Every investor hopes that when they buy a stock, they are buying quality. But what is quality? It has become an investment factor, but at its heart, the goal is to find companies who are generating reliable profits and can do so over a prolonged period. These can ultimately be reinvested at a high rate of return to generate future growth – this concept is called “compounding quality.”
According to Elio D’Amato, principal of stock analysis tool Stockopedia, the basic building blocks of quality are:
- Return on capital and Return on equity;
- Strong profit margins;
- Operating cash flow;
- Consistent revenue growth; and
- manageable levels of financial risk; and
I asked D’Amato to come up with a list of the top 20 “quality’ stocks on the ASX, above $100 million in market capitalisation. His list (in order of market capitalisation, from highest to lowest) was:
- Brambles (BXB)
- Cochlear (COH)
- Computershare (CPU)
- Pilbara Minerals (PLS)
- Pro Medicus (PME)
- Whitehaven Coal (WHC)
- New Hope Corporation (NHC)
- Technology One (TNE)
- Hub 24 (HUB)
- Corporate Travel Management (CTD)
- GUD Holdings (GUD)
- Nanosonics (NAN)
- Data#3 (DTL)
- Accent Group (AX1)
- Aussie Broadband (ABB)
- Cettire (CTT)
- Service Stream (SSM)
- Regal Partners (RPL)
- Praemium (PPS)
- Shaver Shop (SSG)
The problem is that for most of these companies, that quality is well and truly recognised by investors, and baked fully into the share price.
But here are three from the list which analysts believe can be picked up fairly cheaply right now.
- Cettire (CTT, $2.44)
Market capitalisation: $1.9 billion
12-month total return: 113.1%
Three-year total return: n/a (listed December 2020)
Estimated FY24 yield: no dividend expected
Analysts’ consensus valuation: $3.88 (Stock Doctor/Refinitiv, two analysts)
Luxury fashion e-commerce retailer Cettire wasn’t exactly a roaring success when it debuted on the Australian Securities Exchange (ASX) in December 2020, opening at 45 cents, 10% discount from the issue price of 50 cents. But the market soon fell in love with the stock, pushing it to a high of $4.32 by November 2021.
The market suddenly began to think the stock had been pushed too high, for a company that had not yet made a profit. CTT shares slipped back to 38 cents, in mid-2022, but Cettire has climbed rapidly, back to $2.44.
The initial enthusiasm came on the back of Cettire’s “drop ship” business model, which means it ships goods from a manufacturer or wholesaler directly to a customer. It is effectively a ‘retailtech’ business, with a proprietary algorithm that sources the products from multiple suppliers, to gain a price advantage and minimise key-supplier risk. CTT also has some agreements with brands (for example, Zegna Group) that give it direct access to the brand’s products.
The Cettire technology can process and fulfil large order volumes at the lowest cost price. The company is best thought of as a global luxury goods retail platform, holding no inventory itself, but having access to 500,000 products marketed by 2,500 brands, including the likes of Prada, Gucci, Saint Laurent, Balenciaga and Valentino. It now has customers in 53 countries, with the USA the largest group, generating 60% of revenue.
The stock’s new lease on life comes as it dawns on investors exactly how compelling Cettire’s business model is.
In FY23, the company reported an outstanding result, with virtually every number showing a big improvement. There was a 98% lift in sales revenue, to $416.2 million; adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) swung from a negative $21.5 million in FY22 to $29.3 million; and statutory net profit performed a similar turnaround, from a $19 million loss in FY22 to a $16 million profit in FY23.
Cettire recorded a 63% lift in active customers to 423,000. Repeat customers accounted for 58% of gross revenue, up from 50% in FY22, with the average order value (AOV) improving by 6%, to $747 – all of that flows into increasing customer lifetime value (CLV). As well as spending more per order on average, Cettire reported that repeat customers were ordering more frequently, too. Customer acquisition expenses were 8% of sales revenue in FY 2023, down from 14.9% in FY22.
These were hard figures to beat, but for the quarter ending September 30, 2023, Cettire reported that sales revenue surged 92% from a year earlier, to $127.1 million; gross profit jumped 98%, to $167.4 million; unaudited adjusted EBITDA was $8.7 million, up 58%; active customers grew by 67%, hitting 487,289, with gross revenue from repeat customers reaching 59% and average order value (AOV) growing by 2%, to $731 (slightly down on the figure at the end of FY23). The Company’s net cash balance increased to approximately $59 million at period end.
Effectively, it is costing Cettire less than $100 to acquire each customer, but the delivered margin per active customer is at least three times that. And customer loyalty, as shown by repeat orders, is growing. The economics of the business are extremely positive, and the degree of operating leverage is very favourable.
Penetrating emerging markets – especially China – could turbo-charge growth even further. Emerging markets accounted for 27 percent of gross revenue in FY23, up six percentage points (or 28.6%) from FY22. In FY23 Cettire introduced multi-language features and intends to grow capabilities in six languages this financial year, including Chinese, Japanese and Spanish.
Cettire is defying the cost-of-living pressures that are making investors wary of many retailers. Its customers seem more than willing to splurge on designer clothes, shoes and accessories. With the swing to profitability, Cettire’s return on equity (ROE) shot to 59.9% in FY23, and analysts expect it to stay above 40% over the next two years.
- Corporate Travel Management (CTD, $16.53)
Market capitalisation: $2.4 billion
12-month total return: –1.3%
Three-year total return: –1.3% a year
Estimated FY24 yield: 3%, unfranked
Analysts’ consensus valuation: $21.68 (Stock Doctor/Refinitiv, 16 analysts), $23.16 (FN Arena, six analysts)
The recovery in corporate travel revenue has trailed the recovery in leisure travel activity, but it is coming through, and Corporate Travel Management Limited is in a great position to benefit. The 2022-23 result saw group revenue surge by 70%, to $660.1 million, as demand for corporate travel globally jumped across all of the company’s geographic divisions. By the fourth quarter, revenue appeared to have rebounded to more than 90% of FY2019 levels, or what could be considered the pre-COVID norm. Underlying net profit for FY23 ballooned 367%, to $92.5 million. The company’s total transaction value (TTV) lifted 77% to $8.95 billion during the year, with the strong result enabling the company to pay a final dividend of 22 cents a share, on top of the 6-cent interim dividend.
CTD has clients in more than 70 countries and reports its results under Australia and New Zealand (ANZ), North America, Asia and Europe divisions. The result was supported by a 40% rise in revenue in North America, to $303.7 million; a 70% increase in revenue in Europe, to $143 million; a 134% surge in Australia and New Zealand, to $160.1 million, and a tripling of revenue in Asia, to $51.6 million.
CTD is harvesting the benefit of some major acquisitions it made in the pandemic years: it picked up US-based Travel & Transport for $275 million in 2020; Sydney-based travel technology company Tramada Holdings the same year.; and then the $175 million acquisition of Helloworld’s corporate and travel brand in April 2022, which made it Australia’s largest provider of corporate travel services. The company saw the opportunity to build a larger global platform, and that delivered for it in FY23.
In April, CTD announced its largest customer contract, with the British government’s Home Office, to manage accommodation for asylum seekers in the UK. The contract, which began in June this year, will add £1.6 billion ($3.1 billion) to the group’s TTV over the next two years and significantly boost its European results. However, the contract, which involves CTD overseeing the UK’s new asylum accommodation ships, has caused some controversy, with ethical fund Future Super reported as selling its stake in the company, on the grounds that the company is profiting from the mandatory detention of asylum seekers. In the real world, the Home Office and CTD are adamant that the program provides a good, well-managed solution to a pressing problem, and takes the pressure off hotels.
The bigger picture is that CTD has emerged from COVID as the fifth-largest corporate travel manager in the world, with a strong balance sheet (net cash and no debt), and clear runway for improved earnings each year in the near-future. The first quarter (September) update pointed to a record earnings year in FY24, with CTD likely to beat its guidance range, and surging margin (the update showed earnings before interest, tax, depreciation and amortisation [EBITDA] margin of 30.1%, compared to 15.9% in the previous corresponding period.) Return on equity (ROE) was just under 7% in the recently completed financial year, but analysts expect to see that at about 12.6% in FY24, improving further to about 13.8% in FY25.
- Praemium (PPS, 55 cents)
Market capitalisation: $275 million
12-month total return: –23.1%
Three-year total return: 2% a year
Estimated FY24 yield: 1.8%, unfranked
Analysts’ consensus valuation: 98 cents (Stock Doctor/Refinitiv, eight analysts), $1.00 (FN Arena, one analyst)
Investment platform Praemium caters to the growing high-net-wealth (HNW) investor market, and the advisers that service them, with a range of tools and services that streamline the advice process, deliver efficiencies for advice practices and enhance the client experience. It is one of the three major independent platforms, along with fellow listed companies, HUB24 and Netwealth.
Praemium has $44.6 billion held in funds under administration (FUA), comprising $9.8 billion in its branded separately managed account (SMA) scheme, $12.5 billion in Powerwrap (a former competitor it bought in late 2020) and $22.3 billion in its virtual managed account (VMA) solution and administration services (VMAAS), its non-custodial portfolio administration and reporting service. The Praemium SMA scheme is the company’s cornerstone product and highest revenue-margin service.
In August, Praemium reported a 23% increase in underlying Australian EBITDA for FY23, to a record $23.4 million: including the impact of its discontinued international business, which was sold to Morningstar in 2022, underlying EBITDA was up 41%. Continuing business revenue rose 17%, to $74.3 million, boosted by $1.4 billion in inflows and a 9% increase in total FUA to $44.0 billion, backed by positive equity market valuations and improved cash administration fee contribution.
Now fully integrated, Powerwrap’s FUA increased by 11% to $12.6 billion, with net inflows of $497 million, while the SMAs garnered FUA growth of 19%, to $9.6 billion, and $865 million in net inflows.
Consolidated profit from continuing operations was $15.2 million, up from $3.7 million, while the company delivered record earnings per share (EPS) of 3.2 cents, up from 0.7 cents in FY22.
In the September quarter, the first of the current financial year, Praemium reported net inflows of $206 million for the September quarter, up 69% on the $122 million in net inflows seen in the June quarter. Quarterly net inflows for the SMA scheme more than tripled, from $80 million in the June quarter to $257 million in the September quarter, but Powerwrap moved from net inflows of $42 million in the June quarter to net outflows of $51 million in the September quarter. Praemium said that because the Powerwrap scheme is specifically targeted to advisers with ultra-high-net-worth clients, “flows volatility is a consequence of fulfilling needs in this market segment.”
The company has great potential to generate operating leverage in FY24 through a continuation of revenue growth and falling costs. Analysts expect EBITDA margins to continue to expand, and the view is very much that consensus earnings expectations for Praemium in FY24 are too low.
Analysts polled by Stock Doctor/Refinitiv expect Praemium’s return on equity to rise from 9% in FY23 to 12.8% in FY24 and 13.8% in FY25, an impressive trajectory. All up, Praemium is viewed as having plenty of scope to rise in price.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
