Melbourne IT (MLB) & Web Central Group (WCG)

[stolwyk]

Half year report:

http://stocknessmonster.com/news-ite...E=ASX&N=282222

Extract:
"Highlights from the newly consolidated WebCentral Group:
#56256;#56451; Revenue $28.72m up from $5.05m at 31 December 2003
#56256;#56451; Net profit $2.20m up from $0.36m at 31 December 2003
#56256;#56451; Interim dividend of 1¢ per share declared
#56256;#56451; EPS 5.89¢ per share, diluted EPS 5.73¢ per share
#56256;#56451; Mr Wayne Goss and Hon Neville Wran AC QC appointed to join WebCentral Group Board

“The first half has given us strong momentum for the remainder of the financial year. Our growth strategy is focused on expanding our presence in the corporate and government markets in Australia and the US, as well as driving growth through our wholesale and ASP markets,” Mr Spicer said.

“Our operating divisions have signed significant new corporate and government clients in the previous half year and will continue to leverage that success in the coming six months.

WebCentral Pty Limited is expecting increased demand in 2005-06 for its high end managed hosting services and application hosting solutions and FTR will capitalise on its success with the SSA contract to penetrate new markets.”

WebCentral Group Limited (ASX:WCG)
Level 12, 77 Castlereagh St, Sydney | www.webcentralgroup.com.au | info@webcentralgroup.com.au

[stolwyk]

About $1.64 (+19) Quote 164/168. Not much left to sell.

[OneUp]

Hi Micro, all I can say is that management will be in Brisbane, Sydney and Melbourne later this week to brief interested parties on the result. If you want to go email Monique. The worst they can say is no .

Overall WCG's NPAT of $2.2 m was at the lower end of my expectations. FTR chimed in with an excellent result. But Web Central was less impressive - revenue was roughly in line with expectations (increasing 7.6%) but EBITDA was a smidgen lower. This is surprising, given the economies of scale that should arise from increased revenue as discussed earlier. One reason for this may be the increased sales & marketing expenditure this half, the benefits of which would show up in coming periods. Another reason could be a decrease in the revenue from one or two major higher margin contracts (from $2.9 to $2.4m). Whatever the cause, I will read over the reports in a bit more detail and be quizzing Spicer.

It was pleasing to see debt repayments ahead of schedule due to strong cash flows and no dilutive capital raising planned. Focusing on EPS growth is just what I wanted to hear. With low forecast capex debt repayments alone will ensure an improved second half (because of lower interest costs). In addition, and as noted in the report, the results to June 30th 2005 will be accounted for under A-IFRS. Goodwill of $830,000 was amortized in the first half. Under the new system, goodwill is not automatically amortized but tested for impairement. In the future it is unlikely to be written off for WCG. Indeed, if I read correctly, WCG may well write back on the $830,000 in the second half. If we 'normalise' the current result to exclude goodwill amortization, then we get NPAT of $3.0m.

I expect a full year NPAT (assuming no goodwill amoritzation is charged this year) of at least $7m. That comes from adjusted NPAT of $3.0m in the first half, reduced interest expense in the second half, and continued improvement in both businesses. With a market cap about $70 million, WCG still offers outstanding value IMHO.

[stolwyk]

http://www.couriermail.news.com.au/c...5E3122,00.html

Ex-premiers beef up WebCentral (Thanks Figjam)
Liam Walsh
15feb05

ONE of Australia's biggest Internet businesses, the Malcolm Turnbull-linked WebCentral Group, has snared ex-premiers of Queensland and NSW in a bid to boost corporate and government work.

WebCentral, which hosts 25 per cent of Australia's websites, said director appointees Neville Wran and Wayne Goss would bring government sector experience and commercial expertise to the board.

Yesterday, it reported underlying revenue growth for the half year of about 26 per cent to $28.7 million, net profit of $2.2 million and a 1¢ fully franked interim dividend.

Chief executive officer Andrew Spicer predicted growth at the "larger end of town".

"Corporate and government clients are increasingly using the web as a core part of their business," he said.

WebCentral shares rose 19¢ to $1.64.

Mr Wran, a former NSW premier and Mr Goss, a former Queensland premier, started as non-executive directors this month.

Mr Spicer said their political connections would prove useful.

"Not in a negative way, but just they know how government ticks," he said.

WebCentral was known last year as FTR Holdings – partly owned by Liberal parliamentarian Malcolm Turnbull and wife Lucy. FTR bought the remaining half of WebCentral last year for about $19.8 million.

The half-year report reveals goodwill has jumped from zero to $14.3 million due to the acquisition – resulting in net tangible assets per share falling from 44¢ to 9¢.

The company also has its FTR unit selling recording software and devices. Revenue from FTR lifted $3.1 million to $8 million on a new US contract.

The WebCentral operation's revenue rose $3 million to $20.7 million with the largest growth in wholesale and smaller-end sectors.

Independent telecommunications analyst Paul Budde said WebCentral had "established itself as one of the leaders in the market and that's paying off".

A boom in broadband technology would drive corporate demand for video-based web services, he said.

Advisory firm IDC Australia predicted the web-hosting sector would expand from $217 million in 2005 to $300 million in 2007.



>>>>>>>>>>>>&g t;

[OneUp]

I've had a chat to Spicer.

Key points:
* Like I supposed, the lower EBITDA margin for WPL was due to increased selling expenses (in the range of $500k) mainly wages.
* Second half tends to be stronger than first half and no different this year (no problems so far!)
* SSA Contract in second half will underpin FTR earnings and will continue into 1H FY06. Noted that they are trying to win additional contracts of this nature but that such wins are difficult to predict this far out.
* Decision on goodwill amortization charge not made yet but at the least expect goodwill will be lower.
* Expect EBITDA margins to be fairly constant (if not ticking up a touch) for next 12-18 months before increasing again at a reasonable clip. They believe EBITDA margins can be somewhat higher (and will be achieved with increased scale) looking into the future.
* Strong free cash flows. These will be used to
(1) Pay down debt. Company is continuing to pay down debt, and will probably go as low as 5% of market value of equity (about $3.5m). But happy with 10-20% debt levels. Noted it is generally hard for IT companies to get much debt funding but WCG managed to borrow for the WPL purchase at a good rate of interest. Potential for more aggresive capital management in the future (ie borrow more to expand/make capital returns to shareholders) but Board is quite conservative in this regard.
(2) Make acquisitions. These will likely be of the smaller medium sized type. Not interested in DSE or HWG - considered too expensive and not worth taking over.If no worthwhile acquisitions can be found then can either:
(3) Buy back stock - from existing major shareholders rather than the free float so as not to decrease liquidity or
(4) Increase the dividend.
* No general capital raising planned. Seeking to convince one or two major shareholders to sell 10% of company stock to increase liquidity.

[OneUp]

I have communicated some more with Spicer.

The company is looking at ways to improve communication of its underlying profitability to investors. This will include emphasising the NPAT pre goodwill (as many companies do) and the EBITA (as comparable companies like HWG do) rather than NPAT. Clearly, such a change in emphasis does not change the underlying value of WCG but may improve investor appreciation of that value.

Spcier also confirmed that "We'll also be adopting a completely different goodwill treatment when Australia adopts the International Accounting standards next financial year. Goodwill will be subject to an impairment test, and may not need to be amortized."

So under the new rules, the PE of WCG will be about 10x assuming $7m NPAT for the year (pre goodwill...of which there is unlikely to be under the new system).

[micro]

I am pretty sure most institutional investors would add back goodwill anyway when assessing a growing company - I certainly do - so I cant see how promoting ebita rather than npat on its own will do anything for the share price. Why dont directors just put their heads down and worry about getting the business running even better ( VSL fell into this trap a couple of years back )and the share price will eventually move in the right direction. The only thing a high share price does usefully for the company in the short term is if new capital needs to be raised for expansion at an outrageously high price.
A little bit of interest crept into WCG and HWG yesterday. I think shareanalysis in NZ had a write up on FTR once, if directors wanted an immediate boost in the shareprice all they would have to do is put their case to shareanalysis. Similarly, a write up in shares mag would help. The only thing with this approach is that a lot of short term investors would get in and the shareholder base might become weaker. Still, cant complain about price at the moment.

[OneUp]

Micro, WCG is not targeting institutions - the shares are tightly held as it is!

Rather, Spicer is looking at ways to communicate results better to retail investors, to increase interest and liquidity. You and I and others as well as analysts and institutions who are familiar with goodwill will usually discard it when calculating underlying profitability and PE ratios etc. But there are a number of retail investors who lack basic financial literacy (as we all did at one stage in our life!), and may not realise that goodwill amortization is a non cash charge or that there is even a difference between amortization and depreciation for example. If you look at the latest WCG press release, I did not see anywhere the NPAT pre goodwill figure. I had to read through the half yearly and look in the notes to the accounts to get it. How many people do that?

So stating the numbers plainly may help more investors understand the underlying performance of WCG.

And when WCG's numbers are re-stated under A-IFRS's treatment of goodwill (via the impairement test) there might be some out there who are surprised by the sudden surge in reported NPAT. For example, let's assume goodwill amortization for this financial year was $1.6m, NPAT was $5.4m and NPAT before goodwill was $7.0m. $5.4m would be the bottom line under current accounting standards and $7.0m the bottom line under A-IFRS (assuming no impairement, which seems the likely outcome). Such a notion that the presentation of the results can affect the share price may not fit well with efficient market hypothesis, and for a large company followed by a number of analysts and institutions I doubt it would make a difference. But WCG has few (any?) analysts following it, so it could well do.

Like I said, the way things are reported do not affect the intrinsic value of WCG one iota, but they can affect market value.

PS: Welcome to the forum

[Damo79]

All the way down to $1.43 at the moment. Must admit I'm suprised. I thought they'd hold their price at the $1.60 ish mark and then make big gains in next reporting season. Considering getting back in. Unless something has really changed, WCG is excellent value at this price.

Damo

Held but took profit.

[micro]

Yes, the price is down, but depth on the buy side looks like someone is interested at least and not a mum and dad type either.