Questions & Analysis - Mcgraths learning thread

[mcgrath111]

Hi All,

I'm starting a thread to keep my learnings on track, which have largely stagnated the last few months.

My aim for this thread is to gain feedback from the greater ASF members around some analysis of stocks I'm going to compile. The analysis will be on a variety of stocks that interest me/ trying to gain some insight as to an Buy & sell points, headwinds for the company etc.

It should be noted my analysis will likely have big holes / errors, however I'm relying on you to point out to me area's that I should focus on, or may have missed. Initially this will comprise fully of fundamental analysis, however hoping at working in some technical analysis moving forward.

Hope you can keep it constructive, and if I can learn from you; one day I'll be able to provide valuable content to the ASF forums

The first company I'll be looking at is Spotless Limited (SPO), I'll post some analysis in a couple days.


Thanks,
Mike

 

[mcgrath111]

Spotless Review:
Spotless is a diversified services provider, covering the following brands:

• Spotless (Cleaning services)
• AE Smith / UASG (Engineering services)
• Asset Servies (Gov contracts)
• Clean Domain / Clean Event (Event Cleaning)
• Ensign / Taylors (Linen Cleaning)
• Epicure / Alliance / Mustard (Food Catering)

Back in 2014 Spotless IPO (It’s Probably Overpriced) first listed at $1.60, after being re- listed by Pacific Group Partners.
Initially we can see at June 2015, Spotless has over achieved from its ‘prospectus targets’, bolstering it’s SP to the $2 mark.
Overall the 2015 report seemed in line with the prospectus.

Heading into the 2016 Annual report it’s apparent why the share price took a major hit, with profit after tax down 14.5%, also in part from the prior year DTA that was reduced by about $50m. The worrying thing from the report is that while Spotless were able to increase sales,, they were unable to convert this into profit; which management likes to believe it was due to ‘Integration of new businesses’ (In reality this was just a failure to forecast and perhaps the likely gutting from private equity has taken effect).

The revenue changes in the various service divisions has been account for due to changing of contracts win or lose. The worrying thing presented within the report is that exsiting business performance has dramatically fallen, and whilst it promotes new acquisitions ans synergies, they account for a minor amount in the big picture – adding to this, it’s noted that ‘EBITDA from the existing Laundries business decreased by $18.5m or 22.1%, mostly as a result of performance and integration issues resulting from the recent acquisitions.

The underlying EBITDA margin in the Laundries business was impacted by integration issues flowing from the acquisitions with margins decreasing from 31.0% to 24.2%.’ It would be great if there was clarity around the ‘integration issue’.
It should be noted that Goodwill increased by 13% due to acquisitions, however I wouldn’t be surprised if this is just to make things look prettier, and wait for it to be impaired in a year or two.

Net leverage ratio increased; with debt subsequently increasing form 2015/16 – with low interest rates this isn’t all bad, however given the financials it appears they’re just using debt to buy unnecessary acquisitions, when they should be focusing on the core businesses.

Market Value = 1.08b
Net Assets = 827m
P/E = 8.91
Div: 3.5c (0% Franked) & 5c (30% Franked)

Pros:
• I learnt something outside of what the AFR provides.
Cons:
• Unable to calculate IV
• Unable to dig deeper into areas / a generic piece could have covered what I covered.
• Too Brief; yet didn’t want to ramble.

Anywhoo, Constructive criticism would be much appreciated.


Thanks,
Mcgrath111

 

[tech/a]

Hi.

Firstly I'm a technical trader.
But reading your analysis I find myself asking.
What are your conclusions if any? AND WHY?

Your pros and cons don't seem to lead to any decision?

 

[BarneyChambers]

Hey McGrath111 I really like this thread and how you have broken everything down that you use to consider which stocks to trade. I'm definitely going to be keeping an eye on this thread because it's been an interesting read so far! Have you considered starting similar threads to this one on other sites such as ADVFN? They have a technical analysis thread on their forums that would love this sort of thing!

 

[Boggo]

....
The analysis will be on a variety of stocks that interest me/ trying to gain some insight as to an Buy & sell points, headwinds for the company etc.

The first company I'll be looking at is Spotless Limited (SPO), I'll post some analysis in a couple days.

After all of the analysis what is the prognosis, which box would you tick ?

[ ] Buy
[ ] Outperform
[ ] Sell
[ ] Underperform
[ ] Hold
[ ] No opinion

 

[mcgrath111]

Hi All,
Thanks for the feedback, I guess it was a major thing to leave out!

If we take into account things such as market cap, div etc. the company appears undervalued. However I guess, it fits into:
* Is the company undervalued? - Appears to be.
* Is the company growing organically? - No (Seems reliant on buying new businesses / rather than taking account of ).

Would I buy SPO?
It really depends, on the side of perhaps getting some 'value', yes. But on the side of where growth will come from; and what the financials appear to be telling me; I wouldn't want to own this company. Given the ASX is trading higher; and 'value' is seemingly harder to find, I'd rather have cash in the bank than own SPO.

As for putting it in a neat little box, my pure guess would be hinting toward outperform; particularly if a few big contracts are secured, and core businesses are inline with guidance. Though, I wouldn't want my money in a company that would rather keep buying, than having cash on the book. (Management would rather buy than address problems in the core businesses.) As previously mentioned, it is likely that the core businesses have underperformed, due to the gutting by Pacific Group Partners.

(My 2c, clearly not financial advise.)

Once again advice appreciated.

Next post will be on another under performing company within the ASX200 / or recently departed...however I'm going to steer clear of mining (Due to unpredictability of mining prices.)


Thanks,
Mcgrath,