Profit taking

As this week I’m now eligible for the 12 month CGT discount, I’ve been waiting to sell off my Supply Network (SNL) shares at $1.60, and today the order filled.  I began buying SNL at 42c, however this block cost me 89c – giving me a mere 80% profit for the period.  Not bad!

 

After only writing about Nearmap (NEA) a month ago, I logged in to see I was currently sitting at a 50% profit, so I sold them too.  I believe Nearmap have long-term prospects, but such a fast windfall is worth taking now, and if it falls back around the 7c mark I will buy in again.

 

Finally, while I hadn’t written about Mincor (MCR) I bought a small block of shares due to their low-cost operation, exploration upside, and competent management.  In retrospect I probably should never have bought MCR with the current systemic risk out there, which could easily hammer the price of nickel into the ground.    It’s another competent firm which I believe will be cheaper in the future, so I have decided to undo my mistake, and picked up 8% profit while I was at it.

 

I am planning to sell down my BigAir (BGL) too, but since HY13 numbers came out the share price has been hovering around the 50c mark.  I plan to sell down at least part of my shares when they return to 60c.

My medium-term portfolio strategy is not going to be holding a lot of value, I’m more focused on a few explorers, cash, and precious metals.  Hardly a value portfolio.  I still hold CKL in anticipation of an inevitable re-rate of the stock.

In my view, the global economy (including Australia, China, and everybody else) is going to have to eat an enormous shit sandwich in the very near future.  My super is now in 100% cash and I get a guaranteed tax-free return by paying down my mortgage.  I will keep an eye out for value picks that are less subject to systemic risk, but in the meantime I am sitting and waiting for everything to play out before I go risk on again.

Supply Network HY13 numbers (SNL)

I’ll be honest, when I originally posted about SNL back in 2011, I thought I’d found a cheap company with a stable business that wasn’t set to grow much faster than the economy.  Back then, it was a $19m market cap minnow, selling for 9.2 times earnings.  Since then market cap has more than tripled, to $53m, and earnings have kept a reasonable pace, with a P/E multiple of 13.39.  Over the past 2 months alone it has rocketed from the $1.20 range up to $1.60!

 

So today management released preliminary HY13 figures.  NPAT of $2.08m represents an increase of around 17% against PCP, with a half year dividend of 3.5c.  I’ve already sold down half my holdings, and my 1 year capital gains discount applies at the end of February.  I’m still sitting on a 75% profit on my most recently bought parcel, so if share prices are still at current levels in a month’s time I will take profits.  Much of SNL’s growth has been from Central Queensland mining, and if commodity prices fall it could lead to reduced sales.

Profit taking

In reviewing my current book, there are a couple of stocks I have either sold down, or plan to sell down in the near future:

 

AMM: I have now fully exited my position in AMM.  There is likely to still be good growth but with the recent price appreciation I’m happy to book a healthy profit and look for new opportunities.

 

SNL: I’ve got a parcel that comes to 1 year holding in February, so I’ve sold half and will sell the other half when I get my 50% CGT discount.  Another fine company but with recent price appreciation it’s not the same bargain it was at 42c.

 

COH: This was an opportunistic buy for me, due to a temporary scare driving the price from the $70 range to the high $40s.  I’ve just ticked over 1 year of ownership so have put in a sell order at $68.  No hurry, but I’ll be happy with that price, and the profit.

 

I’m going to continue holding BGL for now – the recent rise in share price looks like the beginning of a broader appreciation of BGL, and they are generating cash like the billy-o.  I’ve got my eye on a few other blue chips, and will be undertaking a new sweep of “cigar butts” to find more SNL-type opportunities.

Supply Network profit guidance (SNL)

I just can’t shut up about Supply Network (SNL).  After predicting at the start of 2011 that the company would grow at roughly the size of the economy, Supply Network has blitzed the general market, with NPAT growing 53% in FY11 and the share price almost doubling in a year, all while paying out generous dividends.

 

Today, Supply Network put up their HY12 numbers and forecast for the full year:

 

Revenue up 21% to $29.5M

EBIT up 53% to $2.73M

NPAT up 54% to $1.79M

 

Full year EBIT is anticipated to be $5.5M, up 44.7% from FY11.  The interim dividend has also been increased 1c to 3c per share.  The strong cash balance suggests more dividend increases (or a special dividend) may be in order later this calendar year.

 

(It should be noted that I have not yet added to my position)

 

Update 22/2/12: SNL today confirmed guidance at the above figures.  Half year earnings per share?  5.23c.  Current share price?  86c.

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.

Supply Network FY11 numbers

Having steadily risen during 2011, from the 40c range to its current price of 69c, the thinly-traded SNL has been a standout performer, booking a 12-month shareholder return of 126%, thanks to price appreciation and an unbelievable 8c of franked dividends in FY11.

 

This begs the question, has this return reflected the underlying performance of this Truck and Bus parts business?  Despite sluggish revenue growth for the past few years, Supply Network delivered impressive 17% FY11 Revenue growth to $50m, EBIT growth of 46% to $3.8m, and Profit after Tax growth of 53% to 3.8m.  Given that FY10’s 3 year organic growth strategy was aimed at growing revenue by 7%, FY11’s performance suggest the strategy has been effective.

 

One of the key growth drivers for Supply Network is the new Mackay Branch, which services Northern Queensland and the Bowen Basin mining region.  This branch was opened in April and is already hitting their numbers, and given the new investment in bulk commodity infrastructure such as the Northern Missing Link; I’m bullish on Mackay’s prospects to contribute to further business growth.  But it’s not all about digging stuff out of the ground.  The truck business was nominated as a key foundation of business growth over the next several years, having grown by 20% in FY11.

 

SNL have been using the Dividend Reinvestment Plan to control gearing, and with this ratio now down at 21% the DRP has been suspended.  Throughout the investor summary the theme has been on steady organic growth.  The current 3-year transformation being 1 year ahead of schedule, management are now working on the next 3-year plan.  New branches are under consideration, but with a long-term view of customer service strategy each location would offer the business.  While SNL shot the lights out this year with 17% revenue growth, their target is 7%, compared to the industry average of 5%.  Next year’s guidance is 10%.  With careful management like these guys running the show, I’ve got plenty of confidence in SNL’s future.

Supply Network profit upgrade (SNL)

Easter has come early with Supply Network who are now forecasting a year-end EBIT upgrade of 15%, from the 3.1M-3.3M range up to the 3.5m-3.8m range.

Another important factor of note is that this EBIT improvement is a result of revenue growth rather than improved profitability. If the company transformation successfully reduces overheads this should improve profitability and EBIT further for FY12.

Supply Network (SNL)

Market Cap: 17M
P/E: 9.2
P/B: 1.31
Dividend Yield: 6%

With a market cap of only $17M and thin trading volumes, a sensible investor would shy away from a company like Supply Network, which supplies truck and bus parts. Fortunately these disadvantages are minor enough not to be insurmountable, and Supply Network’s niche operations generate a decent cashflow.

SNL’s dividend history goes back to 2001 and at 7.9 x earnings is selling for an attractive price. Dividends are high and can be re-invested at a 5% discount.

What you do get when you buy SNL, is a steady business selling for not much more than book value, which continues to produce steady earnings. The 4 company directors are all subscribed to the Dividend Reinvestment Plan, collectively owning 17.6% of the company.

Supply Network are currently in year 2 of a 3 year growth strategy, aimed to grow organically by increasing network capacity and customer service. FY10 saw modest profit and revenue growth around 7%, which is net of a recent investment in new staff, branch expansion, and IT systems. The unaudited half year FY11 report showed a 40% increase to NPAT pcp which will be largely offset by an increase to 2nd half costs associated with new systems and the opening of the Mackay branch. Regardless, full year EBITDA has been revised upward from 3M to 3.1-3.3M.

Long-term, I see Supply Network as a business which will grow roughly in line with the economy, with potential for a bigger profit jump short-term by improving current business processes. While it lacks the prospect for spectacular earnings growth, this steady business has survived the GFC with no material impact and focusing on their core market means a more certain future.

Given the limited prospects for high growth, I plan to sell my holdings in SNL should it ever reach 15x earnings. If not, I anticipate continuing to hold this business for years to come.