Top Picks for June 2016

 
Nearmap Ltd


NEA Details
 
Contract win worth $1.1 million: Nearmap Ltd (ASX: NEA) reported that it bagged $1.1 million annual contract from one of its client in the digital infrastructure companies. This follows the $1 million contract executed by the company recently. Moreover, Nearmap announced a strong third quarter of 2016 results reporting 12% rise in sales on Q-o-Q basis supported by accelerated growth in Australia and the US. Its Australian subscription revenues were up 32% to $7.8 million for the quarter as compared with $5.9 million in corresponding quarter. The US population coverage by Nearmap imagery increased by 12 million in Q3 to 182 million.
 

Quarter performance (Source: Company reports)
 
In the last half yearly period, Nearmap has spent approx. $3.7 million on plant and equipment and development costs much of which is a likely spent for the US operation that has started yielding result. The company has also launched First HyperCamera2 flights and successfully completed test flights in Australia as well as the US. The continuously rising subscription bases and bagging of high value contracts indicates that the company is moving on growth track. We therefore maintain our “Buy” stance at the current price of $0.44.
 
 
SomnoMed Ltd


SOM Details
 
New business division: SomnoMed Ltd (ASX: SOM) recently announced the results for its retail entitlement offer of May 03, 2016, indicating 80.4% acceptances received for new shares to be issued on June 06, 2016. The offer raised about $6.467 million in addition to $4.035 million raised through institutional offer. The proceeds will be used for ongoing working capital requirements and for investments. SOM has obtained an exclusive license with Simple Sleep Services LLC (S3) to open and operate direct to patient sleep treatment centres in the USA and globally. The SomnoMed’s new subsidiary Sleep Centers America Inc (SCA) is incorporated with 84% owned by SomnoMed and S3 will operate at least 5 centers by end of FY2017 and 15 centers by end of FY2018. The company expects a breakeven within 12 months of opening. The company’s entitlement offer raised approx. $10.5 million to meet its working capital requirements and investments associated with SCA.
 

 
Global performance (Source: Company reports)
 
Meanwhile, management has guided FY16 revenue of $44-45 million, which is a growth of 28-30% against FY2015 and underlying EBITDA of $2.0 -2.4 million, growth of 130%-175% on FY2015. As a result, the stock delivered over 20.5% return in last six months (as of June 01, 2016). We give a “Speculative Buy” on the stock at the current market price of $3.21
 
 
Xero Ltd


XRO Details
 
Strong FY16 results and remarkable growth opportunities: XERO Ltd (ASX: XRO) reported strong 67% growth in revenues for FY16 to $124 million while its gross margin increased to 76%. Xero has remarkable growth opportunities despite the already-stellar growth it has experienced in New Zealand, Australia and the UK.
 

Xero subscriber velocity (Source: Company reports)
 
The group offers online accounting platform for small business but is increasingly diversifying its offering and now becoming more of an online portal for everything small business related. Xero’s subscription model is its competitive advantage whereby customers once acquired, maintained their subscription for an average 7 years. Moreover, with the charges ~ $60 a month, it is a very low cost solution. Considering the strong growth reported by the company, we feel the company is on growth track. We believe Xero will continue to expand business and report rise in revenues. We therefore give a “Buy” recommendation at the current price of $17.52
 
 
BigAir Group Ltd


BGL Details
 
Signs agreement with new strategic partner: BigAir Group Ltd (ASX: BGL) has entered into new strategic partner agreement with Australian Student accommodation provider, the PAD to install and manage a high speed WiFi network at their new Brisbane site consisting of 286 rooms student accommodation facility. This is the part of a pipeline of over 2,500 room to come over from PAD. BigAir manages wireless internet services covering more than 40,000 student beds around Australia and the new contract from PAD will enhance its growth potential further. The stock has generated over 18.52% gain in share price in last five days (as of June 01, 2016). We believe the stock is a “Buy” at the current market price of $0.645
 
 
Magellan Financial Group Ltd


MFG Details
 
Rise in funds under management: Magellan Financial Group Ltd (ASX: MFG) has advised that the last date of quotation of the MFG 2016 Options exercisable at $2.6411 on or before June 30, 2016 will be June 24, 2016. MFG reported rise in net inflows of $487 million in the month of April 2016 over March 2016. It included net retail inflows into Global equities strategies of $151 million, net retail inflows into infrastructure equities of $39 million and net institutional inflows $297 million.
 

Five-year earning summary (Source: company reports)
 
The company has reported revenues of $182.2 million and profit after tax of $109.3 million for first half of FY16. The company has also declared interim dividend of 51.3 cents per share. MFG has cash and liquid assets of $312.9 million as on December 2015 with no debt in the books. In the last month the stock has given 13.44% returns (as of June 01, 2016). We place a “Buy” on the stock at the current market price of $23.57
 
 
National Australia Bank Ltd


NAB Details
 
Capital Notes 2 Offer and improving net interest margin: National Australia Bank Ltd (ASX: NAB) announced an offer of NAB Capital Notes 2 (offer) on May 31, 2016 wherein the offer is made under the prospectus filed with the Australian Securities and Investments Commission on May 31, 2016 (Prospectus). Through this offer, NAB intends to raise $750 million with the ability to raise more or less. NAB also reported a 6.5% rise in cash profit to $3.31 billion and surprised market by reporting rise in net interest margin for the half year ended March 2016.The net interest margin rose for the first time since 2011, to 1.93 % from 1.88 % of September 2015. Meanwhile, the bank has spun off the UK business and registered a net loss of $1.74 billion. But, the bank has decreased charges for bad and doubtful debts by 6% on secured loans. The bank set aside $375 million for bad loans, this helped to improve net margin but may partly impact future earnings. Recently, NAB sold 80% of its life insurance business to Japanese insurance operator Nippon Life in a deal valued at around $2.4 billion to focus on Australian and New Zealand lending. For half year ended on March 2016, the lender’s Australian banking cash profit climbed 5% to A$2.69 billion, the New Zealand unit’s earnings dropped 3.3%, while profit at the wealth management division rose 11.7%. We maintain our “Buy” rating on the stock at the current price of $26.34
 
 
Fairfax Media Ltd


FXJ Details
 
Proposed merger of New Zealand operation: Fairfax Media Ltd (ASX: FXJ) is planning a merger of Fairfax New Zealand with APN’s New Zealand business (NZME). The ownership structure for the proposed merged entity has not yet been established but it is currently proposed that NZME would acquire Fairfax assets or shares from parent company Fairfax Media Limited for a mix of new shares in NZME and cash. Fairfax Media’s shareholding in the merged entity is expected to be less than 50%. Furthermore, the Group is investing in Domain Group and is focusing on growing vertical - Life Media and Events with competitive strengths and skills.The Domain Group has acquired a 35% interest in Oneflare Pty Ltd for around $15 million. Local trade service is a substantial market and Oneflare is well positioned to leverage the benefits of growing digital marketplace. The investment would allow Fairfax to broaden its offering across the property lifecycles. The stock has gained 13.12% in the last one month (as of June 01, 2016) while we maintain our “Buy” recommendation on the stock at the current price of $0.905
 

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