The latest interim profit-reporting season has been unusual. The market, normally fixated on earnings results, seems more interested in overseas news. That’s no surprise after savage falls in global equities earlier this month, as bear-market fears intensified.
Nevertheless, company valuations – and bull and bear markets – are ultimately determined by earnings. On this score, the latest interim reporting period has been solid rather than spectacular, but there is enough to suggest the bull market will resume.
Reasonable earnings results that are not getting downplayed in a market that, for now, is focused on macro trends, will buoy value investors. That’s a good time to look for quality companies that are outperforming market expectation, and still offer value.
Here are seven results that stood out:
1. CSL (CSL)
The biopharmaceuticals star trumped expectations with net profit of US$1.086 billion for the first half of FY18 and increased full-year guidance of about 4%. Market share gains, volume growth in key pharmaceutical products and growth in CSL’s blood-plasma collection centres underpinned the cracking result.
I outlined a bullish view on CSL in August 2017, after the release of its FY17 result, at $124 a share, for the Switzer Report. I argued the market was too bearish on CSL at the time and underestimated the latent value in its global blood-plasma network. CSL now trades at $156.
Nothing has changed on that view and CSL’s interim result reinforces my bullish outlook on the stock. Macquarie’s 12-month $165 target is achievable.
CSL
Source: ASX
2. CIMIC Group (CIM)
Earnings strength from companies exposed to mining services and infrastructure has been an early highlight of this profit season. Rising earnings for mining service companies suggest greater activity in the resource sector in the next year or two.
CIMIC delivered a good FY17 result, with after-tax net profit of $702 million just topping the company’s guidance range. Strong growth in the mining and minerals processing division was a highlight, as was CIMIC’s excellent cash-conversion rate.
CIMIC is superbly leveraged to a recovery in the mining sector, has a strong balance sheet and scope for a share buyback. Exposure to infrastructure projects is another positive.
I missed CIMIC’s rally last year, after favouring WorleyParsons, UGL (before the takeover), Downer EDI and, more recently, Monadelphous (see below). After its latest result, and share-price weakness this year, I’ll add CIMIC to that list.
CIMIC
Source: ASX
3. IDP Education (IEL)
It feels slightly repetitive writing again about IDP Education, having favourably covered it several times for this Report over the past two years. But IDP’s interim result was among the highest-quality results delivered so far this year.
IDP trounced market expectation with revenue growth of 27% to $242 million and growth in underlying earnings (EBITDA) of 33% to $50.3 million. A spike in English-language testing volumes and international student placements drove the gains.
IDP has good growth prospects as it expands student placements to universities in more countries and as demand for English-language testing grows. An average price target of $6.61, based on the consensus of seven firms, suggests IDP is overvalued at the current $6.92.
As I have written before, the market continues to underestimate IDP. Gains will be slower from here and a pullback or correction would not surprise given the extent of its rally. But IDP, an exceptional company in a long-term growth industry, deserves a valuation premium.
IDP Education
Source: ASX
4. Domain Holdings Australia (DHG)
I wrote a positive story on Domain for this Report before its demerger from Fairfax Media in November 2017. Thankfully, I included the caveat that Domain, like most spin-offs, would be best bought six months after listing. Demergers often underperform their parent at the start before outperforming them in the medium term.
Nobody could predict CEO Antony Catalano’s surprise resignation this year or its impact on Domain’s share price. But the company delivered a strong maiden interim result and appears to have good operating momentum. It might be enough to get the market refocused on Domain’s underlying strength, rather than conjecture about the CEO’s departure.
Price rises in its key markets, higher take-up of new products and slower costs growth featured in the result. The breadth of Domain’s gains – across different geographic markets and its various services – impressed. Several engines are driving growth.
I still prefer REA Group to Domain. But Domain’s result was better than the market expected and helps justify a positive long-term view on the company’s growth prospects. Domain has a lot of avenues to grow.
Domain
Source: ASX
5. 3P Learning (3PL)
Having been wrong on this stock most of 2015 and 2016, I was pleased to see 3P Learning beat market expectation with its interim result. The education-software developer delivered 13% growth in revenue to $28.3 million for the first half of FY18 and growth in underlying earnings (EBITDA) of 21% to $10.3 million.
Better-than-expected gains in average revenue per user and good gains across 3P’s international markets were highlights. This company has a world-class product in Mathletics and is poised to roll out more versions of existing products or new ones to new markets.
The new management team has beaten market forecasts three consecutive times and the strategy to simplify 3P’s operations is smart. I like where 3P is headed, although the recent rally has taken the share price closer to fair value.
3P Learning
Source: ASX
6. Monadelphous (MND)
Like CIMIC, Monadelphous is benefiting from a rapid pick-up in the mining services sector as firming commodity prices drive greater resource-sector activity.
Monadelphous reported 39% growth in revenue to $874 million and 32% growth in after-tax net profit for the first half of FY18. New contract wins, higher spending on mine maintenance and Monadelphous’ focus on the infrastructure and energy sectors underpinned the result.
Monadelphous expects full-year revenue to be up 30% on the previous year and describes the outlook as “positive”. The company noted improving demand in its core resources market – an excellent sign for Monadelphous and the mining services sector generally.
I nominated Monadelphous in this report in early February as a stock to buy during the market correction, when it traded near $16.50. It has spiked to $18.32 in two weeks and the interim result suggests the rally has further to run in 2018, as more contracts are won and margins expand.
Monadelphous
Source: ASX
7. Auckland International Airport (AIA)
The New Zealand airport operator delivered a first-half FY18 result broadly in line with market forecasts. Net profit of NZ$133 million was 7.8% up on the same time last year. AIA reaffirmed full-year guidance of NZ$250-$257 million. Unlike others on this list, AIA’s result did not make the market’s pulse race.
I’m including AIA on the strength of its retail revenue result in the interim report. The airport’s new duty-free offering and first tranche of destination stores are among the keys to its share-price recovery. Retail revenue growth in FY18 and FY19 could do better than the market expects. Solid international and domestic passenger growth is another tailwind.
I outlined a positive view on AIA for this report in November 2017, in a story on tourism stocks, at $5.55. The stock now trades at $6.05 and while I don’t expect strong price gains this year, AIA has investment merit for those with a medium-term view as the redevelopment of the airport’s retail facilities kicks in and as the boom in inbound Asian tourists rolls on.
Auckland International Airport
Source: ASX
- Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor
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