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11-Mar-2011
LEGEND CORP, AUSTBROKERS & NEPTUNE MARINE SERVICES
Small cap vultures take flight
ASX Code LGD, AUB, NMS
Legend Corp's (LGD) chief executive Bradley Dowe is at pains to emphasise that his company doesn't act as some sort of vulture in the event of others' ill-fortune.

“We're not seeking to profit from natural disaster,” he keeps repeating, and then adds, “but where there are assets that are damaged and destroyed we see a lift in business, definitely - whether it's flooding in Queensland, or north west Victoria, cyclone events, bush fires in WA or earthquakes in New Zealand.”

Of course Legend isn't looking to make money from other people's sorrow but there is no doubt that its business is well-placed to help alleviate the pain.


One of Legend Corp's divisions provides the accessory components such as cable lugs, links, connectors and tools that are required by public utilities, as well as for mining and rail infrastructure. In the half ending December 31, revenues from this segment represent about 15 per cent of earnings but RBS Morgans small cap analyst Scott Power thinks that this sector can easily grow by 20 per cent-plus a year.

Dowe does also say, however, that the damage from the recent floods is still being assessed. Meanwhile, his company is supplying electricity wholesalers with product because their stores were destroyed.

At 37 cents before today, its share price has climbed 67 per cent in the past six months. But the company still has a market cap of $80 million and trades on a current price/earnings multiple of under 10. Considering its growth prospects, it could easily trade on a P/E of 11-times, giving it a valuation of 42 cents in the near term.

Your columnist doesn't believe in sure bets, but given that the company has a dividend yield of 5 per cent and is well positioned in the infrastructure and energy sectors, there is much to like about it.

No pain all gain?

Another executive at pains to emphasise that people's mishaps aren't part of its business plan but accepts that his company stands to benefit is Lachlan McKeough, chief executive of Austbrokers (AUB).

This is a group that listed about five years ago with a market cap of $100 million and buys insurance brokers. It now writes about $1.3 billion in premiums a year and has a market cap of $331 million.

Its first-half profit after tax increased 21 per cent to $8.7 million and benefited greatly from a 40 per cent increase in the cash rate because of the uplift in interest earned from the cash it holds in trust for investors.

McKeough says that the result reflects premium growth of only about 3 per cent.

This is probably at the bigger end of what I normally look at, but it is definitely a business in the sweet spot.

Austbrokers benefits from any increases in insurance premiums, reflecting the pain felt by individuals and businesses in flood ravaged Queensland.

Says McKeough: “The way the claims have been, you would have to think there will be increases, McKeough says. "Reinsurers will start to charge more to the likes of QBE and IAG and as the renewals of treaties come up, we would expect re-insurers to look to recoup their losses, which are passed on to underwriters and then on to consumers.”

The beauty about Austbrokers' business is that it's all reward (from commissions on premium increases) and zero pain, not having to stump up any money for when the claims come in. Sure, most of the increases will only occur in certain classes of businesses, namely property and motor vehicle. But these businesses represent about 55 per cent of the total.

At $6.00 before today, Austbrokers' shares have climbed just over 20 per cent in the past six months and trade on a current fiscal year P/E multiple of 14 times. RBS sees further earnings upgrades likely and has a price target of $6.46.

Other companies in this space that fundies have been investing in include a pumps operator that has been instrumental in getting flooded mines back in business, Resource Equipment (RQL); and the clean-up business, Transpacific Industries (TPI), although one cited its high debt levels as a reason for not investing. Another one is Tox Free Solutions (TOX), which has a furnace in WA that cleans up (you guessed it) toxic chemicals.

A tug boat in need of rescuing

One listed engineer that might need some help is Neptune Marine Services (NMS) whose stock fell as much as 75 per cent yesterday to 5 cents.

The company, which services oil and gas companies, has just emerged out of a voluntary suspension commencing November 2010. It has been a dizzying fall for Neptune shareholders. Almost one year ago its share price was 50 cents

The company offers marine services to offshore oil wells. This means it transports crew and equipment out to the wells and provide operators with deep sea remote operated equipment. The oil spill in the Gulf of Mexico has meant that demand for these services has waned.

Neptune used brokers Patersons and Euroz to raise a minimum of $60 million (the company originally wanted $80.6 million) but initially fell short by about $30 million and ended up with $65 million. The raising wasn't underwritten but the shortfall was somehow covered. The secret to the fall is terms of the rights issue, which suggest the desperate need for funds: 3.6 new shares for every share held at an issue price of 5 cents per new share.

At its half year ending December 2010, the company produced a loss of just over $111 million. It also has around $50 million debt that must be serviced this year. If you were a big oil company needing its services, I think it would be prudent to look around at other operators.

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