Stocks to Watch · Wed 11 January 2017 09:00 AM

5 stocks for dividends and growth

By James Dunn

It’s a new year on the stock market, and stock pickers are sifting through the ASX lists for good buying. Here are five prospects we’ve found that could deliver healthy returns in 2017 through a combination of dividends and share price growth.

Data#3 (DTL, $1.525)

  • Market capitalisation: $235 million
  • Three-year total return: 23.4% a year
  • Expected FY17 dividend yield: 5.9%, fully franked
  • Expected FY18 dividend yield: 6.6%, fully franked
  • Analysts’ consensus target price: $1.60 (FN Arena), $1.655 (Thomson Reuters)

Information and communications technology (ICT) cloud solutions and technology consulting services provider Data#3 is riding the trend of customer demand for cloud solutions. Helping corporate, government and education customers save money by moving from using their own servers and storage – and managing these internally – to using servers and storage managed by Microsoft. Microsoft is one of the top three global providers of cloud services, and Data#3 is Australia’s leading Microsoft services provider. Effectively, Microsoft and Data#3 are creating market demand, and capitalising on their market leadership position. But DTL also works with Cisco and HP – the US trio underpins its revenue and profitability – and a further 14 vendors.

While business is transitioning much of its data to the cloud, and cloud services is the fastest-growing part of DTL’s business, the company still makes most of its revenue from on-premises solutions, and is continually increasing its services annuity revenue.

Data#3 is coming off a standout FY16: the company reported a 13% lift in revenue to $983.2 million, and a 30.4% increase in net profit to $13.8 million. The dividend was raised by 27%, to 8 cents a share. More importantly, the strategic plan – to grow services revenue with an increase in annuity business and an increase in margin; and to grow cloud services revenues – is well on track, as shown by services revenue growing by 17% and cloud-based revenues by 110%.

According to leading industry analyst Gartner, the global IT market is predicted to increase by 2.9% in 2017, to US$3.5 trillion (after contracting slightly in 2016), with the Australian IT market growing by 2.8% to $85 billion in 2017. Data#3 should be right in the thick of this growth. The company has not given specific full-year guidance, but says it overall financial goal for FY17 is to improve on FY16’s result.

However, it has been more specific on the half-year: where last year’s interim net profit before tax was $6.1 million, DTL projects 1H17 net profit before tax to be in the range of $7.0 million–$8.5 million, which underpins its full-year outlook. At a consensus 13.9 times expected FY18 earnings, Data#3 is arguably the cheapest of the technology providers on the ASX, and carries an attractive yield.

Source: Yahoo!7 Finance

Lendlease (LLC, $14.32)

  • Market capitalisation: $8.3 billion
  • Three-year total return: 13.5% a year
  • Expected FY17 dividend yield: 4.6%, unfranked
  • Expected FY18 dividend yield: 5%, unfranked
  • Analysts’ consensus target price: $16.26 (FN Arena), $16.24 (Thomson Reuters)

Global property developer and infrastructure giant Lendlease is changing again: after battening down the hatches in the GFC, selling assets in the US and Europe and returning largely to a domestic focus, the company is back to generating 30% of its earnings from international markets, and that can be expected to boost this significantly in coming years, as the company targets apartment and large urban regeneration projects across the globe.

Lendlease has increased its focus on urban regeneration projects in recent years, including in countries ranging from Singapore and Malaysia to the US. Such regeneration projects account for a significant chunk of the company’s $48.8 billion pipeline of development work. Lendlease has a $37 billion urban regeneration pipeline, with 12 major projects across eight “gateway” cities: the company says urban regeneration is one of the major themes to which it is exposed. Others include growth in infrastructure spending – which should pick up on the stimulus proposed by the incoming Trump administration in the US – as well as ageing populations: Lendlease is a market leader in retirement living in Australia, and plans to export this capability to China.

Construction still accounts for about 80% of revenue. Lendlease says its integrated model – which means that at least two of its operating divisions, of Development, Construction and Investment – are working together on a project enables it to maximise returns across the whole value chain. (Not all analysts share this view, arguing that there can be problems with a “captive client” approach).

Lendlease is one of the few large developers to secure investors at the development stage: it has raised $8.2 billion in third-party equity in the last five years to support the growth of its investment management platform and development pipeline. This strategy also allows LLC to capture profits at every step of the process – from development to construction to funds management.

Some analysts express concern at the risk of apartment over-supply, but Australian apartments are only about 10% of Lendlease’s earnings, and the company argues that its attributes of pre-selling, premium quality and diversification all work against this risk to some extent. The yield is unfranked, but analysts are generally optimistic on Lendlease’s prospects, seeing significant scope for share price growth.

Source: Yahoo!7 Finance

Nick Scali (NCK, $6.18)

  • Market capitalisation: $501 million
  • Three-year total return: 38.9% a year
  • Expected FY17 dividend yield: 4.4%, fully franked
  • Expected FY18 dividend yield: 4.8%, fully franked
  • Analysts’ consensus target price: $6.90 (FN Arena), $6.75 (Thomson Reuters)

One of the best-managed Australian retailers – if not Australian companies – furniture specialist Nick Scali delivered an excellent FY16 result, and then in November further pleased the stock market with upbeat first-half profit guidance.

FY16 full-year revenue rose by 30.4% to $203 million, through a combination of improved same-store sales and new store openings, while net profit surged 53.1% to $26.15 million, beating both analysts’ consensus forecasts and the company’s own guidance. The fully franked dividend was lifted by 8 cents, or more than half, to 23 cents.

The company’s guidance in November indicated that based on strong year-to-date sales and continued cost containment, NCK expects net profit for the December 2017 half year to be up 30%–35% on the December 2016 half. But managing director Anthony Scali took pains to stress that full-year profit growth would moderate, before the company generated another growth spurt by expanding into New Zealand in 2018 and growing its budget sofa brand Sofas2Go. Nick Scali is an outstanding generator of return, and is still cheap, at 14.5 times expected FY18 earnings, and with an attractive fully franked yield and still plenty of scope for share price growth, what’s not to like?

Source: Yahoo!7 Finance

Adairs (ADH, $1.55)

  • Market capitalisation: $256 million
  • Three-year total return: n/a
  • Expected FY17 dividend yield: 7%, fully franked
  • Expected FY18 dividend yield: 6.6%, fully franked
  • Analysts’ consensus target price: $2.03 (FN Arena), $2.20 (Thomson Reuters)

Still on the retail theme, manchester and homewares specialist retailer Adairs looks promising, with one large caveat: the stock was hammered 42% lower in a single day in November, after slashing its full-year profit guidance.

FY16 was fine – the company outperformed its prospectus forecast and market guidance, with sales up 17.3% to $247.4 million, a gross profit margin of 61% and net profit up 18.9% to $26.1 million – but it was what the company said at its annual general meeting in November about the first four months of FY17 that was the problem. Adairs updated its FY17 sales guidance to $265m – $275m, down from $275 million – $285 million on a gross profit margin range of 58.5% – 60.5%, compared to prior forecasts for a gross profit margin of 60% – 62%. That would see earnings per share in FY17 come in about 15% lower than in FY16. Cue the savaging of the share price.

The reason why the market was so severe on Adairs was because it is a very tight operation: although it outsources the manufacturing, it does its own design, development, sourcing, distributing, merchandising and selling. It is considered to have tighter control than other retailers over its range, supply chain, and quality – so for it to say that it had effectively got the fashion trends wrong in its crucial bed linen category, which accounts for about 40% of total sales, was not what the market wanted to hear at all.

Increased discounting was also mentioned, but with about 90% of the product range own-branded – under Adairs Staple, Adairs Fashion and Decorator – and just 10% coming from third-party brands, Adairs is supposed to generate higher profit margins.

A stock price haircut of that magnitude should theoretically bring ADH back to good buying value – but it has to regain the confidence of the stock market. The company said that it would begin rolling out new product ranges early this year to address the underperformance of the bedlinen category.

Adairs is now trading at a cheap 9.7 times consensus forecast FY18 earnings, and on a fully franked FY18 yield of 6.6%, but it is cheap for a reason: clearly, it can’t afford to surprise the market like that again. If it can overcome the bedlinen blip, Adairs will turn out to have been good buying at these levels.

Source: Yahoo!7 Finance

Elders Limited (ELD, $4.09)

  • Market capitalisation: $465 million
  • Three-year total return: +59.5%
  • Expected FY17 dividend yield: 3.2%, unfranked
  • Expected FY18 dividend yield: 3.4%, unfranked
  • Analysts’ consensus target price: $4.75 (FN Arena), $4.63 (Thomson Reuters)

It has been one of the best turnarounds in corporate Australia, and FY17 should deliver more joy for shareholders in Adelaide-based agribusiness Elders Limited, with the first dividend since 2008.

Chief executive Mark Allison took over in April 2014 with the stock at 82 cents and with his management team has presided over an excellent recovery, based on the company’s “eight-point plan,” now in its final year, which has turned the company not only into one of the nation’s leading agribusinesses, but a highly efficient user of capital, with a steadily increasing return on assets. The company has ditched underperforming businesses – including shipping dairy and breeder cattle to China – while moving up the value-added chain, for example, expanding its fine food business in China, and launching its Killara Black Angus brand in Jakarta and Bali, providing high-end restaurants in Indonesia with premium-quality Australian beef, and growing its rural financial services business.

Elders is benefiting from the spring in the step of rural Australia that follows improved seasonal conditions and high commodity prices. The impact of this on the bottom line should be seen more in FY18, and the company should also roll out further acquisitions. The recommencement of dividends will be a major plus for Elders and should pave the way for an upgraded view of the stock, justifying the share price headroom that analysts expect.

Source: Yahoo!7 Finance

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By James Dunn

James Dunn was founding editor of Shares magazine, and former personal investment editor at The Australian. James is also a regular financial commentator on Australian radio and television. This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances. This article does not reflect the views of nabtrade.

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