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As the world starts (hopefully) to normalise out of its two-year COVID-19 bad dream, investors’ attention is turning to stocks that benefit from a more normal world. While much of this “recovery trade” potential is well and truly priced-in, there are still pockets of the market where you can still find some value. Here are four such cases.
Market capitalisation: $15.9 billion
12-month total return: 10.7%
3-year total return: 11.2% a year
Estimated FY22 dividend yield: 1.6%, fully franked (grossed-up, 2.3%)
Analysts’ consensus valuation: $73.70 (Thomson Reuters), $68.88 (FN Arena)
Ramsay Health Care, the nation’s largest private hospitals operator and one of the largest private healthcare providers in the world, will be a major beneficiary of a normalising world. Ramsay is one of the largest and most diverse private healthcare companies in the world, with 480 facilities across Australia, France, the United Kingdom, Sweden, Norway, Denmark, Germany, Italy, Malaysia, Indonesia and Hong Kong. The company has been severely disrupted during COVID, hit by widespread bans and restrictions on elective surgery, patients cancelling procedures, isolation orders and lockdowns, and staff shortages as a direct result of infections.
Given the significant restrictions placed on elective surgery and the slump in demand for non-surgical services, Ramsay’s earnings have held up well, given government support and payments for helping to relieve pressure on the public hospital and aged care systems. But the major driver for RHC in 2022 will come from the pent-up demand for private healthcare services, in particular the massive back-log of elective surgeries in its markets, and the queue for beds in private hospitals. There is concern that Ramsay’s offshore businesses in the UK and France continue to be pressured by high rates of infection and interruptions to the reopening – and there are ongoing issues with staffing – but the volume swell coming down the pipe, although very well-flagged, could surprise both in terms of with what it does to the share price, and for how long it is sustained.
Market capitalisation: $9.4 billion
12-month total return: –2.9%
3-year total return: –1.7% a year
Estimated FY22 dividend yield: no dividend expected
Analysts’ consensus valuation: $6.40 (Thomson Reuters), $6.00 (FN Arena)
Qantas has struggled ever since the pandemic hit, with a 60% fall in the company’s valuation at its trough, but it was always understood that the business would eventually recover. The share price was hit again by the emergence and spread of the Omicron variant, but while that could delay the resumption of international travel, the attraction in Qantas is actually more around the outlook for domestic travel, which is quite a bit healthier, even with some states dragging the chain. QAN has about 70% of the market, with Virgin Blue going to be a significantly scaled-down competitor.
Earlier this month, chief executive Alan Joyce said that Qantas expects to reach more than 115% of pre-COVID domestic capacity levels by April 2022 as Australian state borders open, while the Jetstar operation should reach 120% of pre-COVID domestic capacity by April. Some analysts see QAN getting back to earning as much as 80% of its pre-COVID earnings without any contribution from the international business, with the domestic business generating a 25% margin.
Qantas stripped $1 billion out of its cost base over the pandemic and added an $800 million land sale for good measure. The Frequent Flyer program could emerge as a wildcard for Qantas: the airline is already planning to re-deploy some Airbus A380 flights into “points planes,” with every seat going cheaply to reward frequent flyers. But the base of the buying case for QAN is the pent-up demand for holiday travel, and the stock’s leverage to it.
Market capitalisation: $1.4 billion
12-month total return: –1.9%
3-year total return: 22.2% a year
Estimated FY22 dividend yield: 2.6% fully franked (grossed-up, 3.8%)
Analysts’ consensus valuation: $9.68 (Thomson Reuters), $9.12 (FN Arena)
Last month, tourism, land and marine transport provider SeaLink Travel Group changed its name to Kelsian Group – if you’re wondering about the significance of the name, it’s simply a rearrangement of the letters for SeaLink. The name change might have been seen as an attempt to arrest a share price slide that had taken 40% from the market capitalisation since August, as the market expressed its disappointment at some major bus contract losses and tender misses.
The company started as a ferry passenger and freight service from the South Australian mainland to Kangaroo Island 32 years ago, but bus revenue now accounts for more than 80% of its $1.2 billion in revenue. (Earlier this month, Kelsian secured the ferry contract for Kangaroo Island for the next 25 years – it has been running this service for 32 years. Under the new contract Kelsian will design, build and commission two new ferries.)
The biggest business, Australian Bus, provides contracted public transport services to governments around Australia: it generates about 60% of revenue and 54% of EBITDA (earnings before interest, tax, depreciation and amortisation.) The International Bus division does the same with government transport agencies in Singapore and London, while the Marine and Tourism division runs passenger and transport ferries, provides tourism experiences and accommodation. Kelsian says that 88% of its revenue is contracted with government and “blue-chip counterparties.”
In January 2020, the company made a transformational acquisition, buying Transit Systems Group, Australia’s largest private operator of public bus networks, with established operations in London and Singapore, for $635 million. While it was a transformational buy, the International Bus division is the big problem area for the company: London remains a “very challenging market,” with the general impact of the pandemic on bus travel and route cutbacks by Transport for London (TFL) as part of COVID-19 budget constraints. The company plans to expand in the UK and Europe: it kicked-off those plans with a West London joint venture in September. In Singapore, Kelsian is expanding significantly in with government backing. Marine and Tourism is mostly leveraged to robust domestic travel demand in Australia. With COVID-19 hopefully more behind us than ahead, Kelsian has arguably become very cheap.
Market capitalisation: $84 million
12-month total return: 46.9%
3-year total return: 25.1% a year
Estimated FY22 dividend yield: no dividend expected
Analysts’ consensus valuation: n/a
At the more speculative end of the market, as the world normalises, parking technology specialist Smart Parking should benefit as shopping-centre car parks start to fill again, particularly in the UK, where SPZ manages 720 car parks on behalf of clients such as The City of Westminster, Cardiff Council, Gatwick Airport and the London Underground. In Australia, Smart Parking provides a range of parking technology-based services (such as automatic number plate recognition and overstay sensors) to local councils.
The annual general meeting last month heard that demand was “at or around pre-pandemic levels,” particularly in the UK, which generates about 85% of SPZ’s revenue. The company sees good opportunities to expand into new addressable markets in New Zealand, Australia and Europe. COVID-19 restrictions have hampered SPZ in all its markets, but as lockdowns lift, it sees New Zealand and Australia (particularly the latter) as highly attractive markets for growth. SPD had 758 sites under management as at 31 October – it says it is on track for 1,000 sites under management globally by June 2023, and 1,500 sites by June 2025.
In FY21, revenue eased 4% to $20.7 million, but adjusted underlying earnings moved into the black at $2.2 million, compared with a $900,000 loss the year before. For the December 2021 half-year, SPZ has guided for revenue to rise by about 64% on the December 2020 half, with adjusted EBITDA expected to be in the range of $4.4 million–$4.7m, which if achieved would be more than triple the figure for the December 2020 half.
In the longer-term, Smart Parking’s R&D work in the Internet of Things (IoT) and its SmartCloud platform, which gathers parking data and processes it into live information, reporting, and events, is well-placed to leverage the growing “smart cities” thematic. Its cloud-based SmartPark system controls parking, guidance, payment and analytics; being cloud-based, and makes the company a data-intelligence solutions business provider running an IoT platform that supports smart city solutions. There is a lot of opportunity ahead for SPZ to develop new revenue streams in its technology division, which became profitable in FY21. SPZ has already started to run in share price, but it could still be cheap as a recovery play.
All prices and analysis at 14 December 2021. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.