How Will US Inflation Affect NZ Companies?

Inflation seems to be kicking off in the USA, according to the news. I expect that this will cause the Fed to increase interest rates, which will cause the USD to increase in value as currency traders flock to benefit. This could be good for companies selling to the USA and converting their currency back to NZDs, and other companies that benefit from a strong USD.

Of course that’s not to say that any company that trades in USDs will automatically be a good investment or that it will be correctly priced for a purchase.

Can you think of any companies on the ASX or NZX that could benefit from a strong USD? Please mention them in the comments below.


KMD Quick Look

I looked at KMD over the lockdown and had trouble with my weighing scales. Specifically there wasn’t enough information to make a decision and it was all a bit of a gamble. I decided at the time that they were not a good purchase for me. I think that was the right decision at the time, based on the lack of information I had with which to make an analysis.

Returning to have another look at KMD, there is now enough information to do a bare bones price check (which is all I will do, as I’m not currently in a position to buy more shares after a recent purchase of some HLG and MFT shares and some upcoming building repairs on my house. Additionally, I’ve got other plans for my day today).

Let’s dive right in!

Market capitalization currently sits at $1,092m with a share price of $1.54.

HY Underlying NPAT of $23.1m (up 32% from the previous year)
Looking at 2019’s stats (the last “normal” full year we’ve had), it seems that HY NPAT is generally about a quarter of the FY NPAT. From this we might take a punt that this FY will be about $80m NPAT. That puts KMD at a PE of about 13.7 (excluding considerations for cash on hand).

The dividend looks good too, and will likely be above 5% after tax this year.

Without looking too deeply I would imagine that the current dividend is lower to give the company the opportunity to recover from COVID a little – they may require some Retained Earnings on their balance sheet.

I expect buying at todays prices ($1.54) will mean a 9% dividend by the end of FY22. KMD is back on my list to buy, but I don’t think they’ll stay at this price for long.


What’s Going On With LiveTiles?

I’ve had a bit of a job catching up with the state of play for LiveTiles (LVT); since exiting my position last year there has been a lot to read and a fair bit gone on. It’s taken me about a day’s worth of reading all the reports and announcements for the past few years, and checking financials where necessary. Honestly, I’m still at a loss to be sure of the future of LVT.

Historically the stock looked very promising with significant growth and reported outlook of reaching $100m ARR within a few years. This was not delivered, and capital raises were used to grow the company inorganically at the additional cost to the shareholders. Shareholders were not happy. It was at this point that I sold my position at a loss (albeit mainly as part of a portfolio restructure to make my tax returns simpler).

Since then COVID happened and has been (rightly or wrongly) used as an excuse for underperformance. Significant cost cutting has happened in the company and customer numbers have gone from 1092 in July 2020 to 1114 in March 2021. Since average customer value per year is about $53k, that growth is arguably worth $1.17m. That’s about 2% growth attributable to new customers over the year, and the remainder due to increasing fees. LVT reported 7% growth (by usual measures, disregarding currency fluctuations) since last year.

Personally, I’m not sure how I feel about those numbers. On one hand, the aim of a software (SaaS) company is grow by investing in developers to improve the product, add new features and charge their customers more as well as acquire new customers. 7% growth in this respect is pretty good given the COVID situation in (especially in America). That said, 7% growth is too little to justify anything more than a 4.3x multiple of ARR.

On the other hand, there are a number of people on internet forums stating that the company has harped on about what a big pipeline of sales they have in the works, which just isn’t materializing. People seem to not trust the forecasts that LVT management are putting out there and are jaded from historic issue of mistrust in forecasts due to lack of organic growth, and this is heavily reflected in the share price.

Regarding the share price, there is also a possibility that there could be another capital raise in the coming year, since cash on hand has gone from $37.8m in June 2020 to $16.8m in March 2021, which is a difference of $17.8m. If things keep at this rate, they’ll have no money within a year. It’s difficult to be sure if they’ve cut costs enough since July 2020 to avoid another capital raise. I think another capital raise could smash the share price, and given the low interest rates at the moment, the company would be better off issuing bonds if possible.

If I still owned LVT shares, would I sell them now?

Well, that’s a difficult question to answer because investors have different requirements for their investments (different investment timeframes, dividend requirements, growth requirements, risk levels, etc.). Also there’s a matter of opinion involved here, and this stock could (rightly in my opinion) be considered a gamble. The gamble is: whether you believe that COVID is responsible for the lack of growth.

There has been talk of LVT failing to perform when other software companies have enjoyed massive growth from Work From Home (WFH) initiatives due to COVID19. In LiveTiles’ defence, an intranet (which is essentially what LiveTiles is) is not a WFH solution, despite LVT touting it as an employee collaboration tool (which it is). Additionally, I imagine that due to the layoffs and uncertainty in America, companies would have reduced spending on IT projects, and had less IT staff to implement such projects. Also a new way of working (through LiveTiles intranet) would require a lot of staff retraining and would present significant staff performance risks.

People do not like change (especially in their IT systems) and will often use IT as an excuse not to do their jobs. Years ago I worked at a place where the developer changed the background colour of some software. This was the only change. When the software was deployed, the staff using the software refused to work because they didn’t know how to use the software because it had “completely changed”. They needed “retraining” to show them that nothing had changed, and all the buttons they couldn’t find were still in exactly the same location.

People are extremely resistant to change, and I have many stories like this, with many different people in different companies.

Lewis Hurst

I think if I still owned LVT shares, I would probably keep holding to see how they performed in a post COVID world, then consider my position after 6 – 12 months of performance. However I would be deeply concerned about the prospect of a future Capital Raise (CR) because the share price is already very low – the CR would likely mean raising money at a very low share price to undercut the already very low market rate. This means accepting a lot of dilution or forking up more money to invest in a company that I wasn’t happy with. Not a great situation.

On the other hand, I would have significant concerns that the share price could half again, then fall further if the company fails to grow or fails to cut costs enough to turn a profit (so even if growth is immaterial, there is a way to garner return on the investment) and continues year on year to go back to its shareholders for more money through capital raises.

Any investors’ decision to sell might be based on their belief in whether COVID19 is the real reason for lack of growth in customer numbers, but also their willingness to risk losing half the money they currently have invested. Nonetheless, selling at such a low price (2.56x ARR [$150.54m / $58.9m]) is quite punishing.

Such a low price is almost worth waiting for a further drop to buy in again as a gamble. I don’t think LVT will ever get back to it’s lofty heights of 8x ARR, but good performance post COVID19 should see this stock nearly double it’s value and go back to 4.3x ARR (future share value being less 20% for a CR, plus a little for the increased value of future ARR).

Good luck to anyone who decides to hold. You stand alongside shareholders of a2 Milk (myself included) who are in a similar situation with COVID sales stats and a falling share price.


Decreased Demand For Ventilators And Masks

On Friday (30/4/2021), ResMed (a competitor to Fisher Paykel Healthcare) announced in their 3Q Press Release that they have had a decrease in demand for masks and ventilators in Europe, Asia and other markets.

This might be worth considering if you are in the market for either ResMed or Fisher Paykel Healthcare stocks.


How Far Will The ATM Share Price Fall?

Thought I should pull my finger out and do a little analysis on this to see how bad it could get, since I had half an hour free…

Looks like H1 NPAT is $120m, lets assume FY will be $240m (double H1). I know they’re predicting more in their guidance but those predictions are based on COVID going away, which I don’t want to rely on.

Assuming no growth, they might be worth a PE of (at most) 20 (though I think market sentiment could at times demand a lower rate as long as news isn’t good). I won’t speculate at what a lower ranged PE might look like because there’s no way to know where the market’s head is at.

A PE of 20 gives a market capitalization (MC) of $4.8bn (20 x $240m). Adding $775m cash on hand gives a MC of $5.57bn.

Unfortunately the recent milk plant purchase will reduce that number because they’ve said it will be unprofitable/break-even until FY24/25ish. I don’t remember how much they paid for it, but I have a number of $200m in my head for some reason. Let’s use that since I’ve run out of time.

That gives an upper MC of $5,375m at this stage (that’s a share price of $7.23), though this upper limit would go lower on any bad news (or if cash reserves dropped). Implicitly, but for clarity, I expect the ATM share price to fall to at least $7.23, then trade somewhere below and up to that price until there is evidence of a turnaround. I hold in the hope that post COVID, this company can once again be great, but am not investing more money as it’s not running as I would like to see it run (also it no longer fits my strategy).


A Very Short Review Of The HLG Share Price

In my last article on HLG I said that I intended to review HLG after the effects of Coronavirus become clearer and there were less unknowns to factor into the share price. It’s been a long time coming, and it was certainly worthwhile. In short, I liked what I read and even bought myself a small parcel on the back of my research. Since I am writing up my research after making my purchase, this review will be extremely brief.

  • HLG have a market capitalization of $432m.
  • The last FY results released in August 2020 showed an NPAT of $27.7m, which is about the same as the previous year.
  • Recent HY results show an increase of 28.6% giving an HY NPAT of $19.84m.
  • Gross margin remains healthy at 56.5%.

The outlook seems positive for the company. Borders aren’t opening up yet, so conditions remain about the same for consumer spending. Even at last years FY results, HLG would be trading at a PE of 15.6 (not factoring cash in hand), but a 28% improvement (assuming the HY result improvements carry through to the FY results in the same magnitude), HLG is trading closer to a PE of 12 (again, excluding cash). A quick check on the finances seems fine, making HLG a bargain even if they were to have some bad years in their future.

As the dividend return suits my retirement portfolio plans and the fact that I won’t have any retail exposure after I sell only of my major unlisted holdings as per my retirement plan, I decided to treat myself to a small parcel of HLG. As it was purchased for a dividend portfolio, I’m not too fussy about the price I paid, because even if I was able to buy HLG cheaper (say 5% cheaper), I would have only missed out on 5% of a 6.7% (after tax) dividend, which is 0.3% less. This is insignificant when considering the long (or even medium) term growth on this stock.


How Far Will Spark’s Share Price Drop?

As I rapidly approach retirement, my financial plans are crystalizing and I couldn’t help be drawn into investigating Spark’s attractive dividend yield of 7.891% as published on the NZX website. Such a yield opens up several options around my strategy such as using it to reduce the reliance of dividend income from other stocks so I can have a greater investment in reliable low yield stocks or high growth low yield stocks.

I’ve never been attracted to the idea of investing in Spark as they act like a monopoly (high prices, not agile for a number of their divisions, and low levels of growth), but with a yield of nearly 8%, I would get my money back on the investment even if Spark became permanently unprofitable after 13 years (100[% of investment] / 8[% annual ROI] = 12.5 years, not accounting for inflation). While Spark certainly has more competition coming in its future, I don’t foresee this whale being beached-as within the next few decades.

The first thing I noticed about Spark (when I went to confirm the dividend yield calculation on the NZX website and check the share price) is that their share price is in a downwards pattern. This (combined with a high dividend) gave me concern that this could be a dividend trap or signs of serious headwinds, which gave me a place to start my research.

Upon looking at the H1 FY21 financials, it looks like there was an 11.4% drop in income compared to the H1 FY20. According to the financials released, most of this drop was in their Voice (mobile is listed separately) and Broadband products. In Spark’s Investor Presentation however, they state that the drop is due to decline in mobile market due to border closures and loss of roaming revenues, and fewer people migrating to NZ which affected the broadband and prepay markets.

Personally I can’t see how border closures would cause people to use less broadband when everyone had more reliance (and spending) on work from home services over the period. Perhaps fewer people working from home since lockdowns finished could be an explanation for this?

I also can’t see how lack of population growth would cause a reduction of broadband; it should be static, if anything. This makes me wonder if Spark are making excuses rather than offering reasons for the change.

I do have a slight concern that people could be wising up to cheaper alternatives offered by competitors, such as cheaper broadband & mobile rates, which might cause people to cancel their packaged services with Spark.

Nevertheless, for the purpose of this initial research I will assume that the numbers are solid and what we’re seeing is just a drop back to normal levels post COVID lockdown.

Let’s assume that the last H1 is indicative and proportional to H2, and relatively little growth will follow (nil). In fact, we can assume that following years are likely to be equal to FY19. From this, I estimate a long term average NPAT of $400m per year, growing in line with inflation.

As I’m happy with an ROI of 5% at the moment (though realistically I would probably want more to mitigate the risk that unpaid earnings might find their way into the retained earnings part of the balance sheet), a PE of about 20 is a sufficient upper limit on which to base a value investment in Spark. This would give Spark an upper market cap of $8bn which is a share price of $4.28.

However, as mentioned earlier, I would really need more than 5% ROI, so I would probably make a deduction from that price relative to the dividend payout ratio to find the maximum price I’d be willing to pay. Assuming Spark have an 80% payout ratio on their dividends vs earnings, this would put the suggested trading range of Spark shares between $3.42 and $4.28. Given that the market seems to historically agree with this back-of-the-beer-mat quick analysis, I’m not going to look too much further into the stock until it drops down to more sensible levels and enters the range in which I’d consider buying.

Before I wrap up so I can go biking, I just wanted to leave a note that it’s possibly worth investigating if Spark are a dividend trap stock, as they are offering a dividend above 5% of the share price, and the share price is trading at only a little over a PE of 20. In other words, without dipping into treasury reserves or debt, I can’t see how they can afford to maintain the dividend that they are paying – though this needs a proper analysis to confirm this, I see Simply Wall St have similar concerns in their analysis that the “…dividend is not well covered by earnings…” and Spark has “…a high level of debt…”. It’s always good to double check your own analysis against someone else’s research after you’re done.

Summary: Revisit Spark shares as a potential investment once they fall below $4.28, check debt levels and whether the dividend is sustainable.


Where Is The SCL Share Price Going? Part I

On the 12th of September Scales shares (NZX:SCL) were worth $4.92, but I stated that SCL are worth $4.60. They are now trading at $4.59 at the time of writing this. It seems that the market is operating under the same assumptions that I made with my September valuation.

That’s good because we can apply those same assumptions to upcoming results to find out what they are likely worth and if it’s worth buying at these prices.

I originally arrived at $4.60 based on the fact that under typical conditions they’d be worth $5.00, but needed to be worth less than that to offer 8% ROI as they were having a bad year due to COVID related issues.

Unfortunately it looks to me like those COVID related issues (namely getting fruit pickers from abroad) are still present. Looking at the dates that apples need picked, it would be sensible to assume that this issue will not be resolved in time for the season, and that we can assume disappointment in the next results announcement.

In addition to this, the measures (opportunities) resulting from this (namely pruning orchards and developing premium varieties) may mean that Scales won’t be up to capacity until 2022 (albeit a higher capacity than former years).

It could be argued that Scales will probably be worth between $4.60 and $5.00 next year, which means that currently they are worth between $4.25 (offering an 8% ROI on a price of $4.60 next year) or $4.60 (offering an 8% ROI on a price of $5.00 next year). I think this is supported by the trading range over the past month (which is a low of $4.26 to a high of $4.65).

Unfortunately I don’t think it’s as simple as the market would have it. There are a number of variables to add to this and to throw a spanner in the works, Scales are currently in the process of making an offer for a winery business, which I will likely discuss in my next article…


When Will SCL’s Orchards Reach Maturity?

There was a lot of redevelopment done on Scales’ orchards as a reaction to the lack of pickers available due to COVID19 lockdown restrictions. With foreign seasonal workers unable to get into the country, Scales took the opportunity to redevelop orchards, performing a lot of pruning and switching to higher value apple species such as the Dazzle variety.

Page 14 of the 2020 Annual Report states that:

…redeveloped orchards [will] reach maturity from 2023 onwards.

Page 14 of the 2020 Annual Report, paragraph 2.

More Headwinds For a2 Milk

ATM have had a bad run of late. After suggesting that all is well, followed by a mass sell off of shares from the board of directors, the board then declared that the situation was not too clement for ATM’s milk sales.

Despite the directorate touting the collapse of the Daigou market as the reason for a drop in sales, I can’t help wonder if increased competition lending itself to lower margins has assisted recent failings in profit.

Despite this I held my position with the view that ATM will recover post covid19. I accept that the playing field is now different with competition appearing, but competition is normal in business, and the share price had already fallen to a level that accounted for this. Besides, it’s a growth market with plenty of room in China for many players in MBS alone. Also ATM have other things going on in their growth plans such as the move into milk processing which I think derisks the business. I’m a big fan of vertical growth for companies that are big enough to swallow the entire output of upstream production, because although initially expensive and risky due to lack of inhouse experience, vertical growth derisks business in multiple ways, and offers an avenue of growth.

That aside, there is now a new problem emerging, which suggests that the Daigou market may not return post vaccine as I had expected. (Probably rightly so, given the racial issues that were reported) China appears to be urging students not to apply to Australian universities. This is a big problem for ATM because it’s believed that Chinese students make up a big part of the Daigou market.

Personally I’m not going to sell my shares on this news, mainly because I can’t bare crystallizing my losses at this price (which I acknowledge is a really bad way to think), but also because doing so doesn’t effect my long term strategy and I’m willing to wait to see how the company is in 5-10 years time.

That said, with all that’s gone on and what’s to come, I am not a happy shareholder and won’t be buying more ATM shares (not only because it doesn’t fit my strategy for retirement income in the near term).