With the interim profit reporting season in its final days, the upshot is that it has been a good one: according to AMP Capital, 73% of companies have reported profits higher than a year ago, which is a proportion both well up on the “norm” of 65%, and more impressively, the highest since the GFC hit a decade ago. About 46% of results have exceeded expectations – against a norm of 44% – and 66% of companies have increased dividends from a year ago.
Consensus profit growth expectations for the 2017-18 financial year across the market remain at about 7%, with resources stocks having been upgraded slightly to 15% and the rest of the market downgraded to 5% from 6%, mostly on the back of diminished expectations for the banks. Profit expectations for the 2018-19 financial year have been lifted from 4% to 5%, on the back of higher expectations for resource companies.
Here are three small-cap companies that surprised the market with good news during the reporting season:
Afterpay Touch (APT)
Market capitalisation: $1.5 billion
FY18 forecast yield: n/a
Analysts’ consensus target price: $9.20
Source: ASX
At $1.5 billion, fintech star Afterpay Touch is barely a “small-cap” these days, and it may not carry that tag much longer. Afterpay offers a buy-now, receive-now, pay-later service in the Australian and New Zealand retail markets: its frictionless payments technology allows shoppers to buy goods and split the payment over four equal fortnightly installments, with payments linked to the customers’ debit or credit accounts. A retailer pays Afterpay a merchant’s fee for each transaction.
Afterpay did not so much surprise on the profit front: it reported a pre-tax profit of $700,000 for the December half-year, which turned into a net loss of the same amount. Nor did Afterpay upgrade its guidance: it had done that in January, with respect to the half-year. Its EBITDA (earnings before interest, tax, depreciation and amortisation) came in at $12.1 million, slightly ahead of that guidance, which was for EBITDA in the range of $11 million–$12 million.
Where Afterpay surprised the market was in its key numbers, which quite simply, defied the tough times in retail. Underlying merchant sales for the Pay Later business increased to $918 million for the six months to 31 December 2017, up from $145 million in the same period in 2016. The number of merchants integrated into the Afterpay system swelled from 2,044 in December 2016 to 11,500. Merchant fees grew six-fold to $37 million in six months. The number of customers using Afterpay jumped from 400,000 to 1.5 million and 90% of transactions are repeat business.
Afterpay estimates that it now handles more than 25% of all Australian domestic apparel online sales and more than 8% of all online physical retail sales. It says more than 15% of all Australian “millennials” are Afterpay customers: its app has been downloaded more than one million times. And before the result, in January, Afterpay announced plans to introduce the Afterpay platform in the United States, in a strategic partnership with venture capital firm Matrix Partners, which took $19 million worth of shares.
Afterpay looks to be a working example of the “network effect:” the more customers who use it, the more merchants want to join it – and the more it grows. But the good news is that on analysts’ consensus target price, Afterpay appears to have scope to rise. It is a growth story only at this stage, with no dividend foreseen.
Webjet (WEB)
Market capitalisation: $1.4 billion
FY18 forecast yield: 1.7%, fully franked
Analysts’ consensus target price: $13.33
Source: ASX
After disappointing the market in November 2017 when it told its shareholders to expect total transaction volume (TTV) of $3 billion and EBITDA (earnings before interest, tax, depreciation and amortisation) of $80 million in FY18 – which was a disappointment because the market expected more – travel website operator Webjet came through with an outstanding first-half result. The company upgraded its full-year guidance, but brokers appear to believe this could turn out to be conservative.
The first half result was replete with strong organic growth, which investors always want to see. TTV (total travel services sold) surged 55%, to $1.44 billion, while EBITDA jumped 63% to $41 million. The business-to-consumer (B2C) flights booking business lifted earnings by 26%, and continues to generate bookings growth ahead of the market.
Bookings for flights grew by 11%, while packages booking jumped by 86.4%. The business-to-business (B2B) segment reported bookings growth of 227% and TTV growth of 168%, which saw revenue surge 170% and segment EBITDA increase 14 times. Webjet said bookings were up in January in all businesses and it expected trading in the second half to be stronger than in the first half – TTV, bookings, and EBITDA are all expected to be higher. Analysts expect about 47% growth in earnings per share (EPS) in FY18 and about 34% in FY19. And analysts see Webjet as undervalued, on consensus target price.
Integral Diagnostics (IDX)
Market capitalisation: $325 million
FY18 forecast yield: 3.6%, fully franked
Analysts’ consensus target price: $2.33
Medical imaging business Integral Diagnostics, which operates 47 clinics across Western Australia, Queensland and Victoria, was one of the guidance stars of the half-year reporting season. At its 2017 annual general meeting (AGM), Integral stated FY18 guidance for “high single-digit” net profit growth, but now expects to achieve full-year normalised net profit growth of about 20%, as a result of stronger revenue growth.
The upgraded guidance came after a first half that saw operating revenue rise 6% to $92.8 million and underlying net profit climb 23% to $9.2 million. The company expects strong revenue growth in the second half, as well as cost efficiency gains, lower capital spending, driven by economies of scale, favourable lease negotiations and a reduction in its effective tax rate from 30% to 28%, flowing from capital revaluations for tax depreciation purposes.
Integral Diagnostics is fighting off a takeover bid from rival radiology business Capitol Health, which Capitol lobbed in November. Integral has told its shareholders to take no action, describing the offer as “opportunistic” questioning the underlying value of Capitol’s shares, and saying it doubts that Capitol has the ability to run a combined business.
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