Five ASX stocks ready to crack the $1 billon mark
Achieving a $1 billion market capitalisation (stock market value) on the Australian Securities Exchange (ASX) is a big deal – both in status terms and index terms.
There are only 205 companies on the ASX valued at more than $1 billion, meaning that companies around that level are in the ballpark for inclusion in the S&P/ASX 200 Index, which is rebalanced quarterly. The constituent companies get the benefit of the guaranteed buying of the indexed vehicles, such as exchange-traded funds (ETFs) and index funds.
Cracking the $1 billion mark does not guarantee that a company will be added to the S&P/ASX 200, because there are liquidity and volume criteria as well; but $1 billion in market capitalisation usually gets noticed by more brokers and analysts that followed the stock before that point. In short, a stock becomes a serious player when it achieves a ten-digit market capitalisation.
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Here are five candidates for the $1 billion capitalisation mark in the near future.
1. Pushpay Holdings (PPH:ASX)
- Market capitalisation: $994 million
- FY20 estimated yield: n/a
- Analysts’ consensus target price: n/a
New Zealand dual-listed company Pushpay certainly has a unique business focus: it has developed a mobile phone-based payments tool that has found a surprisingly lucrative niche in facilitating church collections, donations and tithes, most notably in the US “Bible Belt,” in the southwest and southeast of the country. It has a broader market than that – its products are also used by non-profit organisations, charities and schools in the US, Canada, Australia and New Zealand, and 15 other countries – but the “faith sector” has emerged as the company’s specialty.
What churches love about Pushpay’s technology is that it encourages people to give more, and do so more frequently. In FY18, Pushpay doubled its revenue to US$70 million, but reported a net loss of US$23.4 million for FY18. The company’s chief executive Chris Heaslip said in a February statement that Pushpay expects to report “a substantial net profit after tax” for the year ended 31 March 2019 – the company will report its results on Wednesday 8 May – but this will be affected by the company recognising some or all of a US$18.5 million unrecognised deferred tax asset it has on its books.
In pure business terms, Pushpay expects to meet its revenue target for the March year, which is US$97.5 million–US$100.5 million, and deliver a gross margin of more than 60% for the year. In FY18, the gross margin was 54%.
In FY18, Pushpay lifted its annualised processing volume (the payment transaction volume through the Pushpay payment platform) by two-thirds to US$3 billion. By the end of the 2020 financial year, the company expects total processing volume to be in the range of US$4 billion–US$5.1 billion.
Pushpay has been a $1 billion company on the ASX before – its share price has been as high as $4 in January 2018, which capitalised the company at $1.1 billion – and it is knocking on the door again.
2. Service Stream (SSM:ASX)
- Market capitalisation: $952 million
- FY20 estimated yield: 3.8%, fully franked
- Analysts’ consensus target price: $2.42 (Thomson Reuters), $2.15 (FN Arena)
Service Stream is front-and-centre in Australia’s booming infrastructure sector. The company has built its business as a contractor and provider of essential network services to the telecommunications industry, particularly on the back of the rollout of the National Broadband Network (NBN) and the country’s mobile networks.
Service Stream has also built up a business serving energy and water utilities, and the recent (January 2019) $162 million acquisition of Comdain Infrastructure will balance the revenue breakdown from the previous dominance of fixed communications – which generated more than 80% of revenue in FY18 – to a split of about 55% telecommunications and 45% utilities. Comdain’s customer base in the water and gas sector in eastern Australia will also boost Service Stream’s proportion of annuity-style (that is, recurring) revenue.
Having benefited from the tailwind of the NBN rollout, Service Stream has now positioned itself nicely to participate in structural changes in the infrastructure sector, for example the rollout of 5G networks, the increasing demand for mobile data and “smart” energy meters.
In its recent first-half result (for the six months to December 2018) SSM comfortably beat consensus expectations of revenue, net profit and EPS, and analysts reacted by lifting full-year targets. On Thomson Reuters’ collation, analysts expect Service Stream to earn 14.2 cents a share in FY19, up from 10.5 cents in FY18, and extend EPS to 15.8 cents in FY20. FN Arena has analysts’ consensus EPS at 13.3 cents in FY18 and 15.1 cents in FY20.
Service Stream has been a tremendous performer on the stock exchange in recent years, powering to a total return (share price growth plus dividends) of 72% a year over the past five years, according to Stock Doctor. The return for the last 12 months stands at 53%. It is only natural for a stock to cool down after such a performance: paradoxically, just when Service Stream is starting to be followed by more brokers.
Thomson Reuters puts the analysts’ consensus price target for SSM at $2.42, while FN Arena cites $2.15. As it beds down the Comdain acquisition, Service Stream joining the $1 billion club looks to be only a matter of time. In the meantime, on analysts’ estimates there is a 3.2% fully franked yield in FY19 on offer, and 3.8% – a grossed-up yield of 5.4% – in FY20.
3. Collins Foods (CKF:ASX)
- Market capitalisation: $931 million
- FY20 estimated yield: 2.6%, fully franked
- Analysts’ consensus target price: $7.70 (Thomson Reuters), $7.76 (FN Arena)
Quick service restaurant operator Collins Foods is a KFC and Taco Bell franchisee in Australia and KFC franchisee in the Netherlands and Germany; it also owns the Sizzler restaurant chain in Australia, and is franchisor of the Sizzler brand in South-East Asia. CKF owns and operates 223 KFC, 4 Taco Bell and 14 Sizzler restaurants in Australia; 15 KFC restaurants in Germany, 18 KFC restaurants in the Netherlands. CKF has 73 franchised Sizzler outlets in Thailand, China and Japan.
In FY18 (year ending April), Collins Foods earned 32.7 cents a share: on Thomson Reuters’ collation, analysts expect CKF to earn 38.7 cents in the just-completed FY19 and 43 cents in FY20. Collins Foods has several avenues to earnings growth: the expansion of KFC in Germany and the Netherlands (and in Australia), the opportunity to roll out Taco Bell in Australia, and expanding Sizzler in Asia.
The shares have been heading higher with a bullet – from $1 just seven years ago, CKF is at a record high just under $8 – and that means the stock is due for a breather. CKF is above Thomson Reuters’ analysts’ consensus price target of $7.70, while FN Arena has it a touch higher, at $7.76. However, the company looks a likely $1 billion market-cap stock in the near future: there is also a 2.6% fully franked dividend yield projected for FY20.
4. Austal (ASB:ASX)
- Market capitalisation: $906 million
- FY20 estimated yield: 2.7%, unfranked
- Analysts’ consensus target price: $2.60 (Thomson Reuters), $2.603 (FN Arena)
Perth-based shipbuilder Austal is a quiet achiever in the maritime field. Austal designs, builds and delivers both commercial and defence vessels: it is the world’s largest aluminium shipbuilder, and the only non-US company to build ships for the United States Navy.
It is also a quiet achiever on the stock market. According to Thomson Reuters, Austal has delivered a total return (capital growth plus dividends) of 23.3% a year over the last five years.
From its beginnings building aluminium fishing “tinnies” in Perth in the 1970s, Austal has progressed to being a world leader in aluminium vessels. Austal currently has an order book of $5.2 billion, with 47 ships under construction or scheduled: it is building 19 Littoral Combat Ships (LCSs) for the US Navy, with nine of the vessels delivered; as well as 14 Expeditionary Fast Transport (EPF) vessels, with ten of these delivered. In March, Austal was awarded a new US$261.8 million ($369 million) contract for two additional EPF ships for the US Navy.
The company operates five shipyards: its Henderson base in Perth; a US shipyard in Mobile, Alabama (the fourth-largest shipbuilding facility in the country); a recently expanded shipyard at Cebu in the Philippines; Austal Vietnam, located in the port city of Vũng Tàu; and in 2018, Austal established Aulong Shipbuilding, a joint venture with Guandong Jianglong Shipbuilding of China, kicking off with a $20 million contract for four new high-speed ferries for local operator Xidao Dazhou Tourism Co. Ltd. It also has six service centres, three in Australia, one in the US (San Diego), one in the Philippines and one in Oman.
Austal has guidance for revenue in FY19 of $1.8 billion–$1.9 billion, well up on the $1.39 billion recorded in FY18. The consensus of analysts’ estimates collated by Thomson Reuters expects earnings per share (EPS) of 14.5 cents in FY19, up from 11.2 cents in FY18, and rising further to 16.7 cents in FY20. Austal looks to be fully valued at the moment, but the company has very strong future growth prospects.
5. Tassal (TGR:ASX)
- Market capitalisation: $900 million
- FY20 estimated yield: 3.8%, 60.3% franked
- Analysts’ consensus target price: $5.23 (Thomson Reuters), $4.86 (FN Arena)
Aquaculture operator Tassal is benefiting from a shift to healthy eating – its main product, Tasmanian-grown Atlantic salmon, is a highly nutritious fish and an increasingly important source of the fatty acid Omega-3s, which are essential for brain development and function, but are not produced by the human body. Tassal has been farming the fish in southern Tasmania – one of the few areas in the world with the climatic and waters conditions that can support salmon farming – for three decades.
In FY2018, Tassal lifted revenue by 13% to a record $509.5 million, with strong growth in fish size and harvest tonnes, with underlying net profit up 19% to a record $50.3 million. It followed that with an even better result for the December 2018 half-year, with salmon sales revenue surging 33% to $285 million, as both prices and the average weight of salmon sold lifted, boosting profit by 22% to $31.7 million.
Late last year, Tassal made a big move to leverage its aquaculture experience, buying from Fortune Group one of the largest prawn farming businesses in Australia, with tiger prawn farms at Yamba, in New South Wales, and Proserpine and Mission Beach, both in Queensland. Tassal was already processing and selling prawns through its De Costi Seafoods subsidiary, and saw a similar market developing to salmon, where demand was starting to outstrip supply. Tassal says the annual prawn market in Australia is about 60,000 tonnes, with Australian acquaculture supplying about 10% of that: the salmon market is a similar size, but Australian aquaculture meets about 90% of demand.
Earnings from prawns will commence in the current half-year: Tassal plans to lift prawn production from 700 tonnes a year in FY19 to more than 3,000 tonnes a year within the next three to five years. The company is targeting EBITDA (earnings before interest, tax, depreciation and amortisation) from prawns of $25 million a year within three years: that is one-quarter of group EBITDA in FY18, before the prawn acquisition.
While the prawn business represents a clear potential source of earnings upside, in the meantime, Thomson Reuters expects Tassal to pay a 3.5% fully franked dividend yield this year (to 30 June), rising to 3.7% in FY20, which gross-up to 4.4% and 4.7% respectively.