Author: Alonzo

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Has Bellamy’s damaged its brand in China?

Bellamy’s Australia Ltd (ASX:BAL) share price went into free fall last Friday when the company downgraded its expectations for the 2017 financial year.

Bellamy’s Australia Ltd (ASX:BAL) share price went into free fall last Friday when the company downgraded its expectations for the 2017 financial year. The downgrade comes just 6 weeks after its 2016 Annual General Meeting when no such problems were forecast.

The downgrade amounts to roughly a 30% reduction on what analysts had been predicting, with revenues forecast to match 2016 and margins falling by around 10%.

Bellamy’s lays the blame for the downgrade at the feet of the proposed changes by the Chinese government along with competitors rushing to clear stock (at reduced prices) before the legislative changes take affect.

Was the fall justified ?

Pros

Changes to Chinese laws is outside of the Bellamy’s control, they are also temporary in nature. (hopefully)
Regulatory changes should result in less competition as the legislation takes affect
Bellamy’s appears confident they will meet the new requires and be able to continue to sell into the Chinese market
Demand for Bellamy’s products appears to remain strong as shown by sales numbers at Chinese annual singles day event.

Cons

Downgrade comes just 6 weeks after its annual AGM which casts doubt on management’s current knowledge of the market or openness to investors.
Competitor a2 Milk Company Ltd (Australia) (ASX:A2M) recent guidance appears to indicate that they have not been as affected by competitors dumping product. This indicates possible higher brand loyalty to a2 milk products and/or a better understanding of the Chinese consumer.
Brand perception is paramount. Investors need to ask what damage has been done to the brand by price discounting.

Comments

It is hard to overstate the importance of brand perception in China, particularly in regard to children’s food and health. The whole reason Australian companies were able to gain a foot hold into the Chinese market came from safety concerns surrounding local products. This perceived safety was the driving reason behind a2 Milk and Bellamy’s being sort after by “diagou” shoppers in Australia with the Chinese market valuing premium quality (even if just perceived) over price . (see here)

To this end my greatest concern is what damage has been done by Bellamy’s engaging in price discounting, which is rare for a premium brand in China. In my opinion this may indicate a failure by Bellamys to understand its position within the market or the importance that the premium tag carries.

Tips for new investors

Understanding what a company does is only part of the puzzle. You also need to understand where the company fits in the market and what are the key drivers to its success. Regulatory changes are also important to consider and how a company adapts to such changes reflects directly on the quality of the management.

Update:

The Australian Financial Review has spoken to “diagou” shoppers you can read their thoughts here.

Disclosure:
Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.

Has Afterpay Holdings Ltd (ASX:AFY) hit paydirt?

Afterpay Holdings Ltd (ASX:AFY) agreement with Super Retail Group Ltd (ASX:SUL) is another major step forward for this innovative small company.

The recent announcement between Afterpay Holdings Ltd (ASX:AFY) now (ASX:APT) and Super Retail Group Ltd(ASX:SUL) to offer Afterpay’s payment solutions to Super Retail customers is another major step forward for this innovative small company.

Background

If you haven’t heard of Afterpay Holdings Ltd (ASX:AFY), it won’t be long before you do.

Listed on the ASX in May, Afterpay offers customers an alternative to credit cards or higher purchase financing options. Afterpay works by providing credit instantly for consumer purchases with the repayments broken up into four payments over 2 months. This enables customers to buy items in-store, or online instantly, and then repay the purchase over time. The interesting thing is that a credit or debit card is still required to make payment but your payments are broken up over time to match your cashflow.
More details can be found here.

I am sure you’re wondering by now, where does Afterpay make its money? Customers or Merchants.
In theory not from customers.

“Afterpay does not charge a fee to consumers when purchasing. The only fees applied to consumers are late fees if your scheduled payments are unsuccessfully processed and, after being notified, you do not log in to your Afterpay account to make your payment via a different method.”

But of course if payments are not made fees apply.

“If a payment has not been made, it will incur a late payment fee of $10 and a further late fee of $7 if the payment is not made within 7 days”

So the answer is from Merchants with Afterpay receiving its revenue from fees paid for processing payments.

The obvious question is then why would a merchant want to use Afterpay if they are charged a processing fee?

The advantages are twofold. First, once the decision to pay by Afterpay is made, Afterpay bares all responsibility for the debt. Secondly, merchants have found a higher conversion rate (buyers actually buying) when Afterpay is offered and the transaction values on average are higher.

afterpay-merchant-benefits Source: Afterpay Holdings company presentation.

Outlook

Believing a picture is worth a thousand words, the growth from IPO has been nothing short of phenomenal.

afterpay-pic Source: Afterpay Holdings company presentation.

Comments

I believe the success of Afterpay Holdings Ltd can be summed up by its motto.

“Life doesn’t wait Afterpay it!”

In my opinion, Afterpay has cleverly tapped into the “need it now and I will worry about how to afford it later” mindset. Much comment has been made about online financing disrupting the big four banks but it appears that new online/cloud lenders are actually disrupting the established lowend financers more, such as FlexiGroup Limited (ASX:FXL) and Thorn Group Ltd (ASX:TGA).

While I was sceptical of Afterpay Holdings Ltd before it came to market, I will definitely not be betting against its future success.

Tip for new investors

Valuing small start up companies is definitely more art than science.

Understanding exactly what value the company brings to its customers is the key. Before investing in any small company, I recommend reading the last 4 quarterly reports paying particular attention to appendices 4C . From this report you can gage if revenue is growing as well as what expenses are being incurred. Importantly, it also keeps track of the levels of cash and cash equivalents the company has remaining.

Alan Edmunds owns shares in ASX:AFY.

Is Monash IVF Group Ltd (ASX:MVF) losing market share?

Recent trading updates from both Monash IVF Group Ltd (ASX:MVF) and Virtus Health Ltd (ASX:VRT) show they are losing market share to new competitors.

After posting stellar 2016FY results, Monash IVF Group Ltd (ASX:MVF) latest trading update may well be causing concerns for shareholders.

monash-ivf-2016-report Source: Monash IVF 2016 results presentation

As we can see from the graph above, IVF treatments are somewhat cyclical in nature. After posting excellent growth last period we would again expect a pullback in Q1 2017.

monash-ivf-agm-update-2016 Source: Trading update for Monash IVF 24/11/2016

As expected the pullback occurred, but rather than beating or at least matching the market, Monash IVF Ltd has suffered an even worse decline.

The more worrying information is that the decline got worse in part due to a new competitor entering into the Victorian market. (Note Victoria is one of Monash’s largest markets.)

This threat was confirmed by the another ASX listed IVF provider Virtus Health Ltd (ASX:VRT)

virtus-health-ltd-2016-agm Source: Vitrus Health Company announcement 9/11/2016

Comments

With the average age of mothers in Australia 37 years and rising, perhaps only the aged care sector has a more robust demographic tailwinds than IVF providers.

While the tailwinds are a plus and unlikely to abate in the near future, they would also act as a strong incentive for new entrants. Unfortunately the barriers for new entrants are not particularly high and have come through already established hospital providers such a Primary Health Care Limited (ASX: PRY).

While new entrants are currently skewed towards providing a cheaper service I believe the biggest risk to current market operators is scientific advances which could reshape the industry overnight.

Tips for New Investors

Understanding a company’s economic moat (or lack of) is one of the most important lessons a new investor can master.

Warren Buffet coined the term economic moat and refers to a company’s competitive advantage over other market participants. This maybe a price advantage due to cheaper raw materials or a patented process allowing the company to produce at a significantly cheaper price than its competitors.

Nick Scali Limited (ASX:NCK) upgrades profits again!

The last 4 years have seen record profits for furniture retailer Nick Scali Limited (ASX:NCK) and this looks set to continue.

It is hard not to like a company that continues to under promise and over deliver. You tend to find companies that do so have a large percentage of their share being held by management and Nick Scali Limited (ASX:NCK) is no different.

Here’s how the good new was announced to investors.

nick-profit

For long term shareholders of Nick Scali this upgrade will come as no surprise with the last four years (and from the latest trading update it looks set to be five) Nick Scali has achieved record profits.

History

As mentioned above the last 4 years have seen record results. Last financial year (15/16) saw sales revenue increase by 30.4% to $203 million, and incredible same store sales growth of 11.1%.

These excellent numbers came through continue selective store openings and increased investment in a targeted marketing. 2016 also saw the establishment of its Western Australian operations. While overall cost of sales increased, operating expenses decreased as a percentage of sales from 44.3% to 41.3%.

Such cost efficiency arose from favourable lease renewals along with economies of scale as the company grew. Importantly for the company and investors gross margin remained at a health 60.8% despite the decline in the Australian Dollar through the period.

Comments

It is hard to be critical of a company that continues to produce outstanding results. While other retailers have struggled in the slowing Western Australian economy Nick Scali’s new stores have continued to perform above expectations. It is not hard to believe that its proposed expansion plans into New Zealand for 2018 will be anything less than a success.

Points for New investors

While Nick Scali has performed incredibly over the last four years this does not mean it can or will continue on forever. As the US returns its interest rates to more normal levels this will present challenges to Nick Scali for the cost of their furniture which is produced over seas. Also as Nick Scali grow economies of scale it is now enjoying will start to diminish.

Having said all of that it would be a brave investor to bet against the retailing skill of the Scali family.

http://www.nickscali.com.au/

Paragon Care Ltd. (ASX:PGC) can this small cap grow into a blue chip?

It has been an extraordinary couple of years for this small health care company but can it keep going?

Source: https://www.google.com/finance

About Paragon Care

Over the past few years Paragon Care has progressively acquired businesses in the healthcare sector to become a leading provider of medical equipment, devices and consumables for the Australian and New Zealand healthcare market.

Paragon has targeted high growth markets driven by Australia’s ageing population, rising consumer expectations and increasing government spending.

Paragon operates in a highly fragmented industry, characterised by a high proportion of smaller, privately owned businesses which has allowed it to acquire 13 businesses over the last 7 years at so far reasonable prices.

Paragon aims to differentiate itself from other suppliers by increasing scale aims to significantly reduce the administrative burden experienced by hospitals and other health care providers when procuring items.

Paragons latest results

paragon-results

Latest Trading Update

paragon-tradoing-update

Conclusion

Simple extrapolation of the last 9 months and inclusion of the latest trading update for the full financial year has Paragon sitting on a PE or approximately 13.25 which in my opinion is hardly demanding for a company in a growing market such as health care. There has been concern around changes the medicare subsidizes but any impact will have less an effect on providers of consumable as compared to imaging providers.

So far shareholders have benefited from sensible acquisitions as most investors know roll up companies are only as good as the companies they buy and the price they pay. While Paragon has done well so far that does not guarantee the same will happen in the future and as such investors need to watch and assess each new acquisition carefully.

Tips for New Investors

Small companies embarking on roll up strategies can make great investments if you get in early and they get their acquisitions right . I have learned to be wary of companies that try to expand too quickly and take on too much debt which can cause problems if economic or market conditions impact on their cash flow and intern their ability to service the debt.

Webjet Limited (ASX:WEB) goes into overdrive

Webjet reports a huge rise in EBITA, and looks set to fly even higher over the next 5 years.

With Donald Trump’s election as the next President of the United States of America and the ensuing market turmoil you can be forgiven if you missed the latest market update from Webjet Limited (ASX:WEB) .

Fortunately for investors the market also appears to missed the quality of the announcement with the price falling back to preannouncement levels so lets take a look at what it missed.

webjet-1

For a company which was already growing EBITA by over 30% in the FY2016 that is quite a step up.

webjet-2

So what’s the story? What is webjet doing so right. Firstly more travel booking is moving online, nothing surprising there but what is interesting is that Webjet is smashing market growth rates.

webject-3

I know what you are thinking that is great but that wont account for such a huge rise in EBITA

Well here’s the kicker their new move in room booking B2C and B2B is also dwarfing industry growth rates.

webjet-4

Comments

Webjet continues to surprise me with its ability to grow profits and maintain margins. Personally when I book travel I rarely find webjet to be the cheapest but their market presence is currently dwarfing other players.

I believe its move into room booking will see the company continue to grow strongly over the next few years. Siting on a current PE of around 30 the price doesn’t look cheap but if you factor in the latest guidance figures the valuation becomes much more reasonable.

iSentia Group Ltd (ASX:ISD) disappoints again!

Shareholders in iSentia Group Ltd (ASX:ISD) are surely due for some good news with this mornings downgrade another blow to long suffering holders.

This how the company broke the news.

isd-down-grade

While it is some solace for shareholders that the “core” Saas and VAS businesses are performing in line with expected growth. The content marketing division although only representing 7% of EBITDA in 2016 it has managed somehow to drag the first half below last years result.

Lets not forget it was only a few short months ago the company was expecting solid double digit growth.

While the company has put in place actions to resolve the situation there is no guarantees, as such I believe investors should wait to see proof before making a decision either way.

Tip for new investors.

When a well known stock falls by 30% such as iSentia has done, it is important to reconsider the fundamentals of the company and not to panic sell on the first day. You will often find (nothing is 100% guaranteed) such companies will often rebound strongly with other investors rushing in to buy what they believe is now a bargain price. This will allow you time to check the fundamentals overnight and allow you to receive a better exit price if you wish to sell.

Note: This rebound is not applicable to small illiquid stocks which can tend to head lower over time.

Disclosure:

Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.

Warren Buffett is buying airlines, has the world gone mad?

Berkshire Hathaway the company run by investing legend Warren Buffett has announced in its regulatory filing that as at September 30, Berkshire owned $US797 million of American, $US249.3 million of Delta and $US237.8 million of United shares. He has also recently gone on record to owning Southwest Air as well.

Lets not forget this is the same Warren Buffett who wrote in a letter to Berkshire Hathaway:

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money. Think airlines. Here, a durable competitive advantage has proven elusive since the days of the Wright brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

While it is customary for Warren Buffett to not comment on why Berkshire has started to invest in a company what we see from Australian airlines is that profits are very much aligned with the oil price. Australia’s own airline Qantas Airways Limited (ASX:QAN) which had been struggling for many years posted record profits over the last 12 months on the low oil price.

In my opinion a bet on the airlines by Buffett means he believes lower oil prices are here to stay for the medium term and that the US economy is picking up to afford extra income for travelers to spend.

What concerns me is the increased competition in pricing, which we have seen in Australia which no doubt will have also infiltrated the American market. While cheap flights are great for travelers they are the reverse for airline margins. Any rise in the oil price will in my opinion cause some serious issues for the airline’s bottom line and that is why I wont be following Warren into the airline industry investments anytime soon.

Tip for New Investors

It is important to only enter positions because you understand the reasons for investing not because another investor is holding the company. Firstly the well known investor may have held the company for a long time before you became aware he holding and it may no longer represent value at its current price. You also need to be aware to the possibility that some investors may make their holdings public in an effort to inflate the price before selling. (Note I am not suggesting Warren Buffett would engage in such practices I believe he is one of the most upfront and honest investors in any market)

Disclosure:

Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.

Trump Triumphs

Wow what a day and what a week.

The man no one thought would become President of the United States of America has done just that.

As the shock waves still vibrate around the world the question for investors is what does this mean to them and how should they invest a Donald Trump presidency?

If you had asked me this question last week I would have said go short equities and buy gold but since Donald Trump has been elected his whole approach has changed completely.

It began with his gracious acceptance speech where he thanked Hillary for her years of service yes that’s the very same Hillary just a few weeks earlier he had said he would send to jail if elected. He then went on to outline his idea of spending big in infrastructure to stimulate growth and get middle class Americans back to work.

The policy of huge tariffs had apparently disappeared and the market was liking the change with the ASX down 5% at one stage to bounce back to over 3% the next day.

While I must admit I do not know if this new approach will last I have been calling for expenditure on infrastructure in both Australia and the US to help economic growth as rate cuts begin to lose their affects.

While I am not convinced President Trump will follow through with these new promises as an investors I can only invest on what I know, and so far Trump is making the right noises.

Tip or New Investors.

While it is tempting to guess which way the market will head with a Trump victory, I have learnt that even the most highly paid analysts are wrong about the future more often than they are right. It is human nature to try to foretell the future but it is better to base your investing on facts and sound economic principles.

Disclosure:

Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.

REA Group Limited (ASX:REA) Q1/2017 listings slowing.

REA Group Limited (ASX:REA) has today released its Q1/2017 trading update and the announcement confirms what was reported by Fairfax Media Limited (ASX:FXJ) that property listings in key markets Sydney and Melbourne had continued to fall throughout the quarter. (See announcement below)

rea-01-2017

REA Group is blaming the lack of listings as deterring potential sellers, perhaps this is the case but it sounds an unusual reason not to list a property for sale. Personally I would prefer less competition when selling my home. I dare say uncertainty around government changes to tax treatment of investment properties are starting to influence the market. REA Group does however appear to be coping slightly better than Fairfax’s doman.com.au in the local market.

Pleasingly revenue growth in Q1 was driven by its purchase of iProperty Group Ltd (ASX:IPP).

The good news for investors is that revenue is forecast to increase above revenue costs over the forward financial year but trading on a forward price to earnings ratio of 25 its share price may come under further selling pressure.

Tip for New Investors

As a new investor it is tempting to jump on companies which have grown strongly over a number of years but it is important to remember nothing grows strongly forever. As a company matures and growth slows it is more important to look for value in the share price before entering.

Disclosure:

Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.