Grit your teeth and close your eyes

Well, it turned out to be famous last words (at least short term) with respect to PRO and MBE bottoming out. That said, my conviction is unchanged and I will continue to hold. 

Now that I am considering turning this one year project into something more long term I will attempt to write updates more regularly. I will look to write updates on new companies I am looking into as well as updates of companies I currently hold. I will also start writing about companies I hold outside of the 20k portfolio.

In general the market has retreated in the last month. That explains a lot of the negative SP action in that period. I never like to speculate on the reasons behind short term SP fluctuations as I don’t think it is beneficial and is often based on human emotions or outside forces. With that said, here is an update on the companies I hold:

PRO

The SP of PRO has been struggling ever since they lowered guidance earlier in the year. The market punished PRO for this and it has been sitting around the $1 mark ever since. Last week they announced their Q1FY17 revenue and provided a general update. Revenue came in at $3.1m (PCP $4.5m, but that included a large one-off sale of $1m). They also reaffirmed that Q2 and Q4 are their best periods, so this is a good result.

Once again, the market showed it wasn’t happy. I have dug a little deeper into the numbers to try and understand where things are at.

I have assumed the following growth rates for each division: 15% SNARE, 40% eMite and -30% Legacy. I am forecasting the following:

H1FY17

Revenue – $7.6m (down 5% from $8m)

NPBT – $2.3m (down from $2.57m)

FY17

Revenue - $16.5m (up 13% from $14.6m)

NPBT - $4.6m (up 23% from $3.75m)

NPAT - $3.2m (up 33% from $2.4m)

OCF - $5.5m (up 12% from 4.9m)

OCF less income in advance $4.2m (up 17% from $3.6m)

EPS – 5.0cps (up 32% from 3.8cps)

OCF/share – 8.7cps (up 13% from 7.7cps)

OCF less Income in advance/ share – 6.6cps (up 16% from 5.7cps)

Dividend per share 4.5cps (up 13% from 4cps) 

I am not suggesting for a moment that the above figures are particularly scientific. PRO have already proved their earnings are lumpy and therefore relatively difficult to predict.However, they do give insight into whether or not PRO is a good investment at this point. I have only looked at FY17, but I am satisfied their products will remain in demand going forward. I expect FY17 onwards to potentially be significantly better. Using the above figures we can apply the following valuation methods at the current SP of 82.5c:

P/E (TTM) = 22

P/E (FY17) = 17

Dividend yield (TTM) = 4.8%

Dividend yield (FY17) = 5.5%)

P/OCF (TTM) = 11

P/OCF less income in advance = 14

Summary going forward

Using the above metrics I am happy with the valuation of PRO. The headline P/E ratio makes it look a bit expensive. However, looking a bit deeper at the cash earnings (mainly removing amortisation of intellectual property) the valuation looks pretty cheap. Not to mention a 4.8% dividend yield on a growing tech company!

PRO have two quality products (SNARE and eMite) and they are currently smoothing their sales processes to maximise these. I believe this will start showing some pretty good results from FY17 onwards. I also expect them to be on the lookout for another acquisition once they are satisfied with how they have shaped the business with SNARE and eMite.

MBE

The MBE SP is suffering from market uncertainty. We haven’t heard anything on revenue since the FY16 results. This has made the market to fear the worst. We have received a snippet into the overseas revenue growth from DCB which is now >$600k/month and growing. I believe this figure has been significantly depressed due to the devaluing of the pound post Brexit (it was 520k/month in January pre-Brexit).

The AGM is coming up at the end of this month and the market will be expecting a good update from management. I believe management are doing a good job. Revenue growth going forward will be hard to predict due to the saturation of the Aussie market coupled with the ramping up of overseas revenue. However, it you believe in the business model there is no reason to sell unless overseas proves fruitless. We can't make this call yet.

I am working on an estimate for FY17 which I will upload in the next week or so.

MOY

MOY continues to find gold and expand its mineral resource and ore reserves. Recent results have shown the huge potential of their tenements. Valuation isn’t particularly cheap, but there is upside from the gold price (which looks to have resumed its uptrend) and from further exploration.

Current FCF looks to be close to $40m before exploration expenses. This is about 5cps.

WPG

Over the next year they look likely to ramp up production once Tarcoola is given the go ahead. Solely based on this I expect a rerate of the SP. However, they have significant exploration upside also. 

They could be looking at 70k ounces per year for a FCF of $20m+ or 3cps. This is using conservative costs. There is also the exposure to the gold price. I will look to expand on WPG again in the coming weeks.