Category Archives: Articles

Data#3 Limited (ASX:DTL)

Data3 logo 300x77 Data#3 Limited (ASX:DTL)Data#3 Limited (ASX:DTL) is an ASX listed company that provides market-leading business technology solutions.  The company operates in what is now a hybrid IT environment where some of their clients prefer solutions maintained on their business premise and other clients have solutions outsourced to the cloud.  Data#3 provides IT Solutions across a wide range of industries throughout Australia and Asia Pacific.

Headquartered in Brisbane, Data#3 have offices in all Australian capital cities with data centres, and warehousing facilities in Sydney, Melbourne and Brisbane.

Data#3’s customers cover a wide range of industries including banking and finance, mining, tourism and leisure, legal, healthcare, manufacturing, distribution, government and utilities that are located throughout Australia and Asia Pacific.

Does this business have a sustainable competitive advantage?

Data#3’s competitive advantage comes about due to having strong relationships with leading global vendors of IT software.  This enables Data#3 to act as a consultant and implement the right IT solutions from the vendor with the best technology to meet their client’s needs.

Data#3 have adapted to the changing environment in the last few years it appears better than most.  The company offers business technology solutions including offering Software, operating Infrastructure, Managing the solutions and now offering Applications (Apps).

While the IT solutions have become pretty much a commodity, the way in which their clients are using technology has evolved due to cloud computing and the integration of tablets, smart phones and apps being used in the workplace.  This evolution has created the next opportunity for Data#3 as their clients ‘upgrade’ to the new way of doing business.

Data#3 have adapted, bolstered their business and diversified revenue streams in the past year by:

  • Partnering with The Alpha School System (TASS) to provide ‘best-in-breed’ IT solutions to the Australian education sector.
  • Acquiring a Wi-Fi Data Analytics company named ‘Discovery Technology’ to enhance the company’s offering of cloud based solutions.
  • Acquiring a company called ‘Business Aspect Group’ that specializes in helping businesses transition from traditional technology to new ways of doing business in an ‘app centric environment’.  This acquisition is immediately earnings accretive.

What are the risks facing this business?
One risk that caused the ‘sell-off’ in 2013 in a number of IT business is the ever changing technology sector creates permanent structural challenges for those that do not adapt. I think Data#3 have used their relationships with global vendors to stay at the forefront of this structural change for the time being.  This has enabled the company to adapt their business and act on the need to acquire a couple of businesses that specialize in offering services that meet this new way of doing business.

Is it run by able and trustworthy management?

The business has been run for many years with a strong balance sheet showing plenty of cash on hand.  The company operates with an interesting cash flow seasonality where cash flow runs low in the first half of the financial year to December before jumping significantly in the second half of the financial year by June.

Is it trading at a bargain price?
The company was a clear bargain a few months ago and is still good value in my opinion.

Company Code Rank 2014 Actual Valuation Today’s Share Price Margin of Safety 2015 Forecast Valuation 2016 Forecast Valuation
Data #3 Limited DTL Gold 1 $0.78 $0.82 18% $1.00 $1.10

*Forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

The Situation
The company had rightfully been sold down on a weaker outlook for the year to April 2014.  I had been patiently lining up a buy in Data#3 for many months since the company announced at their Annual General Meeting on 7 November 2013 that a turnaround was not expected until the second half of 2014.  I was pleased with my execution in buying this stock at the time.  Price is now is at a bit of an inflexion point where it could fall or just continue on the upward trajectory.

The Conversation
I tweeted my buying of this company in a twitter conversation that originated out of an article I wrote back in May about another IT company DWS.  A couple of the tweets in the conversation are here:


The Chart

DATA3 LIMITED Data#3 Limited (ASX:DTL) (click to enlarge)

Summary
In summary, Data#3 has been an excellent business with a solid reputation for many years.  The company has adapted to the challenges it faced over the past couple of years and appears to be flourishing again as a result.  It met these challenges while still maintaining a strong balance sheet and a very strong position in the IT space.  The company was very cheap and is still good value if you believe the opportunities created by adaption are sustainable.  And, how can you go past a company with a number in its name?

This article is published by Dean Mico.

Disclosure: The Edge Fund owns shares in Data#3 Limited.
The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Magellan Financial Group Limited (ASX:MFG)

Magelllan Financial Group Logo Magellan Financial Group Limited (ASX:MFG)Magellan Financial Group Limited (ASX:MFG) is a specialist funds management business based in Sydney.

Magellan manages global equities and global listed infrastructure strategies.

Magellan operate six global investment funds in total.  They have two Global Funds (one is hedged);  two Infrastructure Funds (again one is hedged) a High Conviction Fund and the Magellan Flagship Fund which is also listed on the ASX under the code MFF.

What is there to like about Magellan’s business?

1. Magellan enjoys a significant tailwind with a strong pipeline of inflows adding new funds under management each month.  Magellan began in 2008 with a few billion under management.  Today, the company manages about $23 billion and has the capacity and a pipeline of distribution channels virtually guaranteeing new fund inflows each month.  Magellan present that they expect to be managing in the vicinity of $70 billion by the year 2018.

2. This growth in funds under management creates the potential for significant revenue and net profit growth for many years to come.

3. Magellan invests in arguably some of the best performing businesses around the globe.  In a way, Magellan’s shareholders receive the benefit of the performance of those global businesses via an Australian domiciled company.  Some of Magellan’s large international holdings as of June 2014 include:

  • Microsoft (USA)
  • eBay (USA)
  • Tesco (UK)
  • Nestle (Switzerland)
  • Visa (USA)
  • Oracle (USA)

What are the risks facing this business?
One risk is the ability of the company to produce significant returns on investment particularly if / when global equity markets fall for a significant period of time.

Is it run by able and trustworthy management?
Magellan’s CEO and Portfolio Manager is Hamish Douglass.  I form my investment views from a wide range of sources.  There are a number of people both here in Australia and internationally that I am happy to read everything they write and even happier to watch every video presentation they make.  Mr Douglass is one of those people.

Is it trading at a bargain price?
Magellan on my valuations is not trading at a bargain price.  However, with the tailwinds behind this business, its performance to date and the intelligence of the manager, it would be a pleasant surprise if this business was trading at a cheap price.

Company Code Rank 2014 Actual Valuation Today’s Share Price Margin of Safety 2015 Forecast Valuation 2016 Forecast Valuation
Magellan Financial Group Limited MFG Gold 1 $8.95 $13.37 -46% $9.15 $10.02

*Valuations subject to change on a daily/weekly basis

The Chart
After falling from the high $12’s in July 2013 to the high $9’s in December 2013, Magellan gave a nice clean buy signal for my system in December 2013.
MAGELLAN FINANCIAL GROUP LIMITED1 Magellan Financial Group Limited (ASX:MFG)(click to enlarge)

Summary
In summary, Magellan is an excellent business run by a very intelligent manager.  Magellan has a long run way ahead courtesy of a large pipeline of new funds under management flowing into the business.  In a way, Magellan is a proxy for receiving international investment performance from some excellent global businesses without having to research abroad.

This article is published by Dean Mico.

Disclosure: The Edge Fund owns shares in Magellan Financial Group Limited.
The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Reporting Season Wrap – Part 4

Reporting Season has pretty much finished and on balance the core stocks we hold are fundamentally stronger than they were this time last year. Here is my thoughts on some of our main holdings that reported in the fourth week.

NIB Holdings Limited (ASX:NHF) is a relatively new holding in the Edge Fund. We have held some of this stock since October 2013.  It is simply a reliable and steady business that has a growing demographic.  I will write some more detail about NIB in the not to distant future.  Weekly chart included…
NIB HOLDINGS LIMITED Reporting Season Wrap   Part 4 (click to enlarge)

McMillan Shakespeare Limited (ASX:MMS) is a company I have discussed a few times in the past year or so.  It reported good results and more importantly the outlook is bright.  After breaking out in May, it decided to take the scenic route in June and July.  Fortnightly chart attached…
MCMILLAN SHAKESPEARE LIMITED3 Reporting Season Wrap   Part 4 (click to enlarge)

Flight Centre Limited (ASX:FLT)
published results that were flagged to the market but still were a little sub par due to a couple of varying ‘one-off’ costs.  This is one of the stocks which has sat at the core of Edge7 and driven our performance since Christmas 2011.  The outlook for the next year or two looks good.  The market appears to have priced in the relatively lower results in the April to June period and I think this looks like it has the potential to go higher from here.  Weekly chart below…
FLIGHT CENTRE TRAVEL GROUP LIMITED1 Reporting Season Wrap   Part 4 (click to enlarge)

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Reporting Season Wrap – Part 3

This week has definitely been a big week with the volume of companies reporting seeming like a never ending conga line.  Here are my thoughts on a few of the companies we hold.  Each of these companies I  have written about in the past.

Sirtex Medical Limited (ASX:SRX) produced an outstanding result.  The share price had a good trot into results and continued on after too.  Still huge potential here and it is good to see the market likes it as much as the patients whose lives the company help save. Weekly chart attached
SIRTEX MEDICAL LIMITED11 Reporting Season Wrap   Part 3
(click to enlarge)

ARB Corporation Limited (ASX:ARP) reported results in line with expectations.  This is A Reliable Business for both shareholders and those needing help when their Four Wheel Drive needs to be winched in the outback. Fortnightly chart here
ARB CORPORATION LIMITED Fortnightly Reporting Season Wrap   Part 3
(click to enlarge)

Webjet Limited (ASX:WEB) produced results that surprised the market and myself to a degree.  I was anticipating earnings per share of 19 cents and the result was 24 cents a share.  Using a simple Price/Earnings ratio of 15 times (ie Price $2.90 / Earnings 19 cents).  I expect (although it is not guaranteed) a re-rate on Webjet closer to 15 times the 24 cents of earnings equaling $3.60 before too long.  And, that is before pricing in earnings growth looking out over the next two financial years.  Love it!!  Quarterly chart attached
WEBJET LIMITED Quarterly Reporting Season Wrap   Part 3
(click to enlarge)

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Why has the Edge Fund has been fully invested since May?

This chart below explains why we have continued to be at least 95% invested since the end of May.  We are currently 98% invested and holding just 2% cash.

Probability of good things happening has increased
During July, the ASX finally broke above the sideways price movement going back to October 2013. From my view point, this means that the probability of good things happening for share prices in aggregate has increased.

I have been sharing updates of this chart for the past few months with those invested in the Edge Fund.

The weekly chart of the ASX All Ordinaries shows that breakout above the top of the arrows at the 5500-odd point level.  The time between the arrows represents a nine month (October to July)  sideways consolidation.

ALL ORDINARIES INDEX Why has the Edge Fund has been fully invested since May?
(click to enlarge)

Today’s investors are living in unprecedented times

In 1994, the US market endured a similar sideways movement for a little over 12 months prior to enjoying a bull market run for more than a year.  However, in Australia, we have to go back to the 1960’s to see a sideways consolidation of the same duration.  And, yes, after that long consolidation in the 1960’s, what followed was over a year of strong gains.   I doubt many people reading this were actively investing in the 1960’s which means that today’s market participants are certainly operating in unprecedented times.

The longer we stay above that 5500 breakout level on the ASX All Ordinaries (about 5540 is the equivalent on the ASX200) the higher the probability of this upside continuing.

Cash on the sidelines is finding a home
With record low interest rates forcing people to look beyond bank term deposits, it seems enough of this money is now collectively finding its way into the share market.

The current consensus is to hold 30% cash
I have observed a number of fund managers over the past couple of months on business TV programs such as Switzer and CNBC talk about the market being “fairly priced” or “fully priced”.

These fund managers have cited this ‘fully priced’ reason to hold cash levels of about 30% as a consensus. Holding the consensus view may be safe on their part because if everyone else is doing it (holding cash), than they won’t look bad relative to their peers.  But, I do wonder if holding high levels of cash at this point is in the best interest of their clients, those who have invested in such funds?

I have only seen one fund manager on these business programs holding just 5% cash to his credit, but a couple others holding 40% cash and one fund holding 50% cash!!!

Holding cash in a rising market will likely equal under performance

  1. A fund holding 30% cash meaning they are 70% invested have to rely on the stocks they hold outperforming the market by 43% in order to keep pace with a rising market.
  2. The manager holding 50% cash (ie only 50% invested) has to rely on their stock picks rising twice as fast as the rising market just to keep pace.

So, while fundamentally, the rationale of these fund managers is correct to hold higher levels of cash.  In practice, given the positivity now shown on the charts as an aggregate of the sentiment of all investors in the market place, it is likely those holding high levels of cash will under perform the market until the positive sentiment drifts away.

Good news
The good news for those heavily invested is that the longer the All Ordinaries stays above this 5500 breakout level, the more pressure those fund managers holding high levels of cash will face.  If this breakout holds and continues higher, the fund managers holding a lot of cash will have to make a decision based on two choices:

  1.  Stay wrong (stay with relatively high cash levels)
  2. Chase the market higher by putting some of their cash to work

A combination of the two will probably prevail.  I think their is a distinct possibility that those chasing the market higher and trying to find ‘pockets of value’ will most likely fuel higher share prices in the months ahead.

Waiting for opportunities or an opportunity cost?
Another rationale given by many fund managers is that they are holding cash waiting for opportunities. I use to subscribe to that way of thinking because everything I read and heard from experts told me this was the best approach.  Fortunately, I am no longer on that band wagon.  Here is why……

  1. I currently have more good ideas than cash.
  2. I have a simple solution when I am fully invested (which I am) and a better opportunity does come along.     
    I will simply sell half of my two most expensive or a third of my three most expensive holdings relative to value in order to free up enough cash to buy a full position in what is now the best opportunity for investment gains.


Perhaps, just maybe

And perhaps, just maybe, those holding cash waiting for ‘opportunities’ have just missed the best opportunity they may have for a year or two to buy the cheapest stocks on dips during the last nine months.

Monitor and Adjust instead of Forecast
Assuming the breakout holds, I hope I am good enough to stay the course until the market tells me the probability of good things continuing is coming to an end.  It could be a week, a month, a quarter or a year from now.  I have some views that it could be well into 2015 at this stage but would prefer to ‘monitor and adjust’ rather than stick to a forecast. I plan on holding until the market profile morphs into something that looks more like January 2008 or May 2011.

Beating a rising market will not be easy
We hold a diversified portfolio of companies that in aggregate have stronger fundamentals (higher profits, lower debt levels and better cash flow) than the average stock on the market.  While beating a rising market will not be easy if it persists, I believe that the fundamentals of the companies we hold can lead us to outperform the broader market even if it does continue rising.

Happy investing !!!!

This article is published by Dean Mico.


The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Reporting Season Wrap – Part 2

The second full week of reporting season has been kind to the Edge Fund courtesy of our part ownership of quality businesses that keep getting better.

Domino’s Pizza Enterprises Limited (ASX:DMP) reported another fantastic full year result.  This is the only business I know of publishing a plan showing what the business will look like a decade from now.  Domino’s currently have 1,333 stores in total across Australia, Europe and Japan.  By June 2025, Domino’s is planning to more than double that number to 2,950 stores across Australia, Europe and Japan.  The weekly chart shown says the remainder of the 1,000 words…..
DOMINOS PIZZA ENTERPRISES LIMITED Reporting Season Wrap   Part 2
(click to enlarge)

Mineral Resources Limited (ASX:MIN) also reported a very good result. Interestingly (for me), Mineral Resources after threatening to do so a couple times in recent years has finally become a ‘Gold 1′ ranked business for the time being.  The Gold 1 ranking comes due to exceeding my profitability, debt level and cash flow hurdles.  Mineral Resources reported Thursday and with the good result being foreshadowed by the company, the sell the news crowd predictably arrived.  On Friday, the buy the dip gang took over and I will be watching to see if that continues next week.
MINERAL RESOURCES LIMITED1 Reporting Season Wrap   Part 2
(click to enlarge)

Magellan Financial Group Limited (ASX:MFG) produced an excellent result and have a bright outlook.  Magellan currently have $23 billion under management.  Funds under management is expected to grow to about $70 billion in five years time meaning Magellan have many good years ahead.  Magellan is a relatively new addition (Decemeber 2013) to the Edge Fund and I might write some more about the company after reporting season.
MAGELLAN FINANCIAL GROUP LIMITED Reporting Season Wrap   Part 2
(click to enlarge)

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Investing with all Five senses

Five Senses Investing Investing with all Five sensesWhen it comes to investing, we can look to nature to help us make decisions.  That is to buy, hold, sell or do nothing.

Senses = Sensible
It might sound odd however, I have come to realise that the my senses and how they react to the ever changing information can help to make those sensible decisions.  After all, I am completely responsible for my decisions and it is my decisions that ultimately determine my performance.

Sight
Well, this is easy, I am watching the markets each day and the charts tell me a lot.

Sound
A perfect example was seen in the past week as the ASX200(XJO) pictured fell from circa 5640 to 5440.  Each day as the Aussie market fell more, the bears were getting louder and louder as their confirmation bias seemed to reach a crescendo.  The ears can tell us plenty if we choose to listen.

ASX 200 INDEX Investing with all Five senses

Taste
It is the actions of management of companies listed which have the most relevance here.  I am usually left with a sour taste in my mouth after management announce a decision I do not think is in the best interest of existing shareholders.  I do not need to be holding shares in a particular company to feel this sour taste.  Two examples come to mind here:

  1. Companies raising capital for seemingly no immediate reason (ie no acquisition on the horizon or just to take advantage of high share prices)
  2. Companies reporting poor annual results after the close on a Friday afternoon

I would say on balance that those who are shareholders in listed business have higher than average IQ.  Management of such businesses taking these actions should know their shareholders are smarter than that….

SmellMonsters Inc Odorant 300x161 Investing with all Five senses
As an investor who considers that I am buying a small part of the business in the same manner that I would buy the whole business, I would say that speculative stocks have always had a bit of an odour to them.  Spec stocks sometimes remind me of the ‘odorant’ used by the characters pictured in Monsters Inc.

‘Spec’ stocks seem to just move from one fad to the next. In recent memory the ‘hot’ sectors have been uranium, biotechs, software & services, nickel and graphite.  It appears the short term benefit of owning stocks in the latest hot sector seems to favour a few at the expense of many.  The allure of making (or attempting to make) a quick profit on a company which has a very remote chance of ever turning a profit has never appealed to my senses.

I do understand there is a place for speculation just as I understand there is a destination for my weekly garbage collection. At least exploration companies digging holes in the ground for the one-in-a-million chance of finding oil or nickel are employing people to dig those holes. Perhaps when deodorant stocks become speculative, things might change for the better.

Touch
This one is counter-intuitive.  Generally, when it feels really bad to buy after a decline, that is the best time to do so.  When it feels too good and there is a cheery consensus, that is often a good forewarning that the crowded side will be wrong before too long.

May your five senses guide you in your investing endeavours!!

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Reporting Season Wrap – Part 1

A few of the companies we hold reported their annual results in the first week of August.  Here is a snapshot of my thoughts thus far:

Credit Corp Group Limited (ASX:CCP) produced an excellent result which beat the upper end of expectations.  And, importantly guidance for the future has improved which has provided intrinsic value increases in the vicinity of 8% per annum higher than my previous calculations for the next couple of years.  And, I noted a director bought on market this week after the results were announced which is good form.

The weekly chart shows a consolidation for more than 12 months.  Could we be seeing the start of the next leg up?
CREDIT CORP GROUP LIMITED2 Reporting Season Wrap   Part 1
(click to enlarge)

Cochlear Limited (ASX:COH) also produced a result better than expected.  The outlook has improved and the market liked it immediately.  Interestingly, even with relatively poor results from a historical perspective, profitability of Cochlear is still ahead of the vast majority of other listed businesses.  Weekly chart attached…

COCHLEAR LIMITED2 Reporting Season Wrap   Part 1
(click to enlarge)

REA Group Limted (ASX:REA) result was spot on guidance.  Being fully priced in, the market reacted accordingly by selling the news.  Surprisingly, the future looks brighter than I previously anticipated courtesy of large cash resources and more international expansion on the cards.

REA is an amazing business and certainly in the top handful across the country.  With Friday’s sell off shown on the daily chart after the results were announced, the smarties know what to do…..
REA GROUP LTD Reporting Season Wrap   Part 1
(click to enlarge)

 

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Where to invest? Australian or Overseas share markets?

Two roads have diverged
I have been observing a growing divergence in the answer to this question of recent times.

In Australia, it seems we have an increasing trend here of recommendations to invest abroad from financial advisers.  And, it appears that a fad has emerged amongst Australian based fund managers to open an international fund as an addition to their local offering.

However, on the other hand, we have international investors looking at Australia and beginning to snap up our assets.  From my recent memory:

  1. Graincorp was almost taken over by Archer Daniels Midland (an American firm) before our government intervened late last year
  2. David Jones has been acquired by Woolworths SA (a South African firm)
  3. Country Road has been acquired by Woolworths SA (the same South African firm)
  4. Wotif has been acquired this week by Expedia (an American firm)


So, is now a good time to invest overseas?

This chart sourced from the Reserve Bank of Australia (chart pack) might give some clues.

Aust and World Share Prices Where to invest?  Australian or Overseas share markets?

And, what this chart does not show is that in Europe, the German market (DAX) is at all time highs and the UK market (FTSE) is knocking on the door of 20 year highs.

Are these international investors and organisations buying our assets telling us something?
What is better value right now?

  • US and European markets at all time highs due to monetary policy (money printing);  or
  • The Australian market that is nowhere near all time highs, has not had a recession in 22 years and has not required any money printing by our central bank.

Could it be that collectively we Aussies do not fully appreciate all that we have at this point in time?

This article is published by Dean Mico.


The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

VMT – Vmoto Limited

Vmoto logo VMT   Vmoto LimitedVmoto Limited (ASX:VMT and London Stock Exchange:VMT) is a leading global scooter manufacturer and distribution group specialising in electric powered two wheel vehicles.  Vmoto’s electric scooters have chic European design and German engineering.

Vmoto wholly owned its state of the art manufacturing facility in Nanjing, China, which has an estimated production capacity of 500,000 units of scooters per annum.  Vmoto also have offices in West Perth, Australia and Bremen, Germany.

Vmoto has one of the widest global distribution networks of any electric scooter manufacturer in the world, being represented by more than 28 distributors in 30 countries in the geographic regions of Asia Pacific, Europe, North America, South America and South Africa.

The group operates two primary brands: Vmoto and E-Max.  The electric scooter market is experiencing high growth and Vmoto is a well positioned brand in this space.  The company also supply to a number of customers on an OEM basis.

What is there to like about Vmoto’s business?

  1.  Vmoto is a growing brand selling electric scooters to about 30 countries worldwide.
  2.  The company owns outright their own 30,000 sqm production facility outside of Shanghai in Nanjing, China.
  3.  The production facility has the capacity to produce up to 500,000 electric scooters per annum.
  4.  Current production is less than a quarter of capacity so they have plenty of room to grow.
  5.  Vmoto turned cash flow positive in the December 2013 quarter.
  6.  And reported a maiden Net Profit after Tax for the 2013 Financial Year which ended December 2013.
  7.  The 1st quarter of 2014 was also cash flow positive and the beginning of the year is historically their slowest time of year. So profit and cash flow for the year should increase quarter-on- quarter throughout the year.
  8.  The company has minimal and manageable net debt of about $1 million as of April 2014.
  9.  And, electric scooters are a very environmentally friendly mode of transport.


What are the reasons for continued business growth?

  1.   Vmoto have distribution agreements in place with companies such as Chrysler and another company called PowerEagle to supply up to 150,000 units by 2015.
  2.  They now have 16 retail stores in China open with plans to open more.  The retail stores are where their profit comes from.  This draws comparisons with a company such as ARB (selling their own four wheel drive parts with a very successful retail model).
  3.  Vmoto supply to the main markets for scooters being China, India, Indonesia and Brazil. China is by far the biggest market though.
  4.  In a lot of Asia, people cannot afford to buy a car but they can afford to buy an electric scooter.  Plus scooters are a large form of transport for many people across Asia and developing countries in any case.
  5.  The company announced yesterday 2nd July that DHL (the leading courier company) is trialing the use of Vmoto’s scooters.  Supplying to a worldwide company such as DHL would open up a new and large market for the company.

What are the risks facing this business?

  1.  A more recent risk is a bit of instability within the board. The company is presently searching for an Australian based director.  However, the business has its current momentum from the work done on building the business over the past number of years.  The need to fill a director role is not going to have a significant impact on the trajectory the business.
  2. Another risk I see is that the company falls into the trap of taking on too many distributorships which are good for turnover although may not be good for long term profitability.  Long term, I think they will be much better off focusing on developing their brand and selling via their own retail stores.   Wih the company growing from eight retail stores to 16 retail stores in the past year, I think management know that the best outcome for the business is to continue to develop the profitable retail brand and business model.
  3. The third risk is that current shareholders are diluted with a capital raising at some point.  Despite the company now producing positive cash flow, for a business growing this fast, the difficulty is managing cash flow appropriately.  I am sure however if a capital raise does occur, it may lead to a temporary setback in the share price for the long term good of the business and long term share price.  In saying that, I will be delighted if there is no need to raise capital.

Is it run by able and trustworthy management?
When researching this business, I watched a video by one of the directors Mr Olly Cairns.  I was suitably impressed with the way Mr Cairns articulated the work done by the company over the past few years with the development of the manufacturing facility and the current activities being rolled out to grow the business.

Is it trading at a bargain price?
Based on cash flow reported by the company and the momentum of that cash flow and profitability I believe the company is trading at a bargain price.  I estimate the company will generate NPAT of between $1 Million and $2 Million in 2014.  Based on the lower $1 Million figure, I estimate the company to be valued at 6 cents a share in 2014 (December is year end).

And, based on my own estimates of profitability growth, I think the intrinsic value of the business can rise significantly over FY15 and FY16.  However, being my own estimates, while my numbers are conservative, they are “not as dialed” as I would like.

Company Code Rank Today’s Share Price Margin of Safety 2014 Forecast Valuation 2015 Forecast Valuation 2016 Forecast Valuation
Vmoto Limited VMT Gold 5 4.8 cents 20% 6 cents 10.4 cents 21 cents

The Chart
Vmoto has pumped the air in the tyres of its scooters.  It has been in an uptrend for the past year or so.
VMOTO LIMITED VMT   Vmoto Limited
click to enlarge

Summary
In summary, Vmoto is a great business with an excellent product. Vmoto has a significant pipeline of work from other manufacturers such as Chrysler, a good international distribution network, growing number of retail stores and some exciting opportunities for the future.  By my calculations, the company is trading at a good discount to my estimate of intrinsic value with my estimates of that value growing over the foreseeable future.

This article is published by Dean Mico.

Disclosure: The Edge Fund owns shares in Vmoto Limited.

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