Portfolio Complete

On Thursday 5/5/16 I put the remainder of the 20k to use. It wasn't in the way I had been planning, but an opportunity presented itself which I couldn't pass on.

Prophecy International (ASX:PRO) released updated guidance for FY16. The guidance was (on the face on it) a significant downgrade. After reading a bit further into the update however, it became clear this was just a blip on the radar.

Updated Figures:

Revenue $15-17.5m (down from $20m)

EBITDA $5-7m (down from $8.9m)

Management also gave a breakdown on the new guidance and where it differed from previous guidance. My quick analysis:

$0.7m is from a change in revenue model from upfront to subscription based. This is actually a positive as the lifetime value of the sale has increased.

$0.8m (possibly up to $1.3m for lower end of guidance) is from delayed orders that will now fall into FY17. I am first and foremost a long term investor (this one year timeframe makes things a bit tricky though), and the accounting period that revenue falls into is largely irrelevant as long as it is earnt.

The lower end of guidance allows for another $1.2m due to sales being below expectations. I see this largely as a safety net rather than actual guidance. Management have been stung by ambitious guidance once and I doubt they will do it again.

$0.4m comes from lost contracts. That is (assuming I am correct about the above point) actually the only negative part about the announcement. 

Now in a number of situations a downgrade is seen to be the first indication something is going wrong. I am always sceptical when these things happen. However, in this case I believe management. The chairman bought shares a month ago. They have overseen some seriously impressive growth and incorporated a new business into the company. The original guidance represented a forecast revenue growth of 67% but actual growth may be closer to 50%. That's still pretty impressive! If it wasn't for previous guidance the market may see this as a good result and have the SP a lot higher. I think management just got a little too ambitious after such great success, it happens. I will give them the benefit of the doubt here. 

Now let's look at the earnings:

Guidance is likely to be approximately 5-7cps once it reaches the bottom line. At the time of buying the SP was 103c. That's a PE of 20-15 for this FY (finishing in 2 months). The company is cashflow positive, paying a steady dividend and growing revenue and earnings at greater than 50%! I think next FY revenue will be >20m comfortably which will see the SP closer to $2 if not significantly higher, just a bit later than expected.

My 20k portfolio is now half PRO, which wasn't part of the original plan. However, when value presents itself as it did last week I had to take advantage. If the SP gains significantly I will reevaluate and consider taking profits. So far the SP is back at 118c so the market seems to be seeing the same value as I am.

Prophecy International and TFS Corporation Limited release Half Year Report

Last week two companies I hold in the 20k portfolio released their half year reports. Both company's reports were very pleasing. The market's reaction however has been polar opposite.

TFS Corporation (ASX:TFC)

TFC's results were largely as expected, but there were a few crucial pieces of information that I think the market had flagged as key risks. Plantation sales are up 50%, cash EBITDA is up and royalties from Benzac sales has tripled. The market rewarded it with a 24% increase in the stock price.

The main highlight for me was that both this years and next years anticipated harvest volumes have been forward sold. This included new agreements with Chinese and Indian buyers for heartwood at comparable prices to USD4,500/kg of oil. I think this has reduced a key risk - the significant increase in sandalwood volume over the coming years will actually lead to cash generation. I have always thought this was a concern for the market, because otherwise the forward earnings can be relatively easily estimated and discounted (this isn't the only risk however).

Another thing I had mentioned previously was the amount of shorting of the stock that has been going on recently. This had reached almost 10% of the float. This equates to just over 30 million shares. That is a significant number of shares that need to be bought back at some stage. I think the rise on Friday was largely attributed to these shorters covering their position, leading to a potential short squeeze. There are still approximately 30m shares that need to be covered. I think this could lead to a significant rerate over coming weeks as shorters scramble to buy back shares. Very exciting times for the long shareholder after what has been some pain at the hands of these shorters.

Unfortunately, I decided not to complete my position in TFC for the 20k portfolio, but the 1,700 I picked up could produce a very good return. Especially if the short squeeze continues.

Prophecy International (ASX:PRO)

Prophecy's results were also relatively as expected, however, there was a key piece of information regarding already booked revenue that I assumed the market would reward. This was not the case though!

PRO's guidance for the year is $20m revenue. The half year produced 8m revenue. This was announced previously and some may have been concerned that this indicated they weren't on track to meet guidance. It should be noted guidance is 67% revenue increase for SNARE and eMite products, which even if missed will still represent very impressive growth.

The profit for the half year was subdued, but this was expected and management reiterated previous guidance. Guidance is for 8.8cps. At the current SP this is a forward PE of 16. That is for a company that will double earnings this year and likely continue at a significant growth rate going forward. PRO has the ability to leverage earnings without increasing the cost base. More sales staff have increased the cost base recently, but for a company growing at such a rate it is obvious why they went to do this. Growth funds more growth!

Interestingly, the commentary indicated that 3.8m of sales is already booked regardless of new sales in the half. That puts the revenue for the half at 11.8m. On top of this, a significant amount of existing revenue is reoccurring. Therefore, the new sales required to meet guidance aren't overly onerous. Remember when this report came out we were already two months into the second half. Management obviously like what they see from recent sales.

Management also updated the market on various initiatives such as product development and different sales avenues. This is positive and shows the company isn't resting on its laurels even with their tremendous recent success. To add to that a director has bought in the last few days (albeit a small amount relative to their 7.5m existing shares)!

Moving to the SP, the market has continued to hammer PRO. I put this down to a combination of profit taking (the SP was up around 600% in the past year) and PE contraction due to the global doom and gloom (I am of the opinion the world will not end and good companies will keep making money). PRO's trailing PE will all of a sudden be 16 come the end of June, and it has tremendous growth prospects ahead. I can't see the SP staying low for very long and one positive update could send it back up.

The long term investor in me unfortunately won out and I bought more during the sell off after the report came out. I figured the market would study up and realise it was a buy. This was not to be unfortunately! I will endure some short term pain, but the long term prospects have me licking my lips. I've missed out on this additional upside for the 20k portfolio (I don't want to be too overweight in any company), but I will add more to my personal portfolio if it keeps dropping. I should have used TA here, but the opportunity was too good to resist. I'd rather be in and not miss out on a significant rise given I am a happy purchaser at these levels.

All in all, a good report from both companies, and I'm confident there is significant upside to be had for my 20k portfolio timeframe and well into the future.

Update

I haven't done a post in a while so here is a quick update:

Research

I have been filtering through a list of about 30 (and growing by the day) companies I have come across. These are companies I've encountered in the news, on forums, word of mouth and any other medium. That obviously means there are no gaurentees about their quality and each company needs to be looked at from scratch. I simply use it as a method to discover a company I don't know about.

A few I've come across justify further research. This usually means they are reasonably valued, have a decent balance sheet, have an interesting business and make money. I'll post about them if I consider they are worth pursuing further.

I'm considering investing in a gold miner as a possible turnaround in the industry is apparent. However, I may decide to keep this out of my 20k portfolio as it's likely going to be a lot more volatile and therefore a longer term view may be necessary. 

There's been a good rally this week in the US. A sustained consolidation may bring some money back into riskier assets. As I already predicted, the world doesn't seem as though it will end. Investing in companies growing their earnings is a good place to have your hard earned. Short term pain is tolerable provided you understand a company's risks and take a long term view (more than a year!!). Let others capitulate and sell around you and buy when things are cheap. 

Portfolio Plan

I've reconsidered my original plan of buying shares in 4 companies with 5k in each. I may end up limiting total purchases to 2.5k in some companies and holding another one or two companies. It all depends how my buy list looks. Having said that, PRO released their half year which was a good one (largely as expected but with good commentary around future growth). The market sold down which means I will probably complete this position.

Global Health Limited (ASX:GLH) is a company that lost a big contract and had an eps drop a year ago. Since then they've resumed winning contracts and growing the business. There was recently an independent research report written about them. Rather than rewriting about them please see the link: http://risingstarresearch.com.au/resources/Global%20Health%20.pdf

I've held shares through the rough times and topped up just before Christmas as the forward PE multiple was around 7. Since then it's rerated considerably and warrants further consideration. I will be watching their half year results and commentary closely. Any upgrade will likely see another rerate. If I can get in early enough I would happily add it to the 20k portfolio.

The Third Purchase

Yesterday I bought my first parcel in Prophecy International (ASX:PRO) for the 20K challenge portfolio. I've written previously about why I like the company, but yesterday's drop where the share price touched $1.50 after opening at $1.70 was an opportunity too good to pass up. The price could still drop further obviously, and I'll wait for a turn around in momentum before I complete the position.

At $1.50 the SP was 40% below its peak of $2.53. Based on guidance for this FY that's a a forward PE of 20. I made my purchase at the closing price of $1.58. The revenue growth target of 67% is on track, and this  growth momentum looks like it will continue. 

Recently, the company announced its revenue for the first half of $8m. This appears on track to achieve guidance of not exceed it slightly. Commentary was positive about the coming quarter.

Given current market conditions it is easily perceivable that the SP will drop further in the short term. However, removing this from our minds, the value on offer is very good for such a high growth, profitable, cash flow positive company. It is also relatively under the market radar. The current entry point looks like a very good one if we look a few years out. I believe due to the news stream in the next year it will also perform well for my 20K challenge portfolio.

The next few days of SP action will be interesting and if it continues to fall I will be grateful for the continued opportunity!

Prophecy International is Looking like a Bargain

I recently wrote a brief post about Prophecy International (ASX:PRO). This is a company I really like. They are experiencing huge growth, and the growth is funding more sales staff to chase more growth.

They are in the business of developing and selling software.

Their two biggest selling (and feature) pieces of software are SNARE and eMite. SNARE is a cyber security monitoring program, and eMite is a business dashboard program. Both are in markets that are growing rapidly. Businesses are increasingly at risk from cyber attack and budgets are increasingly expanding to prevent it. Dashboards are also becoming increasingly used as the amount of data a business produces has expanded hugely in recent years. eMite allows the operations manager to monitor key data and react accordingly. In yesteryear such action wasn't possible until reports were manually produced when the events become historic.

The current SP on offer has prophecy trading on a forward PE of 19. This is for a business growing revenue at 67% and profit by significantly more. That is very good value and looking a couple of years ahead the PE is easily single figures. Their half year results are due to be reported in the very near future which I believe will back up its forecast growth and provide a catalyst to SP appreciation.

Their two primary packages have been acquired in recent years and added to the companies infrastructure. eMite was added last year and is benefiting from the sales network already in place that has proved so successful for SNARE. The company knows how to get the most out of excellent software. It is also on the lookout for earnings accretive additions to its existing portfolio.

Looking at the chart it closed on Friday at its 200 day EMA at 170c. It also bounced off recent support in the low 160s. Monday will be interesting as Wall Street closed heavily in the green on Friday. I expect to see good support and a short term bounce. However, I will wait for a reversal in momentum before getting on board at this stage.

Another thing to consider about the SP is that in appreciated hugely last year. A number of institutions were invested and are likely realising these profits as the world moves into a de-risking phase. Once this pressure alleviates then the relative illiquidity of the shares should see good upwards momentum based on fundamentals.

The value on offer is huge and it is only a matter of time before the SP turns around. Once global concerns stabilise this will be a very interesting proposition. One that I think will end up in the 20k challenge portfolio. While others run and duck for cover, those who can remain rational have the ability to buy solid companies for a lot cheaper than they should be!

Prophecy International Tempts

I won't do a full write up on Prophecy International (ASX:PRO), but I will just document that I am very tempted to get on board (again).

Prophecy sells software and has two major products - SNARE and eMite. SNARE is a cyber security program and eMite is an operations dashboard. Both are forecast to grow sales 67% this year (and profit by more). The forward PE is in the low 20s. Based on recent sales figures I believe they are ahead of their forecasts. They have created a virtuous circle where growth funds further growth - the best thing for investors!

I would invest in Prophecy (again) today if it weren't for the significant percentage of my portfolio that it takes up. Even then I am very tempted to increase my exposure in the short to mid term as I think a rerate isn't too far away. The company has had a very good run over the last year and since then has taken a breather. The good run is very much justified based on fundamentals! 

The below chart shows the recent price action and the possible formation of a symmetrical triangle pattern. If it were to breakout of this pattern the price target would be around $2.90.

I only use TA to back up fundamentals, and in this case I like what I see. Even if I don't add Prophecy to the 20k challenge portfolio I hope I've raised awareness of this great company for others. As always do your own research, this is just an idea.