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Australia’s manufacturing future is in specialised, advanced products for global markets. On this score, Australia is fighting above its weight; some ASX-listed manufacturers starred in the latest reporting season and their shares rallied.
Not that one would know that by market and media commentary. Advanced manufacturers on ASX tend to cut across sectors: from building materials to home appliances, auto parts, medical devices, vessels and defence. We don’t think of advanced manufacturing stocks as a sub-set or hear as much about them as we should.
But impressive advanced manufacturers, such as Reliance Corporation Worldwide, Breville Group, ARB Corporation and Austal, have four common characteristics.
First, their success is built on genuine innovation that differentiates their products. They are exporting a competitive advantage rather than a me-too product that larger manufacturing rivals with greater economies of scale quickly crush.
Second, each is focused on a niche market. None are targeting mass markets for manufactured products, where lower-cost producers win. Focusing on a niche and exporting an innovative-driven competitive advantage helps our advanced manufacturers take on the world’s best.
Third, our advanced manufacturers are “born global”. Successful niche manufacturers quickly outgrow a small market such as Australia. The best ones rapidly scale their opportunity into offshore markets – a feature of advanced manufacturers highlighted in this report.
Fourth, several advanced manufacturers fall in that “mid-cap” sweet spot. Standout performers on ASX are increasingly mid-caps with an expanding global footprint: a trend I have identified several times for the Switzer Report and used to identify promising stocks.
This summary is not to downplay the challenges facing advanced manufacturers or manufacturing generally. But is hard to fault the recent performance of some ASX-listed advanced manufacturers. Here are four standouts:
The maker of plumbing products has been one of my favoured mid-caps for this report since it listed on ASX in August 2015. Reliance’s $2.50 issued shares have rallied to $4.72, amid better-than-expected earnings and as the market reassesses its prospects.
Earlier this year, I nominated Reliance as one of my top-three stocks for 2018 on Sky News’ Money Talks program, hosted by Peter Switzer (who talked me into a rare TV appearance!).
To recap, Reliance makes innovative SharkBite branded push-to-connect (PTC) fittings, used in behind-the-wall plumbing systems to connect pipe lengths and valves. SharkBite fittings are said to be faster and easier to install than traditional copper joining.
Reliance is rapidly expanding in the United States and wants a bigger presence in Asia. The company has the potential to disrupt the small-diameter global pipe, valve and fitting market this decade and next, taking share from traditional copper and CPVC piping.
Share-price gains might be slower from here, but Reliance has further to run. The company is an example of how innovative, well-run manufacturers, with a genuine competitive advantage, can tackle global markets – and scale the opportunity to more regions.
The kitchen-appliances maker rarely gets the kudos it deserves. Australia has no right to be a leader in a global kitchen-appliances market dominated by giants.
But Breville has shown customer-focused innovation can move advanced manufacturers in developed nations further up the value chain and away from low-cost Chinese producers.
I wrote favourably on Breville for The Super Report in June 2017 at $10.24 and again in January in a report on “stocks to make us proud” that coincided with Australia Day.
Breville then rallied to a 52-week high of $14.18 in February 2018 after a better-than-expected interim profit result. But it has since drifted to around $11. There has been no fundamental news to warrant such a fall; it looks more like profit taking and a buying opportunity.
The market was initially sceptical of Breville’s strategy to speed up its innovation cycle, through greater investing in marketing and offshore operations. Management appears to be implementing the strategy successfully, judging by the latest interim result.
I like the innovation strategy and decision to invest more in streamlining its marketing and sales operations. It looks like short-term pain for long-term gain.
The maker and exporter of four-wheel-drive parts and accessories has been one of Australia’s great small-cap stocks (and now a mid-cap) over many years. An annualised 10-year total return (assuming dividend reinvestment) of 23% is exceptional.
As other car-parts makers stagnated, ARB moved up a gear. The stock rallied from a 52-week low of about $15 to $20 after beating market expectations with its recent interim result.
ARB reported 12% growth in sales to $208 million for the first half of FY18 and 10.9% growth in pre-tax profit to $23.4 million. Export sales starred with 20% growth. ARB is making bigger inroads in the United States, Thailand and the Middle East; growth would have been stronger if not for a higher Australian dollar against the Greenback.
An average share-price target of $19.72, based on the consensus of five broking firms (too small to rely on), suggests ARB is fully valued after recent gains.
I’ll stick with the market consensus on this one. ARB is due for consolidation or a share-price pullback. But any sustained weakness would be a buying opportunity for long-term investors.
The company’s domestic outlook is improving as construction and infrastructure activity strengthens (both sectors are heavy users of 4WDs and associated parts). ARB’s export markets are improving, and several company initiatives are boosting sales and margins.
Longer term, demand for 4WDs in developed markets shows no signs of abating and is expected to increase in emerging nations. ARB is superbly leveraged to one of the fastest-growing auto categories as more people favour sports-utility vehicles.
ARB’s full-year result could be the catalyst for the next share-price re-rating and the market will closely watch its May trading update. Prospective investors should watch and wait for better value as the glow from ARB’s outstanding interim result fades a little.
The manufacturer of defence vessels has had a tough time in the past two years. Austal shares plunged in late 2015 on news of lower margins and earnings from its US shipbuilding yards.
Austal sank from $2.43 before the news, to below $1 in early 2016 and has since recovered to $1.74. For all the share-price machinations, Austal is a quality manufacturer competing in the intensely competitive maritime-defence industry.
Austal delivered a better-than-expected interim result in February, helped by US tax reforms that should deliver around $5 million annually to its profits, on some broker forecasts.
The company’s momentum in US shipbuilding is quickening; it has won several commercial-ferry contracts in the past 12 months and looks well placed to win more.
Macquarie says Austral is “set up for a strong FY19, due to an improving US shipbuilding market, a better contribution from its commercial-vessel program, and improving US and Australian support segments”. (Austal has potential to provide more aftermarket support in its products).
Macquarie’s 12-month price of $2.29 suggests reasonable upside from Austal’s current price. The stock is riskier than others on this list, given the lumpy nature of its revenue and reliance on a smaller group of customers.