Not every stock participated in the stock market rise this year. There are always laggards, and here are six that for various reasons have underperformed – to the point where they offer good value for 2018, to investors prepared to take a contrarian view.
ANZ Bank (ANZ)
Market capitalisation: $82.9 billion
Total return last 12 months: –0.8%
Estimated yield FY18: 5.7%, fully franked
Analysts’ consensus price target: $30.17 (FN Arena), $30.25 (Thomson Reuters)
In a banking sector where the growth outlook is expected to be flat at best over the next year – and where the reputational odium will be heightened by the Royal Commission into banking – investors could be forgiven for thinking of the banks only in terms of the juicy fully-franked dividends that are the traditional attraction. And that is still a very powerful attraction, especially for Australia’s army of self-managed super funds (SMSFs). ANZ is no slouch on this measure, offering, on analysts’ consensus expectations, a grossed-up yield of 8.1% in FY18 and 8.3% in FY19.
There will be more to the bank’s return to shareholders this year, now that it has bitten the bullet on wealth management. In October ANZ sold its financial planning and superannuation business to IOOF, and earlier this month the bank sold its life insurance arm to Swiss giant Zurich for $2.85 billion. Analysts expect the bulk of that will be returned to shareholders through a share buyback, with possibly up to $4 billion worth of stock to be bought back, which would help with earnings per share (EPS) and dividend growth.
The bank has largely been de-risked from a capital perspective: ANZ reached the Australian Prudential Regulation Authority’s (APRA’s) new capital target of being “unquestionably strong” more than two years ahead of schedule. It has a lot further to go in terms of cutting costs – ANZ’s fall in underlying costs of 1.4% over the FY17 full year could have been more impressive – and that should start to flow through to the bottom line over the next couple of years.
Bank investors must accept that the sector faces headwinds, with housing credit growth projected to fall significantly over the next 18 months, which will ratchet up pressure on net interest margins, and the Royal Commission prime among these. But the combination of 7% capital growth implied by consensus price targets, the dividend and the potential for share buybacks should give ANZ investors a better 12 months looking forward than the stock delivered in the last year.
Brambles (BXB)
Market capitalisation: $15.8 billion
Total return last 12 months: –14%
Estimated yield FY18: 3%, 27.5% franked (company reports in US$)
Analysts’ consensus price target: $9.96
It has not been a banner year for global logistics and supply chain specialist Brambles, bookended by a poorly received earnings downgrade early in the year that gave rise to a shareholder class action, and an investor backlash that almost delivered the company a first-strike vote against its remuneration report.
In between the company became collateral damage from the rise of Amazon, with the structural disruption wrought by the e-commerce giant eating into profit margins at traditional retailers and manufacturers, which in turn flowed through to Brambles’ bottom line.
Brambles’ CHEP Americas suffered a 10% slide in underlying profits to $US395 million in FY17, and its profit margins dropped by 2.8 percentage points, to 19.1%. Company-wide, Brambles company reported a 69% fall in bottom-line profit to $US182.9 million, as it booked US$244 million in impairments on its recycled pallets business in North America, which was subsequently sold. The company kept its dividend steady at 29 US cents. Brambles said that its underlying profit growth in FY18 would be restrained because of the loss of a large Australian reusable plastic crate contract with Woolworths and the impact of the shut-down of the Australian car manufacturing industry, where Brambles had several logistics contracts (a combined $23 million in profits will disappear.)
Brambles is experiencing rising competition in North America, not only from major pallet rival PECO but smaller, independent “whitewood” (unpainted pallets) operators.
There has also been market concern about Amazon’s impact on the pallets business: goods still move from manufacturers to Amazon distribution centres on pallets, but the delivery to the customer increasingly favours vans and couriers.
Brambles concedes that the market is changing, but argues that it is working closely with Amazon in Europe on ways of making deliveries more efficient; the company also speaks of Amazon the way quite a few Australian retailers do, as a company that actually tends to stimulate the online retail business wherever it operates – and that it benefits from this.
In October, Brambles reported that first quarter sales for FY18 had increased 6%, which may indicate that CHEP Americas is rebounding. Broker Ord Minnett thinks that the concerns about CHEP have been overplayed, and that there is considerable scope for the business to win back (and win) customers from the whitewood operators.
Analysts expect Brambles to boost earnings per share(EPS) by about 9% in FY18, and by a smaller figure in FY19. However a lower dividend is expected this year. Ord Minnett has a price target of $12.65 on Brambles – other brokers are not so optimistic, and the consensus price targets are $10.39 (FN Arena) and $9.96 (Thomson Reuters).
Ramsay Health Care (RHC)
Market capitalisation: $13.9 billion
Total return last 12 months: 3.7%
Estimated yield FY18: 2.1%, fully franked
Analysts’ consensus price target: $74.50
Private hospital operator Ramsay Health Care paid the price this year for the share market having come to consider it as a company that demonstrated consistent growth over the last two decades, and thus deserved high price/earnings (P/E) ratio: RHC was considered a high-20s P/E stock, which effectively meant that it was priced for high expectations. When you’re in that group of high-fliers, the market does not take kindly to those rosy expectations dimming in any way, but unfortunately, that is what Ramsay delivered in FY17.
Ramsay’s earnings growth is slowing but it remains one of the best performing companies in the top 200 for the 2017 financial year with final dividend growth of 13% and growth in earnings per share of 13%, which was at the top end of its guidance range, but there were significant concerns about the quality of the earnings – it looked as if, stripping out one-offs, there was very little in the way of organic growth to be seen.
In particular, analysts were concerned about the growth outlook for the French hospital portfolio, which is seen as vulnerable to the position of the new Macron government on government funding for health care. Ramsay chief executive Craig McNally told analysts that there would be no growth in the company’s private hospital businesses in France and the United Kingdom in FY18. Ramsay issued earnings guidance for FY18 of 8%–10% growth, which was below market consensus forecasts, and said there were challenges in all three of its core markets, Australia, France and the UK. In all, it was an underwhelming result from Ramsay, and the share price took a 19% hit in three weeks, to $61.40.
The share price has recovered somewhat, to $68.97, and while analysts are not rushing to slap ‘buy’ recommendations on RHC, the outlook beyond FY18 is a bit more promising, with the offshore operations expected to return to growth. The company is also aggressively expanding into the pharmacy sector in Australia, through a franchise network, and that should start to boost earnings.
On FY19 consensus analysts’ earnings expectations, RHC comes down to 21.9 times FY19 expected earnings, which starts to look attractive. Ramsay is not a copious dividend payer, but scope for further rebound in the share price arguably opens up a bit of value on a total-return basis.
Webjet (WEB)
Market capitalisation: $1.2 billion
Total return last 12 months: 4%
Estimated yield FY18: 2.2%, fully franked
Analysts’ consensus price target: $11.80
The major culprit in travel booking site operator Webjet’s poor year was a trading update at the annual general meeting in November, in which the company said it was on track to deliver earnings of $80 million in FY18: well short of what analysts had penciled in. The surprise downgrade more than overshadowed the record net profit of $52.4 million for FY17, on a 52% jump in revenue to $234.9 million, as well as the fact that bookings growth on Webjet.com.cau was more than six times market growth, and that the online consumer travel brands and business-to-business operations were exceeding the company’s target growth rates.
Webjet has growth targets for bookings in its consumer travel brands of more than three times the market rate, and more than five times the market rate in its business-to-business operations, so beating those ambitious targets was a big positive. Webjet also forecasts total transaction value (TTV) of $3 billion in FY18, a hefty rise on the $1.9 billion in the prior year. But the earnings downgrade took 22% off the share price in a trading week, to $9.25.
Webjet also had an unseemly disagreement with its auditor BDO this year over the way it accounted for transactions linked to its supply agreement with British tour operator Thomas Cook. While Webjet described the issue as “a technical accounting matter,” the FY17 annual results for Webjet had a “qualified” audit. Despite two top-tier accounting firms agreeing with Webjet’s original treatment, the company eventually accepted BDO’s verdict, which pruned $11.5 million from reported FY17 earnings.
WEB has begun to recover from its haircut, and if analysts are correct, it should be able to regain the levels from which it fell. The company is the largest online travel agency in Australasia. Growth in the consumer travel market is not the only game for it: Webjet’s B2B business, where hotels and travel operators arrange bookings, is also a big growth opportunity – in fact, Webjet has the potential to be the global leader in this space.
Analysts have some difficulty getting a handle on Webjet because it has altered its business mix: last year it sold its Asia-focused travel bookings business Zuji, and has replaced that with several new acquisitions including motorhome and cruise business Online Republic, and European travel business JacTravel – the one-off acquisition cost incurred from buying JacTravel will actually push the company’s cash flow into the negative in the first half of FY18. But in FY19 the company will have the benefit of JacTravel contributing in July and August, which are seasonally the strongest. Contrarian investors should be able to convert Webjet’s recent share price woes to some decent value.
JB Hi-Fi (JBH)
Market capitalisation: $2.8 billion
Total return last 12 months: –4.4%
Estimated yield FY18: 5.5% fully franked
Analysts’ consensus price target: $25.18
Electronics retailer JB Hi-Fi is one of Australia’s retail stars, but it is firmly in the firing line from Amazon’s entry into Australia, with electronics one of the American behemoth’s main lines: consumer electronics are expected to account for about 44% of Amazon’s local sales. About 96% of JB Hi-Fi’s sales are in-store, and its online capabilities have not hitherto been considered world-class. Perceptions that Amazon would decimate retailers like JB Hi-Fi are one of the main reasons for the stock’s poor 2017 – JBH has delivered shareholders a holding loss of 4.4% in the last 12 months, and is down 17% since Amazon announced its Australian foray in February.
But JB Hi-Fi is not about to go gently into irrelevance. Earlier this year its top management went overseas to study how similar businesses had confronted the Amazon threat. The company’s fightback strategy hinges on three planks: its low cost of doing business, emphasis on traditional retailing skills, and improving its online offering. The company says its first line of defence is how its suppliers value how JB Hi-Fi “brings their products to life” in the eyes of shoppers, and that customers also value the interaction with product experts. JB Hi-Fi has also invested heavily in its logistics capability, and has unveiled quick delivery options for online customers, offering same-day deliveries and even, in some circumstances, deliveries within three hours. The company has brought out a free, interactive digital magazine that focuses on appliances and consumer electronics information. In many ways, this is the classic business response to disruption: arguably JB Hi-Fi has been shocked into lifting its online game – and pronto – and that is good for customers.
In FY17, JB Hi-Fi lifted net profit by 13.3%, to $172.4 million, on the back of sales that surged 42.3% to $5.63 billion, following the purchase in November of The Good Guys. Underlying profit, which strips out one-offs, jumped 36.5% to $207.7 million. Analysts still expect a strong FY18, with consensus earnings expectations looking for 33% growth in EPS and a 13% boost to the fully franked dividend: with Amazon really getting going in Australia in FY18, those growth projections come right back to single-digits. But with a 5.5% fully franked dividend yield projected for FY18 and 5.7% expected for FY19, a strong balance sheet and a determination to defend its patch, JB Hi-Fi looks to offer contrarians a decent value proposition.
Fletcher Building (FBU)
Market capitalisation: $4.8 billion
Total return last 12 months: –27.1%
Estimated yield FY18: 4.7%, unfranked
Analysts’ consensus price target: $7.48
Kiwi-based builder Fletcher Building had a shocker of a year, with three earnings downgrades in less than a year following revelations of major cost blow-outs on two major building projects (the international convention centre in Auckland and Christchurch’s Justice Precinct project), big losses in the value of several overseas investments, and a management overhaul. A loss of NZ$292 million ($279.4 million) in the building division for FY17 – which took net profit down by 80%, to NZ$94 million ($89.9 million) – was the inevitable result.
It turned out that the company had built up a pipeline of work worth more than NZ$3 billion ($2.8 billion), but had bid too aggressively for much of that work, and was vulnerable to shortages of materials, equipment and labour on some jobs. With fixed cost contracts and penalties for delays, the key building division lost heavily. Chief executive Mark Adamson fell on his sword because of the problems, accounting firm KPMG was hired to look into the two big projects, and the company’s board members all took a 20% cut in directors’ fees. The company now says it is being much more careful about what it bids for – and you can bet your bottom dollar that the board will take a much closer interest in how new chief executive Ross Taylor (former boss at Australian engineering and construction business UGL) and his executive team go about their business.
But the stock was over-sold, down to the low $6 level on the ASX. FBU has recovered considerable ground, but there is still value to be had, according to analysts, particularly on FY19 grounds, when EPS and dividends are expected to rebound, after residual problems with the building division this financial year. The company is trying to mollify investors with quarterly updates on project performance, but it is likely that the Auckland convention centre project will still cause problems this year.
However, on a longer-term horizon FBU appears to offer good value at present. There is also potential short-term spice in the share price, with private equity firms continuing to run the ruler over the company. The stock is a healthy dividend payer, but the problem for Australian investors is that the imputation credits from fully franked New Zealand dividends are not available to Australian residents: the New Zealand government refunds the imputation amount to foreigners, minus 15% withholding tax. This refund is paid as a supplementary dividend, increasing total dividends received by foreigners by about 18%. This makes New Zealand dividends not as tax-effective for Australian investors as local stocks paying fully franked dividends.
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