Supply Network – A 2011 winner (SNL)

After buying last November around the 42c mark, my only regret with SNL is that I didn’t buy more.  After rocketing up to 72c and paying out another 9c in fully franked dividends, I’m sitting on close to a 100% return for the year with a company set to continue performing.  Based on the discount method for Capital Gains Tax calculation, I could sell now and realise a 50% discount on my 30c capital gain.

 

So should I do nothing, sell out, or add to my position?

 

The company currently sells for 9.2 times earnings, and the 5c of ordinary dividends corresponds to a yield of 6.9%.  Normally figures like this would be the result of a beaten-down share price due to problems in the company, but with the aforementioned appreciation to the share price this year, this is not the case.  Gearing is 21% with Operating cashflow of $3.1m. Longer-term, the growth is forecast at 7% per annum, with next year’s growth targeted at 10%.

 

With all of these factors in mind, I think it is reasonable to consider the business as still being undervalued and having excellent future prospects.  For these reasons I am going to add to my position in SNL.

Amcom – Increase to position (AMM)

I’ve been singing Amcom’s praises since I first got in at 20c nearly 2 years ago.  Since then, the company has gone from strength to strength, growing organically, making smart acquisitions, and winning big new contracts.  Importantly, they’ve also divested their IInet position and built a broader product offering which complements the existing core fibre business.

This has prompted me to review my position in Amcom.  My original post stated a price of 20 times earnings to be a reasonable sell point, and at a current P/E of around 13 with double digit growth anticipated for FY11, I’d be letting go too cheaply at this price.  What I will be doing is increasing my holding by another 50%.

Barring an irrationally exuberant price increase, Amcom is a forever stock for me.  The only other foreseeable reason to sell would be major problems integrating an acquisition.  Given that L7 should contribute $4m EBITDA in FY13, and Amcom’s cloud and voice business have both shown strong growth, I am likely to hold for at least the next 2 years.

HGL Limited: Still a good proposition or time to dump? (HNG)

Despite attractive fundamentals, HGL has suffered recently with the bankruptcy of one of its suppliers.  So is the business sufficiently valuable to continue holding, or is it time to abandon ship?  Management are certainly demonstrating a proactive approach, by offloading 3 non-core businesses, attacking adjacent markets, and identifying ways to improve the prospects of underperforming businesses.

 

The $9.6m cash impairment related to the Biante business equated to a loss of $2.4m.  However looking at the underlying profit of $13.9M and the operating cashflow of $13.2M, the business is still throwing off plenty of money and keeping inventory and receivables under control.

 

Dividend for full year increased to 5.5c compared to 5c last year, reflecting the 83% payout policy.  Given Biante’s revenue contribution of $8M against total revenue of $163m, the impact to EBIT should only be in the order of 5% (if Biante fails to contribute any EBIT).  It would not be surprising to see management give up on Biante (and indeed, their cosmetics business BLC) entirely if performance did not improve in these businesses.

 

While some of the business may not be performing, the company is diversified, has a proactive management, and targets niches which are not commoditised.  I am going to continue monitoring HNG cautiously however the remaining strength of their businesses means I will continue holding.