1. Baby Bunting (BBN, $2.16)
Market capitalisation: $272 million
FY19 forecast yield: 3.7%, fully franked
Three-year total return: –0.2% a year
Analysts’ consensus target price: $2.72
I nominated baby goods retailer Baby Bunting in April as a fallen star: the stock had been caught up in the general fear that no retailer could survive the arrival of Amazon Prime in Australia – especially as the stock market knew that Amazon was a major player in the baby goods category in the US. But there has been a huge change of view in the market since then, with Baby Bunting now viewed as dominating its market, and heading down the track towards Bunnings-like status in the $2.4 billion baby goods sector. The discounting problems that caused Baby Bunting to slash its profit guidance in November 2017 have now washed-through the sector – Baby Bunting reported a 9% rise in revenue to $303 million in FY18, but a 29% fall in net profit to $8.7 million – and its profit guidance for FY19 was lifted in October and then again in November, on the back of strong sales in the first 20 weeks of the financial year. Baby Bunting has been re-rated significantly, but still looks very rewarding buying at these levels.
2. Afterpay Touch (APT, $11.97)
Market capitalisation: $2.7 billion
FY19 forecast yield: no dividend expected
Three-year total return: n/a
Analysts’ consensus target price: $19.15
There is no shortage of people who would argue that digital payment app Afterpay Touch deserves to be below, in the sells: priced at 240 times expected FY19 earnings, a price/earnings (P/E) multiple that screams “trouble.” Stocks priced for perfection usually disappoint: it only takes one stumble for them to fall badly, and it is not as if there are no potential banana-skins lying in wait for Afterpay.
The company’s platform, which allows retailers to offer their customers the ability to buy products on a “buy now, receive now, pay later” basis – with the credit assessed and funded by Afterpay – has proven highly successful, almost to the point of becoming a verb, in the way that people will “Uber” somewhere, they “Afterpay” for stuff, in four instalments. It appeared that success had come at a price, however, and that Afterpay would be dragged into this month’s Senate inquiry into payday lenders, lease-to-buy schemes and “buy now, pay later” providers; but the company got strongly onto the front foot with its submission to the inquiry, saying that its customers use it as a tool to help them budget and manage their money, not as a source of credit. Corporate regulator, the Australian Securities & Investments Commission (ASIC) also wants the power to more closely regulate the buy-now-pay-later sector.
These concerns pulled back the APT share price from the high-$19 levels in August, to current levels, which are still outlandish for a stock expected to earn 4.9 cents a share in FY19. But all of this ignores the real reason to buy Afterpay – its progress in entering the US market. It announced last month that less than six months after launching in the US, more than 300,000 consumers and more than 900 retailers had transacted with Afterpay in the US, and it had a pipeline of another 1,300 retailers moving on to its platform. The US is a market more than ten times the size of Australia, and ultimately, that’s the main game for Afterpay – and the company is exceeding expectations there.
3. Western Areas (WSA, $1.93)
Market capitalisation: $527 million
Estimated FY19 dividend yield: 1.8%, fully franked
Three-year total return: –3.1% a year
Analysts’ consensus target price: $3.00
Nickel producer Western Areas has dropped sharply in price since July, from levels above $3.60, as the nickel price has come off from its highs of more than US$7 a pound, to levels under US$5 a pound. It wasn’t supposed to be like this: investors felt back then that nickel was poised to run, given its prominent role in electric-vehicle batteries. Supply – as it usually does – flowed in to spoil the picture, this time from Indonesia and the Philippines. But rising Chinese demand is seeing nickel stockpiles fall and it is likely that the market has moved into deficit, where it should stay for several years – enabling the nickel price to rise. That should play into the hands of Western Areas, which runs two of the best producing nickel mines, Flying Fox and Spotted Quoll in Australia. Its recent purchase of Odysseus (acquired through Cosmos) appears to be another high-quality nickel asset. Western Areas needs a nickel price rise to comfortably fund bringing Odysseus to mining, but it looks like it will get that: it also looks as though the global market will require plenty of high-grade nickel sulphide supply into the next decade, and Western Areas is very well-placed to meet that demand. Western Areas is debt-free, with more than $150 million in the bank as at the June 30 result.
Here are 3 stocks to consider selling
1. ASX (ASX, $58.71)
Market capitalisation: $11.3 billion
FY19 forecast yield: 3.8%, fully franked
Three-year total return: 17.7% a year
Analysts’ consensus target price: $57.25
A stock market under pressure means less revenue for the operator of that market, and that is the likely scenario for ASX Limited heading into 2019. The recent (and ongoing) market correction is likely to hit ASX’s revenue from capital raisings over the next six months at least, and it can take some time to recover from a downturn in that part of the business. Analysts did not like the company’s warning with its FY18 result that its costs were rising more than expected. ASX is a regulated monopoly – it does have some minor competition from alternative exchanges Chi-X and National Stock Exchange (NSX), but it is still the dominant local stock, derivative and options trading exchange. ASX is the only organisation licensed to operate securities clearing and settlements services in Australia for exchange-traded securities and derivatives, which represents 46% of its revenue. As a stock ASX has been a very sound performer, because of its high margins and return on capital, and has become known as an income stock, but at 24 times expected earnings, it has simply become pricey, and a weakening market is the last thing such a multiple can afford.
2. Coca-Cola Amatil (CCL, $8.33)
Market capitalisation: $6 billion
FY19 forecast yield: 5.3%, 67.8% franked
Three-year total return: 3.5% a year
Analysts’ consensus target price: $8.20
The bottler of the black stuff has returned a derisory –1.8% a year over the last five years – meaning significant opportunity cost for investors as well as a loss – and in the wake of the company’s investor day event last month, that doesn’t look like changing anytime soon. CCL finds earnings growth very hard to come by. Price pressures, concerns about sugar and the introduction of container deposit schemes have all been drawbacks for the core Australian beverages business, which is struggling – although CCL has bitten the bullet and decided to sell its canned fruit operation SPC, which will improve the underlying earnings base. Indonesia and Papua New Guinea had a good year in 2017, but market growth rates are holding the company back; the New Zealand and Fiji businesses are going OK, and alcohol and coffee is a bright spot in Australia and New Zealand, albeit from a low base.
Coca-Cola Amatil says 2019 will be another transitional year, and that simply is not what long-suffering shareholders want to hear, particularly when there is considerable nanny-state scrutiny on the core product. The company’s main focus is on seeing-through its “Accelerated Australian Growth Plan” and unlocking growth in Indonesia, but earnings growth will be stagnant this year (Coca-Cola Amatil is a December year-end reporter) and in 2019, and there are no good reasons keeping investors in the stock.
3. Vocus Group (VOC, $3.38)
Market capitalisation: $2.1 billion
FY19 forecast yield: no dividend expected
Three-year total return: –22% a year
Analysts’ consensus target price: $2.62
Telco Vocus Group is an awfully long way from the $9.25 peak in 2016, and although it has rebuilt from the depths of the $2.20s earlier this year, its rebound looks like stalling. Vocus is another stock in a transition year, as it struggles to find the right structure with its suite of brands – including M2 Commander, Dodo and iPrimus – and its business units, which are enterprise and government, wholesale and international, consumer and New Zealand. The company has had a string of bad publicity, ranging from having to compensate NBN customers for selling them onto plans with unattainable speeds, to video of non-existent security at one of its New Zealand data centres going viral. Vocus has finished laying the Australia-Singapore Cable – which it took over, along with the North-West Cable System, when it bought Nextgen Networks in 2016 – and now has the fibre and network infrastructure in place to generate growth, but analysts see ongoing weakness in its consumer and small to medium business (SMB) business units holding it back. In FY18, revenue grew 4% to $1.9 billion, while net profit was down 16% to $127.1 million. New CEO Kevin Russell is committed to turning the company around, and should be able to point to earnings growth in FY19, but analysts feel the market is being asked to pay too much for that growth.
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