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Sometimes good companies get a hammering from the market for a variety of reasons. It could be a disappointing earnings number or forecast, or a potential acquirer walks away with little explanation. But if the fundamentals of a company’s operations haven’t changed, you might be able to pick up a good quality stock at bargain-basement prices. Here are four shares under $4 that fit that bill.
1 year performance: -23.05%
Market capitalisation: $12.3 billion
Estimated yield FY19: 5.6%, fully franked
Analysts’ consensus price target: $4.80 (Thomson Reuters)
This month, Fortescue Metals Group touched a two-year low of $3.52, meaning the iron ore heavyweight’s shares had lost 35% of their value since February. The rationale for the share price fall was straightforward: Fortescue produces lower-grade iron ore than its major peers. Fortescue ore thus attracts a price discount, and this discount has widened from the usual 10%–15% to levels around one-third, as Chinese steelmakers have been forced (by government edict) to prefer higher-grade iron ore, which is less polluting.
Against this, FMG is the lowest-cost supplier of iron ore into China – selling for US$44 a tonne in FY18 – so it can bear this to a large extent. However, net profit dropped by 58% in FY18, to $US878 million, on the back of lower prices, and slowing demand for its ore from China. The company also cut its fully-franked final dividend to 12 US cents, down from 25 cents in the previous year, which had the effect of halving its full-year dividend to 23 US cents a share.
Fortescue is about to introduce a new higher-grade product, which it calls West Pilbara fines, which will be much closer to the market benchmark. The company expects to start shipping the higher-grade product from Western Australia in December, at an annual rate of 10 to 15 million tonnes, and eventually to expand this volume to as high as 40 million tonnes a year, with the opening of its US$1.28 billion Eliwana mine and rail project in December 2020.
It also could ship more ore in total this year, with shipments of 165 million to173 million tonnes of iron ore projected in FY19, compared with the 170 million tonnes in FY18. The market has re-set earnings and dividends expectations lower for FMG, but the 35% price fall looks very much like an over-sold situation, implying a robust case for a price rebound from these levels.
1 year price performance: -21.23%
Market capitalisation: $244 million
Estimated yield FY19: 0.5%, fully franked
Analysts’ consensus price target: $6.63 (Thomson Reuters)
Anyone who has experienced a painful injury or suffered a traumatic accident would be familiar with the “green whistle,” an inhaler that, after a few puffs, provides instant pain relief.
This pain management product is Australian. Known as Penthrox, it is made in Melbourne by Medical Developments Limited (MVP). Penthrox is a fast-acting, non-narcotic analgesic that can be self-administered, as well as used during short surgical procedures – such as dental and cosmetic surgery – and other medical applications.
Penthrox has been used by hospitals, ambulances, the Australian Defence Force, national sporting leagues, surf lifesavers and other emergency services for more than 30 years. It is currently sold in more than 30 countries, but approval in the big kahuna of healthcare markets, the United States, is the big prize – and the main bugbear.
Medical Developments submitted an investigational new drug (IND) application to the US Food & Drug Administration (FDA) in July 2018. The FDA response was to ask for a “clinical hold,” until seven questions were answered. The shares plunged 40%. MVP had already fallen by 28%, in May, after a market warning that FY18 sales revenue would be lower than the market expected.
Since the “clinical hold” announcement, MVP has responded that it believes it can satisfactorily answer all the FDA’s queries; that the product is mainstream in many markets where it is sold; and that it is currently completing a Phase 1 clinical trial in Europe that is a bigger and wider study than the one proposed for the FDA.
FDA approval would be the game-changer. MVP is budgeting conservatively for approval in the US “after 2022” – and has China at the same status. The company says Penthrox sales are expected to increase in FY19, as MVP benefits from its global expansion. Analysts expect strong growth in EPS this year, from 0.4 cents to 2.1 cents (on Thomson Reuters’ collation).
The share price fall from levels around $8 at the start of the year could work to the favour of an in investor buying into MVP now. Any positive news from the FDA, in particular, would likely galvanise the share price.
1 year price performance : +72.33%
Market capitalisation: $339 million
Estimated yield FY19: 3.7%, fully franked
Analysts’ consensus price target: $4.25 (Thomson Reuters)
Women’s fashion chain Noni B has been a great turnaround story in retail. When investment company Alceon Group bought from the founding Kindl family in 2014, turnover was $100 million, the company was making a loss and the share price was just 44 cents. In FY18, NBL generated $372.4 million in revenue, lifted net profit five-fold to $17.3 million, and saw its share price reach $3 by year-end.
The market appears to be backing the Alceon management team at Noni B to continue the growth story – despite analysts factoring-in an earnings retreat in FY19, before a return to growth in FY20.
The improvement in FY18 came with the first full-year contribution from the Pretty Girl business that Noni B bought from James Packer in 2016. In July this year, Noni B also acquired Specialty Fashion Group’s Millers, Katies, Crossroads, Autograph and Rivers brands, for $31 million – and these brands could be the springboard to the next level of growth, as NBL makes them profitable. Noni B has predicted that the Specialty brands will triple annual revenue to about $1 billion, lift volumes of garments sold to 40 million items, and expand its store network from 645 to more than 1400.
The market likes the NBL story, of four consecutive years of like-for-like sales growth and organic expansion, with the share price moving to $3.52 and the analysts’ consensus price target moving higher with it, to $4.25. Analysts do expect EPS to fall this year, but the dividend to increase slightly, before both get a significant boost in FY20. If FY20 expectations are remotely close to the mark, NBL looks very cheap, with an improving yield situation, too.
1 year price performance: -32.71%
Market capitalisation: $492 million
Estimated yield FY19: 2.7%, fully franked
Analysts’ consensus price target: $5.43 (Thomson Reuters)
BWX is another former market darling that now looks oversold. The company is a developer, maker, distributor and marketer of skin and haircare products.Its brands include Sukin, Andalou Naturals, Mineral Fusion (the number one natural cosmetics brand in the US) and the Nourished Life online wellness retail platform – and it also sells DermaSukin, USpa, Edward Beale and Renew Skincare.
An impressed stock market took it from its initial public offering (IPO) price of $1.50 in November 2015 to a high-water mark of $8.08 in January this year – before an earnings downgrade brought the rise to a sudden halt.
The major driver of the rise has been the flagship Sukin range of ‘natural’ skin care products, which has become the number-one-selling ‘natural’ skin care brand in Australian pharmacies, leaving globally-recognised brands in its wake.
Recently the BWX “story” has been distracted by a takeover approach led by US private equity group Bain Capital, which made an indicative bid of $6.60 a share, alongside BWX executives in a management buyout, which was rejected by BWX. Earlier this month, the private equity heavyweight walked away, after spending 12 weeks conducting due-diligence work on BWX. The chief executive John Humble, and finance director, Aaron Finlay, are to step down now that the bid will not proceed.
Now that the takeover is not going ahead, the market can return to looking at the fundamentals and on that measure expected EPS and dividend growth in FY19 and FY20 looks fairly healthy. By FY20, analysts expect BWX to earn 30.8 cents a share, compared to 20.9 cents a share in FY18. Likewise, the FY20 fully franked dividend is projected on analysts’ consensus to be 13 cents, up from 7.4 cents in FY18.
Also, it has been reported that the Bain Capital approach attracted interest from other major players in this space – and that potential trade buyers such as Estee Lauder, L’Oreal, Coty and even Unilever cast an eye over BWX, while Chinese private equity group CITIC was also interested, according to The Australian.
Investors entering the stock at these levels have expected rising earnings and dividends, and potential further takeover interest in their favour – but they have to balance this off against the execution risk of BWX’s major US expansion, which has brought Australian companies undone before. The plan is to expand Sukin into the US on the back of Mineral Fusion, in particular its burgeoning online sales, and then later, bring the Mineral Fusion brand to Australia.