As the driving force of the economy moves from the resources sector to the industrials, investors are looking to get set in the businesses driving this expansion. But the risks can be just as stark in the non-resources world. The latest industrial to give investors heartburn is Spotless Group, which appalled the market earlier this month with an unexpected fiscal 2016 profit warning: the result was a 40% collapse in the share price.
Unfortunately, this kind of reaction is now common for industrial stocks that disappoint the market. The intrinsic risk of investing in stocks does not disappear when moving the focus of your investment into companies that make things, sell things and provide services. But here are four industrial stocks for 2016, where the “story” and the investment thesis appear to provide reasonable grounds for confidence.
AV Jennings (AVJ, 54 cents)
Market capitalisation: $206 million
Last 12 months: +2.7%
Analysts’ consensus price target: 76.5 cents*
Implied upside: +41.7%*
Analysts’ consensus FY16 yield: 7.6% fully franked*
Analysts’ consensus FY16 P/E: 5.9 times*
Famous Australian house builder AV Jennings has not always delivered results that accord with its household-name status, plunging into loss in FY2009, FY2012 and FY2013, but the residential property developer put in a strong performance in FY2015 that appears to have positioned for further growth. AV Jennings almost doubled its reported net profit to $34.4 million in FY15, and while profit growth will be a lot more modest over the next few years, AVJ’s dividend yield is expected to be in the 7 to 8% range, fully franked, despite the spending required to keep restocking the land bank as sales come out of it.
AVJ’s holds a portfolio of about 10,700 housing lots, well-diversified geographically, with 31% in Victoria, 28% in New South Wales, 23% in South Australia, 12% in Queensland, 4% in Western Australia and 2% in New Zealand. The company specialises in high-quality, good-value master-planned communities and urban renewal sites.
According to broker Wilson HTM, AVJ holds a land bank of about 10,200 lots across Australia, with 1,512 lots under construction. As the company progressively sells down its land bank, it releases the value of the land already bought, plus earns its development margin. Wilson HTM says AVJ is trading at a 38% discount to its net tangible asset (NTA) backing, and also says there is scope for capital management options – such as a special dividend or a share buy-back – to improve shareholder value. Wilson HTM has a 63-cent share price target on AVJ: on Thomson Reuters’ collation, the analysts’ consensus price target is 76.5 cents.
*Thomson Reuters numbers
Greencross (GXL, $4.69)
Market capitalisation: $529 million
Last 12 months: –34.2%
Analysts’ consensus price target: $6.55
Implied upside: +39.7%
Analysts’ consensus FY16 yield: 4.3% fully franked
Analysts’ consensus FY16 P/E: 12.5 times
Australia’s first listed veterinary group, Greencross listed in June 2007 with 32 veterinary practices. The company’s business proposition was to aggregate a strong position in a highly fragmented industry: it has built its portfolio to more than 130 vet centres and more than 200 pet specialty retail stores in Australia and New Zealand. It also has seven emergency centres, two specialist centres, two pathology laboratories and two pet cremation sites.
The strategy is to supply everything pets need, from vet services to pet food and pet accessories. And why not: research firm IBISWorld estimates that 63% of Australian households own a pet. The veterinary services industry is estimated to be worth $2.6 billion a year while the broader pet industry in Australia is worth about $8 billion a year. It is still a very fragmented business and Greencross still has scope to grow, although prices for established practices are now much higher, pushed upward by a couple of other aggregators (including listed competitor National Veterinary Centres) that have emerged to take Greencross on.
To a large extent Greencross has been a victim of its own success: float subscribers saw their $1 shares rocket to $10.50 by August 2014, but that appeared to be driven more by the company’s rapid growth in vet practice acquisitions. Earnings growth has been slower to catch up, and the share price has more than halved from the high point. However that makes for a much more attractive entry point for a stock that looks to have one of the strongest growth outlooks among consumer-facing stocks.
Programmed Maintenance Services (PRG, $2.54)
Market capitalisation: $633 million
Last 12 months: +19.2%
Analysts’ consensus price target: $3.05
Implied upside: +20.1%
Analysts’ consensus FY16 yield: 7.4% fully franked
Analysts’ consensus FY16 P/E: 10.9 times
Staffing, maintenance and project services company Programmed Maintenance Services (PRG) was hammered in the fall-out of the resources downturn, because resources sector work made up more than half of PRG’s earnings. Its marine division, which provides services to the offshore oil & gas industry, has been particularly hard-hit. So at first glance, proposing a merger with another company, Skilled Group, that actually increases the exposure to that work, might look like doubling down on a bad bet.
But the combination of Programmed and Skilled offers enhanced scale and diversification, and taps into two major sectors of the economy that are growing, property and infrastructure. Programmed’s work growth in property and infrastructure heading over the next couple of years should offer sufficient growth to offset weakness in resources.
In the meantime the $420 million merger – in which Skilled shareholders emerged with about 52.4% ownership in the combined business – will give rise to considerable synergies and savings. Along with the greater scale and business diversification, this puts the combined group in a good position for growth. On a medium-term basis the stock looks cheap, it is a strong yield candidate and at the end of this week, Programmed Maintenance Services will be added to the S&P/ASX 200 Index.
Fisher & Paykel Healthcare (FPH, $7.74)
Market capitalisation: $4.3 billion
Last 12 months: +38.9%
Analysts’ consensus price target: n/a
Implied upside: n/a
Historical FY15 yield: 2.0% unfranked
Historical FY15 P/E: 39.7 times
New Zealand-based Fisher & Paykel Healthcare does not make refrigerators or washing machines: that sister company has not been listed on the ASX since 2012. Fisher & Paykel Healthcare designs, makes and markets products and systems for use in respiratory care, acute care, and the treatment of obstructive sleep apnoea (RSA).
It sells its products and systems in more than 120 countries worldwide, through two product divisions – Respiratory & Acute Care (RAC) and Obstructive Sleep Apnoea (OSA). Just under half of FPH’s sales come from the US.
The RAC division sells respiratory humidifiers and accessories. The OSA division sells positive airway pressure (PAP) machines that make sleep easier: in this market it competes with the likes of ASX-listed investor favourite ResMed, and Phillips Healthcare. FPH is not a yield stock and at first glance appears expensive, but it has a strong underlying growth profile in its major markets as its products further penetrate the sleep apnoea patient market, in particular. Citi, for example, is forecasting earnings per share (EPS) growth of 30% in FY16, 30% in FY17 and 21% in FY18.
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