation. It is also the key to quality products and successful project delivery, which in turn leads to new opportunities and thus propagates growth. Our head count has increased by approximately 30% in the past 12 months which will allow ISS to both sell and deliver the increased number of projects required to achieve our targets.
The company has quite erratic earnings and cash flows when we compare the quarterly results. Can you explain why this is? Q1 and Q3 are traditionally lower revenue yielding months. This is due to the normalization of maintenance and support contracts in line with our customers budgets which fall in Q2 and Q4. Additionally, we generally see an increase in project spends at the end of our customers’ budget cycle which, as mentioned, align with Q2 and Q4. Cash flows are relatively consistent for ISS however the quarterly reporting periods highlights the timing differences between revenue realization (invoicing) and actual payments received, which are based on the payment terms we have with our customers.
In FY11, management talked about the high Australian Dollar and the negative impacts it had on revenue and earnings. What steps have been taken to address the exposure to currency fluctuations? The high Australia dollar affects our consolidated AUD earnings on foreign currency revenues. There is an impact of foreign exchange (FX), fluctuations in our P&L due to the differences in invoiced vs. received exchange rates on consolidated revenues, and the impact of FX variances against our intercompany loans. We have a number of initiatives in progress to minimize our FX exposure, those being the reduction of our intercompany loans and the company’s foreign cash conversion policy. Additionally we have primarily focused our sales team growth in Australia to leverage the large number of opportunities in the resource sector, our large number of delivery resources in Australia, and to minimize FX exposure on foreign revenues. It is also important for ISS to manage the growth of our sales team and ensure we have the correct support structures in place to empower new sales resources when they join the company, thus refining this process in Australia adds the greatest value at this point in time.
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ISS | RESEARCH OVERVIEW
FINANCIAL SUMMARY
INCOME STATEMENT KEY RATIOS Year to June 2009A 2010A 2011A Year to June 2009A 2010A 2011A Revenue 18.6 18.8 17.6 Sales 18.3 18.7 17.5 Expense (28.9) (15.5) (16.2) % Chg YoY -% 2% (7%) - Net Interest Expense (0.3) (0.1) (0.2) Price/Sales 1.5x 1.5x 1.6x + Depreciation & Amortisation 8.6* 0.4 0.3 EPS (cents) (8.8) 2.7 0.8 EBITDA (2.0) 3.7 1.5 % Chg YoY -% -% (70%) % Chg YoY -% (282%) (59%) P/E - x 7.6x 24.6x EBITDA Margin (11%) 19.5% 8.6% Enterprise Value 22.8 20.9 21.3 Depreciation & Amortisation (8.6) (0.4) (0.3) EV/EBIT - x 6.4x 18.0x EBIT (10.6) 3.2 1.2 EV/EBITDA - x 5.7x 14.1x EBIT Margin (57%) 17.3% 6.7% DPS - ¢ 0.50¢ 1.15¢ Net Interest Expense 0.3 0.1 0.2 Dividend Yield -% 2.5% 5.8% Profit Before Tax (10.3) 3.3 1.4 ROE (144%) 31% 9% Tax (0.8) 0.3 (0.3) Debt to Assets 1% 0% 0% NPAT (11.1) 3.6 1.1 Debt to Equity 1% 1% 0% *Intangible write-off CASH FLOW BALANCE SHEET STATEMENT Year to June 2009A 2010A 2011A Year to June 2009A 2010A 2011A Cash & cash equivalents 4.8 6.7 6.3 Receipts from customers 19.4 18.3 17.3 Payment to Trade and other receivables 2.8 4.5 5.2 (19.6) (16.0) (15.3) suppliers/employees Government grants Total Current Assets 7.6 11.2 11.5 0.3 - 0.2 received Net interest Property, Plant & Equipment 1.7 1.5 1.3 0.3 0.0 0.2 received/(paid) Receivables 0.3 0.2 0.6 TaxesPaid (0.9) (0.1) (0.6) Deferred tax assets - 1.2 1.1 Cash from Operations (0.5) 2.2 1.8 Intangibles - - - Payments for PPE (1.5) (0.2) (0.1) Payments of development Total Non-Current Assets 2.0 2.8 3.0 - - - costs TOTAL ASSETS 9.6 14.0 14.5 Payments of Subsidiaries - - - Payment for security Trade and other payables 1.6 1.5 1.6 (0.1) 0.1 - deposit Proceeds from sale of Interest-bearing liabilities 0.0 0.0 0.0 0.0 0.0 - PPE Current tax liabilities 0.0 0.4 - Cash Flow From Invst. (1.5) (0.2) (0.1) Provisions 0.2 0.2 0.9 Incr/(Decr) in Equity 13.5 - (0.2) Total Current Liabilities 1.8 2.2 2.5 Share issue costs (0.5) - - Provisions - - 0.0 Return of capital (12.0) - - Interest-bearing liabilities 0.1 0.0 0.0 Payment of dividends (2.0) - (1.4) Deferred tax liabilities - - - Incr/(Decr) in Debt (0.0) (0.0) (0.0) Total Non-Current Liabilities 0.1 0.0 0.1 Cash Flow From Fin (1.1) (0.0) (1.6) TOTAL LIABILITIES 1.9 2.2 2.5 Net Cash +/(-) (3.1) 2.1 0.1 NET ASSETS 7.7 11.9 12.0
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ISS | RESEARCH OVERVIEW
IMPORTANT DISCLOSURE INFORMATION: Produced by Microequities Pty Ltd in accordance with section 949A of the Corporations Act 2001. Any recipient of the information contained in this document should note that the information is general advice in respect of a financial product and is not personal advice. Accordingly, the recipient should note that a) the advice has been prepared without taking into account the recipient’s objectives, financial situation or need; and b) as a corollary, the recipient should, bef ore acting on the advice, consider the appropriateness of the advice, having regard to the recipient’s objectives, financial situation and needs. Although Microequities Pty Ltd (Microequities) considers the advice and information contained in the document to be accurate and reliable, Microequities has not independently verified the information contained in the document which is derived from publicly available sources. Microequities assumes no responsibility for updating any advice or recommendation contained in this document or for correcting any error or admission, which may become apparent after the document has been issued. Microequities does not give any warranty as to the accur acy, reliability or completeness of advice or information contained in this document. Except in the case where liability under any statute cannot be excluded, Microequities, its employees and consultants do not accept any liability (whether arising in cont ract, in tort or negligence or otherwise) for any error or omission in this document or any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Microequities, its e mployees, consultants and its associates within the meaning of Chapter 7 of the Corporations Act 2001 may receive remuneration from transactions involving financial products referred to in this document. Microequities and its associates (as defined in Chapter 7 of the Corporations Law), officers, directors, employees and agents, companies to which this document refers and may trade in the securities mentioned either as principal or agent. Furthermore, the trading by its associates may not necessarily correspond to the recommendation been provided in this document.
RECOMMENDATION GUIDE
Recommendation Market Price undervalued/overvalued to Microequities price objective
Strong Buy Above 40% Buy 20 to 40% Hold 0 to 20% Sell 0 to -20% Strong Sell Greater than 20%
ADDITIONAL VOLUNTARY DISCLOSURE BY MICROEQUITIES* Analyst Equity Stake Disclosure to Business Investment Banking Staff Interest personal By Microequities Company Relationship Interest Associates
NO NO NO NO
* To promote transparency, Microequities voluntarily discloses potential conflict of interests covered by this research document.
Additional disclosure: Microequities Pty Ltd has a research distribution agreement with ISS Group
April 2012 www.microequities.com.au
MICROCAP COMPANY RESEARCH
Montezuma Mining April 2012 Company Ltd GICS Sub-Industry: Materials– Metals and Mining
Research Overview- UPDATE
Business Description ASX : MZM
Montezuma Mining Company Limited [ASX:MZM] is a Western Australian based exploration company with a Last traded A$ 0.315 Market Cap A$’’m 21.3 portfolio of early stage mineral assets focusing on 21.3 Nº of Shares m 67.7 manganese, copper and gold. 2011A EPS ¢ (8.1) 1H FY12 Events 2011 PE x - 2011 EV/EBITDA x . The Butcherbird Manganese and Copper project: Work to - DPS 2011A ¢ - date has successfully identified manganese and copper Diiv Yiielld 2011A % - mineralisation and current work is ongoing to assess the Revenue 2011A m 1.4 commercial potential of the deposits discovered as well as to EBITDA 2011A m (4.5) explore further discoveries. NPAT 2011A m (3.6)
OVERVIEW . Yanneri Ridge Resource: MZM is currently undertaking a feasibility study with a view of producing 0.5-1.0Mtpa of Share Price | 1 Year
manganese products at +36%Mn for export. . Butcherbird manganese resource upgrade: Independent expert Snowden completed mineral resource estimates for seven additional deposits. Additional inferred resources of 70Mt @11.4% Mn reported with global inferred resources now stand at 119Mt @11.6% Mn. Low-grade resources stand at 55.9Mt @9.3% Mn. . Butcherbird manganese Direct Ship Ore (DSO) studies: Six potential DSO localities were identified with five tested through bulk sampling (scraping and trenching). As a result,
the mineralisation grades of +40% Mn achieved at the main
localities with a total tonnage of 410Kt - 780Kt. Further work
research will be undertaken to confirm DSO surface deposit size, Investor Queries recoveries and product grades. . Butcherbird copper upgrade: The drilling programme to test Justin Brown Managing Director the copper prospectivity (Butcherbird Shear Zone) intersected Montezuma Mining high-grade copper zones (61m @1.96% Cu including 6m + 61 8 6315 1400 @6.08% Cu). The results have confirmed the zone as a highly [email protected] [email protected] prospective exploration target. Follow-up extensive drilling has
recently commenced to extend the discovery. . 1H FY12 results: Exploration stage still makes the company
unprofitable and with negative CFO. Cash position improved
through the sale of financial assets and new equity issues.
Important disclosure information at the end of this report MZM | RESEARCH OVERVIEW
COMPANY DESCRIPTION Montezuma Mining Company Limited (ASX:MZM) is a minerals exploration company listed on the Australian Securities Exchange on 22 November 2006. Originally founded to explore tenements in the Pilbara region, MZM has successfully discovered and divested a series of greenfield iron ore and gold assets. The company is currently focused on developing its 100% owned Butcherbird Manganese / Copper Project in Western Australia to production stage, while continuing drilling activities to expand the gold resource in the Peak Hill and Durack Gold Projects.
BOARD OF DIRECTORS & MANAGEMENT TEAM Seamus Cornelius | Chairman Mr. Cornelius brings 21 years of corporate experience in both legal and commercial negotiations. From 2000 to 2010, Mr. Cornelius was an international partner with Allens Arthur Robinson based in Shanghai and Beijing, specialised in dealing with cross border investments, particularly in the energy and resource sectors. Mr. Cornelius has for many years advised large international companies on their investments in China and in recent years advised Chinese state owned entities on their investments in natural resource projects outside China, including Australia.
Justin Brown | Managing Director Justin Brown is a geologist with extensive experience in mineral exploration in Australia and New Zealand. He has a strong technical background with experience in the full spectrum of mineral exploration and mining from grass roots target generation through to resource mining and mine production. Justin’s successful career in the mining industry culminated in a position managing exploration for a large multinational company in the Leonora, Edjudina and Marvel Loch regions of Western Australia. Since leaving mineral exploration to pursue other business interests, Justin has founded and operated a successful internet services consultancy, developing and enhancing his management expertise which he now brings to the Company.
John Ribbons | Non-Executive Director & Company Secretary Mr Ribbons is an accountant who has worked within the resources industry for over fifteen years in the capacity of company accountant, group financial controller or company secretary. Mr Ribbons has considerable site based experience with operating mines and has also been involved with the listing of several exploration companies on ASX. Mr Ribbons has experience in capital raising, ASX and TSX compliance and regulatory requirements.
MAJOR SHAREHOLDERS MZM - Top 20 Shareholders as at 22 September 2011
SHARES HELD ISSUED CAPITAL
1. JP Morgan Nominees Australia Ltd
2. South Boulder Mines Limited 5,382,500 8.00%
3. Alpha Boxer Ltd 4,002,500 5.95%
4. Duketon Consolidated Ltd 3,050,000 4.54%
5. Alpha Boxer Ltd 2,543,334 3.78%
6. Dragon Gas Ltd
7. Atoc Inc 2,500,000 3.72%
8. Avania Nominees Pty Ltd 1,792,567 2.67%
9. Ranguta Ltd 1,758,000 2.61%
10. Vetter, Anthony John 1,355,000 2.02%
11. Mandies Meats Pty Ltd 1,351,796 2.01%
12. Kongming Investments Ltd 1,297,018 1.93%
13. Aradia Ventures Pty Ltd 1,030,000 1.53%
14. Aradia Ventures Pty Ltd
15. Grammer, Dianne Claire 1,000,000 1.49%
16. Actdine Pty Ltd
17. Dragon Gas Ltd 1,000,000 1.49%
18. Sino West Assets Ltd 956,637 1.42%
19. Cunningham, Peter Thomas 950,000 1.41%
20. O’Meara, Denis William 699,071 1.04%
TOTAL FOR TOP 20 SHAREHOLDERS: 41,858,310 62.25%
April 2012 www.microequities.com.au
MZM | RESEARCH OVERVIEW
MANGANESE EXPLORER TURNING TO PRODUCER MZM manganese drilling campaigns over its 100% owned Butcherbird tenements, located 120km south of Newman, WA, had originally uncovered significant tonnage potential of over 100 million tonnes of manganese (Mn) supporting a long mine life of 10-20 years. During 2011, independent appraiser estimated the deposits and confirmed the resources. Therefore, the Butcherbird project now hosts the largest on-shore manganese deposits in Australia. The type of mineralisation is amenable to relatively low cost beneficiation.
Current work is ongoing to assess the commercial potential of the deposits discovered. In January 2011, appraiser Snowden Mining Industry Consultants (“Snowden”) estimated 64.7Mt @11.2% Mn of JORC inferred mineral resource at 8% Mn cutoff, including 48.8Mt at 10% cut-off. The inferred resource is contained within the Yanneri Ridge deposit, one of nine deposit areas identified through EM survey in the Butcherbird region. In December 2011, Snowden estimated seven additional manganese deposits and reported 70Mt @11.4% Mn of JORC inferred mineral resource at 10% Mn cut-off, bringing global inferred resources for the project to 119Mt @11.6% Mn at a 10% Mn cut-off. Moreover, low-grade mineral resources now stand at 55.9Mt @9.3% Mn calculated for material grading 8-10% Mn. These additional low-grade tonnages are expected to provide additional flexibility with respect to blending during the production stage of the project. Therefore, the total of high and low-grade mineral resources now stands at over 170Mt.
FIGURE 1: MZM - INFERRED MINERAL RESOURCE ESTIMATES AT THE BUTCHERBIRD MANGANESE PROJECT
Classification Inferred Resource Inferred Resource Cut-off 10% Mn 8-10% Mn
Deposit Tonnes (Mt) Mn (%) Tonnes (Mt) Mn (%)
Biindii Biindii Hiillll 8.75 11.09 5.7 9.2
Budgiie Hiilllls 1.03 10.82 3.5 8.9
Cadgiies Fllats 0.25 11.08 0.2 9.1
Coodamudgii 12.9 11.48 3.6 9.5
Illllgarariie Riidge 17.0 10.71 18.5 9.2
Mundawiindii 14.2 12.23 2.1 9.4
Riichiies Fiind 16.1 11.56 6.6 9.4
SUBTOTAL 70.2 11.4 40.1 9.3
Yannerii Riidge 48.8 11.8 15.8 9.4
GLOBAL TOTAL 119.0 11.6 55.9 9.3
SOURCE: COMPANY DATA The style of mineralisation at the seven additional deposits is consistent to the Yanneri Ridge Resource where MZM is currently undertaking a Feasibility Study with a view to converting the resources to reserves and to producing up to 1.0Mt of manganese product at +36% Mn for export. Based on the geological similarities and preliminary metallurgical test work, the company expects that these new resources will be amenable to the same mining and beneficiation processes undertaken for Yanneri Ridge. These additional deposits represent important long-term inventories which enhance the projects overall commercial viability.
DSO manganese potential In December 2011, MZM announced that results for a bulk-sampling programme completed at the Butcherbird Manganese Project. The programme targeted five of six identified sites with potential for Direct Ship Ore (“DSO”) surface mineralisation grading 40% Mn. The test work aimed to determine whether these sites could complement the global
April 2012 www.microequities.com.au
MZM | RESEARCH OVERVIEW
JORC resources by providing early production material with low capital and operational costs with the benefit of minimal processing requirements. The main result is that grades of 40-42% Mn achieved at key, larger tonnage localities with total exploration target of 410Kt – 780Kt.
Results to date suggest that a DSO lump product is achievable through simple surface mining, washing, screening and crushing. The significant tonnages of DSO ore, which could be potentially recovered from these occurrences, represent short-term manganese inventories that are expected to enhance the projects commercial outcome. The potential production from these areas is additional to the existing JORC resources. Further work will be undertaken to confirm DSO surface deposits size, recoveries and product grades.
FIGURE 2: MZM – ASSAY RESULTS FOR SURFACE DSO MANGANESE BULK SAMPLING PROGRAMME
Area Raw Material Type Mn Product Type Yield % Mn %
Cadgiies Fllats Scrapiings Lump DSO 57 40.6
Cadgiies Fllats Trench Lump DSO 46 41.3
Biindii Biindii Hiillll Scrapiings Lump DSO 59 41.5
Biindii Biindii Hiillll Trench Lump DSO 20 40.1
Budgiie Hiillll Scrapiings Lump DSO 72 39.6
Budgiie Hiillll Trench Lump DSO 16 33.4
Illllgarariie Hiillll Scrapiings Lump DSO 61 40.6
Illllgarariie Hiillll Trench Lump DSO 32 39.9
Yannerii Riidge Scrapiings Lump DSO 45 36.5 SOURCE: COMPANY DATA
EXTENDED HIGH-GRADE COPPER MINERALIZATION Butcherbird copper upgrade In November 2011, MZM announced the assay results from the completed RC drilling programme (24 drillholes for over 3.5km) at the Butcherbird Copper Project. The drilling program was initiated to test the copper prospectivity of the Butcherbird Shear Zone. The programme intersected a number of copper/cobalt zones, including drillhole BBRC00153 that intersected 61m of copper mineralisation averaging 1.96% Cu and 228ppm Co and containing a higher-grade interval of 6m @6.08% Cu and 631ppm Co at the top of intersection.
FIGURE 3: MZM – ASSAY RESULTS FOR RC DRILLING PROGRAMME
Hole number Intercept (m) Cu % Co (ppm)
BBRC00153 61 1.96 228
iincll. 6 6.08 631
BBRC00168 83 0.43 n/a
iincll. 3 4.15 n/a
BBRC00154 16 0.72 173
BBRC00172 3 3.42 n/a
BBRC00174 2 3.66 n/a
BBRC00174 2 4.74 n/a SOURCE: COMPANY DATA
April 2012 www.microequities.com.au
MZM | RESEARCH OVERVIEW
The results have confirmed significant copper mineralisation associated with the Butcherbird Shear Zone. The company views the zone as a prospective exploration target. Follow-up extensive drilling program (5.5 km) re-commenced in March 2012 to further test for extensions to the previous discovery.
PEAK HILL/DURACK GOLD PROJECTS Given Montezuma’s core focus on the development of the Butcherbird manganese/copper deposits, there is currently no production initiatives at Peak Hill. Managing Director Justin Brown announced that there are a number of scenarios for Peak Hill, which would move the project towards production including further exploration to expand the resource base and/or looking at regional consolidation options. There have been a number of significant transactions in the region which are adding momentum to the concept of renewed production from the area. However, there were no official releases regarding any progress in the Peak Hill / Durack gold projects up to March 2012.
1H FY12 FINANCIAL RESULTS
FIGURE 4: MZM – 1H FY12 REPORTED FINANCIAL RESULTS, $M
1H FY12 1H FY11 % change
Revenue 0.32 1.08 (70%) Explloratiion expenses 1.70 2.37 (28%) Net profiit / (lloss) (1.94) (2.14) (9%) CFO* (2.05) (2.58) (21%)
1H FY12 FY11 % change
Cash 8.61 3.40 154% Totall assets 10.35 7.80 33% Equiity 10.08 7.39 36% Note: *adjjusted for proceeds from salle of fiinanciiall assets (reallllocated from CFO to CFI) SOURCE: COMPANY DATA, MISCOREQUITIES ESTIMATES
Montezuma is an exploration and developing mining company with no production revenue for the period. The major components of revenue are interest received and capital gains on financial assets (shares of four mining companies). A significant decline in 1H FY12 revenue was largely due to fewer exits from financial assets and consequently lower reported gains. The company also generated $0.13m revenue from mining properties (royalties) during 1H FY11 but no royalties reported for the last financial period. Exploration expenses are the largest part of total operating expenses (circa 88%) followed by administrative and employee-based costs.
The company’s cash position has significantly improved, mainly due to the sale of financial assets and new equity issues on options conversion or for cash ($2.87m and $4.44m in 1H FY12 respectively). The company views conventional debt/equity finance options and portfolio holdings as short-to-medium sources of funding and finance arrangements with potential end users as long-term funding strategy.
Montezuma also expects to initiate a fast tracking production from high-grade surface DSO mineralisation within the next 12 months. The production process requires minimum capital expenditures, and could play a vital role in providing funding for the large-scale manganese project development.
April 2012 www.microequities.com.au
MZM | RESEARCH OVERVIEW
CHANGES IN LISTED COMPANY SHAREHOLDINGS As at 31 December 2011, MZM holds shares in four other listed explorers: 3.25M shares in Auvex Manganese, 3.01M shares in Buxton Resources, 1.525M shares in Lithex Resources, and 2M shares in Exterra Resources. The shares were acquired through divestment of MZM’s exploration projects in return for scrip.
Auvex Resources was acquired by Mineral Resources (ASX: MIN) via scheme of arrangement, and in August 2011 MZM converted the in-specie distribution of MIN shares into $2.88M of cash. MZM also retained 3.25M shares in specie in Auvex Manganese Limited that aims to seek a listing on the ASX. The remaining shares of three other mining companies are valued at just under $0.7m at the time of writing (closing prices of 16 March 2012), and are subject to various escrow agreements ending through 2013.
April 2012 www.microequities.com.au
MZM | RESEARCH OVERVIEW FINANCE OPTIONS FOR THE BUTCHERBIRD MANGANESE PROJECT:
MANAGEMENTQ&A “We have identified a significant tonnage of high-grade surface DSO Justin Brown mineralisation, which we are Managing Director currently investigating as a way of
fast tracking production within the Montezuma’s global inferred resources have next 12 months. This early cash flow recently achieved 119Mt @11.6% Mn from should play an important role in eight manganese deposits. The company providing funding for the larger scale development. We are also seems to achieve a critical mass that makes looking at conventional debt/equity the Butcherbird manganese project finance options, as well as off-take interesting for potential investors. What finance arrangements with potential options are currently in place to finance the end users of our product.” production stage of the project? We are fortunate to have a few funding options. In addition to the large-scale resource “I see no immediate mentioned, we have also identified a significant tonnage of high-grade surface DSO advantage to signing mineralisation, which we are currently investigating as a way of fast tracking sale agreements production within the next 12 months. While we have yet to complete detailed financial modelling, the nature of the DSO material such that we expect to be able to unless they come commence commercial production with minimal capital expenditures and strong with significant operating margins. This early cash flow should play an important role in providing associated support funding for the larger scale development. We are also looking at conventional for the financing of debt/equity finance options, as well as off-take finance arrangements with potential the operation. We end users of our product. As we progress through the feasibility studies, these options assess every will be fine-tuned and we will look to choose the option, which provides the best value potential deal on its for shareholders. merits, but this is our starting point” Given the recent developments in exploration, are there any changes in the estimated capital expenditures ($127m for 0.5Mtpa and $163m for 1Mtpa production)? At this stage, no. However, we remain confident that, given the large contingencies applied to the Scoping Study, we will be able to potentially improve on these numbers.
The lower grade manganese resources now stands at 55.9Mt @9.3% Mn. What are the plans to deal with these resources? Logically, the production strategy will focus on initial production from the DSO material, with the larger scale ramp-up utilising the higher grade core resources. Given the size of the higher grade ore bodies we have available, we expect to be able to underpin production of 1Mt of product for a period well in excess of 10 years, and we suspect that any exploitation of the lower grade material is likely to be the subject of studies well into the future, and will be based on the prevailing commercial environment at the time.
Based on the recent copper upgrades and completed drilling programme (24 drillholes), the Butcherbird Shear Zone is viewed as highly prospective exploration copper target. What are the next steps the company plan to
April 2012 www.microequities.com.au
MZM | RESEARCH OVERVIEW undertake to develop the Butcherbird Copper Project? What is the capital investment program required to continue drilling and commence production stage of the project? The copper is a pure exploration stage programme at this stage, so other than preliminary conceptualisations we have not spent really any energy on looking at potential commercial studies. However, it remains a very high priority for us. To that end, we currently have a +5,000m deep RC drilling programme underway with a budget of slightly over $0.5M to test the depth and strike extensions of the existing intersections. Although subject to results, if we can demonstrate that the target has sufficient potential, I would anticipate an additional budget of approximately $2M would be allocated to fund ongoing exploration work over the next two quarters. That should provide us with sufficient information to form a more long-term development view.
What is the company’s current view on signing sale agreements? Does Montezuma plan to tie these contracts to funding agreements for mine development capital? Whilst I would never say never, I see no immediate advantage to signing sale agreements unless they come with significant associated support for the financing of the operation. We assess every potential deal on its merits, but this is our starting point.
Does the company aim to move the gold projects (Peak Hill / Durack) towards production stage including further exploration or looking at regional consolidation options? What is the most probable scenario? The most likely scenarios would be either a sale, or a spin out, potentially including regional consolidation. There have been a number of significant transactions in the region, which are adding momentum to the concept of renewed production from the area. I see Peak Hill as a key part of that story and as such, I think there are good opportunities ahead to extract value from the asset through one of the above scenarios.
The company holds 3.25m shares of unlisted Auvex Manganese and some other mining companies. Does Montezuma aim to continue a strategy of divestment of the portfolio of listed company investments / non-core assets to provide funding for the core activity? We sold our Auvex Resources shares under the scheme of arrangement whereby Mineral Resources Limited acquired the company in a script takeover. Prior to the takeover, the company was deconstructed into two parts, and we received 3.25M shares in specie in Auvex Manganese Limited, an unlisted company with a number of manganese and base metal exploration projects. Our Mineral Resources shares were sold on market for approximately $2.8m, and we have retained the 3.25M shares in Auvex Manganese. Their stated intention is to seek a listing on the ASX, so we anticipate further capital returns once this takes place.
In broader terms, we also have a number of other shareholdings, and we will look to manage these holdings as one of our medium term funding strategies.
April 2012 www.microequities.com.au
MZM | RESEARCH OVERVIEW
FINANCIAL SUMMARY
INCOME STATEMENT K E Y R A T I O S
YEAR TO JUNE FY09 FY10 FY11 YEAR TO JUNE FY09 FY10 FY11 Revenue 2.1 7.9 1.4 Salles 2.1 7.9 1.4
Expenses (1.8) (2.1) (5.6) % Chg YoY 270% (83%)
+ Depreciiatiion & Amort 0.0 0.0 0.0 Priice/Salles 9.9x 2.7x 15.4x
+ Net Interest Expense/(Income) (0.1) (0.1) (0.3) EPS (cents) 0.8 11.0 (8.1)
EBITDA 0.2 5.7 (4.5) P/E 60.9x 4.2x - x
% EBITDA Margiin 10% 72% n/a Enterpriise Vallue 19.1 15.2 17.9
Depreciiatiion & Amort (0.0) (0.0) (0.0) EV/EBIT 92.6x 2.7x - x
EBIT 0.2 5.7 (4.5) EV/EBITDA 86.7x 2.7x - x
% EBIT Margiin 10% 72% n/a DPS 0.0 0.0 0.0
Net Interest (Expense)/Income 0.1 0.1 0.3 Diiviidend Yiielld 0.0 0.0 0.0
Profit Before Tax 0.3 5.8 (4.2) ROE 13% 63% n/a
Tax 0.0 (0.8) 0.6 Debt to Equiity 0.0 0.0 0.0
Net Profit 0.3 5.0 (3.6)
BALANCE SHEET CASH FLOW STAMENT YEAR TO JUNE FY09 FY10 FY11 YEAR TO JUNE FY09 FY10 FY11 Cash & cash equiivallents 2.2 6.1 3.4 Payments to supplliiers (0.3) (0.3) (0.6) Trade and other receiivablles 0.0 0.1 0.1 Interest receiived 0.1 0.1 0.3 Fiinanciiall assets at faiir vallue 0.1 2.5 3.6 Royalltiies on miiniing iinterests 0.0 0.4 0.1 Total Current Assets 2.4 8.7 7.1 Salle of miiniing iinterests 2.0 4.4 0.0 Receiivablles 0.6 0.6 0.6 Expendiiture on miiniing iinterests (0.9) (1.7) (3.7) Pllant & equiipment 0.0 0.0 0.0 Diisposall of fiinanciiall assets 0.0 1.0 0.0 Total Non-Current Assets 0.6 0.6 0.7 Payments for fiinanciiall assets 0.0 (0.1) (0.2) TOTAL ASSETS 3.0 9.3 7.8 Income taxes paiid 0.0 0.0 (0.2) Trade and other payablles 0.4 0.6 0.4 Cash from Operations 0.9 3.8 (4.2) Current tax lliiabiilliitiies 0.0 0.2 0.0 Payments for pllant & equiipment (0.0) (0.0) (0.0) Total Current Liabilities 0.4 0.7 0.4 Payments for tenement bonds 0.0 0.0 (0.0) Deferred tax lliiabiilliitiies 0.0 0.6 0.0 Cash from Investing (0.0) (0.0) (0.1) Total Non-Current Liabilities 0.0 0.6 0.0 Issues of ordiinary shares 0.0 0.0 1.6 TOTAL LIABILITIES 0.4 1.3 0.4 Cash from Financing 0.0 0.0 1.6 NET ASSETS 2.6 7.9 7.4
Issued Capiitall 5.7 5.7 7.3 Net Incr/(Dcr) iin cash 0.9 3.8 (2.7) Reserves 0.5 0.7 2.1 Openiing cash ballance 1.4 2.2 6.1 Retaiined profiits (3.5) 1.6 (2.0) Cllosiing cash ballance 2.2 6.1 3.4 TOTAL EQUITY 2.6 7.9 7.4
April 2012 www.microequities.com.au
MZM | RESEARCH OVERVIEW
IMPORTANT DISCLOSURE INFORMATION: Produced by Microequities Pty Ltd in accordance with section 949A of the Corporations Act 2001. Any recipient of the information contained in this document should note that the information is general advice in respect of a financial product and is not personal advice. Accordingly, the recipient should note that a) the advice has been prepared without taking into account the recipient’s objectives, financial situation or need; and b) as a corollary, the recipient should, before acting on the advice, consider the appropriateness of the advice, having regard to the recipient’s objectives, financial situation and needs. Although Microequities Pty Ltd (Microequities) considers the advice and information contained in the document to be accurate and reliable, Microequities has not independently verified the information contained in the document which is derived from publicly available sources. Microequities assumes no responsibility for updating any advice or recommendation contained in this document or for corr ecting any error or admission, which may become apparent after the document has been issued. Microequities does not give any warranty as to the accuracy, reliability or completeness of advice or information contained in this document. Except in the case where liability under any statute cannot be excluded, Microequities, its employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Microequities, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Act 2001 may r eceive remuneration from transactions involving financial products referred to in this document . Microequities and its associates (as defined in Chapter 7 of the Corporations Law), officers, directors, employees and agents, companies to which this document refers and may trade in the securities mentioned either as principal or agent. Furthermore, the trading by its associates may not necessarily correspond to the recommendation been provided in this document.
ADDITIONAL VOLUNTARY DISCLOSURE BY MICROEQUITIES* Analyst Equity Stake Disclosure to Business Investment Banking Staff Interest Personal By Microequities Company Relationship Interest Associates
NO NO NO NO
* To promote transparency, Microequities voluntarily discloses potential conflict of interests covered by this research document.
Additional disclosure: Microequities Pty Ltd has a research distribution agreement with Montezuma Mining
April 2012 www.microequities.com.au
MICROCAP COMPANY RESEARCH
Radar Iron Limited April 2012
GICS Sub-Industry: Materials– Metals and Mining
Research Overview - UPDATE Business Description ASX : RAD
Radar Iron Limited [ASX:RAD] is an iron ore explorer based in the Central Yilgarn region of Western Australia with its main Last traded A$ 0.31 Market Cap A$’’m 22.1 projects at Johnston Range, Evanston and Die Hardy. Nº of Shares m 71.2 Tenements cover circa 1,100 sqkm with potential for both 2011A EPS ¢ (1.7) magnetite and hematite mineralisation. JORC indicated and 2011 PE x - inferred mineral resource stood at 353M tonnes at 26.1% Fe 2011 EV/EBITDA x - DPS 2011A ¢ - 1H FY12 Events Diiv Yiielld 2011A % - . JORC mineral resource at Die Hardy: The drilling Revenue 2011A m 0.2 programme resulted in a JORC indicated and inferred mineral EBITDA 2011A m (0.9) NPAT 2011A m (0.6) resource at a 20% Fe cut-off grade of 353M tonnes at 26.1%
OVERVIEW Fe. Share Price | 1 Year . Promising modeling results at Die Hardy: The modelling results indicate that a concentrate can be produced exceeding 69% Fe with low levels of contaminants. The drilling resulted in a JORC reportable Indicated and Inferred Mineral Resource at a 20% Fe cut-off grade of 353M tonnes at 26.1% Fe. . Hematite mineralisation confirmed at Johnston Range with further drilling scheduled for 2Q 2012. The recent drilling has defined two zones of hematite mineralisation with average of the grades of 56-58% and reasonable assay levels for contaminants. Moreover, multiple other hematite targets
with BIF bands were identified. Further drilling is required to
test the strike and depth extent prior to potential resource
evaluation and to form a critical mass to justify the research establishment of a sustainable mining operation. Investor Queries . Further regional exploration. Regional geological exploration continues on existing tenements. A number of
areas have been identified as containing outcropping hematite F ortbridge Consulting mineralisation. The focus is on identifying new hematite Bill Kemmer y
targets for drill testing with an aim of establishing Radar Iron’s +61 (0) 400 122 449 initial hematite resource inventory in the first half of 2012. [email protected] [email protected]
. Cash on hand of $2.57m at end of December quarter: Well funded for the planned drilling in 2012. We believe
management have laid out a clear exploration and project
development programme going forward.
Important disclosure information at the end of this report RAD | RESEARCH OVERVIEW
BUSINESS DESCRIPTION Radar Iron acquired 100% interest of Radar Resources from Transit Holdings (ASX: TRH) and listed on the ASX in Dec 2010 after raising $6.8m. It holds a number of prospective tenements totalling 1,100 sqkm in the Central Yilgarn region with potential for significant magnetite and hematite iron ore mineralisation. Its main projects are Johnston Range (Fe-rich hematite) and Die Hardy (magnetite). The company focuses on the resource definition drill testing of a major magnetite body at the Die Hardy Range project and drill testing of around 20 hematite targets identified in the Johnston Range and Evanston project areas.
BOARD OF DIRECTORS & MANAGEMENT TEAM
Alan Tough | Non-Executive Chairman Alan Tough has over 25 years experience in managing publicly listed companies with previous domestic and international experience in a number of industries including manufacturing, mining, finance, management and government sectors. Mr. Tough holds a mechanical engineering honours degree and an MBA from the University of WA. Current board positions include current Chairman of Scanalyse Pty Ltd, non-executive director of Mrs Macs Pty Ltd and President of Westcare Incorporated. Previous positions included Executive Director Operations of Polaris Metals NL (taken over by Mineral Resources in 2010) and Manager of Project Development of Giralia Resources NL (recently acquired by Atlas Iron) with responsibilities for DSO projects in the Pilbara and the Yerecoin magnetite project.
Jonathan Lea | Managing Director Jonathan Lea brings over 25 years of experience in the resource industry with previous role as Technical Director and MD of Polaris Metals Ltd (taken over by Mineral Resources). During his tenure with Polaris, significant iron ore discoveries were made in the Central Yilgarn region and the Mayfield magnetite project. He is a qualified geologist from the University of Tasmania with postgraduate qualification in Mineral Economics and Applied Finance and Investment. He is also a member of the AusIMM.
Ananda Kathiravelu | Non-Executive Director Ananda Kathiravelu has over 20 years experience in the financial services, funds management and stock broking industries. Current positions include MD of Armada Capital Ltd, a corporate advisory firm providing strategic corporate advice and services to listed and unlisted public companies, including Pryme Oil and Gas, CuDeco and Rockstead group, Meridian Minerals and Intium Energy. His main areas of expertise include corporate advice, capital raising and M&A focusing on small cap and emerging business sectors. Mr Kathiravelu holds a Bachelor of Business and Graduate Diploma of Applied Finance and Investment.
RAD - Top 20 Shareholders as at 17 August 2011
SHARES HELD ISSUED CAPITAL
1. Transit Holdings 22,690,612 36.09%*
2. Jonca Inv P/L
3. NBT P/L 1,073,400 1.71%
4. Southern Cross Goldfields 1,000,000 1.59%
5. Shipbag P/L
6. Tadea P/L 500,000 0.80%
7. NBT P/L 500,000 0.80%
8. Cadex Petroleum P/L 500,000 0.80%
9. PG Binet P/L 500,000 0.80%
10. Craoe Inv P/L
11. CVC Ltd 495,000 0.79%
12. Moore John Daniel 375,000 0.60%
13. Hagen Eric L and Ogley D I
14. John and Emma Hannaford Super
15. Simm Michael Sydney
16. Riverview Corp P/L 315,000 0.50%
17. Endeavor P/L 307,937 0.49%
18. Leibler Nom P/L 300,000 0.48%
19. Jimboco P/L 300,000 0.48%
20. Falk James Alexander 300,000 0.48%
TOTAL FOR TOP 20 SHAREHOLDERS: 32,622,584 51.94% * Transit Holding held 22,690,612 ordinary shares or 31.89% of voting rights as at 31 Oct 2011.
April 2012 www.microequities.com.au
RAD | RESEARCH OVERVIEW
DIE HARDY RESOURCE DRILLING Based on surface geology, drill hole data and metallurgical properties assessments, the Die Hardy Range magnetite is the first major resource drill out for Radar Iron. The drilling program completed in Sep 2011 includes 25 holes (over 7,200m of drilling). The drilling resulted in a JORC reportable Indicated and Inferred Mineral Resource at a 20% Fe cut-off grade of 353M tonnes at 26.1% Fe.
The modelling results run by consulting firm CSA Global indicate that after-benefication concentrate can be produced exceeding 69% Fe with low levels of contaminants. This indicates that the mineralisation can be recognised and has the potential for producing a saleable concentrate. The results reported for a 20% Fe cut-off are as follows:
FIGURE 1: RAD - INFERRED AND INDICATED MINERAL RESOURCE ESTIMATES (20% FE CUT-OFF) AT THE DIE HARDY PROJECT
Tonnes Classification Fe (%) Al2O3 (%) SiO2 (%) P (%) S (%) LOI (Mt)
Total Indicated 214.9 26.7 3.4 51.0 0.1 0.5 0.7
Total Inferred 137.6 25.2 3.5 52.1 0.1 1.0 1.3
Total 352.6 26.1 3.4 51.4 0.07 0.7 0.9
SOURCE: COMPANY DATA An indicative concentrate inventory (upgrade resources) is as follows:
FIGURE 2: RAD - INFERRED AND INDICATED UPGRADE RESOURCE ESTIMATES (20% FE CUT-OFF) AT THE DIE HARDY PROJECT
Tonnes MassRec Classification Fe (%) Al2O3 (%) SiO2 (%) P (%) S (%) (Mt) (%)
Total Indicated 71.2 69.3 0.1 4.2 0.0 0.3 33.8
Total Inferred 40.9 69.1 0.1 4.4 0.0 0.4 33.9
Total 112.1 69.2 0.1 4.3 0.01 0.3 33.8
SOURCE: COMPANY DATA Following the initial resource evaluation, Radar Iron is planning to commence a pre-feasibility study to analyse transport, infrastructure and mining options at Die Hardy Project. A number of consultants have been contacted with the aim of identifying the best capable of undertaking specific aspects for the study in 2012.
JOHNSTON RANGE AND EVANSTON HEMATITE DRILLING Multiple hematite mineralisation targets were identified in the Johnston Range and Evanston project areas using a combination of geological mapping and geophysical interpretation. RC drilling programme tested near-to-surface zones of hematite mineralisation was completed in Dec 2011 with 77 holes drilled (over 6,000m). The drilling has only tested the obvious targets at Johnston Range to date and resulted in the presence of over 50 linear km of multiple banded iron formations (BIF). This means there are a significant number of potential targets generated from mapping and geophysics yet to be drill tested (only 25% of tenements drilled so far).
The potential for hematite mineralisation suitable for economic extraction has been reinforced by this drilling with the indication of some pods grading over 55% Fe. Further drilling is required to test the strike and depth extent prior to potential resource evaluation subject to the normal drill approval process.
April 2012 www.microequities.com.au
RAD | RESEARCH OVERVIEW
On 4th April 2012, the company announced that Johnston Range drilling programme at the Muldoon prospect (34 holes drilled for 1,410m) had defined two zones of near surface hematite mineralization up to 1 km long. Numerical averages of the grades for both zones are 56-58% Fe with reasonable assay levels for contaminants. Managing Director Jonathan Lea said that the near surface mineralisation (30-40m below surface) presents a low cost development opportunity using open cut mining methods (shallow open pit mining). Given the hematite mineralisation confirmed at the Johnston Range, the company intends to estimate the resource in coming months.
Radar Iron expects that further resources will be identified in 2012, through the drill testing of several smaller hematite bodies that together form a critical mass to justify the establishment of a sustainable mining operation.
REGIONAL EXPLORATION Regional geological exploration continues on existing tenements and those acquired from Southern Cross Goldfields Limited (ASX: SXG) in July 2011. A number of areas have been identified as containing outcropping hematite mineralisation. The focus is on identifying new hematite targets for drill testing with an aim of establishing Radar’s initial hematite resource inventory in the first half of 2012.
TRANSPORT INFRASTRUCTURE Management believes there are a number of infrastructure options with the potential to utilise either ports at Esperance (planned expansion from 8mtpa to 30mtpa) or Kwinana (existing berth with 5-6mtpa capacity and with potential expansion to 15-20mtpa through the construction of a new berth). There is also an open access railway located 90-130km to the south of Radar Iron’s project areas with potential to upgrade capacity. The development of Johnston Range and Die Hardy projects and other nearby projects in the region will necessitate the expansion of existing infrastructure involving a significant capital contribution from the beneficiaries. Nevertheless, the challenges of the other WA iron ore regions (e.g. the Pilbara with privately owned infrastructure preventing access and the Mid West having a lack of infrastructure) are not a major factor for the central Yilgarn iron ore projects.
1H FY12 FINANCIAL RESULTS
FIGURE 3: RAD – 1H FY12 REPORTED FINANCIAL RESULTS, $M
1H FY12 1H FY11 % change
Revenue 0.07 0.03 +176% Explloratiion expenses 0.05 0.00 Emplloyee expenses 0.20 0.30 -34% Consulltiing fees 0.15 0.04 +313% Admiin expenses 0.28 0.73 +288% Net profit / (loss) (0.62) (0.39) -58% CFO (0.40) (0.12) -237%
1H FY12 FY11 % change
Cash 2.57 4.24 -40% Explloratiion & evalluatiion capiitalliised expendiitures 7.01 4.70 +50% Totall assets 9.90 9.52 +4% Equiity 9.23 7.06 +31%
SOURCE: COMPANY DATA, MISCOREQUITIES ESTIMATES
April 2012 www.microequities.com.au
RAD | RESEARCH OVERVIEW
Radar Iron is a pure exploration mining company with no production revenue for the period. The major components of revenue are interest earned on available cash funds. Relatively low share of exploration expenses accrued on P&L is largely explained by the company’s accounting policy to defer exploration and evaluation expenditures (i.e. capitalise expenditures on balance sheet). RAD capitalised $2.3m for the period, bringing a total amount of deferred expenditures to $7m. Only $51.6k recognised through P&L.
In order to maintain exploration rights, Radar Iron has certain commitments to perform minimum exploration work. These obligations may be varied because of renegotiations, relinquishments, sales or carrying out work in excess of the permit obligations. The minimum expenditure required on exploration permits during the year to 31 Dec 2012 is circa $200k, well below what the company expects to spend for the period.
As at 31 Dec 2011, Radar Iron had 71.16M fully paid shares, including 8.28M shares issued for capital raising and 1M shares for acquisition funding (see below). Moreover, the company has 47.68M unissued ordinary shares on which options were outstanding (24.63M in listed and 23.05M in unlisted options) with a weighted average exercise price of 35.71 cents (range from 25 to 45 cents per share).
Radar Iron completed the acquisition of the iron rights owned by Southern Cross Goldfields Limited (ASX: SXG) in July 2011. The company paid $1.5m in cash and issued 1M ordinary shares for the iron rights to over 900km2 of tenement holdings in the Yilgarn area.
In Oct 2011, Radar Iron completed a placement of 8.28M shares (@30 cents each) to investors. The placement raised $2.48m. Equity placements and issued options are the main sources of funding for the company.
2012 OPERATING PLANS
Radar Iron has highlighted the following key activities for 2012 calendar year:
Further focus on hematite resource base through ongoing mapping, ground geophysics and drilling campaign at Johnston Range (expected for late March pending approval permit).
Pre-feasibility study to analyse transport, infrastructure, water and mining aspects for Die Hardy magnetite deposit.
Selective regional targeting through geological mapping and geophysical interpretation followed by focused drill tests (March-Sep 2012).
Initiating a partner search for magnetite development funding.
April 2012 www.microequities.com.au
RAD | RESEARCH OVERVIEW EXPECTED NEWS FLOW OVER NEXT 12 MONTHS:
“Major aim for 2012 is to define and MANAGEMENTQ&A expand our hematite resource inventory – progressive news flow of Jonathan Lea drilling results. Die Hardy study Managing Director results are likely to be released periodically. Regional exploration
should identify new target areas for The drilling campaign at Die Hardy resulted in a progressive follow up. Possibility of successful partner identification for JORC Indicated and Inferred Mineral Resource the magnetite development”. of 353M tonnes at 26.1% Fe. The modeling results also indicate that a concentrate can be produced exceeding 69% Fe with low levels of
contaminants. What are the next steps the company aims to undergo? Will Radar Iron conduct a full-scale feasibility study? “I strongly believe that the major producers over- Radar has commenced further studies leading up to the commissioning of a pre- estimate their potential feasibility study in the second half of 2012. The current emphasis is to identify the future production to act as a potential water resources of the area along with further metallurgical assessment of barrier for the long-term iron the ore. Subject to a successful PFS results a DFS is likely in 2013. ore price and prevent new competition. Analysts tend to be conservative for mid-long Multiple hematite mineralisation targets were identified in the Johnston Range run pricing estimates. Hence, and Evanston project areas. Does the company plan to continue the drilling I do not think the supply side will be as robust and given program or commence resource evaluation in the foreseeable future? Yes – a the continued demand for drilling programme was completed in March with results due this week on Asia etc., the price will be Wednesday. With multiple targets and further encouraging results it is anticipated that maintained at ~120/t or progressive drill campaigns will be completed aimed at incrementally increasing a higher for this decade. ” resource inventory of hematite ores throughout 2012 ultimately aimed at proving a critical mass sufficient to commence a sustainable mining operation.
Given the recent success in the drilling program, have any parties expressed interest in JV opportunities with respect to Radar's exploration tenements? And will Radar Iron look to parties in the future that could potentially help to fund ongoing exploration? Yes and Yes – interest shown ion both magnetite and hematite mineralisation and discussions continue aimed at fast tracking both exploration and development to the benefit of our shareholders.
Radar acquired iron ore rights from Southern Cross Goldfields Limited (SXG) in July 2011. What is the strategic rationale behind this acquisition? What are the prospects of identifying hematite targets on SXG’s tenements? SXG had a large land holding largely unexplored for iron ore. Regional analysis confirmed the potential for both hematite and magnetite mineralisation. First pass exploration has shown potential for hematite mineralisation on these tenements and they will be progressively explored in the coming year. Excellent opportunity to acquire highly prospective ground and add to our long term, resource inventory.
What is Radar's exploration budget for Die Hardy, Johnston Range and Evanston for the rest of 2012? What is Radar's current cash position and is the company fully funded for the rest of this year's drilling campaign? What are the funding options (equity placements, options)?
April 2012 www.microequities.com.au
RAD | RESEARCH OVERVIEW
Budget for exploration for 2012 is ~$5M, Radar had $2.5M cash on January 1, 2012 and there are share options expiring on April 30 that Radar hopes to get in the money to provide funding. Failing this, we will look at all options for fund raising during the year.
What is management's outlook for iron ore demand and supply conditions and do you believe the current prices sustainable? I strongly believe that the major producers over-estimate their potential future production to act as a barrier for the long- term iron ore price and prevent new competition. I also think analysts tend to be conservative for mid-long run pricing estimates. Hence, I do not think the supply side will be as robust and given the continued demand for Asia etc., the price will be maintained at ~120/t or higher for this decade.
What are the operating plans for Radar over the rest of 2012 and what type of news flow can we expect? Major aim for 2012 is to define and expand our hematite resource inventory – progressive news flow of drilling results. Die Hardy study results are likely to be released periodically. Regional exploration should identify new target areas for progressive follow up. Possibility of successful partner identification for the magnetite development.
April 2012 www.microequities.com.au
RAD | RESEARCH OVERVIEW
FINANCIAL SUMMARY
PROFIT & LOSS FY11 KEY RATIOS FY11
Revenue 0.2 Sales 0.0
Expenses (0.9) Price/Sales n/a
+ Net Interest Expense (0.2) EPS (cents) (1.7)
+ Depreciation & Amort. 0.0 P/E -
EBITDA (0.9) Enterprise Value 17.8
Depreciation & Amort. 0.0 EV/EBIT -
EBIT (0.9) EV/EBITDA -
EBIT Margin - DPS -
Net Interest Expense 0.2 Dividend Yield -
Profit Before Tax (0.7) ROE (8.2%)
Tax 0.1 Debt to Equity -
NPAT (0.6)
BALANCE SHEET FY11 CASH FLOW STAMENT FY11
Cash and cash equivalents 4.2 Receipt from customers 0.1
Other receivables 0.4 Interest received 0.1
Total current assets 4.7 Payment to suppliers/employees (0.6)
Exploration and evaluation expenditure 4.7 Cash from Operations (0.3)
Plant and equipment 0.2 Purchase of non-current assets (0.2)
Total non-current assets 4.9 Payment for exploration (1.6)
Total assets 9.5 Payment for prospects (0.6)
Trade and other payables 2.5 Net cash acq./(paid) on acquisition (0.1)
Total current liabilities 2.5 Cash Flow From Investments (2.4)
Total liabilities 2.5 Incr/(Decr) in Equity 7.7
Equity 7.1 Share issue cost (0.7)
Cash Flow From Financing 7.0
Net Incr/(Decr) in Cash 4.2
Opening cash balance 0.0
Closing cash balance 4.2
April 2012 www.microequities.com.au
RAD | RESEARCH OVERVIEW
IMPORTANT DISCLOSURE INFORMATION: Produced by Microequities Pty Ltd in accordance with section 949A of the Corporations Act 2001. Any recipient of the information contained in this document should note that the information is general advice in respect of a financial product and is not personal advice. Accordingly, the recipient should note that a) the advice has been prepared without taking into account the recipient’s objectives, financial situation or need; and b) as a corollary, the recipient should, before acting on the advice, consider the appropriateness of the advice, having regard to the recipient’s objectives, financial situation and needs. Although Microequities Pty Ltd (Microequities) considers the advice and information contained in the document to be accurate and reliable, Microequities has not independently verified the information contained in the document which is derived from publicly available sources. Microequities assumes no responsibility for updating any advice or recommendation contained in this document or for correcting any error or admission, which may become apparent after the document has been issued. Microequities does not give any warranty as to the accuracy, reliability or completeness of advice or information contained in this document. Except in the case where liability under any statute cannot be excluded, Microequities, its employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or any resulting loss or damage (wheth er direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Microequities, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Act 2001 may receive remuneration from transactions involving financial products referred to in this document . Microequities and its associates (as defined in Chapter 7 of the Corporations Law), officers, directors, employees and agents, companies to which this document refers and may trade in the securities mentioned either as principal or agent. Furthermore, the trading by its associates may not necessarily correspond to the recommendation been provided in this document.
ADDITIONAL VOLUNTARY DISCLOSURE BY MICROEQUITIES* Analyst Equity Stake Disclosure to Business Investment Banking Staff Interest Personal By Microequities Company Relationship Interest Associates
NO NO NO NO
* To promote transparency, Microequities voluntarily discloses potential conflict of interests covered by this research document.
Additional disclosure: Microequities Pty Ltd has a research distribution agreement with Radar Iron Limited.
April 2012 www.microequities.com.au
MICROCAP COMPANY RESEARCH
April 2012 BUSINESS Viralytics Limited
GICS Sub-Industry: Health Care – Pharmaceuticals & Biotechnology
Research Overview ASX :VLA
Business Description Last traded A$ 0.35 Viralytics Limited [ASX:VLA] is developing oncolytic 0.35 Market Cap A$’’m 26.4 virotherapy for a number of different cancers with Nº of Shares m 75.4 TM minimum side-effects. Its main product, CAVATAK 2011A EPS ¢ (0.5) recently received US FDA allowances for a Phase II trial 2011 PE x - 2011 EV/EBITDA x in Late Stage Melanoma which commenced in December 2011 EV/EBITDA x - 2011. DPS 2011A ¢ - Diiv Yiielld 2011A % - Event Revenue 2011A m 1.7 EBITDA 2011A m (2.5) . 1H12 results: Net loss of $2.7m with cash on hand of NPAT 2011A m (2.7)
$8.0m after a capital raising was completed in the
half.
OVERVIEW
Share Price | 1 Year
. Phase II trials commenced in December 2011: US TM FDA approval for Phase II trials of CAVATAK in the US on late stage melanoma patients was received in July 2011 with patient recruitment currently underway.
. Viralytics and oncolytic virotherapy’s potential: Viralytics is the only Australian company developing oncolytic virotherapy for the treatment of cancer.
Similar companies in North America have been acquired by larger biotech companies (e.g. Biovex
acquired by Amgen for US$1bn) or have substantially Investor Queries larger market capitalization. As Viralytics progress research through its Phase II trials and results confirm clinical Br yan Dulhunt y success, there could be increased interest from Managing Director foreign firms. Viralytics Limited
+61 2 9988 4000 [email protected] [email protected]
Important disclosure information at the end of this report
VLA | RESEARCH OVERVIEW
BUSINESS DESCRIPTION Viralytics Limited [ASX: VLA] is developing oncolytic virotherapy for the treatment of various cancers. This treatment allows cancers to be treated effectively with minimal side effects. Its main product, CAVATAKTM is currently in Phase II clinical trials for Late Stage Melanoma with recent US FDA (Food and Drug Administration) allowances in the US. CAVATAKTM is a naturally occurring, genetically unaltered virus, which infects, replicates and destroys cancer cells, whilst not affecting healthy cells. Once the cancer cells are destroyed, tumour proteins are released into the blood, activating the patient’s immune system to combat and destroy the cancer. Viralytics has a portfolio of oncolytic viruses, Coxsackievirus A18, 15, 13 and is pursuing the development of ECHOvirus1 (EVATAKTM).
BOARD OF DIRECTORS & MANAGEMENT TEAM
Paul Hopper | Non-Executive Chairman Mr. Hopper has over 20 years experience in the management and funding of biotechnology and healthcare public companies with extensive capital markets experience in equity and debt raisings in Australia, Asia, US and Europe. Mr. Hopper's sector experience has covered a number of therapeutic areas including anti-bacterials, medical devices, antibodies, inflammation and oncology, with a particular emphasis on cancer vaccines. Mr. Hopper is also a Director of Boston based pSivida Corp a drug delivery company which has completed Phase III trials for ophthalmology and iSonea which manufactures and markets respiratory devices with a focus on asthma. Paul is Head of the Australia Desk and Head of the Life Sciences and Biotechnology practice at the Los Angeles merchant bank Cappello Capital where he is a partner. Mr. Hopper has served on the boards of many listed biotechnology and healthcare companies including as Executive Chairman of Bone Medical Limited, Director of Advanced Biotherapy Inc, Managing Director of Australian Cancer Technology Limited, and Director of Medaire Ltd. He was the co-founder and Managing Director of Alpha Healthcare Limited.
Bryan Dulhunty | Managing Director Mr. Dulhunty‟s background is primarily financial and management of long term capital intensive development projects. Initial experience was gained with one of the big four audit firms before moving to one of the world's largest international companies. Mr. Dulhunty became involved in the biotechnology industry in the mid 1990's and shortly thereafter established his own financial management and financial assurance company focusing on biotechnology companies, both listed and unlisted. Mr. Dulhunty has been on the board of a number of listed and unlisted biotechnology companies but has focused his activities on Viralytics since 2006.
Leonard Post | Non-Executive Director Dr. Post has extensive experience in oncolytic viruses and virotherapy having been a past director of and consultant to Biovex Ltd, recently acquired by Amgen Inc. He was also Senior Vice President of R&D at Onyx Pharmaceuticals which was one of the first companies involved in the development of targeted oncolytic viruses. Prior to this, Dr Post’s experience covers almost 20 years with large international pharmaceutical companies. Dr. Post has a strong commercial background which includes founding US-based LEAD Therapeutics Inc. in 2007 which was subsequently acquired by BioMarin Pharmaceuticals Inc in 2010. He currently holds the position of Chief Scientific Officer of BioMarin Pharmaceuticals Inc and is also an advisor to a well known Australian based venture capital firm. Dr. Post is a director of two USA-based biotechnology companies and has been a member of a number of Scientific Advisory Boards.
Phillip Atman | Non-Executive Director Dr. Altman is a well-known Australian authority on clinical trials and regulatory affairs with more than 30 years experience in clinical research and regulatory affairs. He is a graduate of Sydney University with an honours degree in Pharmacy, Master of Science and Doctor of Philosophy (pharmacology and pharmaceutical chemistry) degrees. Dr. Altman also co-founded and is a Life Member of the largest professional body of pharmaceutical industry scientists involved in clinical research and regulatory affairs (Association of Regulatory and Clinical Scientists to the Australian Pharmaceutical Industry Ltd). In addition to working in senior management positions for several multinational companies, including Merrell-Dow, Hoechst, Roussel and GD Searle, Dr. Altman established his own company, Pharmaco Pty Ltd, one of the first contract research organizations where he served as a Senior Industry Consultant and he continues to provide consultant support for a range of companies.
Peter Molloy | Non-Executive Director Mr. Molloy is a successful Australian pharmaceutical and biotechnology executive and now an industry consultant and director. In addition to Viralytics, he is a director of Parnell Pharmaceuticals and Synthesis Med Chem USA Inc. Previously, Mr. Molloy was the MD and CEO of ASX-listed Biota Holdings Limited (2002-2005), Australia‟s premier antiviral drug development company. His previous executive roles in the biotechnology sector included President and CEO of SLIL Biomedical Corp, a Madison Wisconsin based cancer and viral research company; managing director and CEO of Florigene Limited, a Melbourne based biotechnology company focused on genetic modification of plants; and President of Moleculon Inc, a Boston based transdermal drug delivery company. In addition to this valuable US perspective, he brings considerable big pharmaceutical company experience. He worked as a pharmaceutical marketing executive for 17 years (1979-1996) with his last role as VP of Strategic Marketing for Pharmacia. Pharmacia at the time was one of the top 20 global pharmaceutical companies (now part of Pfizer). Over the years Mr. Molloy has been involved in the licensing, clinical development and launch of many new pharmaceutical products in Australia. At Pharmacia he was responsible for evaluating new drug candidates and coordinating the launch and marketing strategy for more than 50 pharmaceuticals across 23 countries. Mr. Molloy is a fellow of the Australian Institute of Company Directors and has served on several Australian and US boards, both as managing director and non executive director, including as chairman of two international businesses. He has been a consultant to several Australian and US companies and a guest speaker on licensing and business development at industry meetings including BIO, the Australian Biotech Summit and the Ausbiotech National Conference. He holds a BSc in Microbiology and Biochemistry from the University of Melbourne and an MBA from the University of Adelaide.
April 2012 www.microequities.com.au
VLA | RESEARCH OVERVIEW
MAJOR SHAREHOLDERS
VLA – Top 20 Shareholders as at 30 March 2012.
SHARES HELD ISSUED CAPITAL
1. Dr Nicholas Smith 1,350,000 1.79%
2. Newcastle Innovation Limited 1,349,601 1.79%
3. Aslan Investment Holdings Pty Ltd
4. Getty Minerals Pty Ltd
5. Mr Stephen Richard Barrett
6. National Nominees Limited 636,826 0.84%
7. Ignatius Lip Pty Ltd
8. Filmsmiths Australia Pty Ltd 368,638 0.49%
9. Mr Manfred Zimmer 358,426 0.48%
10. Luca Borreggine
11. BFM Superannuation Fund Pty Ltd 342,519 0.45%
12. Epping Real Estate Pty Ltd 336,638 0.45%
13. Citicorp Nominees Pty Limited 314,030 0.42%
14. Dr Jason Wesley Armstrong 313,052 0.42%
15. Mr Shahen Mekertichian 300,000 0.40%
15. Dog Trap Investments Pty Ltd 300,000 0.40%
16. Mrs Sarah Kay Daly 298,638 0.40%
16. Mr Donald George Merritt & Mrs Anne Maree Merritt
17. Dr Donald Eng Kiat Kuah 263,669 0.35%
18. Lornette Pty Ltd
19. Armco Barriers Pty Ltd 250,000 0.33%
20. Confederate Renters Pty Ltd
TOTAL FOR TOP 20 SHAREHOLDERS: 11,484,072 15.22%
TECHNOLOGY OVERVIEW Oncolytic Virotherapy
Oncolytic Virotherapy is a method of treating cancer by infecting cancer cells with viruses, multiplying those viruses and bursting cancer cell walls, whilst leaving healthy cells unharmed. This type of treatment also induces an anti-cancer tumour immune response. The development of such treatment in the early 20th century prompted patients to be injected with a rabies or polio virus. However, lack of proper administration and understanding of virus characteristics meant there were extreme side-effects and high death rates in patients was common. In other cases, the human immune system developed strong immune to the virus that was administered and prevented it from killing the cancer cell.
April 2012 www.microequities.com.au
VLA | RESEARCH OVERVIEW
VIROTHERAPEUTICS IN DEVELOPMENT GLOBALLY
Commercial Stage of Company Product Ownership Value Development US$1bn OncoVEX Acquired by Phase III: (acquisition of Amgen in 2011 Melanoma Biovex Inc. (US) Herpes virus Biovex by Amgen)
REOLYSIN Oncolytics Publicly listed US$350m market Phase III: Head & Biotech Reovirus NASDAQ capitalisation neck cancer (Canada) €116m (European JX-594 rights licensing Phase II: Liver Private Jennerex (US) Pox virus development deal cancer 2010)
CAVATAKTM Phase II: Melanoma Coxsackievirus Viralytics Publicly listed US$27m market Phase I: (Australia) EVATAKTM ASX capitalisation Melanoma, breast, prostate, Echovirus gioblastoma SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATES
CAVTAK TM
Viralytics’ main oncolytic therapy in development, CAVATAKTM is a naturally occurring, genetically unmodified virus that attaches to ICAM-1 receptors which is common on cancer cells. It then attacks the cancer cell by replicating itself, causing the cell walls to break. Tumour proteins are then released into the blood stream, triggering an immune response from the human body, providing a natural defence against cancer cells. In July 2011, US FDA allowances was received for Viralytics to undertake Phase II trials of CAVATAKTM on Late Stage melanoma in the US, with recruitment of suitable patients currently taking place.
EVATAK TM
EVATAKTM is also being developed by Viralytics. It works in a similar way to CAVATAKTM by attacking, multiplying and breaking cancer cell walls and releasing tumour proteins that induce an immune response. EVATAKTM binds to integrin alpha 2 beta 1 receptor, commonly found in large numbers on ovarian, prostate and gastric cancer cells.
PHASE II CLINICAL TRIALS - COMMENCING In July 2011, the US Food and Drug Administration (FDA) allowed Viralytics to test CAVATAKTM in late stage melanoma in the US. The company is currently in the recruitment phase. It is expected around 54 patients will take part in the whole trial, with each patients on the trial for 6 months, receiving 10 injections of CAVATAKTM over that period.
PHASE I CLINICAL TRIALS - RESULTS Final Phase I intratumoural trial results for late stage melanoma were released in 2010. The aim of the trial was to assess product safety of two doses of CAVATAK™ when injected directly into the cancer tumour. The results showed none of the patients exhibited serious side effects. The trial also showed signs that the injected tumours of 36% of the patients reduced in size with another 22% of patients remaining stable.
April 2012 www.microequities.com.au
VLA | RESEARCH OVERVIEW
Viralytics is currently conducting an intravenous trial in breast, prostate and melanoma patients to assess the safety of CAVATAK™ when administered in high doses directly into the bloodstream and spreading throughout the body. So far, eight patients have received CAVATAK™ intravenously.
PRE-CLINICAL TRIALS AND OTHER RESEARCH Viralytics is conducting ongoing pre-clinical testing of other cancer treatments of CAVATAKTM, including pancreatic and lung cancers. Viralytics also has IP rights to CVA13, 15 and 18 and Echovirus1 (EVATAKTM).
MILESTONES TO DATE
2005 2006 2008 2011
•Acquired portfolio of virus •CAVATAKTMreceives •US and European patents •US FDA IND allowances of technologies from orphan drug status from granted for CAVATAKTM Phase II melanoma trials Newcastle University FDA using CAVATAKTM in the US
•Decision to commercialise Coxsackievirus A21 (CAVATAKTM)
SOURCE: COMPANY DATA
FY11 AND 1H12 RESULTS SUMMARY
. FY11 loss of $2.7m compared to a loss of $4.8m in FY10. The smaller loss was due to the recognition of R&D tax concessions of $1.4m. . 1H12 loss of $2.7m compared to a loss of $1.3m in pcp. Cash on hand at the end of the half was up to $8.0m (FY11: $5.0m) after a capital raising was completed.
PROGRAM OVER THE NEXT 12-18 MONTHS
. Patient recruitment for Phase II trials expected to be completed in 2014. . Patients will be injected over an 18 week period, be on the trial for a total of 6 months and a further 6 month extension study if they show signs of responsiveness to the treatment. . Funding required for the next 3 years is expected to be around US$15m with cash balance around $8.0m at the end of the December quarter. . Completing Phase I Breast, Prostate & Melanoma trial. . Licensing, patent grants and international collaborations
April 2012 www.microequities.com.au
VLA | RESEARCH OVERVIEW NEWS FLOW OVER THE NEXT 12 MONTHS: “The next 12-18 months should be an MANAGEMENTQ&A exciting news flow period for the Company. The market will be keenly Bryan Dulhunty watching our Phase II clinical trial Managing Director announcements. We also expect to be making announcements in terms of TM Can you explain the main products that our future strategy for CAVATAK , EVATAKTM and significant Viralytics is developing and what phase international collaborations” of testing are they in? What is the timeframe for these trials?
Viralytics is an Australian Stock Exchange listed company developing a portfolio of Oncolytic viruses that have the potential not only to provide a more effective treatment of a range of cancers, but also a
substantial improvement in patients quality of life. Viralytics lead product is CAVATAKTM, a Coxsackie A21 virus that forms part of the common cold family of “The Company has viruses. demonstrated in extensive pre-clinical and animal The Company having completed its Phase I safety program in Australia has research, CAVATAK’s commenced a Phase II trial to assess CAVATAK’s ability to treat late stage ability to effectively kill Melanoma. This trial is being carried out in the USA under an IND, following human lung, pancreatic, allowance by the FDA to conduct the trial. Viralytics is aiming to complete this trial prostate, breast, Head and in the first quarter of 2014. The trial is designed to allow ongoing market updates Neck cancer cells to name a few” of its progress.
The US FDA approval for Phase II trials is for the testing CAVATAK on late stage melanoma. Will the company look at potential applications for other types of cancer in future trials? Yes, CAVATAKTM is more than a Melanoma treatment. CAVATAKTM has the potential to treat a wide range of cancers. The Company has demonstrated in extensive pre-clinical and animal research, CAVATAK’s ability to effectively kill human lung, pancreatic, prostate, breast, Head and Neck cancer cells to name a few. The Company is currently considering which of these indications it should progress to Phase II human trials.
How is the treatment for cancer that Viralytics is developing different from what others in the industry are doing? As we all know there is a large unmet need for a well-tolerated cancer treatment. Most standard treatments in place today have been in existence for a generation or more and are highly toxic to both healthy and cancerous cells. A new generation of products are emerging that attack only cancerous cells. This results in not only a more effective cancer treatment, but also substantial improvements in the quality of life. CAVATAKTM is one such product.
The emerging field of Virotherapy (of which CAVATAKTM forms part of) is unique in that it has been discovered that a select range of viruses will attack and destroy cancer cells while leaving healthy cells intact. Clinical results of CAVATAKTM have shown that patients tolerate the treatment very well whether delivered via the intratumoural or intravenous routes.
April 2012 www.microequities.com.au
VLA | RESEARCH OVERVIEW
What other products are there in the development pipeline? The Company has a portfolio of Oncolytic viruses. The development of CAVATAKTM will remain the Company’s prime short-term focus, however the Company has commenced early stage development of a second virus. This virus is from the ECHO family of viruses and has been trademarked EVATAKTM. EVATAKTM has displayed very promising pre-clinical activity particularly in human ovarian and prostate cancers.
Is the end game for Viralytics to develop and sell the company to a larger biotech company or develop and license the drug with a larger partner? Our preference would be to develop and license the drug with a larger partner. The larger partner would bring the regulatory skills of running large international Phase III trials and a worldwide product distribution network. Viralytics would bring the detailed technical knowledge of its Oncolytic virus platform. However, having said that, Viralytics would consider other business proposals that would add value to its shareholders.
What experiences does the management team and the scientific advisory board have that will take the company into the next stage of development? The management team and scientific advisory board encompass some of the world’s most recognized and experienced clinicians in the field of virotherapy. Viralytics is most fortunate to have attracted such a group of experience and talented people.
Can you update us on the amount of cash on hand and what is the likely expenditure requirements for the remainder of FY12 and budget for FY13? At the end of March 2012 Viralytics is expected to have $7m cash on hand. Historically the Company has had an annual net operating outflow of $3.0 - $3.5m. With the commencement of the USA based Phase II trial annual net operating expenditure based on current activities is expected to increase to $4m-$5m depending on the speed of patient recruitment.
What can we expect in terms of news flow over the next 12-18 months? The next 12-18 months should be an exciting news flow period for the Company. The market will be keenly watching our Phase II clinical trial announcements. We also expect to be making announcements in terms of our future strategy for CAVATAKTM, EVATAKTM and significant international collaborations.
April 2012 www.microequities.com.au
VLA | RESEARCH OVERVIEW
FINANCIAL SUMMARY
INCOME STATEMENT KEY RATIOS Year to June 2009A 2010A 2011A Year to June 2009A 2010A 2011A Revenue 0.1 0.1 1.7 Sales 0.0 0.0 0.0 Expense -4.7 -4.9 -4.4 % Chg YoY -% -% -% + Net Interest Expense -0.1 0.0 -0.2 Price/Sales - x - x - x + Depreciation & Amortisation 0.5 0.5 0.4 EPS (cents) -1.6 -1.3 -0.5 EBITDA -4.1 -4.3 -2.5 % Chg YoY -% -% -% % Chg YoY -% -% -% P/E - x - x - x EBITDA MARGIN -% -% -% Enterprise Value 25.3 21.6 21.7 Depreciation & Amortisation -0.5 -0.5 -0.4 EV/EBIT - x - x - x EBIT -4.7 -4.8 -2.9 EV/EBITDA - x - x - x EBIT Margin -% -% -% DPS - ¢ - ¢ - ¢ Net Interest Expense 0.1 0.0 0.2 Dividend Yield -% -% -% Profit Before Tax -4.6 -4.8 -2.7 ROE (94%) (56%) (30%) Tax 0.0 0.0 0.0 Debt to Assets 5% 4% 4% NPAT -4.6 -4.8 -2.7 Debt to Equity 0.0 0.0 0.0
BALANCE SHEET CASH FLOW STAMENT
Year to June 2009A 2010A 2011A Year to June 2009A 2010A 2011A Cash and cash equivalents 1.3 5.1 5.0 R&D tax refund 0.0 0.0 0.7 Payments to Trade and other receivables 0.1 0.2 1.0 -3.2 -3.6 -3.9 supp/employ Inventories 0.0 0.1 0.4 Net Int. (Paid)/Rec 0.1 0.0 0.2 Total current assets 1.4 5.5 6.4 Cash from Operations -3.2 -3.6 -3.0 Proceeds from disposal Security deposits 0.0 0.0 0.0 0.0 0.5 0.0 of Cbio Ltd Decrease in security Plant and equipment 0.2 0.1 0.1 0.0 0.0 0.0 deposit Financial assets 0.5 0.0 0.0 Purchase of equipment 0.0 0.0 0.0 Investments 0.0 0.0 0.0 Acquisition of IP -0.1 0.0 0.0 Intangible assets 4.4 4.0 3.6 Cash Flow From Invst. -0.1 0.5 0.0 Total non-current assets 5.1 4.1 3.7 Incr/(Decr) in Equity 1.6 3.9 0.5 Total assets 6.5 9.5 10.0 Incr/(Decr) in Debt 0.3 3.4 2.6 Trade and other payables 0.5 0.6 0.7 Cost of equity raising -0.2 -0.4 -0.2 Borrowings 0.3 0.3 0.3 Cash Flow From Fin 1.7 6.9 3.0 Other financial liabilities 0.9 0.0 0.0 Net Incr/(Dcr) in cash -1.5 3.8 -0.1 Total current liabilities 1.6 0.9 1.0 Opening cash balance 2.8 1.3 5.1 Total liabilities 1.6 0.9 1.0 Closing cash balance 1.3 5.1 5.0 Equity 4.9 8.6 9.1
IMPORTANT DISCLOSURE INFORMATION:
April 2012 www.microequities.com.au
VLA | RESEARCH OVERVIEW
Produced by Microequities Pty Ltd in accordance with section 949A of the Corporations Act 2001. Any recipient of the information contained in this document should note that the information is general advice in respect of a financial product and is not personal advice. Accordingly, the recipient should note that a) the advice has been prepared without taking into account the recipient’s objectives, financial situation or need; and b) as a corollary, the recipient should, before acting o n the advice, consider the appropriateness of the advice, having regard to the recipient’s objectives, financial situation and needs. Although Microequities Pty Ltd (Microequities) considers the advice and information contained in the document to be accurate and reliable, Microequities has not independently verified the information contained in the document which is derived from publicly available sources. Microequities assumes no responsibility for updating any advice or recommendation contained in this document or for correcting any error or admission, which may become apparent after the document has been issued. Microequities does not give any warranty as to the accur acy, reliability or completeness of advice or information contained in this document. Except in the case where liability under any statute cannot be excluded, Microequities, its employees and consultants do not accept any liability (whether arising in cont ract, in tort or negligence or otherwise) for any error or omission in this document or any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Microequities, its e mployees, consultants and its associates within the meaning of Chapter 7 of the Corporations Act 2001 may receive remuneration from transactions involving financial products referred to in this document. Microequities and its associates (as defined in Chapter 7 of the Corporations Law), officers, directors, employees and agents, companies to which this document refers and may trade in the securities mentioned either as principal or agent. Furthermore, the trading by its associates may not necessarily correspond to the recommendation been provided in this document.
ADDITIONAL VOLUNTARY DISCLOSURE BY MICROEQUITIES* Analyst Equity Stake Disclosure to Business Investment Banking Staff Interest personal By Microequities Company Relationship Interest Associates
NO NO NO NO
. * To promote transparency, Microequities voluntarily discloses potential conflict of interests covered by this research document.
Additional disclosure: Microequities Pty Ltd has a research distribution agreement with Viralytics Limited
April 2012 www.microequities.com.au
MICROCAP COMPANY RESEARCH
Vocus Communications Ltd April 2012
GICS Sub-Industry: Information Technology – Telecommunication Services
Research Overview ASX :VOC Business Description
Vocus Communications Limited [ASX:VOC] provides Last traded A$ 1.81 wholesale data centres and telecommunication services to Market Cap A$’’m 115.2 ISPs as well as telecommunications market and operates a Nº of Shares m 63.7 national and global telecommunications network to provide IP 2011A EPS ¢ 13.4 Transit, Ethernet, SDH, and Voice services. 2011 PE x 14.3 2011 EV/EBITDA x 9.9 Event DPS 2011A ¢ 0.00 Diiv Yiielld 2011A % 0.00% . 1H12 Results: Revenue jumped 57% to $21.9m, underlying . Revenue 2011A m 31.0 EBITDA was up 63% to $7.6m and NPAT rose 66% to $4.0m EBITDA 2011A m 13.2 from $2.4m in the previous half. NPAT 2011A m 8.1 . Acquisitions: Acquisitions of Perth iX data centre and Digital
OVERVIEW River Networks boosts Vocus’ presence in the data centre
and dark fibre market. Increased penetration of cloud computing and demand for more secure domestic off-site Share Price | 1 Year data storage will underpin growth in these segments. Performance of the data centre acquisitions are ahead of previous guidance with the dark fibre network expected to contribute positively to earnings from 2H12.
. Network capacity growth: Vocus added cable capacity to Singapore in the half and purchased an additional IRU on the Southern Cross network in response to strong growth in IP transit demand. Significant growth in data traffic is expected with increases in usage of online storage, video streaming, online gaming and large downloads.
. Expansion of Sydney data centre: Vocus announced a
two-staged expansion of its existing Sydney data centre facility with phase one to be completed before the end of
FY12. Investor Queries research
James Spencele y Chief Executive Officer
Vocus Communications
+612 8999 8999
Important disclosure information at the end of this report
VOC | RESEARCH OVERVIEW
BUSINESS DESCRIPTION
Vocus Communications Limited (“Vocus”) listed on the Australian Stock Exchange on 8 July 2010. The company operates an international communications network connecting Australia and New Zealand to the USA as well as a domestic network to provide telecommunications services to the ISP and telecommunications markets. Vocus offers wholesale-only IP transit, data and fixed line voice services, and is one of the only independent IP transit wholesale companies in Australia, which does not offer retail ISP products. Since listing, strong growth has been driven by growing number of customers and expansion into the data centre and dark fibre markets.
BOARD OF DIRECTORS & MANAGEMENT TEAM David Spence | Non-Executive Chairman He has been involved in over 20 internet businesses, as Chairman, Chief Executive Officer ('CEO'), director, shareholder or advisor. Until February 2010, he held the role of CEO at Unwired Ltd. From 1995 until 2000, he held various positions with OzEmail, including Managing Director and CEO. He grew the business to become Australia's second largest ISP. He is a past Chairman of the board of the Internet Industry Association. Other current directorships are AWA Limited and Hills Holdings Limited.
James Spenceley | Chief Executive Officer Mr. Spenceley is the founder and Chief Executive Officer of Vocus Group Limited. He has been involved with the Internet and telecommunications industry for more than 13 years. During this time he was the network architect and infrastructure manager of the $300 million COMindico (acquired by Soul Pattinson Telecom, now TPG Telecom) network, which was widely regarded as the single largest and first converged voice and data network in Australia. Additionally, he was a member of the team responsible for buying and connecting COMindico to the USA via the Southern Cross Cable at COMindico and created the consolidated entity's wholesale IP transit product.
Mark De Kock | Executive Director, Strategy Mr. Kock is responsible for determining and managing the consolidated entity's growth strategy. He has over 21 years' experience in information and communication technology. He has managed the automation of several stock exchanges in Asia, managed the original technical design, the launch and operation of the Qantas website and held senior roles with SingTel Optus, Vodafone AU, HP (Tandem/ Compaq) and Accenture.
Jon Brett | Non-Executive Director Mr. Brett has experience in the areas of management, operations, finance and corporate advisory. His experience includes several years as managing director of a number of publicly listed companies and was also formerly the non executive deputy president of the National Roads and Motoring Association ('NRMA'). He is currently on the board of several unlisted companies and is a director of Investec Wentworth Private Equity Limited ('IWPE').
John Murphy | Non-Executive Director Mr. Murphy is the Managing Director of Investec Wentworth Private Equity Limited ('IWPE') and a director of Investec Bank (Australia) Limited. He has experience in the areas of corporate recovery, corporate finance and mergers and acquisitions. Prior to establishing the IWPE Funds, he spent 26 years with an international accounting firm where he held national and regional responsibilities. Other current directorships include Ariadne Australia Ltd, Gale Pacific Ltd, Staging Connections Group Ltd and Clearview Wealth Ltd.
Nicholas McNaughton | Non-Executive Director Mr. McNaughton is a member of the Australian Institute of Company Directors, Deputy Chairman of Capital Angels and a founding member of Sydney Angels. In 2007, with backing from Japan, he established Blue Cove Ventures, a venture capital company committed to supporting gifted entrepreneurs in building prosperous technology companies. During his career he has been an integral member of the startup teams of globally successful software companies including Allaire (listed on NASDAQ in 1998 and sold to Macromedia in 2001); Soulmates Technology (sold to NASDAQ: IACI in 2002) and Wily Technology (sold to NYSE: Computer Associates in 2006).
Stephen Baxter | Non-Executive Director Mr. Baxter is known in the Telecommunications and Internet Industry for having cofounded and listed PIPE Networks. He is an Industry leader and recognised entrepreneur with knowledge across diverse fields including data centers, fiber and international capacity. Prior to PIPE Networks, Baxter founded the early Internet Provider SENet, which he grew and sold to Ozemail in 1998.
April 2012 www.microequities.com.au
VOC | RESEARCH OVERVIEW
MAJOR SHAREHOLDERS
VOC – Top 20 Shareholders as at 31 July 2011.
SHARES HELD ISSUED CAPITAL
1. Spenceley Management Pty Ltd
2. IWPE Nominees Pty Limited
3. Tamelon Pty Ltd
4. Tamelon Pty Ltd
5. First Capital Partners Pty Limited 2,000,000 3.29%
6. Investec Bank (Australia) Limited 2,000,000 3.29%
7. IWPE Nominees Pty Limited
8. Layer 10 Pty Ltd
9. IBNLT Pty Ltd 1,178,486 1.94%
10. Mr Daniel Lachlan Whitford 1,000,000 1.65%
11. Cogent Nominees Pty Limited 999,614 1.64%
12. David Preston + Cassandra Lenevez + Mark Purcell
13. National Nominees Limited 887,819 1.46%
14. Alsumary Pty Ltd
15. Dalesam Pty Ltd
16. McDonald Whitford Richards 687,500 1.13%
17. Roman Empire Pty Ltd 627,500 1.03%
18. W Donnelly Services Pty Ltd
19. Spenceley Management Pty Ltd
20. HSBC Custody Nominees (Australia) Limited – A/C 2 502,015 0.83%
TOTAL FOR TOP 20 SHAREHOLDERS: 38,425,888 63.25%
April 2012 www.microequities.com.au
VOC | RESEARCH OVERVIEW
BUSINESS SEGMENTS Vocus’ operates in three product offerings, IP transit, Data Services and Voice Services in two main geographic regions: Australia and New Zealand.
REVENUE BY SEGMENT: 35.0 30.7 30.0
25.0 21.7
20.0 17.5
15.0
10.0
5.0
0.0 FY10 FY11 1H12 Data & IP Services 12.7 21.5 15.8 Voice 4.8 9.2 5.9 SOURCE: COMPANY DATA
Vocus has also seen stronger organic growth in customer numbers, increasing from 301 in June 2011 to 337 in December 2011. Customer numbers have also increased to 337 following the acquisitions in FY11. Staff headcount continues to grow, especially in sales personnel, supporting cross-selling to the expanded customer base. In the first half, 54% of new customers purchased more than one Vocus product.
IP Transit Vocus provides wholesale IP transit as a Carriage Service Provider, which allows it to operate without a carrier license. IP transit, is comprised of two bundled services, the advertisement of customer routes to ISPs and the advertisement of other ISP routes to the ISP’s customer. IP transit services are usually priced per megabit per second per month, and the customers are usually required to commit to a certain minimum volume of bandwidth and a minimum term of service.
Vocus purchases internet data traffic through an IRU (Indefeasible Right of Use, which is a long-term capacity agreement) from the Southern Cross Cable. In the first half of FY12, Vocus added international cable capacity to Singapore on SeaMeWe-3 and established Singapore point of presence (PoP). The increasingly important business hubs in South East Asia provided the impetus for Vocus to establish this link, catering to clients seeking lower latency paths.
Data Services Data Services consist of International Ethernet, where customers are charged a flat monthly fee based on usage to access the network, and International SDH, which is tailored individually per client and allows multiple path transport and redundancy options and are usually purchased when speed and security are vital. Vocus has also expanded its product range to offering data centres storage and dark fibre network.
Vocus acquired E3 Networks and Perth iX in FY11, providing a strategic exposure to the fast growing data centre industry. The data centres market in the Asia Pacific has been growing at an increased pace of 14.8% per annum and circa 43% of Australian businesses are using some form of cloud (source Frost & Sullivan). Going forward continued
April 2012 www.microequities.com.au
VOC | RESEARCH OVERVIEW shift to cloud computing will drive growth in the segment. Despite the large number of new data centres being built outside of the CBD precinct, Vocus is also able to capture the demand from clients for redundancy data storage services close to the CBD. There is also strong cross-selling opportunities of other Vocus’ services to existing E3 and Perth iX clients.
Vocus have committed to an expansion of its Sydney data centre (S3) with total capacity to increase by around 50%. Vocus has also secured the option for an additional expansion (S4), increasing total capacity by 174% from its current levels. Expansion of its existing sites allows Vocus to share existing infrastructure and significantly reduce the total upfront capex. The first phase of the expansion will come online by the end of FY12.
The company acquired Digital River Networks in May 2011 for $3.95m in cash. It is a national dark fibre network operator with 59 kilometres of dark fibre in Melbourne and Sydney CBDs. The acquisition allows Vocus to provide an all-in-one service combining IP Transit, data centre and metro fibre products. Since acquisition, Vocus has invested in expanding the network Digital River Networks to around 140km, connecting the new Australian Securities Exchange site in at Gore Hill and Macquarie Telecom’s soon to be completed data centre in North Ryde.
Voice Services Voice Services consists of the following services: CTS; Number Allocation; Number Portability; E1 & IP Access and Carrier Interconnect. Vocus provides voice services to both VoIP Service Providers and the calling card industry by converting telephone calls into digital signals for transmission and connecting with other interconnect carriers.
Vocus Communications Limited
IP Transit Data Services Voice Services
International CTS Ethernet
International Number SDH Allocation
Number Data Centres Portability
Dark Fibre E1 & IP Access
Carrier Interconnect SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATE MARKET OUTLOOK Due to the forecast increase in IP traffic based on increased retail demand for high-content services such as video streaming, online gaming and voice services, Australian IP traffic is estimated to grow by 41% compound per annum to 2015, representing 22 Gigabytes per capita, up from 4 Gigabytes per capita in 2010. Further contributing to this growth is the increase in electronic devices connected to the internet and faster broadband speeds.
April 2012 www.microequities.com.au
VOC | RESEARCH OVERVIEW
1H12 RESULT
. Underlying NPAT (excluding foreign exchange losses) of $4.0m for the first half, up 57% from pcp ((1H11: $2.4m). A full half revenue contribution from the Perth iX and Digital River Networks acquisitions helped to boost revenue, which was up 57% to $21.9m (1H11: $13.9m). Underlying EBITDA also showed strong growth rising 63% to $7.6m (1H11: $4.6m). . The strong results reflect the company’s transformation into a multi-pronged telecommunication company, with multiple product offerings. Revenue was bolstered with strong organic growth and a full half-year contribution from acquisitions made in the second half of FY11. . Vocus announced the expansion of Sydney data centre, increasing capacity by around 50%. It has also secured the option for an additional expansion (S4), increasing total capacity by 174% from its current levels. Expansion of its existing sites allows Vocus to share existing infrastructure and significantly reduce the total upfront capex. . Vocus expanded its capacity on the Southern Cross cable with the purchase of an additional IRU in September 2011. Capacity of 35% remains on the second IRU.
FY12 OUTLOOK
. Phase one of the Sydney data centre expansion to come online before the end of FY12. . Data centre acquisitions (E3 Networks and Perth iX) performing above management expectations. . Dark fibre network (Digital River Networks) will contribute positive to earnings in the second half with continued network expansion from 140km currently to 200km. . Acquisitions in the data centre market are likely to be made in the second half.
HISTORICAL FINANCIAL METRICS
HISTORICAL FINANCIALS
$'m 35.0 47% 50% 43% 45% 30.0 40% 35% 25.0 35%
30% 20.0 22% 25% 15.0 30.7 20%
10.0 21.7 15% 17.5 13.2 10% 5.0 8.1 7.8 7.6 5% 5.1 1.1 0.8 3.8 4.0 0.0 0% FY09A FY10A FY11A 1H12
Revenue ex-interest (LHS) EBITDA (LHS) NPAT (LHS) EBITDA Margins (RHS)
*FY11 EBITDA INCLUDES NET FOREIGN EXCHANGE GAIN OF $3.66M SOURCE: COMPANY DATA, MICROEQUITIES ESTIMATE
April 2012 www.microequities.com.au
VOC | RESEARCH OVERVIEW REASONS FOR STRONG 1st HALF GROWTH:
MANAGEMENTQ&A “In addition to organic and new customer growth, Vocus has James Spenceley expanded its product range from Chief Executive Officer Voice and IP Transit to include Dark
Fibre, Metro Ethernet and Data Centre services all covered via its Vocus announced very strong revenue national infrastructure.” st growth in the 1 half of FY12 and improvement in underlying EBITDA margin. What was behind this growth and margin improvement? The company has grown significantly with existing customers growing the services and spend with Vocus (organic growth), new customer growth (with customer numbers increasing by the largest amount in period from June 30th to Dec 31st 2011). In addition to organic and new customer growth, Vocus has expanded its “Fibre is absolutely product range from Voice and IP Transit to include Dark Fibre, Metro Ethernet and the most in-demand Data Centre services all covered via our national infrastructure. This expanded technology for product range has met significant latent customer demand for a seamless business telecommunications and data processing infrastructure solution. communications today. Owning that Margin improvement is a result of the level of operational leverage of our fibre gives Vocus a International capacity business during the period coupled with the higher margin significant advantage Data Centre business fully included in that period.
in the market and Vocus added capacity on the Singapore SeaMeWe-3 cable. What was the provides us with rationale behind this? How does Vocus pay for this capacity (how is it much higher margins treated differently in the financial statements)? than the majority of Vocus is always looking for ways to expand its products and services. Singapore is providers who resell the major hub for English speaking corporations, so was a natural first step for fibre services” Vocus to expand into Asia. With a large number of Australian businesses operating in Singapore, there is a natural customer base for capacity back to Australia. Additionally, we have found success in Asian carriers wanting to connect their Asian business customers to their branch offices in Australia.
How have the data acquisitions of E3 Networks and PerthiX performed to date? What spare capacities remain in each of the data centres? The acquisitions have performed very well. We have inherited strong earnings streams and great teams with both businesses. PerthiX has given us a strong foothold in the incredibly fast growing Perth economy and given us the ability to connect Perth directly to SE Asia. We are delighted with the acquisitions and they are now fully integrated in the Vocus brand and business.
There is about 10% capacity remaining in PerthiX, Sydney has reached capacity and we have announced recently to the ASX the expansion of our Sydney Data Centre, which will see Vocus add an additional 50% capacity in Sydney and that will drive data centre growth in the FY13. Our Melbourne DC remains full and we are exploring options for more space as we speak.
April 2012 www.microequities.com.au
VOC | RESEARCH OVERVIEW
Can you elaborate on the expansion of the Sydney data centre and what the cost is likely to be? Has Vocus already secured cornerstone customers for the new capacity? The Sydney DC is being expanded by 50%. Given we have been lucky to secure space and power in the adjoining building, we have a number of shared services between the existing facility and the expansion site. As a result, this has kept our initial budget lower than it would be to build the same space at a new location. The initial budget is expected to be between $1.2 and $1.5 million, with additional budget required as the site reaches capacity in terms of space and power. For the space and power this is about half the cost it would have cost to build in a different location, this is inherent value in the location of our Sydney DC.
We have strong demand for the space, given our business model is to sell a bundle of rack, fibre and Internet we are not looking for a single cornerstone customer, rather we prefer to sell individual bundles to a wider range of customers. We have an existing sales pipeline and demand for the space that will see it filled very quickly.
Vocus also announced the potential for a data centre in Melbourne. Has there been a firm commitment to proceed, or if not, when can we expect a decision? Vocus has confirmed it will proceed with space in Melbourne. We are evaluating building another data centre or taking a large amount of space with another data centre operator. A number of options are being evaluated as we speak.
Since the acquisition of Digital River Networks, Vocus has aggressively expanded its dark fibre network from 59km to 120km. What is the strategic importance of the network and when does management expect it to contribute to earnings? 120kms was the size as at Dec 31st, the network has grown yet again since then. This is an incredibly fixed cost business and in the first 6 months of owning the business it is now covering those fixed costs, therefore the fibre division will contribute to earnings in the 2H FY12.
Fibre is absolutely the most in-demand technology for business communications today. As people outsource their data to the cloud and/or host their own data in dedicated data centres, high speed connectivity back to the office (and between the offices) is absolutely critical in today’s market, owning that fibre gives Vocus a significant advantage in the market and provides us with much higher margins than the majority of providers who resell fibre services.
As space in the underground ducts are used, carriers will have to increasingly build rather than share Telstra's ducts, so to replicate the Vocus fibre network in 5 or 10 years time will cost significantly more, that is why we believe the value of the fibre network will increase over time.
Additionally whereas other carriers at the time have had access to cost effective cable sizes of 72-144 cores of fibre per cable, with the cost of cable manufacturing decreasing recently due to higher global demand, Vocus has been able to build the network using 312 and 624 core fibre cables. So we are typically paying the same to install the cable, yet we are installing significantly more fibre cores which allows for greater number of services and customers per cable, which equals greater profits.
Is management actively looking at acquisition opportunities and which segment of the market is most appealing for Vocus? Vocus has always looked at acquisitions opportunities, there is nothing we have or are looking at, that is currently progressed to the point of certainty that would warrant further comment.
April 2012 www.microequities.com.au
VOC | RESEARCH OVERVIEW
Management has talked about cross selling opportunities to its existing client base. What percentage of your clients now purchases more than Vocus product and do you expect this to grow in coming years? As at December 31st we had 337 customers. 88 Customers purchased 2 services 65 purchased 3 services and 9 purchased 4 services. We are very positive that we have the infrastructure to provide the 4 main growth areas (data centre, fibre, high speed internet and IP voice) of the coming 10 years of telecommunications, with the level of satisfaction of our customers we expect most customers to take additional products from Vocus as those existing customers roll off contracts with other providers.
April 2012 www.microequities.com.au
VOC | RESEARCH OVERVIEW
FINANCIAL SUMMARY
PROFIT & LOSS KEY RATIOS
FY11A FY12F FY13F FY11A FY12F FY13F
Revenue 31.0 47.9 60.5 Sales 30.7 47.6 60.2
Expenses -24.4 -35.2 -43.8 % Chg YoY 76% 55% 27%
+ Net Interest Expense 0.0 0.2 0.1 Price/Sales 3.8x 2.4x 1.9x
+ Depreciation & Amort. 3.0 4.2 5.8 EPS (cents) 13.4 13.9 18.4
EBITDA 13.2* 17.1 22.6 % Chg YoY (14%) 3% 33%
% Chg YoY 63% 29% 33% P/E 14.2x 13.0x 9.8x
EBITDA MARGIN 43% 35.7% 37.4% Enterprise Value 130.3 130.3 130.3
Depreciation & Amort. -3.0 -4.2 -5.8 EV/EBIT 12.7x 10.1x 7.7x
EBIT 10.2 12.9 16.8 EV/EBITDA 9.9x 7.6x 5.8x
EBIT Margin 33% 26.9% 27.8% DPS - ¢ - ¢ - ¢
Net Interest Expense 0.0 -0.2 -0.1 Dividend Yield -% -% -%
Profit Before Tax 10.2 12.6 16.7 ROE 24% 27% 26%
Tax -2.1 -3.8 -5.0 Debt to Equity 67% 110% 56%
NPAT 8.1 8.8 11.7
* FY11 included $3.66m net foreign exchange gains
CASH FLOW STATEMENT BALANCE SHEET
FY11A FY12F FY13F FY11A FY12F FY13F
Cash and equivalents 7.6 4.4 0.4 EBITDA 13.2 17.1 22.6
Trade and other rec. 5.5 7.4 9.3 Decre./(Incr.) in WC -0.9 1.0 0.2
Other financial assets 0.5 0.5 0.5 Net Int. (Paid)/Rec -0.0 -0.2 -0.1
Other 0.2 0.2 0.2 Taxes Paid -0.1 -3.8 -5.0
Total current assets 13.9 12.5 10.5 Incr/(decr) in provisions 1.9 0.0 0.0
PPE 14.0 21.5 29.9 Other Op. Cash items -2.7 0.0 0.0
Intangibles 40.0 45.5 41.7 Cash from Operations 11.4 14.1 17.7
Deferred tax 1.1 0.0 0.0 CAPEX -2.5 -8.9 -10.4
Other 0.1 0.0 0.0 Other Inv. Cash Flows -0.4 0.0 0.0
Total non-current assets 55.2 66.9 71.6 Purchase of business -16.2 0.0 0.0
Total assets 69.1 79.5 82.1 Cash Flow From Invst. -19.0 -8.9 -10.4
Trade and other pay. 5.3 8.1 10.3 Incr/(Decr) in Equity 15.8 0.0 0.0
Borrowings 6.0 8.4 11.3 Incr/(Decr) in Debt -7.2 0.0 0.0
Derivative fin. 0.3 0.3 0.3 Ord, Dividend paid 0.0 0.0 0.0
Income tax 2.7 0.0 0.0 IRU Financing -5.9 -8.4 -11.3
Payment for share buy Provisions 0.4 0.4 0.4 0.0 0.0 0.0 back Other 0.4 0.0 0.0 Cash Flow From Fin 2.6 -8.4 -11.3
Total current liabilities 15.0 17.1 22.2 Net Incr/(Dcr) in cash -5.0 -3.2 -4.0
Borrowings 16.6 27.6 13.4
Derivative fin. 1.0 1.0 1.0
Deferred tax 1.4 0.0 0.0
Provisions 1.3 1.3 1.3
Other 0.0 0.0 0.0
Total non-current liab. 20.3 29.8 15.6 Total liabilities 35.4 46.9 37.8 Equity 33.8 32.5 44.3
April 2012 www.microequities.com.au
VOC | RESEARCH OVERVIEW
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ADDITIONAL VOLUNTARY DISCLOSURE BY MICROEQUITIES* Analyst Equity Stake Disclosure to Business Investment Banking Staff Interest personal By Microequities Company Relationship Interest Associates
NO NO NO NO NO
* To promote transparency, Microequities voluntarily discloses potential conflict of interests covered by this research document
Additional disclosure: Microequities Pty Ltd has a research distribution agreement with Vocus Communications
April 2012 www.microequities.com.au
MICROCAP COMPANY RESEARCH
XRF SCIENTIFIC Limited April 2012
GICS Sub-Industry: Materials– Metals and Mining
Research Overview- Update ASX :XRF
Business Description Last traded A$ 0.26 XRF Scientific [ASX:XRF] is a Perth based Australian Market Cap A$’’m 33.5 company which produces equipment and consumables Nº of Shares m 128.8 related to analysing resource composition and purity. It sells 2011A EPS ¢ 2.5 these products directly to resource producers and explorers 2011 PE x 10.4 as well as analytical laboratories. 2011 EV/EBITDA x 7.3 DPS 2011A ¢ 1.0 Event Diiv Yiielld 2011A % 3.8 Revenue 2011A m 20.4 EBITDA 2011A m 4.5
NPAT 2011A m 2.6 . Maintaining strong momentum into FY12: XRF’s continues st to deliver strong organic growth positing an impressive 1 OVERVIEW half result. Sales of $12.4m (+44% YoY) and NPAT of $1.6m Share Price | 1 Year
(+58% YoY). . Free Cash flow generation: XRF generated strong Free Cash Flow over the first six months of FY12. In additional, its capital raising bolstered its cash position to $5.5m. . Strategic investment in Scancia: XRF recently announced the purchase of a 20% stake in Scancia (Canadian based chemical flux manufacturer). In additional it leant Scancia $150k via a convertible bond, which if converted will see XRF achieve a 30% stake in Scancia. XRF will become exclusive
distributor of Scancia’s products in Australia. . Industry Demand Conditions: XRF continues to enjoy favourable demand conditions from its resource industry Investor Queries
research based clientele. We believe the current production levels within the Australian mining industry are likely to be sustained Vance Stazzonelli XRF Scientific-COO over the medium term. . Revenue Growth FY12: We expect seasonally better 2nd half + 61 8 9244 9600 [email protected] [email protected] and have modestly revised our previous forecasts; FY12 sales revised to $26.4m (previously $25.2m), FY12 NPAT
revised to $3.7m (previously $3.4m).
Important disclosure information at the end of this report
XRF| RESEARCH OVERVIEW
COMPANY DESCRIPTION XRF Scientific Ltd (ASX XRF) designs and distributes a range of products focussed around X-Ray Fluorescence (XRF) geochemical analysis. XRF analysis provides major and trace elements in geological materials via XRF. This composition of trace elements is made possible by the behaviour of atoms when they interact with X-radiation. XRF analysis is particularly well suited to the mining industry for the measure and grade of ore. The vast majority of XRF Scientific’s end clients are involved in the mining industry as either producers or explorers.
BUSINESS SEGMENTS XRF essentially has three product divisions; - Custom Fushion Machines: (21% of FY11 Revenue) are technological driven equipment that allow its users to perform laboratory automation and sample preparation used in the analysis of resource sampling. - Platinum Labware Metals: (49% of FY11 Revenue) are used in labware analysis. Platinum possesses unique qualities that make an ideal metal for laboratory ware. - Chemical Flux: (29% of FY11 Revenue) are used to mix powdered samples before been entered into furnace or gas burners. Melting then creates a homogenous glass that can be analysed for the elements and grade.
REVENUE BY SEGMENT: FY11 FY12(f) 29% 22% 32% 28%
49% 40%
Customed Fusion Machines and Furnace Technology Customed Fusion Machines and Furnace Technology Platinum Labware Metal Sales Platinum Labware Metal Sales Chemicals Chemicals
$'m NPAT Margin 35.0 16%
30.0 14% 12% 25.0 10% 20.0 8% 15.0 6% 10.0 4%
5.0 2%
- 0% FY07 FY08 FY09 FY10 FY11 FY12(f)
Thousands Revenue NPAT NPAT Margin SOURCE: COMPANY DATA, MICROEQUITIES FORECASTS
October 2011 www.microequities.com.au
XRF| RESEARCH OVERVIEW
MANAGEMENT TEAM
Ken Baxter | Non-Executive Chairman Ken brings extensive experience from previous corporate directorship and government advisory roles. In addition to his role at XRF, Ken is currently Chairman of TFG International Pty Ltd and PNG Sustainable Infrastructure Ltd. He is a former Chief Policy Advisor to the Chief Secretary of PNG Government, former Director of Hydro-Electric Corporation of Tasmania, former Director of Air Niugini Ltd, former Secretary of Victorian Department of Premier & Cabinet and Director-General of NSW Premier's Department, and former Chairman of Dairy Corporation and the Australian Dairy Research and Development Corporation. Ken graduated with a Bachelor of Economics, and is a Fellow of Australian Institute of management and Fellow of the Australian Institute of Company Directors.
Vance Stazzonelli | CFO & COO and Acting CEO Vance joined XRF Scientific as CFO in October 2008 after working for the group as its external accountant for a number of years. He was subsequently appointed Chief Operating Officer in January 2011. Vance is a Certified Practising Accountant with a public practice background of specialising in corporate taxation and business services, in a wide range of industries, including to various public companies. He has also been in the role of Company Secretary since June 2008.
MAJOR SHAREHOLDERS
XRF Scientific – Top 20 Shareholders as at 5th September 2011.
SHARES HELD ISSUED CAPITAL
1 NATIONAL NOM LTD 9,115,405 7.08% 1
2 D & GD BROWN NOM PL1 8,239,916 6.40% 2
3 SIGMA CHEMICALS 1986 PL 6,666,666 5.18% 3
4 EVELIN INV PL 5,837,080 4.53% 4
5 SPARROW HLDGS PL4 4,176,939 3.24% 5
6 SKYE ALBA PL 4,074,449 3.16% 6
7 PARSONS JOHN GRAHAM3 3,750,000 2.91% 7
8 PARSONS JULIE ANN3 3,750,000 2.91% 8
9 SYDNEY FUND MANAGERS LTD 3,333,333 2.59% 9
10 TZELEPIS NOM PL 3,280,000 2.55% 10
11 COGENT NOM PL 2,767,080 2.15% 11
12 PROSSOR STEPHEN W + F C 2,669,767 2.07% 12
13 GREAT WESTERN CAP PL 2,649,578 2.06% 13
14 SEAWEIR PL2 2,559,347 1.99% 14
15 CITICORP NOM PL 2,400,000 1.86% 15
16 J P MORGAN NOM AUST LTD 2,182,393 1.69% 16
17 ESCOR INV PL 2,000,000 1.55% 17
18 METZ JORG + CARR WENDY 1,977,637 1.54% 18
19 COUNTLOCK PL 1,811,130 1.41% 19
20 J G H METZ PL 1,500,000 1.16% 20
TOTAL FOR TOP 20 SHAREHOLDERS: 74,740,720 58.03%
October 2011 www.microequities.com.au
XRF| RESEARCH OVERVIEW
DEMAND CONDITIONS XRF’s product sales are driven by underlying demand conditions from its end users, which are mining producers and explorers. End demand for XRF’s products is to a large degree intimately related to production and exploration activities by its final mining clients.
Exploration Expenditure Exploration Expenditure in mineral exploration has continued to increase at record levels. The June Half of FY11 saw exploration expenditure increase by 16.5% YoY to $1.8b (source ABS). That figure is expected to surge by 28% for the 1st half of FY12. The strong rise in exploration expenditure is been driven by rising resource demand in from Asian economies and high resource pricing for Coal, Iron Ore, base metals and Gold.
A large component of exploration expenditure (estimated as high as 60% according to ABARE) has been in Brownfield sites (exploration around existing or known deposits). Higher commodity prices have helped reassess sites that were previously considered uneconomic.
Capital Expenditure A similar dynamic is been experienced in mining capital expenditure. Spending relating to the product capacity and infrastructure around mining increased by 55% during FY11 to $55.5b, this figure is expended to surge to $73.7b for FY12, representing a 33% YoY increase. These figures are underpinned by major projects of large mining companies such as Rio Tinto, BHP, Xtrata and Fortescue.
UPDATED SALES FORECASTS Since our last report, we have upgraded FY12 and FY13 sales and revenue forecasts driven by stronger than expected demand conditions for XRF’s core products. Our FY12 and FY13 revised sales forecasts are $26.4m and $29.6m respectively. On the earnings side, we have increased our FY12 NPAT forecasts from $3.4m to $3.8m and for FY13 to 4.4m (previously $3.8m).
Attainment of our FY13 forecasts is dependent on, amongst other factor, on the current state of boom conditions in the resource sector continuing into FY13. We believe that such a scenario is likely given the current super boom cycle which can be traced back to 1999, has been mostly driven by the rapid economic development of China. Our medium term base scenario is that China will continue to grow strongly over that term, whilst we acknowledge there will is likely to be periods of commodity price volatility on residual regional shocks and potential geopolitical events.
CHANGE OF CEO In late March 2012, the company announced that Terry Sweet was retiring from his position as Managing Director, a position he had held since June 2007. The company is thus in a period of temporary transition with COO Vance Stazzonelli currently in the position of acting CEO.
ACQUISITIONS LEAVE POTENTIAL UPSIDE We expect XRF Scientific to use its current cash reserves to undertake an acquisition over the next 2 months. After successfully bedding down the Sigma Flux acquisition, the company has manoeuvrability to expand its operations. A potential acquisition may provide a catalyst for a forecast upgrade.
October 2011 www.microequities.com.au
SUSTAINABILITY OF CURRENT
XRF | RESEARCH OVERVIEW MINING CONDITIONS: “Despite the mixed messages delivered publically by RIO and MANAGEMENTQ&A BHP, we certainly are not seeing any slowdown in the industry.
Vance Stazzonelli Both the miners and contract Chief Operations Officer laboratory groups continue to invest in CAPEX for their labs. The
contract lab groups also appear to The first half numbers showed a very strong be expanding into new geographical areas, which augers performance in Platinum Labware sales (+44% well for the sale of our up on PCP) what drove that large increase? consumable products going There has been a notable increase in the sale of forward”. new platinum labware items since around November 2010, which has since remained at a steady level. As the majority of these type of sales consist of the precious metal platinum, it can significantly increase revenue. The PCP
also only includes 5 months of the Sigma Precious Metals acquisition, which accounts “It is unlikely that for 6 months in the current period. an acquisition will Fusion machine and Furnace technology also delivered strong sales growth; did be concluded prior new product releases drive sales growth for this division? to 30 June 2012, The majority of this increase was driven by a lower margin OEM product, which we are however we would delivering to a European based customer. We are expecting new product sales to have look for a deal to an impact from the second half of FY12 onwards. be concluded at some stage Are there any new product releases for your technology division in the pipeline? throughout 2012” The main new product release is the Fusomatic 15 Fusion Furnace, which was formally launched recently both here in Australian and the USA at a trade show called PITTCON. The chemical division continued to improve its PBT margins, has there been price increases? Numerous factors have led to improving margins in the chemicals division. Similar to the Platinum Labware division, the current period accounts for a full 6-month contribution of the Sigma Flux acquisition, as opposed to 5 months in the PCP. The Sigma acquisition has allowed us to spread our fixed overheads in the chemicals division over a much larger sales base, which has benefited our customers through very competitive pricing.
How sustainable do you believe are these current mining boom conditions? Despite the mixed messages delivered publically by RIO and BHP, we certainly are not seeing any slowdown in the industry. Both the miners and contract laboratory groups continue to invest in CAPEX for their labs. The contract lab groups also appear to be expanding into new geographical areas, which augers well for the sale of our consumable products going forward.
XRF has flagged for some time its intent to pursue a strategic acquisition, how much closer is the company to achieving this objective? Do you expect to finalise a transaction before the end of FY12? We continue to pursue various strategic acquisitions, however as we have communicated to shareholders in the past, we are very conscious of doing the right deal. It is unlikely that an acquisition will be concluded prior to 30 June 2012, however we would look for a deal to be concluded at some stage throughout 2012.
April 2012 www.microequities.com.au
XRF | RESEARCH OVERVIEW
FINANCIAL SUMMARY
PROFIT & LOSS SUMMAR Y ( $ m ) PROFITABILITY RATIOS
Year Ending June 2011A 2012F 2013F Year Ending June 2011A 2012F 2013F Revenue 20.4 26.4 29.6 Sales 20.4 26.4 29.6 COGS -12 -16 -18 % Chg YoY 61% 29% 12% Operating Expenses -4.6 -5.0 -5.2 Price/Sales 1.6x 1.3x 1.1x Depreciation & Amortisation -0.6 -0.7 -0.8 EPS (cents) 2.5 2.8 3.4 EBITDA 4.5 6.0 7.0 % Chg YoY 939% 13% 21% % Chg YoY 2134% 34% 17% P/E 10.4x 9.2x 7.6x EBITDA MARGIN 22% 23% 24% Enterprise Value 32.7 26.7 33.5 Depreciation & Amortisation -0.6 -0.7 -0.8 EV/EBIT 8.5x 5.1x 5.3x EBIT 3.9 5.2 6.2 EV/EBITDA 7.3x 4.5x 4.8x EBIT Margin 19% 20% 21% DPS 1.00¢ 2.00¢ 2.50¢ Net Interest Expense 0.1 0.0 0.0 Dividend Yield 3.8% 7.7% 9.6% Profit Before Tax 3.7 5.2 6.2 ROE 13% 15% 15% Tax -1.1 -1.5 -1.9 Debt to Equity 5% 1% 1% NPAT 2.6 3.7 4.4
BALANCE SHEET SUMMAR Y ( $ m ) CASH FLOW SUMMARY ($ m )
Year Ending June 2011A 2012F 2013F Year Ending June 2011A 2012F 2013F Cash and cash equivalents 1.7 6.9 11.3 EBITDA 4.5 6.0 7.0 Trade and other receivables 4.6 3.8 4.7 Decre./(Incr.) in work. Cap -0.9 0.6 -1.3 Inventories 2.4 2.9 3.8 Net Int. (Paid)/Rec 0.1 0.0 0.0 Other assets 0.3 0.3 0.3 Taxes Paid -1.1 -1.6 -1.9 Total current assets 8.9 13.9 20.1 Incr/(decr) in provisions 0.1 -0.1 0.0 Property, plant and 2.4 2.6 2.4 Other Op. Cash items 0.0 -0.6 -0.1 equipment Intangibles 12.4 11.8 11.9 Cash from Operations 2.7 4.3 3.7 Deferred tax 0.5 0.2 0.1 CAPEX -0.6 -0.9 -0.5 Other financial assets 0.0 0.2 0.2 Other Inv. Cash Flows -5.0 -0.2 -0.2 Total non-current assets 15.3 14.9 14.5 Loans to/from other ent. 0.0 -0.2 -0.2 Total assets 24.2 28.9 34.6 Cash Flow From Invst. -5.6 -1.2 -0.9 Trade and other payables 1.7 2.0 2.5 Incr/(Decr) in Equity 0.0 5.5 5.5 Borrowings 0.9 0.2 0.2 Incr/(Decr) in Debt 0.8 -0.8 -0.7 Provisions 0.6 0.8 0.9 Ord, Dividend paid -1.3 -2.6 -3.2 Other current liabilities 0.1 0.0 0.0 Preferred dividends 0.0 0.0 0.0 Current income tax liability 0.9 0.5 0.4 Other Fin. Cash Flow 0.0 0.0 0.0 Total current liabilities 4.3 3.4 4.0 Cash Flow From Fin -0.5 2.2 1.5 Borrowings 0.0 0.0 0.0 Deferred tax liability 0.3 0.4 0.4 Net Incr/(Dcr) in cash -3.5 5.3 4.3 Provisions 0.1 0.1 0.1 Total non-current liabilities 0.4 0.5 0.6 Total liabilities 4.7 3.9 4.6 Equity 19.5 25.0 30.1 Net Tangible Assets 7.1 13.1 18.2
April 2012 www.microequities.com.au
XRF | RESEARCH OVERVIEW
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ADDITIONAL VOLUNTARY DISCLOSURE BY MICROEQUITIES* Analyst Equity Stake Disclosure to Business Investment Banking Staff Interest personal By Microequities Company Relationship Interest Associates
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Additional disclosure: Microequities Pty Ltd has a research distribution agreement with XRF Scientific Ltd
April 2012 www.microequities.com.au