It’s Easter, and thoughts turn to resurrection. So it is in the stock market, too. Here are three stocks worth betting on at the margins for a possible change of fortune – and in one case, a miracle.
GBST Holdings (GBT)
Market capitalisation: $151 million
FY19 forecast yield: 2.5%, fully franked
Analysts’ consensus target price: $3.02 (FN Arena)
Fintech company GBST had a dismal 2017, falling from $3.76 to $2.44, including a 45% fall in a few days in August (which took it as low as $1.65), following an earnings downgrade on the back of a development cost blowout on an important technology product, and the need to increase research and development spending. The project that ran into difficulties is ‘Project E-VOLVE’, GBST’s three-year, $50 million project to improve Composer, its wealth management platform product. This is an important piece of work, and GBST shareholders would not want to see it fail.
Just a few years ago, GBST looked like following in the footsteps of Computershare in becoming a global leader. The company offers platform software and systems for the capital markets, covering retail stockbroking, institutional markets, wealth management administration, banking, life insurance and taxation applications.
The company’s defining mission is to help clients automate their operations, reduce their costs, be more efficient and ensure readiness for the next wave of innovation, such as blockchain, machine learning and robotic process automation. More than two-thirds (67%) of revenue comes from recurring licence fees, and more than half (53%) of revenue is generated outside Australia. This company is that rare beast on the ASX, a stock with a global franchise.
The Project E-VOLVE blow-out flowed into a 25% fall in net profit in FY17. In the December 2017 half-year, revenue, EBITDA, pre-tax profit and net profit all fell from the December 2016 half, but all (except net profit) improved on the June 2017 half. At December 2017, the company reported a strong balance sheet, with $15 million of cash on hand, and is debt-free, which means it should be able to fund its medium-term development costs. The company won a major new client in the half, Japan’s SBI Group
GBST maintained its FY18 guidance for operating EBITDA (before strategic R&D) in the range of $20 million–$25 million, compared to $21.8 million in FY17, and $23.6 million in FY16. On FN Arena’s collation, analysts expect GBST to earn 9.8 cents a share in FY18, with a fully franked dividend of 4.7 cents, rising to EPS of 11 cents in FY19, and a fully franked dividend of 5.7 cents. The 2017 share price fall has opened up plenty of value in GBST: some brokers feel that recovery prospects are priced into the stock, but FN Arena puts the analysts’ consensus target price at $3.02, with one broker, Morgans, prepared to post a target price of $3.90.
Godfreys (GFY)
Market capitalisation: $10 million
FY19 forecast yield: 26%, unfranked
Analysts’ consensus target price: 82.3 cents (Thomson Reuters)
It would be a roll-away-the-stone moment and then some, but new Godfrey’s chief executive Jason Gowie – the fourth in less than two years – has begun a turnaround at the vacuum cleaner retailer and distributor. Godfreys has been a disaster for investors since its December 2014 float, falling from the issue price of $2.75 to 25 cents at present. Embarrassingly for the company – and infuriatingly, for investors – Godfreys failed to pick a rapid shift in customer preference to ‘stick’ vacuum cleaners: how do you live and breathe vacuum cleaners, and not see that coming? The company was also scarred by fierce competition from JB Hi-Fi and Harvey Norman, which rode the rising popularity of the Dyson brand.
Godfreys plunged into loss in the three most recent half-years, including an $18.4 million loss in FY17 and a $59 million loss for the first half of FY18, following a previously flagged $75.2 million impairment charge and other business restructuring costs. Underlying profit – which excludes one-off items – in the December half fell almost 62%, to $897,000.
So – can there be a resurrection? Gowie says he has begun a three-year turnaround strategy, which will probably involve closing some of the group’s 222 stores, heavy cost-cutting and reinvestment in the brand to try to arrest the sales decline. At least the company finally got up to speed on stick vacuums: sales of these jumped 23% in the first half, and now represent 40%–45% of sales. But online sales don’t even make up 5% of Godfreys’ sales – it has to get better in that regard.
Godfreys has brought in fresh executive blood and says it is driving operational efficiencies to boost investment into its main focus areas: brand and customer experience, product range, sales channels, people and culture, and technology. Its only guidance is for underlying EBITDA (earnings before interest, tax, depreciation and amortisation) for FY18 to be in the range of $5 million–$6 million, compared to $14.1 million in FY17. That’s a low bar, but if Godfreys can “beat” that, arrest like-for-like sales deterioration and close some stores, it might have a chance of rising from the dead.
Mayne Pharma (MYX)
Market capitalisation: $1.1 billion
FY19 forecast yield: n/a
Analysts’ consensus target price: 84.5 cents (FN Arena)
I’m disappointed in Mayne Pharma, but I’m not alone. Like many others, I thought Mayne had pulled off a transformational acquisition in June 2016, when it bought a portfolio of 42 generic drugs from Teva Pharmaceutical Industries and Allergan Plc, for $888 million. Mayne got the chance to buy the portfolio because Teva and Allergan needed to sell it to get regulatory approval for their $US40 billion ($52 billion) merger.
The deal was going to make Mayne one of the largest retail generic drug makers in the US, and boost its earnings per share (EPS) by 30%–40%. But what was overlooked in the euphoria was that US regulators were getting annoyed at the drug companies’ over-pricing. Donald Trump, then only a Presidential candidate, was hammering “Big Pharma,” whose prices he wanted to “control,” and Mayne’s share price got the wobbles. But revenue and profit both more than doubled in FY17, and it still all looked rosy in the US. However, as a price war in generics raged, with new market entrants from India under-cutting the market, and Mayne being named in a price-fixing lawsuit filed by 20 US states, the share price hit the skids. By February this year, when Mayne reported a diabolical half-year loss of $174.2 million, on a 17% fall in revenue, MYX had fallen 70% in 18 months.
But deep in the half-year result were green shoots of recovery. Adjusted revenue for the December 2017 quarter rose 27%, with adjusted gross profit up 42%, and gross profit margins also rising, from 47% to 53%. Shareholders were told that the US generic market “appears to be stabilising,” and that the second half would benefit from this. It must be said that the short-sellers appear to believe that the US generic drugs market is still weak: Mayne is the eighth-most-shorted stock on the ASX, with 10.9% of it shares sold short.
Brokers’ consensus is also negative on FY18, expecting a 49% slump in EPS for the full-year, and no dividend. Analysts see a 35% recovery in EPS in FY19 – but still no dividend. The US generic market is still going to grow, based on the ageing population, increasing incidence of chronic disease and increased demand for generics to lower healthcare costs – it is just a question of ‘at what rate?’
The Specialty Brands division, Metrics Contract Services (MCS) and Mayne Pharma International divisions are growing, but are not large enough, combined, to counteract weakness in the Generic Products Division. If Mayne can see some better news from the US generics market, its portfolio could help it mount a resurrection. Mayne Pharma directly markets more than 55 products, and has a pipeline of about 30 products targeting US markets with sales greater than US$5 billion ($6.5 billion) – that’s got to count for something.
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