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Why People Infrastructure Shares (ASX PPE) Is A Stock To Buy

by Henry Fung - Partner Managing Director Henry Fung - Partner Managing Director No Comments

People Infrastructure Ltd (ASX PPE), a workforce management company, provides contracted staffing and human resources outsourcing services in Australia and New Zealand. The company offers recruiting, on-boarding, rostering, timesheet management, payroll, and workplace health and safety management services. It serves community service, mining, general industrial, infrastructure, construction, food processing, childcare, government, landscaping, and hospitality sectors.

People Infrastructure shares are currently Australia’s largest listed workforce management business, employing over 13,000 people in FY18. More than 3,000 clients diversified by geography and sector, with about 50% of the business being generated from non-cyclical industries.

People Infrastructure shares was floated in November in FY17 at A$1.3, and its price has increased by 53% to A$2 within a year. In FY18, its revenue increased 14% to A$219M, with pro forma EBITDA increased 30% to A$13M. PPE currently sits at about A$134M market capitalisation.                       

People Infrastructure Shares (ASX PPE) share price

Figure: PPE – Share Price History

Well established within the industry

 Well established position in the industry with a national footprint. PPE has customer locations that span through Australia, with 57% of gross profit coming from Queensland, 25% from NSW and 18% from other states in FY18. Moreover, PPE serves a diversified portfolio of sectors, including disability care, nursing and childcare, IT, infrastructure, mining, food processing, and landscape horticulture, with more than 40% of gross profit coming from community services. Furthermore, PPE has grown to have 19 locations across Australia and New Zealand, with 159 employees servicing over 3,000 clients.

Figure: People Infrastructure Shares – FY17-18 Gross Profit Source

People Infrastructure Shares (ASX PPE) - gross profit source

Source: FY18 PPE Investor Presentation and FY17 PPE Prospectus

Long-standing client relationship but risky revenue source. PPE has a relatively low client churn rate, the average tenure of the top 20 clients across the business is more than five years. However, PPE generates a significant amount of revenue from a limited number of key customer relationships and a loss of business from these key customers could result in a material impact on earnings. Moreover, PPE usually provides services to clients under a relatively short-term agreement, under which reduction or termination of the use of PPE service comes at a low cost and relatively short notice (Source: FY17 Prospectus).

Strong focus on safety lowers Employee and Litigation Risk. PPE is subject to employee and litigation risk due to its business model, but it has reduced this risk significantly by an established system for safety risk. PPE carries joint responsibility under occupational health and safety law for the staff it places in other businesses and thus could be liable for claims should adverse events related to the employees’ health and safety occur. However, with well-established health and safety policies and procedures, PPE has reduced the number of incidents, illness and injuries to a level lower than the industry average (See illustration).

Figure: PPE – FY18 Workcover rate*

People Infrastructure Shares (ASX PPE) - workcover rate

Source: FY18 PPE Investor Presentation

*QLD data is a comparison of average work cover rate versus industry work cover rate. NSW data does not provide an industry work cover rate, and therefore the data used is the premium payable compared to the industry calculated tariff premium

Earning-accretive but acquisition risk. PPE is continuously seeking acquisitions that are significantly EPS and DPS accretive to expand its business. Earning-accretive acquisition happens when a high P/E company acquires a low P/E one to boost the post-acquisition EPS and encourage a rise in the price of shares. However, such an acquisition could decrease the overall earning quality should the integration does not go well, and synergies are not realized.

Well positioned in a strong growth industry

Total employment and wages growth. The contracted workforce industry is supported by total employment and wages growth. Total employment in Australia is projected to increase from 12.55 million to 13.44 million people (a 7.06% increase) over the five years to 2023. The employment wage price index (WPI) for Australia over the 20 years to 2017 has recorded an average growth rate of 2.1% per annum.

Casualisation of the workforce. Industrial growth is further driven by a casualisation of the workforce. This trend is demonstrated by the growth of part-time employment.  The percentage of part-time employment in the Australian workforce has grown from 29% in 2007 to 33% in 2016. Besides, total part-time hours worked as a proportion of overall hours worked in the economy has expanded significantly, from 8.9% in 1990 to 16.8% in 2017, representing a 3.7% CAGR. This phenomenon reflects a growing preference for flexible work arrangements by both employees and employers during periods of political and economic uncertainty, which is further accentuated by the trade war between U.S and China and a dimmer global projection of economic growth.


Figure: Proportional share of full-time and part-time employees

People Infrastructure Shares (ASX PPE) - part and full time work

Source: ABS (Source)

Figure: Part-time hours worked (‘000)

People Infrastructure Shares (ASX PPE) - part time hours

Source: ABS (Source)

Strong growth from the community sector. PPE has the largest industry exposure on the community sector, and strong growth in this sector is expected to benefit PPE’s bottom line considerably.

With more than 40% of its gross profit generated from healthcare, childcare, and hospitality, People Infrastructure is a key provider of contracted workforce and HR outsourcing by operating in the community services for more than ten years.

The Australian community service sector is experiencing high growth and driving strong demand for labor requirement. This growth is underpinned by the aging population of Australia, and more importantly, the roll-out of NDIS, a major government disability funding program. In 2015-16, the total Australian government expenditure on community services was estimated at $30.7 billion, equivalent to 1.9% of GDP and 10% of total government spending. Total government funding for disability services was $8.4 billion in FY16, with annual growth in funding for the sector averaging 7.6% over the prior ten years. Of this total, $4.1 billion (48.3%) related to accommodation services, which is a key sub-sector of disability services where People Infrastructure clients operate. Implementation of the scheme is expected to drive major demand for employees in the sector, with growth in the disability workforce forecast to increase by 24% per annum by 2019.

Figure: Total real growth in government spending by functions – 2017-18 to 2020-21(a)

People Infrastructure Shares (ASX PPE) - government spending

Source: Australian Budget 2017-18 (source)

Figure: Forecast workforce in community sector required to service demand

People Infrastructure Shares (ASX PPE) - workforce demand

Source: NDIS Market Position Statements

People Infrastructure shares have strong financial performance

Figure: PPE – FY15-18 Pro forma Financial Performance

People Infrastructure Shares (ASX PPE) - financial performance

Source: FY18 PPE Investor Presentation

Double-digit growth in profitability. Over four years, PPE’s revenue increased 15.4% CAGR to 219M, EBITDA increased 12.1% CAGR to 13M, NPATA increased 13.8% CAGR to 8M, and the number of employees rose 13.1% CAGR to 14,000. However, it is also worth noting that the statutory NPAT is shown consistently less favorable, as illustrated below. Moreover, since PPE is listed only for one year and all profit figures before FY18 are pre-listed, this positive trend of earning may not be very informative.

Nevertheless, the reason why statutory NPAT is much lower than the pro forma NPAT in FY17 is that the FY17 statement excludes AWX and Edmen before their acquisition. In summary, the profitability trend is very positive.

People Infrastructure Shares (ASX PPE) - profit

Low debt but future funding needed. Net debt/EBITDA has decreased from 37.2x to 0.7x FY17-18, and most of the debts are financed by raised capital. Despite its low debt level, People Infrastructure shares only has 4.8M cash on hand, and it would need debt or equity funding soon should it want to sustain its high pace of expansion.

A leader amongst its peers

Rubicor Group Limited (ASX RUB), Ashely Services Group Limited (ASX ASH), Clarius Group Limited (ASX CND) and AWF Madison Group Limited (NZSE AWF) are selected as the peers of PPE due to the similarity of the nature of these businesses, size of the company and their geographic locations. These four companies operate primarily in the Australasian area by providing recruitment services, with revenue all ranging between $1M to $3M.

People Infrastructure Shares (ASX PPE) - peer comparison

Source: S&P IQ Capital and Company report

*PPE doesn’t have FY17-Jun Price available because it was listed on Nov
**RUB doesn’t have FY18-Nov Price available because it ceased trading
***CND didn’t have positive earnings in FY17-18

No.1 in EBITDA margin. As illustrated, PPE has the highest growth of EBITDA margin, with EBITDA margin increased 3.9% FY17-18. RUB ranked the second, with EBITDA margin rose 1.7%. Furthermore, in FY18, PPE has the highest EBITDA margin at 4.8%, followed by AWF at 4.0%, ASH at 2.4%, RUB at 0.5% and CND at -0.7%.

Highest Growth in EPS. PPE has the highest growth in EPS FY17-18. PPE’s EPS rose 17c, followed by ASH up by 7c, CND down by 1c, AWF down by 2c and RUB down by 11c. PPE has the second highest EPS in FY18 at 0.1 and AWF has the highest EPS at 0.15.

Highest P/E and P/B. PPE has a P/E ratio of 20 compared to other competitors at 8-13, and it has a P/B ratio at 3.25 while other competitors sit at 0.3-1.7. This is expected has PPE has experienced strong growth and the market is pricing in growth in the future.

People Infrastructure shares have strong growth potential

People Infrastructure shares saw high growth in profitability and share price since it listed by positioning itself in the fast-growing community sector and by actively seeking for opportunities of earning-accretive acquisition. With total employment and wage growth, casualization of workforce and strong growth from community sector in Australia, and its superior profitability reflected in its EBITDA and EPS, People Infrastructure shares are well positioned for long-term growth in its share price.

Are Freedom Foods Shares (ASX FNP) A Stock To Buy?

by Henry Fung - Partner Managing Director Henry Fung - Partner Managing Director No Comments

Freedom Foods Group Ltd (ASX FNP) sources, manufactures, sells and distributes specialty cereal and snacks, plant and dairy-based beverages and nutritional products. Freedom Foods shares has a footprint in China, South East Asia FNP’s health-focused cereals and snacks are sales leaders on e-commerce site Tmall and JD.com, the two most significant online e-commerce websites in China. Freedom Foods have also entered North America since 2015.

In FY18, FNP launched over 70 new products. Net sales increased 34.5% to A$353M, operating EBITDA increased 49.3% to A$39.2M and operating net profit increased by 96.9% to A$19.4M. FNP currently sits at about A$1.63B market capitalization.

Freedom Foods Shares (ASX FNP) - Summary

Strategic Position

The key strategy of FNP is described as three ‘pillars’: capability, innovation, and markets. Its diversified portfolio of products, which includes cereal, nutritional & specialty (Vital Health), dairy, snacking and plant-based beverages, and numerous innovative product formats under each category, makes it difficult to identify the one key product or strategy of FNP. However, it is believed that FNP does not have a key product. Its three key strategies corresponding to each ‘pillar’ are to realize growth through higher capacity in dairy, innovative product formats and overall higher brand awareness.

Figure: FNP – Strategy Pillars

Freedom Foods Shares (ASX FNP) - 3 pillars

Source: FY18 Full Year Results Presentation

Figure: Product type 

Freedom Foods Shares (ASX FNP) - Products

Source: FY18 FNP Full Year Investor Presentation

Figure: Numerous product formats

Freedom Foods Shares (ASX FNP) - Product Formats

Source: FY18 FNP Full Year Investor Presentation

Pillar #1 Higher Capacity in dairy

Rapidly increased dairy capacity ahead of expected demand. FNP has completed A$350M CAPEX over three years including a new state of the art UHT dairy and milk processing facility in Ingleburn in South West Sydney. Furthermore, FNP revised its dairy production projection aggressively by almost doubling its FY20 plan, from 180 million litres to 350 litres. High CAPEX is expected to increase FNP’s capacity, efficiency, and profitability further.

Figure: FNP – FY17-20 Dairy Production Projection

Freedom Foods Shares (ASX FNP) - Dairy

Source: FY18 FNP Full Year Investor Presentation

Figure: FNP – FY14-18 CAPEX                                                                  

Freedom Foods Shares (ASX FNP) - Capex

Source: Company data, Bloomberg

Figure: FNP – FY06-18 Investment

Freedom Foods Shares (ASX FNP) - Investment

Source: FY18 FNP Full Year Investor Presentation

Pillar #2 & 3 Innovative Product Formats and Overall Higher Brand Awareness

Increase Market Share Through Innovation. FNP attempts to increase its market share and brand awareness in Australia by updating its products frequently. In FY18 another 70 kinds of products were launched, and FNP has seen an increase in branded sales from 53% to 60% and innovative products taking up 21%, up from 12% of total sales (as illustrated below). In total FNP has 37 brands and more than a hundred products, while cereals & snacking has the highest number of brands at 16(See graph below). Consequently, it ranked first within the health food section of retail supermarkets in Australia, No.1 in UHT Plant Beverages in Australia and it even won 2018 World food innovation awards.

Freedom Foods Shares (ASX FNP) - branded sales

Source: FNP FY18 Full Year Investor Presentation

Strong financial performance – but expensive

FNP recorded a very positive trend in revenue and gross profit. But EBITDA and net income saw declining trend FY17-18, primarily due to its expansion in the market.

Figure: FNP – FY15-20E Adjusted Revenue               


Freedom Foods Shares (ASX FNP) - adjusted revenue

Source: Company data, Bloomberg, M&F Co Estimate

Figure: FNP – FY15-20E Adjusted Gross Profit

Freedom Foods Shares (ASX FNP) - adjusted gross profit

Figure: FNP – FY15-20E Adjusted EBITDA                      

Freedom Foods Shares (ASX FNP) - adjusted EBITDA

Source: Company data, Bloomberg, M&F Co Estimate

Figure: FNP – FY15-20E Adjusted Net Income

Freedom Foods Shares (ASX FNP) - Net Income

Source: Company data, Bloomberg, M&F Co Estimate


High Revenue Growth in core segments. All segments but seafood have seen high revenue growth FY13-17. Seafood has declined from $A18M to A$13.8M while cereal & snacks tripled from $30M to A$90M and plant beverages increased six-fold from $10M to $64M FY13-17. The dairy segment, since PDG was acquired in FY15, has seen the highest growth in revenue and has the highest contribution (35.5%) to total revenue in FY18. Revenue contribution of each segment in FY18 is dairy (35.5%), cereal & snacks (34.1%), plant beverages (24.4%) and seafood (5.3%).

Declining Margin due to Expansive Product Portfolio and Reshaped retail landscape. An expansive product portfolio that consists of 37 brands and more than a hundred products have lowered FNP’s margin. Plant beverage category of FNP (operated under Pactum Australia) has the fastest expansion of product lines and saw EBITDA margin FY17-18 down from 30.9% to 13.7%. On the contrary, dairy segment (PDG) has a more concentrated product portfolio and saw about 100% increase in EBITDA, from 5.7% to 11.5%.

Moreover, the increased competitiveness in the supermarket industry could be blamed for Freedom Foods shares low margin. According to FY18 IBIS World report, the rise of Aldi has forced retail giants like Woolworths and Coles to reduce prices to remain competitive. The competitiveness of the retail industry may have a flow-on effect on FNP’s profitability, as its sales in Australia is mostly channelled through Woolworths and Coles.

Overall, the overall EBITDA declined from 17% in FY14 to 8.6% in FY18, and normalized net income margin fell from 11.8% to 4.4% FY16-18.

Freedom Foods Shares (ASX FNP) - Margin

Are Freedom Food shares better than its competitors?

Freedom Foods shares (ASX FNP), Costa Group shares (ASX CGC), Bega Cheese shares (ASX BGA), and Graincorp shares (ASX GNC) all belong to the GICS industry group of Food, Beverage and Tobacco. Costa Group produces, packs, and markets fruits and vegetables. Bega Cheese operates in two segments including cheese and Tatura milk. GrainCorp receives and stores grain and related commodities.

Underperforming EBITDA Margin. Compared to its competitors, FNP’s EBITDA lost the advantage it had to BGA and GNC by declining from 17% to 8.6% FY14-18. In contrast, CGC surpassed FNP in FY17 and reached 18.8% in FY18.

Underperforming Profit Margin. Freedom Foods shares profit margin fell from 9% to 2.8% FY15-17 and bounced back to 3.6% in FY18. CGC again led the league in profit margin, which increased from 0.63% to 7.65% FY15-18. However, FNP’s underperformance of margin is most likely due to its rapid expansion, and it is expected to reduce costs and improve margin soon.

Improved but Still High P/E. Freedom foods shares P/E ratio dropped 48.5% from 163 to 84 FY17-18. Still, it is much higher than its competitors who sits around 20-40. However, this could also reflects the market’s confidence in its potential growth.

Figure: FNP – FY18 P/E Ratio Peer Comparison

Freedom Foods Shares (ASX FNP) - PE

Strong potential in China

Export to China is expected to increase steadily due to online channels and demand growth. By partnering with robust e-commerce platforms of JD.com and Tmall, FNP’s UHT and cereals export to China is expected to see high growth. FNP tactfully chose online retail because e-commerce in China is proliferating, with online transactions increased 300% from US$1.23 trillion to US$3.97 trillion in five years. Furthermore, UHT milk consumption takes up 50% of Chinese dairy sales, and it is growing steadily throughout the last five years (as illustrated).

However, FNP’s products are not competitive in price due to tariffs. M&F Co conducted a proprietary investigation on customer feedback on JD.com and Tmall (the two biggest channels that FNP used in China). The results show that although most of the Chinese customers like FNP’s products, they commented that it was ‘too expensive’. This higher price comes from import tax and transport cost, which has made FNP’s products about 300% more expensive in China than in Australia.

Such a high price tag has impeded most Chinese customers from buying FNP’s products. Furthermore, as the trade war between China and the US escalates, it is uncertain whether the tax rate could further increase. Worse still, there are many strong competitors on China’s e-commerce platform, including Devondale, Arla and Weidendorf, who sell almost identical UHT products at a similar price.

Nevertheless, the overall prospect of Chinese export is positive. As FNP further increase its capacity, a reduction in price is possible. Additionally, UHT demand from China is strong. Moreover, UHT sales in China are relatively inelastic to price as Chinese consumers are willing to pay a premium for foreign brands due to the 2008 milk scandal.

Figure: Dairy product consumption value in China from 2012 to 2018, by type (in billion yuan)

Freedom Foods Shares (ASX FNP) - milk consumption

Source: Statistica 2018 (Source)

UHT has a low market share in Australia. Over half of the consumption of milk in Australia comes from full cream and UHT takes up less than 10%. However, the lower market share may present opportunities for UHT milk as UHT has a lower price tag to fresh milk, especially during economic uncertainty.

Freedom Foods shares are a good stock but expensive

Freedom Foods Group Ltd (FNP) is a fast-growing company that sells specialty cereal and snacks, plant and dairy-based beverages and nutritional products with an international footprint. Its three strategies of higher capacity, innovative product format, and brand awareness have contributed to its exponential growth in the last three years.

Investment in dairy equipment is expected to improve FNP’s capacity, and China’s UHT market offers steady growth opportunities. However, UHT takes up a small share of the Australian market and FNP sees lower margin, primarily due to its aggressive expansion of product portfolio.

Moreover, compared to most of its competitors, FNP is no longer as attractive as it was regarding financial ratios such as margins and PE. Nevertheless, FNP is playing the long game by organically growing its brands, and there is substantial upward potential in the long term should its ‘three-pillar’ strategy work out.

Why PWR Holdings (ASX PWH) Is A Stock To Buy

by Henry Fung - Partner Managing Director Henry Fung - Partner Managing Director No Comments

PWR Holdings Limited (ASX PWH) is an Australia-based company which produces world-class cooling solutions for motorsports and automotive industry.

Apart from providing high-performance radiators, intercoolers and oil coolers for its elite customers such as Formula One, V8 Supercars, NASCAR and DTM, PWH also support customers by customising products to suit their specific cooling requirements. PWR holdings shares have seen stable growth in its sales revenue and accumulated the market capitalization of AU$314 million. Apart from its main business, PWH also generates revenue from automotive aftermarket, emerging technologies and OEM – original equipment manufacturers. Read more

Top 5 High Growth Best Stocks To Buy Now On The ASX In 2018

by Henry Fung - Partner Managing Director Henry Fung - Partner Managing Director No Comments

Picking the best stocks to buy now is hard, but if you dig hard enough, the ASX has a number of hidden gems that can provide strong growth for your portfolio.

Growth stocks are generally driven almost entirely by qualitative factors such as first mover advantage, quality and quantity of assets, permits and technology. Quantitative factors such as profit, revenue and so forth taking a back seat. Even though it is imperative that their financials are sound, when it comes to growth stocks, we are buying the story and perceived future value.

However, the very nature of valuing companies through qualitative factors means that there is a lot of room for error, opinion and subjectivity. This means that high growth stocks tend to be small-cap, high risk and highly speculative.  Read more

AVZ Minerals Shares (ASX AVZ) – A Highly Speculative, China Backed Lithium Stock

by Henry Fung - Partner Managing Director Henry Fung - Partner Managing Director No Comments

AVZ Minerals Limited (ASX AVZ) is a mineral exploration company that acquires, develops, mines and produces lithium, tin, tantalum and other base metals.

AVZ Minerals shares floated at A$0.15 in 2007, fluctuated between A$0.10 and A$0.20 FY07-FY11, before declining sharply to A$0.01 in FY12 and stayed at that level for more than four years.

In FY16, AVZ Minerals completed the acquisition of the Manono Project in Democratic Republic of Congo (DRC), the largest lithium deposit in the world. The acquisition pushed the AVZ Minerals share price up more than 3000% to A$0.34 within two years.

Since then the share price has declined to around A$0.10. At this point, AVZ Minerals is a play on the Manono project, of which only 50% has been explored.

AVZ Minerals shares is a typical high risk and high reward stock. Manono was recently confirmed to be the world No.1 lithium deposit in scale and No. 2 in grade. However, lots of risk and uncertainty exist in the short-to-medium term, as AVZ has not even begun commercial mining.

As illustrated in the table, AVZ is not profitable for five years as its activities were merely an initial investment in exploration. Read more

Are Medibank Shares (ASX MPL) A Good Dividend Stock To Buy?

by Henry Fung - Partner Managing Director Henry Fung - Partner Managing Director No Comments

Medibank Private (ASX MPL) is an Australian-based private health insurance provider. Medibank is in the business of underwriting and distribution of private health insurance policies through Medibank and ahm brands.

The company has two main segments, Health Insurance and Complementary Services. The Health Insurance segment offers private health insurance products, including hospital Cover and Extras Cover for Australia citizens and overseas visitors and students. MPL currently has 3.8 million members and has a 29.1 per cent market share in Australia.

The company is well known for its generous dividend payment. Since April 2018, the company’s share price has been in an uptrend and peaked at $3.3 on 15th August before falling back below $3.00 on soft results. Read more

Are Mirvac Shares (ASX MGR) A Stock To Buy?

by Henry Fung - Partner Managing Director Henry Fung - Partner Managing Director No Comments

Mirvac Property Trust (ASX MGR) is a real estate group focusing on real estate development and investment in Australia. Mirvac shares have seen strong growth this year from is steadily increasing within last month, from 2.1 to 2.43 this year and now has a market cap of 9.03 billion. The company has been named as the world’s most sustainable real estate company by Dow Jones Sustainability Index, differentiating them from other real estate groups. Read more