This week I’m looking at three Australian stocks leveraging into big global market opportunities, in very different industries.
- Lovisa Holdings (LOV, $27.19)
Market capitalisation: $3 billion
12-month total return: 52.2%
3-year total return: 10.7% a year
FY25 (June) estimated dividend: 3.2%, 17.2% franked (grossed-up, 3.4%)
FY25 (June) estimated price/earnings (P/E) ratio: 29.2 times earnings
Analysts’ consensus target price: $30.59 (Stock Doctor/Refinitiv, 15 analysts); $31.40 (FN Arena, seven analysts)
The flagship of retail billionaire Brett Blundy’s stable, costume jewellery specialist Lovisa has more than doubled its store numbers around the world in the last five years, from 390 stores in 11 countries at the end of FY19, to 900 stores at the end of FY24, in 46 countries.
During FY24, it opened 128 new stores (it also had 29 closures/relocations) but in doing that Lovisa entered seven new markets, taking its presence to 46 markets. The new markets were company-owned stores in China, Vietnam and Ireland, with franchise-operated markets, Ecuador, Senegal, Guadeloupe and Gabon. It’s 48 markets now: Lovisa kicked-off the new financial year by opening shops in the Ivory Coast and the Republic of Congo. Lovisa has established itself as a go-to fashion accessory retailer for young people, known for its ability to replicate on-trend designs quickly.
Only one in five stores is now found in Australia. Lovisa’s affordable earrings and friendship bracelets have hit the mark globally. The sales revenue breakdown is now Europe (34%), Australia/New Zealand (29%), USA (25%), Africa/Middle East (7.5%) and Asia (5.5%).
Lovisa says it has a strong base for continuation of store network growth, with its global leasing team in place, and positioned to drive growth from existing and new markets.
There is a big store rollout opportunity remaining around the world. For example, Australia currently has 172 stores, compared to 207 stores in the US. Given that the US population is 12.6 times the size of Australia – at about 335 million versus Australia at 26.6 million – there appears to be a major opportunity for further store expansion in the US alone. Canada, too, is a big opportunity. Lovisa knows its market – affordable jewellery – very well, and it does so profitably: in FY24, its pre-tax profit margin was a stunning 81%. Earnings and dividend growth is strong, and analysts see plenty of scope for the share price to grow, as well.
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- ResMed (RMD, $37.28)
Market capitalisation: $54.8 billion
12-month total return: 60.3%
3-year total return: 1.6% a year
FY25 (June) estimated dividend: 0.9%, unfranked
FY25 (June) estimated price/earnings (P/E) ratio: 25.9 times earnings
Analysts’ consensus target price: $40.76 (Stock Doctor/Refinitiv, ten analysts); $40.12 (FN Arena, five analysts)
Most investors would sense that ResMed is a global leader, and they’re right. The sleep-breathing device maker is a major player in digital health and cloud-connected medical devices, making a range of devices and software applications that diagnose, treat and manage respiratory disorders, including sleep disordered breathing (SDB), chronic obstructive pulmonary disease (COPD), neuro-muscular disease and other chronic diseases.
ResMed is most famous for the continuous positive airway pressure (CPAP) treatment for obstructive sleep apnoea (OSA) which was the first successful non-invasive treatment for OSA, but it also makes airflow generators, diagnostic products, mask systems, headgear and other accessories. As well, ResMed supplies cloud-based health applications, software and devices designed to provide connected care, enabling clinicians to manage more patients efficiently and effectively, and management software to agencies providing out-of-hospital (OOH) care. All up, ResMed sells its products in more than 140 countries.
But for all ResMed’s success, the company’s speciality – sleep health issues — represents a global problem of colossal scope and scale. There is a large and unpenetrated market of people worldwide with unmet sleep health and breathing health needs, and ResMed says it is a largely undiagnosed market.
The company calls it an “epidemic” – of more than 2.3 billion people worldwide, with one billion sleep apnoea sufferers added to 860 million people with insomnia, 480 million people with COPD, and the unestimated population that needs health tech at home.
Even in the company’s main market, of the USA, it estimates that less than 20% of those with OSA have been diagnosed or treated. And the importance of sleep apnoea in women is increasingly being recognized, with nearly 40% of new CPAP patients being female.
ResMed is still benefiting from the troubles of major competitor Phillips, which in June 2021 was the subject of a major recall in the US after the discovery of a potential health risk related to the foam in some of the company’s devices. Many potential Phillips users switched to buying RMD’s AirSense 11 instead; the Dutch company is allowed to sell its devices outside the US but has not been cleared yet in the biggest market. That situation will eventually end, but ResMed has made the most of Phillips’ absence in the US.
ResMed is also a big data play: it has collected 19 billion nights of medical sleep data from people using its devices – it has more than 28 million patients in its AirView platform – and has been analysing it to help its devices “learn” their owners’ idiosyncrasies. More than 8.3 million sleep apnoea patients have signed up for ResMed’s myAir app, giving the company permission to analyse their sleep data so they can receive personalised coaching tips on how to get a better night’s sleep. Res Med says this big-data approach helps it help its users stay out of hospital and have better quality of life.
ResMed says that by 2030, it will empower more than 500 million people worldwide to achieve their highest potential. Whichever way you slice the numbers, it is a big and multi-pronged opportunity, and analysts are backing RMD to make the most of it.
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- Megaport (MP1, $7.57)
Market capitalisation: $1.2 billion
12-month total return: –26.5%
3-year total return: –29.4% a year
FY25 estimated dividend: no dividend expected
FY25 estimated price/earnings (P/E) ratio: 63.1 times earnings
Analysts’ consensus target price: $11.13 (Stock Doctor/Refinitiv, 14 analysts), $11.98 (FN Arena, six analysts)
Megaport is a global Network-as-a-Service (NaaS) provider, meaning it enables businesses to easily and flexibly purchase dedicated data connections on demand. MP1 connects customers to service providers, especially cloud service providers (CSPs) including Amazon Web Services, Microsoft Azure, Google Cloud, IBM, Salesforce and many others on the platform. Megaport’s offering enables businesses to expand their data centre connections quickly and affordably as their needs change.
To use the cloud the two sets of data centres need to be connected, which is where Megaport comes in. There are about 300 cloud “on-ramps” around the world, where companies can connect to use the CSPs’ equipment. With its automated network, Megaport connects more than 930 data centres worldwide (of about 6,500). It has a footprint in most of the cloud on-ramp data centres globally and is rolling-out into the “other” data centres (the 98% of the market without cloud on-ramps). Once Megaport is established in the “other” data centres customers are able to use Megaport’s secure and scalable CSP connection. Megaport operates the most NaaS connections to CSPs in the world. It has a presence in 26 countries, having recently launched in Italy and Brazil.
North American customers contribute most to revenue (57%), followed by Asia-Pacific (27%), and EMEA (Europe-Middle East-Africa), on 16%. Both annual recurring revenue (ARR) and ARR per service show very healthy growth rates, and the company broke through to profitability in FY24, turning a $9.8 million loss in FY23 into a $9.6 million net profit in FY24 (to June). Analysts expect net profit of about $21.7 million this financial year, and $34.5 million in FY26, although MP1 is not expected to pay a dividend, as it reinvests in growth.
As more businesses move to the cloud and increase their use of AI, they need reliable data centre connections. Megaport is well-placed to meet the growing need for cloud computing and AI. In its field, MP1 has first-mover advantage, scale and technical expertise, putting it in a strong position to grow rapidly and maintain a healthy competitive advantage. In particular, its new product solution, Megaport Virtual Edge (MVE), enables it to address the mass business telecommunications market globally, a much larger market than its original data centre-to-cloud solution. Disrupting the “legacy” telecommunications sector brings the prospect of far greater levels of competition, but analysts generally see Megaport as able to make a good fist of disrupting this bigger addressable market.
In the shorter term, the company disappointed the market this month in reaffirming its guidance for FY25. It expects FY25 revenue of $214 million–$222 million, a range that represents a rise over FY24 9.6%–13.7%. Apparently, the market expected an upgrade to this guidance, and the result was a 22% share price haircut.
That situation is par for the course when the market feels even the slightest bit disappointed with the kind of high price/earnings (P/E) ratio growth stock that Megaport is – but longer term, the growth story is still there, and the brutal market reaction should be seen as a tempting discount for an investor buying now. AI and cloud demand continues to drive huge growth in data centre demand and capacity, and Megaport is riding that wave. Broker Citi is the most bullish on the stock, with a target price of $16.05.
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