- Blackmores has experienced strong sales and Mayne Pharma Group has recently acquired a new drug.
- Recently listed fleet management and diversified financial services company Eclipx Group Limited (Eclipx) is also attractive.
- Salary packaging and novated lease administrator Smartgroup Corporation Limited (Smartgroup) faces some positive catalysts.
We have spent the past two weeks visiting our WAM Capital (WAM), WAM Research (WAX), WAM Active (WAA) and Future Generation Investment Company (FGX) shareholders. We have received a lot of questions about the current market and many of our investors are nervous about its direction.
Investors’ apprehensions are well founded as equity valuations are full despite some signs the domestic economy is strengthening. There are still opportunities to be found in the market – our current picks are Blackmores Limited (ASX: BKL), Eclipx Group Limited (ASX: ECX), Smartgroup Corporation Limited (ASX: SIQ) and Mayne Pharma Group Limited (ASX: MYX).
Blackmores Limited (ASX: BKL)
Blackmores Limited (Blackmores), one of Australia’s largest vitamin and supplement producers, has been operating in Australia for 80 years and has expanded its presence in Asia in recent years. The company has a strong management team and is growing rapidly as it successfully expands into Asia. We expect earnings per share growth to be over 60% in 2015, driven by the strong demand from Asia.
[1]Source: Yahoo!7 Finance, 28 May 2015
The clear signs of that growth were reflected in the recent third quarter update with sales growing by 42% to a record level and earnings before interest and tax rising 104% on the same period last year. We expect the company to post a strong full year profit of $42 million.
Blackmores is well positioned to continue to increase sales in Australia as well as to expand throughout Asia, reduce costs through greater economies of scale and consolidate its customer base through e-commerce.
Eclipx Group Limited (ASX: ECX)
The recently listed fleet management and diversified financial services company Eclipx Group Limited (Eclipx) is also attractive. Its primary revenue model is to fund, lease and manage motor vehicles on behalf of a diversified customer base in Australia and New Zealand. The company’s management team is highly respected and given its track record at Flexigroup we are confident they will perform in their new roles.
Eclipx is well placed to continue to win market share due to its superior technology and IT platform and new product innovation. The company will also deliver material cost synergies by restructuring their funding arrangements, which will lower the cost to income ratio and increase margins.
Eclipx recently delivered an interim net profit after tax (NPAT) result of $23.8 million. The result was driven by strong growth in revenue and a reduction in costs. The company remains on target to exceed its prospectus forecast of $47.0 million in financial year 2015. In the 2016 financial year we expect further organic revenue growth, growth in receivables, slightly lower cost of funds and an improved cost to income ratio. We also expect to see further synergies coming through from acquired businesses and growth in the commercial equipment financing start-up business.
At the time of writing, Eclipx shares are trading at $3.19 having climbed 39% from the offer price of $2.30. We participated in the IPO and have acquired more shares since, as we are confident the company will continue to perform well in the medium term.
[2]Source: Yahoo!7 Finance, 28 May 2015
Smartgroup Corporation Limited (ASX: SIQ)
Salary packaging and novated lease administrator Smartgroup Corporation Limited (Smartgroup) faces some positive catalysts, including outsourcing trends from government, contract renewal, acquisition opportunities and positive earnings momentum. We think the company can grow earnings by 17% in the 2016 financial year, which puts it on a price to earnings ratio of 10.
Both Eclipx and Smartgroup are exposed to regulatory risk, however we are of the view this has subsided for the short to medium term. In particular, the recent federal Budget made no material negative changes to fringe benefits tax in respect of cars. Instead the government supported the sector through the immediate deduction for small business expenses up to $20,000.
[3]Source: Yahoo!7 Finance, 28 May 2015
Mayne Pharma Group Limited (ASX: MYX)
We are also closely watching pharmaceutical company Mayne Pharma Group Limited (Mayne Pharma), which acquired anti-acne drug brand Doryx for $50 million in February this year. Following the acquisition, the company established a specialty brand division consisting of a 66-person sales team. We believe management will successfully leverage the sales team and marketing channels to drive higher weekly sales of Doryx than the previous owners.
There is also the potential for Mayne Pharma to launch new dosage levels of Doryx to further expand its market share in the acne treatment market. The company also stands to benefit from the continued decline in the Australian dollar as the majority of its earnings are in US dollars.
[4]Source: Yahoo!7 Finance, 28 May 2015
Just remember, a healthy level of scepticism is particularly important in a mature bull market, although investors still have some opportunities to find value.
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.