“Quality” is an attribute for which every investor should be looking on the stock exchange; but it’s not always available at prices that represent good-value. But here are four high-quality stocks that do appear attractively priced right now.
1. NEXT DC (NXT, $12.10)
Market capitalisation: $5.5 billion
Three-year total return: 16.9% a year
Estimated FY22 dividend yield: no dividend expected
Analysts’ consensus valuation: $14.45 (Thomson Reuters), $14.09 (FN Arena)
NEXT DC is one of the Asia-Pacific region’s top data-centre operators, with ten world-class data centres across Australia. Organisations that store critical applications and data “in the cloud” can use NEXT DC’s facilities to physically store this information securely. The company has benefited as the COVID pandemic has accelerated the digitisation and cloud adoption trend, helped by work-from-home measures, and demand for its services is only expected to increase. Since 2017, NEXT DC has grown its customer numbers by 20% a year compound and its interconnections by 25%. Revenue grew by 27% in the December 2020 half, with underlying earnings (EBITDA, or earnings before interest, tax, depreciation and amortisation) rising by 27%, to $65.7 million. The strong start to 2021 – NEXT DC received more business in January and February 2021 than it did in the whole first-half combined – saw management lift FY21 guidance.
The attraction of NXT is simply the growing need for data – mountains of data is being generated all the time, these mountains are only going to grow, and the data Himalaya has to be stored somewhere; NXT dominates the market in Australia, and is planning an Asian expansion. The company generates a gross margin of about 76% and has a return on invested capital (ROIC) in the mid-teens – those are strong numbers. However, the major drawback with NXT is that it does not pay a dividend. Against that, current analysts’ consensus holds that the stock offers good buying value.
2. TPG Telecom (TPG, $6.16)
Market capitalisation: $11.5 billion
Three-year total return: 9.9% a year
Estimated FY22 dividend yield: 1.8% fully franked (grossed-up, 2.6%)
Analysts’ consensus valuation: $7.60 (Thomson Reuters), $7.70 (FN Arena)
I looked at TPG Telecom in May as a good-value “$5 stock,” and it appears that it’s still good-value now as a “$6 stock.” The full-service telecommunications provider TPG Telecom was created from the $15 billion merger between TPG Telecom and Vodafone Hutchinson Australia in June 2020, which resulted in the formation of the second-largest telecommunications company listed on the ASX, behind Telstra. TPG owns and operate nationwide mobile and fixed networks, operating a swag of brands including Vodafone, TPG, iiNet, AAPT, Internode, Lebara and the new felix, an SIM-only mobile brand launched last year, that is both a value offering and TPG’s main “sustainability” brand, as a carbon-neutral provider (like the Telstra-owned Belong.)
The stock is still well down from pre-merger, for reasons I covered in May – the 2020 result (TPG uses the calendar year as its financial year) was a disappointment: while the merged entity reported a net profit of $734 million in its first full-year result since merging, that was all courtesy of a one-off tax credit of $820 million. The pro forma result, which simulated the figures if the merger had been effective throughout 2019 and 2020, showed a 10% fall in net profit to $282 million, on the back of a 6% slide in revenue, to $5.52 billion.
However, the fixed broadband subscriber base increased by 6% from 2019 to 2.17 million, while the NBN base lifted 28% to 1.9 million. That represents net subscriber gains of 532,000 people. Tempering that was the fact that the mobile customer base went backward, hit by the absence of overseas visitors and migrants to Australia, especially international students, due to global travel restrictions.
The lack of formal guidance also worried the market, although the company did say: “Even with continuing uncertainty due to COVID, our year-to-date results are tracking well against our expectations and we will enter the second half of 2021 with increased confidence. We have moved into 2021 with increased momentum and confidence. We are already a third of the way through 2021 and we are tracking well against our forecast for the year.”
While broker consensus does anticipate further profit falls this year, a recovery is expected to start in 2022 – and the price weakness remains a buying opportunity for this high-quality stock.
3. Newcrest Mining (NCM, $25.85)
Market capitalisation: $20.7 billion
Three-year total return: 6.9% a year
Estimated FY22 dividend yield: 1.6% fully franked (grossed-up, 2.3%)
Analysts’ consensus valuation: $31.56 (Thomson Reuters), $32.12 (FN Arena)
A 10%-plus correction in the S&P/ASX 300 Metal & Mining Index (ASX: XMM) opened-up value in quite a few mining stocks, and gold heavyweight Newcrest is one that followed the index’s fall dutifully. But the stock looks to be good value at the current levels given that its production margins are strong, and increasingly being helped by higher income from copper and silver across its portfolio. At Cadia (New South Wales) this year that will be boosted when the new molybdenum plant starts commercial production in the September quarter, with the new revenue stream expected to add about $50 an ounce benefit to Cadia’s all-in sustaining cost (AISC) per ounce, which is already negative, being helped significantly by copper credits. Across the mine portfolio, copper and silver production is helping to push the company’s overall AISC (which incorporates not only the “cash cost” of production, but all the costs that allow production to be sustained) lower – it was down by 7% in the March 2021 quarter, to US$891 an ounce, giving Newcrest a healthy AISC margin of 49%, of US$854 an ounce at current prices.
Newcrest says it is on track to achieve FY21 guidance, which is targeting group production of 1.95 million–2.15 million ounces of gold for the full year. The company has produced almost 1.56 million ounces in the first nine months. Newcrest is also targeting full-year guidance of 135,000 tonnes–155,000 tonnes of copper, which might be harder to achieve – but with copper prices at nine-year highs, the red metal should be a handy contributor this year.
Further exploration success at Havieron (Western Australia) and Red Chris (Canada) is bringing these growth options closer to development, while at Lihir, Newcrest has a plan in place to develop the mine – which has given it significant issues in its time – into a one million ounce producer for 10-12 years, from 2022. All up, Newcrest is doing a great job of controlling what it can control, and looks to be attractive value at these share price levels.
4. APA Group (APA, $9.09)
Market capitalisation: $10.5 billion
Three-year total return: 1.5% a year
Estimated FY22 dividend yield: 5.9%, 16.7% franked (grossed-up, 6.4%)
Analysts’ consensus valuation: $10.57 (Thomson Reuters), $10.55 (FN Arena)
APA Group has always been considered a high-quality utility company, with a highly defensive income stream that is backed by an extensive gas pipeline network – that is still the case, and has given the company one of the longest dividend growth records on the ASX. That strength has underpinned expansion into renewable energy – APA is now one of Australia’s largest owners and operators of renewable power generation assets, with wind and solar projects across Western Australia, South Australia and Queensland, and the company recently announced its first hybrid energy “micro-grid” project at Gold Road Resources’ Gruyere gold mine in Western Australia, combining solar energy with battery energy storage.
Where it sits at the moment, APA is a crucial part of the federal government’s gas-fired recovery plan, APA plans to spend more than $1 billion between 2021 and 2023 on projects in Australia, including a three-stage, 50% expansion of capacity to deliver gas from Queensland to Sydney; the company is also eyeing large potential growth opportunities with renewables/firming/storage and electrification in this country, and APA is putting in the work to be able to participate in the “hydrogen economy,” should that come to fruition. All up, APA believes there is more than $68 billion worth of growth opportunities in Australia out to 2040.
This bonanza is dwarfed in the USA, where, for some time now, APA has been planning an expansion, seeing massive potential involvement in gas pipeline infrastructure, renewables/firming and electrification. The company envisages that $2.6 trillion of investments are needed in energy infrastructure and renewable generation in the US over the next 20 years, to meet changing energy needs; APA is looking at integrated gas and electricity transmission companies, where it expects growth to meet net-zero emissions targets, as well as gas pipelines and utilities.
While investors wait for a potential move into the US, and the capital-raising plans that will be required, FY21 earnings are likely to come under slight pressure, before resuming growth in FY22. However, the dividend yield situation is expected to hold-up, as a high-yielding stock, with analysts seeing substantial scope for the APA share price to move higher, augmenting the potential “total return” scenario the stock appears to offer.
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