Guidance Time: APN Property, ARQ Group

What is guidance?

Companies often provide guidance which is related to the future performance of the company in an effort to indicate the upcoming prospects of the company. It is alternatively known as earnings guidance, forecast and so forth.

Generally, the companies provide guidance in the released results, and an update to guidance is provided when the companies have incurred material changes to the business, leading to material changes to the earlier provided guidance.

What is a stapled security?

A stapled security is a kind of a financial instrument, consisting of two or more entities stapled into one security. Stapled securities are bound through a contractual agreement that does not allow them to be traded separately.

In Australia, these securities are very popular. Some of the well-established stapled securities include – Transurban Group (ASX: TCL), Charter Hall Group (ASX: CHC), and Sydney Airport (ASX: SYD).

Some relevant updates to the market by APN Property Group & ARQ Group:

APN Property Group Limited (ASX: APD)

Founded in 1996, APN Property Group is a pure-play REIT operator with two listed REIT funds on ASX – APN Industria REIT (ASX: ADI) & APN Convenience Retail REIT (ASX: AQR). In addition, the group operates Real Estate Securities, providing exposure to listed REIT players in Australia & Asia. Its Direct Funds provides an investor with exposure to unlisted property syndicates.

On 24 September 2019, the company announced that it received a draft class ruling from the Australian Tax Office with regards to the stapling proposal. It is currently finalising the Explanatory Memorandum and Notice of Meeting, which would consist resolution related to the stapling proposal.

Reportedly, the Board of the company intends to put forward the proposal to the shareholders at the Annual General Meeting scheduled on 20 November 2019, and it also recommends voting in favour of each resolution related to the stapling proposal.

Admittedly, if the proposal is approved, on the basis of current assumptions – the Board of the company intends to upscale the FY2020 guidance from a dividend distribution of 2.75 cents per share to ~3.15 cents per stapled security.

Presently, if the proposal is approved, the Board of the company expects ~60% of the FY2020 stapled security distribution to include a dividend, which is likely to be fully franked, but this expectation remains dependent on the circumstances, at the time of implementation of the transaction.

FY 2019 Review

In FY 2019 (ended 30 June 2019), the group’s statutory profit for the period stood at $14.5 million, an increase of 7%, which was attributed to unrealised profit on investments in its managed funds.

Recurring income represented ~99% of the total income for the period, and its funds under management increased by 5% or $127 million to $2.9 billion. At the year-end, the balance sheet of the company was at a strong position with cash holdings of $15.7 million, and net tangible assets per share of 40.2 cents, witnessed an increase of 7%.

As a result, the Board of the company increased its (partially franked) dividend by 50% to 1.5 cents, and with this the full-year dividend reached 2.75 cents per share.

On 25 September 2019, APD stock was trading at $0.530, (at AEST 11:46 AM) down by 0.935%.

Arq Group Limited (ASX: ARQ)

Arq Group operates through two divisions providing budding businesses, with capabilities to operate online. Its SMB division provides domain name registration and renewals, website & email hosting, website development, search engine marketing and social advertising campaigns for businesses in Australia & New Zealand. Its Enterprise division provides cloud, mobile application development, data & analytics to Australian enterprise & government organisations.

In a release dated 23 September 2019, the company had advised market regarding its updated guidance and a strategic review. Accordingly, the company is suffering from deteriorating market conditions in its Enterprise division. Meanwhile, it has appointed Macquarie Capital (Australia) Limited to commence a strategic review to determine scope for shareholder value creation.

Revised Guidance

Reportedly, the market conditions for the company’s Enterprise division are not complementing the forecast of the second half of 2019. Therefore, the company intends to alter the guidance, as cost reduction initiatives appear insufficient to cover headwinds.

The company now expects to report underlying EBITDA in the range of $16.8 million to $19.3 million compared to the previous guidance of $27 to $30.5 million.

Enterprise Division

In June this year, the company provided guidance expecting growth from existing & new accounts, and this is tracking below expectations. It is said that several existing customers have been reviewing their respective expenditure, resulting in a delay of new work, and pause in the existing work.

The company believes increasing focus on costs across a range of sectors, including banking & finance, aviation & telecommunications have propelled these headwinds to its operating environment. It expects revenue of the Enterprise division to be flat compared to the interim period.

Besides this, the company is also witnessing margin impacts due to overhead cost structure that is appropriate for a larger business. It has removed ~$1.2 million of overhead costs since June, and further $1.1 million of annualised cost are expected to be removed in the remainder of this year.

ARQ expects underlying EBITDA for the enterprise division to be in the range of $1 million to $2.5 million down from previous guidance of $12 million to $14.5 million.

SMB Division

It is reported that the SMB division is trading in line, with the previous guidance provided by the company – $9.7 million to $10.7 million of core underlying EBITDA for the year 2019. The company had sustained recovery in sales of high ARPU digital marketing services, and growth in subscription revenue would deliver growth in digital marketing services.

CEO Departure

Reportedly, the strategic review may lead to the sale of parts of the company, leading to smaller and less complex business. The CEO of the company – Martin Mercer, has agreed to step down and would be leaving the business in a transitioned manner.

The company has appointed Tristan Sternson as an interim CEO, and the search for a new CEO is underway. Tristan joined the company as a part of an acquisition, and he has a strong professional experience in the enterprise market.

On 25 September 2019, ARQ stock was trading at $0.345( at AEST 11:49 AM), down by 4.167 percent.


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