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 on my TFC Position

A quick update on my TFC position:

I continue to bide my time for purchasing my second parcel. The market continues to be very volatile, and given it dropped through support around $1.30 I will wait until a turnaround of momentum looks to be happening before adding to the position. I am still extremely bullish about the company and look forward to buying more!

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!

MBE Steps up to the Plate

With the sell-off from the past couple of months fresh in the memories of most, we move into more exciting times for holders. As I have previously described I am hoping a number of catalysts help give momentum to the share price over th year. One of these catalysts is the half year results that are just around the corner (this week or next).

When the market was updated about expected results last year the share price found its way to 44c. MBE are known for underpromising and over delivering. Therefore, I'm expecting some upside to the announced revenue of 27m, EBITDA of 3.5m, and underlying EBITDA of 7.5m. However, we all know the market is forward thinking. The market already knows what's coming and has priced it accordingly. So why the huge retrace?

I think the retrace is the result of a number of things including buying by an institution or two. They have cleverly used the recent market turmoil to try and drive the share price lower while they accumulate a position. This has resulted in a lot of weak hands letting go as the SP drops. After closing below support at around 29-30c the SP swiftly recovered to back above 30c. I can now see a possible rally leading into results as buyers try to build their positions prior to the earnings announcement. I see a decent spike following earnings as this is usually the case for MBE.

In summary, I think momentum will start to turn over the next week leading into results and in a month or so we will have seen a rerate possibly back into the 40s. The current market turmoil may take a bit of steam out though, which could offer buying opportunities for a bit longer. I'm confident by the time the year is out we won't be anywhere near 30c. If we are, I'll be accumulating.

TFC Keeps dropping and MBE has significant close

Today was an all round bad day on the markets. It proved no different for my two 20k challenge stocks.

TFC broke below the 129-130 mark which it had been flirting with for a while. There are a few old support points around the low 120s so will be interesting to see where it stops. Sentiment may start changing when results come out which has happened in the past. I will hold off buying my second parcel for now.

MBE closed on the technically important 29c mark. This marks old resistance and recent support. A bounce from here would almost confirm the near term support point. Whereas if we break below then we are searching for new support. Earnings are coming up, the market already has guidance, but expect a beat as usual from management. I expect even though the market knows what's coming we wil get a good bounce.

As all good investors know - short term price fluctuations mean nothing. The quality will rise to the top.

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.

Update on the Research

I haven't had a lot of time to research any new companies lately. I have 20 or so that I have come across (and know nothing about) that I plan to have a quick look at. I'm about to sit down (in front of the Blackcaps chasing down Pakistan's 290) and look at these. Hopefully a couple will warrant a more in depth look and be an option for my 20k challenge portfolio.

Entry Point Support Holding for MBE and TFC... So far

The timing of my purchases of MBE and TFC was based the recent price action. It goes without saying that my purchase price was attractive to me from a fundamental point of view.

MBE

MBE was oversold on the RSI, had just filled at gap between 29 and 29.5c, held above an old resistance line at 29c and bounced off the 200 day EMA. There was also good buy depth at 29.5 and 30.

A few days have passed and support has been tested and held a few times with good buy depth still at 29.5 and 30c. It looks like we have found a temporary bottom and evidence is building that the bottom has been found, however, tomorrow will be telling after today's 30c close.

TFC

TFC was a similar story to MBE. Hit oversold on the RSI after a big sell-off. Support rushed in at 129-130c and has held for a few days. There was a nice bounce today to close at 134c. There has been growing short interest in TFC over the past two years, and any sizeable rally could mean some short covering.

Second Purchase - TFS Corporation Beaten Down to a Buy

I have decided to initiate a position in TFC. I purchased 1700 at 130c. Once again I will split my position over two parcels (this time I will have more than 1 day between purchases!). The timing here involves an element of risk due to the recent substantial fall.

I have outlined the business in a recent post, but here are the facts behind my investment.

Monday’s price drop has potentially marked “capitulation” as the price was beaten down to close at 129.5c. The RSI shows it’s oversold, and there was good support coming in around the 130 level. Today’s pre-market shows very good support around these levels. There also is not a lot on offer on the sell side.

As mentioned in the previous post on TFC, it is very much a long-term play, with the significant future cash flow potential from large harvests still a few years away.

I believe the company is fundamentally undervalued at these levels. They trade on a trailing PE of 3.7 currently (SP of $1.30). Note this includes revaluation of plantation assets as they mature towards harvest. Some believe this is overstated. The revaluation assumes an end oil price that is much lower than what they have achieved with their agreements. I believe they have proved their business model and the revaluation is fair (it is also audited). Trailing Price/Cash EBITDA ratio (excluding non-cash revaluation etc) is 7.3. Cash EBITDA is forecast to grow by 5-10%. I believe reported NPAT will grow by more (last year this was 37% vs cash EBITDA growth of 12%) as it has in the past due to revaluation of assets.

Given my relatively short one-year timeframe (the market may continue to ignore TFC), I need a bit more than that to invest. Catalysts that I believe will have a positive impact on the share price this year are:

·         Announcement of agreements with new end markets

·         Financial results

·         Results of harvesting and subsequent sale of wood/oil

·         High establishment fees for managed plantation investors than prior years

·         Positive results from the pharmaceutical trials and Benzac sales. The reverse applies obviously

·         All the above will continue to prove the business model which will allow build investor confidence.

I will consider closing my position if there is a significant rerate. Normally I wouldn’t do this. I see significant long-term upside for the company, but given the one-year timeframe of this portfolio it will be important to lock in profits for what is otherwise a relatively long-term investment thesis.

Empired - Has the Recent Sell-off Offered an Opportunity?

Empired (ASX:EPD) have been on my radar for a while. I have never committed too much time to researching them because they have appeared to be fully valued.

After the recent drop I decided it could be time to invest. The reported PE ratio is 6-7 and revenue is expected to grow. I read through the reasons for the lower guidance and they say it is all one-off in nature. These are situations that sometimes offer investors a cheap entry due to one bad year and then it's business as usual and the SP recovers.

They indicate H2FY16 will be back to normal. This is always something to be careful about as sometimes management overlook reasons for these events. I am always very sceptical until there is sufficient evidence to prove a one-off is in fact a one-off.

In this situation I don't think I will invest just yet. The reasons for the lower guidance include integration of an acquisition and what appears to be poor contract execution. This may not be the case, but I want to see evidence of their EBITDA margins returning back to their reported target of around 8-10%. Once they prove that it was a one-off hiccup I will look further into the company and consider investing. Until then I will watch with interest.

XPD Soccer Gear - What Gives?

As part of a screen I ran I came across XPD Soccer Gear (ASX:XPD).

On the face of it, this company ticks a lot of boxes. For starters it is growing quickly and has a PE of only 6, and has plenty of cash to cover its debts. This got me excited so I continued with my research.

The company is a Chinese company that listed on the ASX through a holding company in Hong Kong. They are in the business of selling soccer gear to the rapidly growing Chinese market (great, right?).

They listed on the ASX last year to raise $5-15m to fund growth. This is a relatively common thing to do. However, before listing, the company already had around $20m cash on the balance sheet. They are also highly profitable. So why go to all the effort of listing and diluting ownership to raise such a small amount? The short answer is I don't know. I simply cannot come up with a good reason for this. They seem to have plenty of cash to fund their own growth, so why go to the market now?

They reported they were to build another factory to allow for growth, however, this has been pushed back without reasonable explanation.

There is a history of some Chinese companies overstating things to their overseas investors. There's been cases where financial results have been completely fabricated. I'm not saying this is the case here, but we should proceed with caution. Getting money out of China to overseas investors can be difficult. 

Trying to justify what the market is doing is not usually recommended as it will lead to bad investment decisions. However, I ask myself why it has applied a low multiple to the company. I can only assume this is due to the risks I am worried about.

Everything could be OK with XPD, I have no evidence to prove otherwise. There are just a few things that smell a bit to me and that's enough to stop me from investing. I will periodically look up the stock to see how it's tracking. Is it be too good to be true? Only time will tell, and I will find out, either way, from the sidelines.