Three winners and three losers to watch or ditch
Despite the recent reporting season being somewhat “disappointing”, there are always exceptions, with several companies hitting it out of the park. Here are 3 stars and 3 that performed weaker than expected.
The FY19 reporting season has tended toward the “disappointing” end of the spectrum, with aggregate earnings growth expectations lowered over the course of the season, downgrades outnumbering upgrades, outlook statements generally tepid, and the number of companies cutting their dividends has been the highest since 2012.
Within that general trend, there have – as always – been exceptions, with several companies hitting it out of the park. And as usual, some have performed weaker than expected. Here are three of the standouts, and also three candidates for whom the market has marked the report, “could do a lot better.”
The three winners…
1. WiseTech Global (WTC:ASX)
- Market capitalisation: $10.6 billion
- Forecast FY20 dividend yield: 0.2%, fully franked
- Analysts’ consensus target price: $26.69 (Thomson Reuters), $30.00 (FN Arena)
One of the standouts of the season was logistics software maker WiseTech Global, which easily beat analysts’ forecasts and for good measure, issued upbeat guidance for FY20, which surprised the market even more. Along the way, WiseTech – which listed in 2016 at $3.35 a share, raising $167.6 million in the sale of 16% of the equity – has moved into the stock market’s Top 50 companies, with a market value of $10.6 billion.
WiseTech’s revenue for year to June 30 surged 57%, to $348.3 million, cruising past the guidance range it had given in March, of 47%–53% growth in revenue. Net profit rose by 32.7%, to $54.1 million.
WiseTech is a great Australian technology success story, with its software solutions used around the world by logistics companies, to manage the movement of delivery of goods. The company is in the great position of benefiting from geo-political turmoil such as Brexit, trade wars and increasing complexity between borders, because all of these are helping to drive the uptake of its CargoWise One software platform. WiseTech told the market that it expected revenue growth of 26%–32% in the current financial year (FY20) and EBITDA (earnings before interest, tax, depreciation and amortisation) growth of 34%–42%.
The problem for investors is two-fold: one, WiseTech is not a lucrative dividend payer (although it does pay a fully franked dividend), and two, it is by all standards a very expensive stock.
On FY20 estimates, Thomson Reuters’ collation of analysts’ estimates has WTC trading, at the current price, at 122.7 times prospective earnings; FN Arena’s collation has it at 112 times prospective earnings. That is simply too rich for most investors to contemplate buying, and indeed, most analysts believe that the share price has shot past buying value (although Citi has a price target of $36.30 on the stock).
But WiseTech was certainly one of the most impressive results of the season – and must make many investors think, “do I have to re-assess a genuine tech leader like WiseTech?” Expensive or not, the local market does not have many global leaders – which are leveraged to the future – like WiseTech.
2. Altium (ALU:ASX)
- Market capitalisation: $4.7 billion
- Forecast FY20 dividend yield: 1.6%, unfranked
- Analysts’ consensus target price: $26.69 (Thomson Reuters), $30.00 (FN Arena)
Electronic printed circuit board (PCB) design software company Altium is in a very similar position to WiseTech – it is one of the ASX’s genuine global tech stars, and one of the reporting season’s standout results, and as a yield stock, well, forget it.
But Altium certainly delivered an excellent full-year result, with revenue up 23%, to US$171.8 million, and net profit up 41.1%, to US$52.9 million. The EBITDA (earnings before interest, tax, depreciation and amortisation) margin came in at an impressive 36.5%, up from 35%, and the company has committed to build a “floor” of 37% in this crucial number.
While the FY19 result was technically a “miss” – on average, analysts were expecting $US173.8 million in revenue and a net profit of $US53.6 million – the company has set a 2020 target of US$200 million in revenue, and chief executive Aram Mirkazemi is confident that Altium will exceed this.
By 2025, Altium has set itself a target of being the global leader in its field, with $500 million in revenue.
Altium is moving up-market in its software suite and analysts think its growth opportunities in China are huge. The China business reported 37% growth in revenue in FY19.
Altium is not as expensive as WiseTech: Thomson Reuters has the stock WTC trading, at the current price, at 53.4 times expected FY20 earnings and 43.5 times expected FY21 earnings, while FN Arena sees it at 54.5 times expected FY20 earnings and 45.4 times expected FY21 earnings (at current exchange rates). Thomson Reuters has a consensus price target of $36.85, while FN Arena has $33.53. The most bullish forecast is from Blue Ocean Equities, which has a price target of $53 on the stock.
Again, Australian investors find it difficult to assess the true global big-picture of Altium’s prospects – but if the company meets its targets, a price such as the current level could prove to have been a cheap entry.
3. Baby Bunting (BBN:ASX)
- Market capitalisation: $381 million
- Forecast FY20 dividend yield: 3.7%, fully franked
- Analysts’ consensus target price: $3.06 (Thomson Reuters), $3.17 (FN Arena)
Before the reporting season, we proposed baby products specialist Baby Bunting (BBN) as potentially “one of the shining lights of the reporting season,” and the retailer delivered, reporting a 43% surge in net profit in FY19, and forecasting similar growth this year.
On an operating profit (EBITDA) basis the company’s $27 million result – a rise of 46% – beat broker consensus of about $26.2 million, and the company’s own guidance, of $25 million–$27 million. Baby Bunting lifted its guidance for FY20 operating earnings to $34 million–$37 million. Net profit is expected to increase by 32%–45%.
The company is showing a good fist of competing with rivals such as Amazon and Target, with gross margin rising by 1.9 percentage points to 35% in FY19, and Baby Bunting saying it expects that to push past 36% in the current year.
Baby Bunting saw profit drop by 30% in 2018 as rivals such as Babies R Us, Bubs, Baby Bounce and Baby Savings engaged in a discount war, but the company saw them off – they all collapsed – and Baby Bunting now has a market share base of about 30%, from which it says it has “scope to take more share,” from competitors such as Target, Kmart, Big W and Myer and online players Amazon and Catch.
Baby Bunting lifted its fully franked dividend from 5.3 cents in FY18 to 8.4 cents, and analysts see that rising to 11 cents in the current year, equating to a 3.7% prospective yield, or 5.2% grossed-up. It was an impressive financial performance from Baby Bunting in FY19, but because of that, the stock appears fairly valued.
And the 3 losers…
1. Blackmores (BKL, $67.65)
- Market capitalisation: $1.2 billion
- Forecast FY20 dividend yield: 4%, fully franked
- Analysts’ consensus target price: $69.00 (Thomson Reuters), $67.65 (FN Arena)
The heady days of 2015, with a share price above $200, seem a long way away for vitamins and supplements heavyweight Blackmores, which has lost 23% a year for investors in the last three years, even with dividends included. This year’s result was a poor one, with net profit down 24%, to $53 million, revenue up just 1%, at $610 million; and the final dividend more than halved, from $1.55 to 70 cents, leading to a 28% slide in the full-year dividend, to $2.20. In the second half of the financial year, net profit plunged 44%.
The company’s changed world was starkly demonstrated by its estimate that about 40% of its “daigou” trade – the small army of private buyers who bought huge volumes from Australian retailers such as Chemist Warehouse, and sold the products in China – has “vanished” in the wake of tougher regulations in China, which came into force in January. By its own admission Blackmores has struggled to execute in the changed Chinese market: sales in the China segment slid by 15%, to $122 million.
If there was a bright spot, it was sales in Asia excluding China, which increased by 30%, to $107 million. But the problems in China are expected to persist into the current half-year, and the interim net profit (to be reported in February) is expected to show a slide.
2. Costa Group (CGC:ASX)
- Market capitalisation: $1.0 billion
- Forecast FY19 dividend yield: 4.3%, fully franked
- Analysts’ consensus target price: $4.43 (Thomson Reuters), $4.23 (FN Arena)
Horticulture group Costa Group was only reporting half-year results this season – its financial year is the calendar year – but it was a disappointment all the same, with the company reporting a 15% decline in profit, and warning of "further downside risk" in its outlook.
The company said it was hit with a number of challenges during the first half of 2019, including adverse conditions during the Moroccan blueberry season, low mushroom demand, varying raspberry quality, and water costs and fruit fly impacting the citrus category – the latter being the company’s main earnings driver.
Costa has had a tough 2019. Its January update, which told the stock market to expect “largely flat growth” in net profit for 2019, after sales of tomatoes, berries and avocados for December and January came in lower than expected, was a shock to investors – given that the company had previously told investors to expect low double-digit profit growth. Then there was another downgrade, in May – and now a weak interim.
Analysts are very pessimistic on full-year earnings growth – FN Arena puts analysts’ consensus at a 49% fall – but profit is expected to rise in 2020. Unfortunately, shareholders have experienced a 63% slump in return over the last year – including dividends. On consensus target price expectations, that appears to have opened up some value, but prospective buyers would be wary of the interim result.
3. Domino’s Pizza (DMP:ASX)
- Market capitalisation: $3.7 billion
- Forecast FY19 dividend yield: 3.1%, 86.4% franked
- Analysts’ consensus target price: $46.34 (Thomson Reuters), $42.94 (FN Arena)
Domino’s Pizza’s result would have to be described as a disappointment, given that came in under all market expectations, even the company’s own guidance, in its third straight year of falling short of market expectations Not surprisingly, Domino’s no longer intends to provide guidance – which is not compulsory. Instead, it will give “broad targets” over a three to five-year period.
DMP is another former high-flyer, in which some shareholders remember the lofty heights of above $76 back in 2016, but the company encountered a swag of difficulties managing its expansion in Europe and Japan, and the high-flyer fell back to earth. This reporting season, the company said its global sales were up just 3.6% on a same-stores basis, with the 11.9% reported rise reflecting 179 store openings. Domino’s delivered a 7.2% increase in earnings before interest and tax (EBIT), to $220.8 million, but this failed to match its guidance of about $227 million. Underlying net profit rose by 6.1%, to $141.2 million.
There was a strong performance in Japan, where same-store sales rose 8.4%, and EBITDA surged by 32%. In Europe, EBITDA lifted 5.5%. International operations now account for more than half of DMP’s earnings, and they will be the largest driver of its future growth.
While FY20 is also expected to be a struggle for the company – with earnings likely to contract, according to Thomson Reuters’ analyst collation – FY21 looks to be a turning point. Although the FY19 result was not impressive, there will be plenty of investors prepared to back Domino’s to return to growth.