It’s Christmas time and everyone is looking for presents – here are four stocks I’d like to see in my Christmas stocking next month.
The first is a single-commodity (for now) mining giant that is commonly assumed to be in an uncomfortable position, squeezed by a foreseen decline in its commodity price, and worse, a widening price discount for its wares. But Fortescue Metals Group could be worth another look – especially if iron ore prices in 2018 hold up better than previously thought.
Two of them are stars of the Australian medical technology space – an area where Australia punches well and truly above its weight. Both of the companies I’ve chosen are well on the way to establishing their products as the global standard-of-care.
Lastly, there is a specialist insurer from New Zealand that has a very interesting set of market and geographical exposures, which give it a unique proposition in the sector.
Fortescue Metals Group (FMG, $4.64)
Market capitalisation: $14.4 billion
Estimated yield FY18: 7.3%, fully franked (company reports in US$)
Analysts’ consensus price target: $5.67
Source: ASX
By rights, iron ore heavyweight Fortescue should not be a buying proposition – even though it is the lowest-cost producer in the world, beating even Rio Tinto (Fortescue produced iron ore for $US12.15 a tonne in the September quarter.)
The problem is that Fortescue’s ore is lower in iron than its competitors, and China’s directives to its steel mills to do better on the pollution front favours the higher-grade ores from Brazil, South Africa and Australia.
Fortescue has historically sold its ore at an average discount of 5%–10% to the benchmark 62% iron ore index. But that discount has steadily widened this year and it was reported in October Fortescue was landing shipments in China at a 40% discount. The company’s best ores do have the advantage of being lower in certain impurities, which makes them suitable for blending with higher-quality Brazilian ores.
Fortescue would definitely not like to be forced to sustain discounts of those levels – but the company is adamant that government restrictions will eventually be eased, which would mean Chinese steel production would again increase, margins would soften and steel mills would again look to lower their cost of production by buying more lower-grade ore. The company has lowered its price realisation guidance for the full year to between 70%–75% of the index, down from guidance in July of 75%–80%, and much lower than the 85%–90% that FMG has usually achieved.
Fortescue is also coming under cost pressure as its strip ratio – the amount of dirt it has to move to dig up its iron ore – rises inevitably. It will also need to start building a new mine soon, to replace the Firetail mine where production starts to fall from 2020. Fortescue has kick-started the Western Hub development, which is expected to cost about $US1.5 billion and could start to produce (better-quality ore than Firetail) as soon as 2023.
However, Fortescue makes the point that the other half of steel production around the world – that is, outside China – has not been benefiting from the very high steel prices, and is more focused on value in use and minimising their costs. It sees increasing opportunities for its ore in markets outside China.
Fortescue has recently talked about its desire to diversify into new commodities – such as lithium – to leverage the skills the company has developed at its Pilbara operations in Western Australia. The company is about to lose its chief executive Nev Power, who retires in February. Worries about the discount have contributed to a poor year for Fortescue shareholders, despite net profit jumping to $US2.09 billion ($2.63 billion) in FY17 from $US985 million a year earlier, and the doubling of the final dividend: however, the cost improvements continue to be the big story at Fortescue, and it is still posting strong margins. The company believes it can go even lower – that gives Fortescue a lot of leverage for recovery from current share price levels.
Nanosonics (NAN, $2.68)
Market capitalisation: $802 million
Estimated yield FY18: n/a
Analysts’ consensus price target: $3.27
Source: ASX
One of Australia’s premier medical technology companies, Nanosonics has brought to the global market a world-first disinfection technology. Its Trophon technology was a major breakthrough for medical devices that cannot be sterilised by conventional means because of heat sensitivity. Until Trophon, ultrasound probes were disinfected with corrosive chemicals that are only about 80% efficient. Trophon is a ‘biocide’ technology is much more efficient and environmentally friendly. The technology is based around very fine, vapourised droplets of concentrated hydrogen peroxide, which kill microorganisms on surfaces.
As a fully enclosed system, the Trophon system ensures operators and patients are not exposed to toxic chemicals: there is no hazardous waste to dispose of afterwards as the only by-products are oxygen and water. The technology is much more cost-effective than its nearest competitors – which, in any case, are not as “clean” – and stands every chance of being accepted as the global standard of care. Regulatory pressure is building within the radiology industry to provide greater safety and traceability, which should continue to move the industry away from using toxic disinfection methods.
The lead product, the Trophon EPR point-of-care ultrasound probe disinfection unit, is cleared for sale in the USA, Europe, Canada, New Zealand, Australia and Asia. In 2011 Nanosonics won the backing of healthcare giant GE, which signed on as the exclusive US and Canadian distributor of the lead product, the Trophon EPR. GE’s healthymagination Fund, which invests in highly promising healthcare technology companies, subsequently invested $7.5 million in Nanosonics. In August, Nanosonics and GE signed a new re-seller agreement, for a further three years, after the current contract expires on June 30, 2019.
In June, Nanosonics also struck a deal with sterilisation specialist Sakura Seiki to sell Trophon EPR in Japan, the world’s second largest healthcare market. It is also poised to enter the Middle Eastern market.
In FY17, Nanosonics grew its sales by 58% to a record level of $67.5 million, with the North American installed base of Trophon EPR units swelling by 42%, to 12,400, taking the global installed base to 14,100. (The company says its global addressable market is more than 120,000 units). Net profit was $26.2 million, compared to $100,000 in FY16. Nanosonics is only getting started: analysts expect earnings per share (EPS) of 3.7 cents in FY18, then a surge to 6.6 cents in FY19. However, no dividends are seen coming in FY18 or FY19.
Medibio (MEB, 35.5 cents)
Market capitalisation: $69 million
Estimated yield FY18: n/a
Analysts’ consensus price target: 85 cents
Source: ASX
Medibio is another Australian medical technology success story: its technology uses objective biometrics – based on circadian heart rate variability and sleep patterns – and proprietary cloud-based algorithms to screen for, diagnose, monitor and manager depression, chronic stress and other mental health disorders. The technology is based on research conducted over 15 years at the University of Western Australia.
This year Medibio’s depression diagnostic test was put through a prospective study, ahead of its US Food & Drug Administration (FDA) confirmatory study, and shot the lights out. Conducted by researchers from Johns Hopkins University Medical School in the US, the study achieved 82% accuracy, compared to 30%–50% accuracy that is considered standard in diagnosing depression in the clinical setting. This was considered an outstanding result.
Medibio has now applied to become the first FDA-approved objective, evidence-based approach to the diagnosis of mental health disorders. In October, Medibio signed a five-year clinical trial agreement with the prestigious Mayo Clinic in the US to develop new product solutions to assist physicians in addressing psychiatric conditions. In the same month, Medibio struck a deal with Japanese pharmaceutical company Otsuka to “characterise key circadian, autonomic, and sleep biomarkers related to serious mental illness.”
In 2016 and 2017, Medibio participated in Australia’s Biggest Mental Health Check-in, in which participants wore its overnight heart rate tracking device for one night, with the results downloaded onto its Medibio ZBLE app on the user’s phone, and an individualised profile report will be emailed to each participant. The Medibio ZBLE app works in conjunction with devices such as Fitbit and Garmin devices that store heart rate, activity and sleep data for the purpose of determining stress and other mental health conditions.
Medibio is a loss-maker and analysts don’t expect that to change in FY18 or FY19. But as it moves down the track to FDA approval, its star should keep rising: the need to improve the diagnosis of depression is a very pressing one, and Medibio is a major breakthrough in this area. Global funds management giant Fidelity Investment owns 10.6% of Medibio and IFM Investors and Regal Funds Management are also substantial shareholders.
CBL Insurance Group (CBL, $2.74)
Market capitalisation: 646 million
Estimated yield FY18: 2.7%, unfranked
Analysts’ consensus price target: $3.32
Source: ASX
New Zealand-based insurer CBL is a different beast to other listed insurers: it specialises in non-traditional credit and financial risk, including construction insurance and other niche areas, in Europe, Australia and New Zealand. CBL has eight offices, on four continents, and writes business in 25 countries. Its largest market is Europe, including France, Italy, Spain and Ireland, and CBL is developing new markets including Mexico, India and South-east Asia.
CBL’s main products are builder’s warranty; credit and surety bonds required as part of a building or construction contract (used as an alternative to providing a bank guarantee; deposit bonds (used by residential buyers as an alternative to paying a cash deposit on a home or apartment); third-party liability (motor); professional and civil liability insurance; credit enhancement policies; and payment security bonds, which are insurance bonds provided as an alternative to obtaining a bank guarantee. Surety and financial risk and builder’s liability insurance are the dominant product categories, representing about 63% of gross written premium (GWP).
In the recent half-year FY2017 result, GWP surged 29% in NZ$ terms, with reported profit up 4.1% but earnings per share (EPS) up 13%. CBL is a high-quality business and is expanding its business portfolio into a range of interesting areas, including credit default insurance for small business lending in Mexico, insuring infrastructure payments in India and insuring French municipalities for their statutory liability payments. CBL has strong cash flow and liquidity, and is a stock for the future.
Christmas is a good time for reflection. On that note, a year ago, I wrote Six Christmas stocking stocks for 2016. This is what happened to them:
Senetas Corporation Limited (SEN, 9.9 cents)
Now: 12 cents
Move: 21.2%
BPS Technology (BPS, 97 cents)
Now: 50 cents
Move: –48.4%
Baby Bunting (BBN, $2.31)
Now: $1.39
Move: –39.8%
BWX Limited (BWX, $3.88)
Now: $6.79
Move: +75%
Megaport (MP1, $2.30)
Now: $2.63
Move: +14.3%
Superloop (SLC, $2.84)
Now: $2.52
Move: –11.3%
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.
