While the stock market, as measured by the S&P/ASX 200 index, has eked out a 7.5% return in the last 12 months – which dividends boost to 11.4% – there are plenty of companies that do not match that return, for various reasons, which could be related to the broader economy, or specific to the individual business.
Here are 4 stocks that have not participated in the market’s rise over the last year, which could be poised to change direction.
1. Bapcor (BAP, $5.82)
Market capitalisation: $1.6 billion
12-month total return: –7.9%
FY20 projected dividend yield: 3.3%, fully franked
Analysts’ consensus target price: $6.80 (Thomson Reuters), $6.99 (FN Arena)
Australia’s biggest automotive spare parts seller and distributor, Bapcor has been a star performer for investors who bought the stock when it listed on the Australian Securities Exchange (ASX) as Burson Auto Parts in April 2014, at $1.85 a share. Part of the attraction was a sector thought to be relatively safe from a broader downturn in economic performance or consumer confidence, because people still need to have their cars repaired and serviced regularly: arguably, straitened economic times strengthens this case, as less people feel able to upgrade their car.
But Bapcor warned in mid-February of a slowdown in the sector, and the share market was not impressed – despite record first-half result in terms of revenue, profit and earnings per share (EPS). On the back of tough conditions in Australia’s automobile markets, Bapcor lowered its full-year guidance from a previously stated expectation of a 9%–14% lift in net profit, to an expected rise of “about 9%.”
Arguably that is not too bad, and Bapcor has built a strong position in a necessary business. Expansion into Thailand is also showing promising signs, but it is early days. The stock has gone backwards over the past year but analysts like the capital-gain outlook from here. And there is a 3.3% fully franked yield on offer for FY20, which grosses-up to 4.7%.
2. 1300 Smiles (ONT, $6.35)
Market capitalisation: $135 million
12-month total return: 3.4%
FY20 projected dividend yield: 4.7%, fully franked
Analysts’ consensus target price: $6.86 (Thomson Reuters), $6.85 (FN Arena)
Queensland-based dental business aggregator 1300 Smiles flies under the radar of the market of many investors, unless they are rugby league devotees – the company is the naming rights sponsor of 1300 Smiles Stadium in its home town of Townsville, the home of the North Queensland Cowboys.
1300 Smiles is a classic aggregation business: its model is to offer dentists all of the support services they need to run their own dental practices, including the dental surgeries, practice management and all of the administrative aspects. The dentists pay fees to 1300 Smiles for these services, freeing them to concentrate on the dentistry. 1300 Smiles buys dental consumables in bulk, lowering the dentists’ cost of doing business. The dentists maintain ownership of their practices, although there is the arrangement where they work for 1300 Smiles if they choose.
The company operates full-service dental facilities in the ten major population centres in Queensland, and had expanded into New South Wales and South Australia. There is still a great deal of room to grow: dentistry is a highly fragmented market, with no single dental player estimated to hold more than a 5% slice of the market. 1300 Smiles’ major listed rivals are Pacific Smiles Group (PSQ) and Smiles Inclusive (SIL). They don’t just compete with each other: private equity groups are also active in that market. However, 1300 Smiles has shown itself to be a very patient and discerning acquirer.
On Thomson Reuters’ reckoning, ONT trades at a forward (FY20) price/earnings (P/E) ratio of 13.4 times earnings, with an expected dividend yield of 4.7%, equivalent to a gross yield of 6.7%. And analysts are reasonably bullish on where the share price is heading.
3. National Veterinary Care (NVL, $2.03)
Market capitalisation: $136 million
12-month total return: –19.4%
FY20 projected dividend yield: 2.4%, fully franked
Analysts’ consensus target price: $2.80 (Thomson Reuters)
What 1300 Smiles does for dentists, its fellow Queensland-based outfit National Veterinary does for veterinarians: provide all of the support that allows vets to concentrate on their practices, backed by the administrative umbrella and purchasing power of the parent group. Again, the highly fragmented nature of the vet industry is the business opportunity, but it’s not just about acquiring clinics: NVL invests heavily in training its vets, nurses and administrative staff, aiming to lift their skills in order to retain in their clinics the more complex procedures that are usually referred to specialists – and are thus typically the higher-margin vet services.
NVL runs 99 veterinary clinics across Australia and New Zealand, 23 of which (plus two training centres) came with the 2018 acquisition of Kiwi chain Pet Doctors Group. There are now 64 clinics in Australia and 35 clinics in New Zealand. NVL says its addressable market within Australia and New Zealand is worth more than $3 billion.
In the most recent half-year result, revenue rose by 30% to $54.1 million, boosted by acquisitions: NVL says organic revenue growth was 2.9%. Reported net profit was down by almost 20%, to $2.6 million, with EPS down by one-quarter, to 4.2 cents a share: but on an underlying basis – stripping out acquisition, integration, restructuring and other one-off costs – net profit surged by more than 25%, to $3.9 million, and EPS was up 17% to 6.2 cents.
Analysts expect healthy EPS growth in both FY19 and FY20, with the stock trading at an undemanding FY20 projected P/E ratio of 12.8 times earnings, and a 2.4% fully franked yield. While the stock has been heading backwards for the last 12 months, analysts see that trajectory reversing.
4. Elders (ELD, $6.50)
Market capitalisation: $759 million
12-month total return: –26.9%
FY20 projected dividend yield: 3%, fully franked
Analysts’ consensus target price: $7.06 (Thomson Reuters), $6.71 (FN Arena)
Last week, agribusiness heavyweight Elders reported a 34% slump in underlying interim net profit to $26.4 million after a first half (to March 31) hit by “very difficult” drought conditions across large parts of eastern Australia, which cut into wool trading volumes, in particular. Poor summer cropping and grazing conditions, lower cattle prices and the shrinking wool clip all played into the weak result, but the company said that a return to “normal seasonal conditions” in the second half (March to September), could push the company to a record full-year underlying earnings before interest and tax (EBIT) result, ahead of last year’s $74.6 million.
While analysts are not quite ready to agree with that level of second-half rebound, they do see a much stronger FY20 for Elders, as the wool market in particular enjoys buoyant times. The drought has been well and truly factored-in to the ELD share price, so any improvement in conditions could see a price spike. On Thomson Reuters’ consensus, analysts expect 12.7% growth in EPS in FY20: FN Arena has a more bullish outlook, expecting 16.3% growth. However, its consensus price target is less alluring than that of Thomson Reuters, which would make Elders a reasonable buy on recovery potential, backed by a 3% fully franked yield, or 4.3% grossed-up.
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