Five great ASX growth shares from reporting season
The interim profit reporting season confirmed that plenty of companies see favourable growth prospects going forward – and while for many of these, the opportunities had been baked into the share price and price/earnings (P/E) ratio by an expectant market, there were some situations where investors could enjoy a robust result while also seeing scope for the share price to move higher. Here are five such situations.
- Market capitalisation: $88.6 billion
- FY20 forecast price/earnings ratio: 29.6 times (FN Arena)
- FY20 forecast dividend yield: 1.5%, unfranked
- Analysts’ consensus target price: $203.95 (FN Arena), $205.16 (Thomson Reuters)
One of the very few frustrating things about owning global biotech heavyweight CSL is that while it continues to deliver, the market often expects more. The interim result last month was a familiar story: CSL beat market estimates with a 7% rise in interim net profit, to $US1.2 billion ($A1.7 billion); lifted its Australian-dollar interim dividend by 20% to $1.20 a share and lifted its full-year guidance, but the market was unimpressed (the shares initially fell by 7% on the release).
CSL was simply expected to do as well as it did. And confirming that full-year FY19 guidance would be at the upper end of the previously stated $US1.88 billion–$US1.95 billion range – compared to US$1.73 billion in 2018 – was not considered to be a rosy enough outlook: the market was hoping for the guidance band to be moved higher, not just confirmed at the upper end.
The solid half-year performance was driven by rising demand for CSL’s immunoglobulin products for chronic therapies, and higher-value sales of its flu vaccines. The immunoglobulin portfolio is performing very well, with Privigen sales up 17% and Hizentra sales 14% higher.
Sales of the plasma-based products rose 8%, and the Seqirus influenza vaccine business posted a 21% sales gain on the back of the flu prevalence in US and Europe in the northern winter. Sales of Haegarda, CSL’s treatment for patients with hereditary angioedema (rapid and severe swelling, often in an allergic reaction, which can be life-threatening) tripled in the half year. Kcentra, CSL's anti-bleeding treatment used in surgery, posted a 19% increase in sales.
As one of the Australian market’s premier growth stocks, CSL typically justifies a high price/earnings (P/E) ratio: its P/E reached a record high of about 43 times expected earnings last September, when it reported its full-year result and lifted full-year net profit by almost 30%, and the dividend by the same proportion.
CSL is very much a US-style stock in that its dividend yield is paltry – the FY19 expected yield is 1.4% at the current price, and that is unfranked – with the share price growth bringing the reward for shareholders.
CSL 1-year chart
CSL was trading at about 33 times expected FY19 earnings before it released its interim results: the stock’s post-result drop took the P/E to 31 times earnings, and it has moved back to 33 times as CSL has recovered what it lost.
Further out, on FN Arena’s collation of analysts’ forecasts, CSL is trading at about 29.6 times expected FY20 earnings. For most stocks, you would not pay that – but for CSL, many investors will make an exception. FN Arena has an analysts’ consensus target price at $203.95 – just 4.2% above market, with Macquarie the most bullish, at $230 – while Thomson Reuters has a slightly higher analysts’ consensus target price, at $205.16.
REA Group (REA:ASX)
- Market capitalisation: $10.8 billion
- FY20 forecast price/earnings ratio: 28.5 times (FN Arena), 28.7 times (Thomson Reuters)
- FY20 forecast dividend yield: 1.8%, fully franked
- Analysts’ consensus target price: $86.44 (FN Arena), $87.44 (Thomson Reuters)
Of the ASX’s big three internet sales stocks – REA Group, Carsales and SEEK – REA is arguably the best-positioned, after reporting better-than-expected revenue growth of 15.3%, despite a 3% fall in volumes. Net profit rose by 20%, and the company took the opportunity to repay debt from previous acquisitions, resulting in a fall in REA’s net-debt-to-equity ratio from 34% to 29%. That will be handy given the fact the property market will be hit by the New South Wales and federal elections this year.
Better Asian earnings are expected to kick-in, but investors buying REA are banking on the company’s cautious full-year guidance proving to be a case of under-promising in order to over-deliver.
If Australian property listings can start to pick up, REA will look in hindsight to have been good value at around the current share price. REA divides the stockbroking community, with bears such as UBS expecting a price retreat to $75, and bulls such as Citi predicting a move above $100. Analysts still predict earnings growth of 20%-plus in FY19 and FY20 and on balance, REA still appears to be a growth prospect.
REA one-year chart
Treasury Wine Estates (TWE:ASX)
- Market capitalisation: $11 billion
- FY20 forecast price/earnings ratio: 20.8 times (FN Arena), 20.9 times (Thomson Reuters)
- FY20 forecast dividend yield: 3.1%, fully franked
- Analysts’ consensus target price: $17.74 (FN Arena), $19 (Thomson Reuters)
Las month, I nominated Australia’s global wine leader Treasury Wine Estates as one of our best foreign currency earners, on the back of an impressive interim result; and the company qualifies as a standout growth stock, too, given that it reiterated its full-year guidance for 25% earnings growth.
TWE 1-year chart
Treasury Wine Estates generates more than 75% of its revenue from offshore, including 40% from the Americas; and it is the Asian (particularly China) and Americas regions that are driving the company’s revenue and profit growth.
TWE has an almost uniformly bullish analyst panel, with even the only broker rating it a “sell,” Citi, seeing only minimal share price erosion from current levels. The rest see substantial upside, with the most optimistic broker, Credit Suisse, holding a price target for TWE of $19.85.
Bravura Solutions (BVS:ASX)
- Market capitalisation: $1.1 billion
- FY20 forecast price/earnings ratio: 28.6 times (FN Arena), 29.8 times (Thomson Reuters)
- FY20 forecast dividend yield: 2.5%, unfranked
- Analysts’ consensus target price: $5.50 (Macquarie)
The financial services industry may have had a tough 2018, but behind the scenes, a company that supplies the industry with software has continued to generate impressive growth. Bravura Solutions supplies superannuation, pension, life insurance, investment, wrap, private wealth and funds administration software, led by its Sonata wealth management platform. The company sells enterprise software and also software-as-a-service (SaaS) applications, depending on what a customer wants.
In the December 2018 half-year Bravura lifted revenue by 24%, to $127.4 million, and increased net profit by 15%, to $16.3 million. The interim dividend was lifted by 0.8 cents, or 18%, to 5.3 cents, unfranked.
Recurring revenue surged by 31%, and now represents 72% of total revenue – but Bravura has significant room to grow its business in its focus markets of Australia, New Zealand, United Kingdom, Europe, Africa, and Asia, especially in the area of replacing legacy systems that companies have that are no longer up to market standard.
Bravura upgraded its full-year guidance for earnings per share (EPS) growth from “the mid-teens” to “the mid to high-teens.” At $5.09 (closing price 1 March 19), Bravura has come a long way from the disappointment of its listing day, in November 2016, when volatility blamed on the victory of Donald Trump in the US Presidential election saw the company fall 20% from its issue price of $1.45.
BVS 1-year chart
BVS is not a well-followed stock, but the analysts at Macquarie have $5.50 in their sights, on the back of expected growth in business. There is also the distinct possibility of Bravura being involved in M&A (mergers and acquisitions) activity.
- Market capitalisation: $235 million
- FY20 forecast price/earnings ratio: 23.8 times (Thomson Reuters)
- FY20 forecast dividend yield: 2.1%, fully franked
- Analysts’ consensus target price: $1.90 (FN Arena), $1.885 (Thomson Reuters)
Cloud-based software distributor Rhipe is a managed services business that partners with large software vendors – such as Microsoft, IBM, Citrix, VMWare, Acronis and Trend Micro – to market their services to enterprise customers through subscription licensing. Rhipe’s enterprise customers pay for the usage of these services, according to their consumption: Rhipe drives this consumption with value-added services such as training, consulting, marketing, support, reporting and subscription billing services. In this manner, Rhipe also drives lead generation for its vendor partners.
The crucial relationship for Rhipe is Microsoft. Rhipe was appointed to Microsoft’s Cloud Partner Program in 2015 and become one of its twelve global managed partners (out of 500 indirect resellers) in 2017. Rhipe is Microsoft’s number one partner in the Asia-Pacific region driving the adoption of cloud services.
Microsoft is on a mission to tackle Amazon Web Services for leadership of the public cloud services market, and Rhipe is heavily involved in this strategy. Microsoft’s Cloud Solutions Provider (CSP) business and the Microsoft Azure enterprise-grade cloud computing platform are the company’s two main growth channels. As long as Microsoft grows its market share, Rhipe benefits.
Last month’s interim result was very impressive. Revenue grew by 30% and net profit almost tripled: on an EPS basis, earnings jumped from 0.8 cents in the December 2017 half-year to 2.2 cents. The $3 million net profit for the half-year equalled the net profit that Rhipe delivered in the previous full financial year.
The interim dividend was doubled to 1 cent, fully franked. Rhipe upgraded its operating profit guidance to a range of $11.5 million–$12 million which was about 8% higher than the guidance provided at the company’s annual general meeting (AGM) in November, and better than analysts’ consensus expectations.
Although the forward P/E ratio is pushing toward 24 times earnings, the growth prospects for RHP still appear ripe (pardon the pun).