A surprising number of companies on the ASX are global leaders in their fields. Here are four of them that look to be very attractive buying at present.
- Austal (ASB, $1.92)
Market capitalisation: $697 million
12-month total return: –22.3%
Three-year total return: –13.3% a year
Estimated FY24 yield: 3.6%, unfranked
Analysts’ consensus valuation: $2.35 (Stock Doctor/Refinitiv, five analysts)
Perth-based shipbuilder Austal has come a long way from building aluminium crayfishing boats in 1987, to being a global leader in aluminium shipbuilding, manufacturing a broad range of ferries, offshore work vessels, patrol boats and warships. Austal is Australia’s largest defence exporter, and operates shipyards in Australia, the US, Philippines and Vietnam, with service centres worldwide.
Austal is the only foreign-owned prime contractor designing, building and sustaining ships for the US Navy. The company’s shipyard in Alabama is currently contracted on 11 different vessel programs for the US Navy and Coast Guard. The two main classes are the 19 Littoral Combat Ships (LCS), for the US Navy, of which 15 have been delivered; and the 15 Spearhead-class expeditionary fast transport (EPF) vessels, of which 13 have been delivered. On completion of these contracts, Austal will have built 11% of the US Navy surface fleet.
As well as its US orderbook, Austal is also building two vessel classes for the Commonwealth of Australia at its Perth shipyard, the Evolved Cape-Class Patrol Boat for the Royal Australian Navy and the Guardian-Class Patrol Boats for the Commonwealth of Australia, to be gifted to Australia’s Pacific neighbour countries, such as Micronesia, Tonga and Fiji.) In August, Austal delivered its 16th Guardian-class patrol boat to the Australian Defence Department, and in June, it delivered the fifth of eight evolved cape-class patrol boats (ECCPBs) to the Royal Australian Navy.
Conscious that work on its US contracts was winding down, Austal invested in a steel shipbuilding facility, to enable it to simultaneously build both aluminium and steel hulled ships. This facility was opened at the company’s Mobile, Alabama, yard in 2022, and is well and truly paying its way: earlier this month, Austal announced that its subsidiary Austal USA had won a $143.4 million contract to build three steel landing craft utility (LCU) 1700-class boats for the US Navy, with options for manufacture of an additional nine boats and supports.
In July, the company requested a voluntary suspension to announce an estimated FY23 loss of between $69 to $75 million on its $385 million five-ship Navajo-class Towing, Salvage and Rescue Ship (T-ATS) contract for the US Navy, and two days later, Austal announced that its FY23 guidance for earnings before interest and tax (EBIT) had been reduced from about $58 million to an expected range between zero profit to a potential loss of $10 million. In the end, the EBIT loss came in at $4.8 million, but revenue was up 11%, to $1.6 billion. And the company slipped to a net loss of $13.8 million, from a profit of $79.6 million in FY22 — but the market appeared to believe that without the onerous T-ATS contract provision, the result would have been quite strong. With a healthy balance sheet and an orderbook, including options, worth up to $11.6 billion heading into FY24, analysts are fairly bullish on Austal, which sits on the ASX as an obvious takeover target.
- CSL (CSL, $270.85)
Market capitalisation: $130.7 billion
12-month total return: –9.1%
Three-year total return: –1% a year
Estimated FY24 yield: 1.5%, 5.5% franked (grossed-up 1.6%)
Analysts’ consensus valuation: $330.05 (Stock Doctor/Refinitiv, five analysts)
Australia’s home-grown biotech heavyweight CSL has become a true global leader, the world’s largest maker of plasma-based therapies (CSL Behring), a global leader in treatments for immunodeficiency and bleeding diseases such as haemophilia, and the world’s the second largest producer of vaccines (Seqirus). CSL underpins its position by investing massively in research and development to create new products, creating a pipeline of products that continually opens up new revenue streams and keeps the company ahead of competitors.
In August, CSL reported a 10% lift in full-year profit to $US2.61 billion ($4 billion) for FY23, a result that dampened concerns about shrinking gross margins in the core CSL Behring plasma business. The result was just short of CSL’s earlier guidance for full-year net profit of between US$2.6 billion to US$2.8 billion. The company expects full-year FY24 underlying net profit after tax and amortisation this year to come in at between $US2.9 billion and $US3 billion, implying an increase of 13%—17% at constant currencies.
CSL is a truly great stock, but shouldn’t be viewed as an automatic buy that it will always make money for the investor: like the share market itself, CSL has occasionally suffered a pull-back in price. Most recently, CSL slid 29 per cent in the ‘COVID crash’ of February–March 2020; and before that, the stock lost nearly one-quarter of its value in late 2018, when the market saw a flight from growth stocks that was linked to rising US interest rates. CSL has often been the subject of arguments over its high price/earnings (P/E) ratio investment, as high P/Es can often indicate ‘expensive’. Over time, CSL has traded at an average historical P/E of about 27 times earnings, meaning that it is hardly ever considered ‘cheap.’
At the moment, CSL is trading on a historical (FY23) P/E of 35.4 times earnings and a prospective FY24 P/E, on analysts’ consensus estimates, of 28 times FY24 earnings, and 24.1 FY25 earnings, on Stock Doctor/Refinitiv’s numbers. Analysts like the look of those numbers as an entry point – backed by the knowledge that CSL almost routinely under-promises and over-delivers in terms of earnings. The quality of the business — its balance sheet strength, outstanding track record of management and confidence in future earnings growth — has usually justified a high P/E ratio. The most optimistic broker is UBS, which has a price target on CSL of $340.00.
- ResMed (RMD, $23.45)
Market capitalisation: $10 billion
12-month total return: –31.4%
Three-year total return: flat
Estimated FY24 yield: 1.3%, unfranked
Analysts’ consensus valuation: $36.40 (Stock Doctor/Refinitiv, 13 analysts)
Sleep-breathing device maker ResMed is another of Australia’s global leaders, although it is now a US-based company. Its core business is devices that help people suffering from obstructive sleep apnoea (OSA), chronic obstructive pulmonary disease (COPD) and other respiratory conditions to sleep better. ResMed’s crucial advantage is its continuous positive airway pressure (CPAP) machines and masks, which give it a strong market position, being considered the industry standard for moderate to severe cases of OSA. ResMed’s market position gives it pricing power and negotiating with suppliers.
ResMed sells its products in more than 140 countries The portfolio of products includes devices, diagnostic products, mask systems, headgear and other accessories, dental devices, and cloud-based software and informatics solutions. ResMed also leads the market in digital health technology, having collected more than 15.5 billion nights of medical sleep data from people using its devices: it has been analysing it to help its devices “learn” their owners’ idiosyncrasies. The company is increasing investments in this space as it continues to unlock value from this data, to benefit patients, providers, physicians and payers (for example, insurance companies.)
ResMed’s software-as-a-service (SaaS) business for out-of-hospital care remains an integral part of the company’s growth strategy. The Brightree ReSupply program has very close synergies between the SaaS arm and the core business, providing resupply for patients with sleep apnoea, COPD, neuro-muscular disease and beyond.
Recently, ResMed shares have been hammered on the back of concerns that the craze for weight-loss drugs – such as Ozempic and Wegovy – could hurt demand for the company’s sleep therapy devices. But most analysts appear to think that these worries are over-stated, and that ResMed can sustain its revenue growth trajectory of about 5%–7% a year, and double-digit per-share earnings growth, for at least the next few years. With a cheaper access point provided by the weight-loss drug scare, the shares look to be very good value at these levels.
- Catapult Group International (CAT, $1.01)
Market capitalisation: $295 million
12-month total return: 5.2%
Three-year total return: –21.2% a year
Analysts’ consensus valuation: $1.64 (Stock Doctor/Refinitiv, six analysts)
Melbourne-based Catapult Group is on the way to successfully commercialising its world-class sport technology capability, which is based on data-tracking software and hardware in the form of wearable sports vest. The company supplies professional sport teams around the world with GPS-based performance tracking technology, and the data analytics software to help interpret the information: more than 3,800 elite teams, in 100-plus countries, playing more than 40 sports, including major NFL, NBA, Premier League and Formula 1 teams, use Catapult’s software, which is designed to improve the performance of athletes and lower their risk of injuries.
But the share price has been disappointing. Catapult reached levels above $4 in 2016, but there was a long unwind, particularly over 2022, as high-potential-growth tech-related stocks were sold-off brutally. However, from 67 cents in March, Catapult has risen strongly, as the market starts to appreciate that the business has been changed by CEO Will Lopes, who took over the top job in November 2019. At that time, Catapult mainly sold its technology packages to sporting teams, but it has moved almost totally to a software-as-a-service (SaaS) business, which is subscription-based model. At the time of Lopes’ accession, less than 60% of Catapult’s revenue was recurring, but the recurring subscription revenue proportion is now well over 90%.
The business favours annual contract value (ACV) as its preferred metric of growth because its breaks down the total value of customers contracts into an average value per year. In FY23, Catapult’s ACV surged 21% to $US70 million on a constant currency basis – its third consecutive quarter with 20 per cent-plus ACV growth – and because the SaaS model creates predictable revenue, the revenue growth figure for the year also exceeded 20%.
In July, after a strong first-quarter for FY24, Catapult reaffirmed its guidance to be generating positive free cash flow in FY24. Free cash flow (FCF) is the money that a company has left over after paying its operating expenses and capital spending: the more free cash flow a company has, the more it can allocate to dividends, paying down debt, and taking advantage of growth opportunities.
The major caveat with the stock is that analysts do not see net profit for Catapult before FY25, but overall they appear to like the direction that ACV, revenue and free cash flow are heading. Catapult looks set for growth, from these prices.
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