There are always stocks that have not been doing much in terms of share price performance, but which have been putting in place the steps required to begin to improve their fortunes. Here are three such opportunities on the ASX at present – two global leader mid-caps, and one smaller-cap stock that has only recently begun the global expansion move.
- Orica (ORI, $14.67)
Market capitalisation: $6 billion
12-month total return: –1.9%
Three-year total return: –0.9% a year
Estimated FY24 dividend yield: 3.3%, unfranked
Analysts’ consensus valuation: $17.30 (Stock Doctor/Refinitiv, 13 analysts), $17.99 (FN Arena, six analysts)
Orica is a global provider of commercial explosives and blasting systems to the mining, quarrying, oil and gas industries; it is the world’s biggest explosive maker, with operations in 47 countries, with more than 12,500 staff globally. The company is riding on a wave of strengthening global commodities demand, and robust global commodities demand, and efficiency gains from the increased adoption of advanced technology.
Orica’s Digital Solutions business, established in 2019 to seamlessly connect customers’ physical and digital worlds for improved decision-making and enhanced predictability of outcomes. The company is also working toward the position of having a portfolio of mining chemicals that help in the extraction and purification of commodities that it calls “future-facing” – the commodities such as copper, nickel and lithium that are at the heart of the transition to clean energy.
In the first half of FY23 (the six months ended 31 March), sales revenue rose 31% to just under $4 billion, and underlying net profit lifted 27%, to $163.5 million. That net profit, which included $40.9 million of significant items expense, was a huge turnaround from the $84.6 million net loss the company posted in the first half of FY22.
Orica expects strong performance to continue in the second half, on the back of growth in global commodities demand and increased adoption of advanced technology into the business. The company looks poised to grow its earnings over the next few years: its main earnings driver is the flagship product, ammonium nitrate, the key ingredient in ammonium nitrate/fuel oil (ANFO) explosives used in mining and fertilisers used in agriculture. Orica uses large quantities of natural gas to manufacture ammonium nitrate, so gas prices are the main input cost. That price is an issue that the company has to monitor closely, but the upside for this stock appears to substantially outweigh the downside. The most bullish price target on the stock is that of Morgan Stanley, which projects $20.30.
- Treasury Wine Estates Limited (TWE, $10.78)
Market capitalisation: $7.8 billion
12-month total return: –2.1%
Three-year total return: 0.8% a year
Estimated FY24 dividend yield: 3.6%, fully franked (grossed-up, 5.2%)
Analysts’ consensus valuation: $13.75 (Stock Doctor/Refinitiv, 17 analysts), $13.23 (FN Arena, six analysts)
Global wine company Treasury Wine Estates has bet its success on the increasing global demand for quality wines, and that is paying-off for the company: its high-margin luxury brands, including the flagship (and most profitable) brand Penfolds, Wolf Blass, Lindeman’s and Frank Family Vineyards in the US market, and premium brands such as 19 Crimes and Squealing Pig, now represent more than 80% of total sales. TWE benefits from a strong market position, diverse product range, and focus on innovation, and it has plenty of opportunities for global growth and expansion.
Weakening consumer spending is also an issue for Treasury, and also, there have been issues in the low-margin wines business, particularly in the Treasury Americas, have hurt full-year FY23 earnings guidance, and it is likely that the US concerns could continue into FY24.
Offsetting this is the rising probability that China may remove the hefty tariffs it placed on Australian wine imports in 2020, which effectively shut the doors on what was Australia’s largest export market. Overnight, Treasury Wines lost 30% of its earnings, and two-thirds of its sales to Asia. Treasury did a great job in reallocating wine to other markets, but the company is now planning for China to open up to it again; additional demand from China would come into what is already an under-supplied global market for premium wine and drive global pricing higher. (Against that, given the three-to-five years’ time it takes for luxury wine to mature, it would take a few years for TWE to source and produce the required wine to fully meet Chinese demand.)
On balance, Treasury looks well-placed to deliver earnings growth over the next few years, and analysts are bullish on its share price prospects. There is a nice fully franked dividend yield available, too, to boost the total-return opportunity.
- Premier Investments (PMV, $19.78)
Market capitalisation: $974 million
12-month total return: 4.2%
Three-year total return: 11.4% a year
Estimated FY24 dividend yield: 5.3%, fully franked (grossed-up, 7.6%)
Analysts’ consensus valuation: $27.00 (Stock Doctor/Refinitiv, 15 analysts), $25.92 (FN Arena, six analysts)
Retail company Premier Investments, the main business vehicle of famed retail figure Solomon Lew, owns and operates a stable of brands that includes Smiggle, Peter Alexander, Just Jeans, Jay Jays, Portmans, Jacqui E and Dottie. Premier also holds a stake of just over 28% in electrical consumer products manufacturer Breville Group, and a stake of 26% in department store operator Myer.
Australian retailing is a business under the pump, as cost-of-living pressures bite and discretionary spending falls across a broad range of retailers. The big question hanging over Premier is whether its high-quality brand line-up can weather this storm. Across the stable, the company has fierce discipline on costs, and coupled with the diversified offering, this should help sales hold up despite the growing pressure on household budgets.
In March, Premier reported a fairly good result in the circumstances, with a 17.6% lift in total sales to $905.2 million, and net profit rising 6.5% to $174.3 million, as sales rebounded across all its apparel brands. The company’s five key apparel brands delivered sales of $452.8 million, an increase of 14.3%, with Jacqui E registering its best first-half sales in ten years. Sleepwear brand Peter Alexander’s sales jumped 15.1% to $261.7 million, while stationery brand Smiggle – which has been a star performer for Premier, through its international expansion – posted a 30.3% surge in sales, to $190.7 million, mainly on the back of its collaborations with Harry Potter, Minecraft and Disney’s Mickey and Minnie.
The company lifted its fully franked interim dividend by 17.4%, to a record 54 cents a share, and also tacked-on a fully franked special dividend of 16 cents a share. Premier did not give any guidance for the second half or the full year, but it did say that the second half had started positively – and it has not subsequently said anything to the contrary.
The June 30 full-year result, released next month, will be critical for the share price; but assuming that there is no last-minute nasty surprise, Premier’s 20% share price fall year-to-date could be poised to start reversing, with a strong result. Analysts believe this will be the case.
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