With the interest rate differential between Australia and the United States expected to widen in 2019, the Australian dollar is coming under pressure. The Federal Fund’s rate in the United States is currently at 2.25%, versus the Reserve Bank of Australia’s (RBA’s) cash rate of 1.50% – with the Fed likely to lift rates, and the RBA moving recently toward an easing bias.
Most strategists are revising down their forecasts for the Australian dollar, with expectations of mid-70s US cents by the end of 2019 turning significantly lower – even into the 60s. For example, HSBC now expects the Australian currency to fall to US66 cents by the end of the year, a level not seen since the depths of the 2008-09 global financial crisis (GFC).
The A$ lost almost 10% against the US$ last year to become the worst-performing of the major currencies against the greenback, hurt by the escalating US-China trade war and the prospect of US interest rate rises. The A$ tends to rise when markets are in “risk-on” mood, but falls when markets grow wary.
The Aussie faces renewed pressure as central banks from Australia to Europe turn dovish, making a host of currencies weaker against the greenback.
If the A$ does retrace to a post-GFC low this year, one benefit could be in company earnings. Any fall in the A$ against the US$ – the major exchange rate that affects Australia – benefits those companies with significant percentages of their revenue coming from the US, or priced in US dollars.
Apart from the group of companies that actually report their financial results in US$, which we looked at last week, there is a growing cohort of companies with significant percentages of their revenue coming from offshore, such as Boral, Treasury Wine Estates, Macquarie Group, CSR, BlueScope Steel, Austal, Cochlear, Flight Centre, SDI, Carsales.com.au, Aristocrat Leisure, Ainsworth Gaming Technology, Hansen Technology, News Corporation, Twenty-First Century Fox, Seek, Sims Metal Management, Orora, IPH, Mayne Pharma, Sonic Healthcare, GrainCorp, Integrated Research, SomnoMed, Ansell, Breville, Adelaide Brighton, GWA, SDI, Navitas, Bega Cheese, Incitec Pivot, Ardent Leisure, Altium, Transurban, Nufarm and Orica.
However, investors should not simply look to buy stocks solely on the basis of their foreign revenue: the prospects for the business are what should drive the decision. A company whose revenue is closely linked to the global economic cycle is not where you want to be right now. But where there is a clear structural growth opportunity, to which a falling A$ would represent a tailwind, then it becomes interesting.
Here are five of our best-positioned offshore earners.
- Corporate Travel Management (CTD, $24.68)
Market capitalisation: $2.7 billion
FY20 forecast yield: 2.1%, 71% franked
Analysts’ consensus price target $27.94 (FN Arena), $26.90 (Thomson Reuters)
The corporate travel specialist has endured a diabolical last six months on the stock exchange, surrendering a quarter of its value as a major short-seller of the stock published a highly critical report, which CTD has been striving to rebut. CTD is one of the companies on the ASX most exposed to fluctuations in exchange rates: about half of the company’s profits are in US dollars, or currencies closely linked to it, for example, the Hong Kong dollar, and a further 20% is in British pounds. The company says every one-US-cent move in the exchange rate has a $1 million impact on profits, and every one-pence move means a $600,000 change. But on the business front, brokers feel the growth opportunities for CTD are healthy, and Wednesday’s interim result should be solid – although guidance has prepared the market for weaker cash flow. It would be a major shock if the company were to change its FY19 full-year guidance at this stage – and assuming that does not happen, CTD appears to be reasonable value. However, it is not a stellar yield stock, and suffers from the bugbear of stocks with overseas businesses – a lack of full franking.
- Treasury Wine Estates (TWE, $16.15)
Market capitalisation: $11.6 billion
FY20 forecast yield: 4.2%, 88.3% franked
Analysts’ consensus price target $17.74 (FN Arena), $18.65 (Thomson Reuters)
Treasury Wine Estates generates more than 75% of its revenue from offshore, including 40% from the Americas; and it is the Asian and Americas regions that are driving the company’s revenue and profit growth. Market expectations see the contribution to revenue growth of these two regions approaching 80% by 2022 – with the skew starting to favour Asia, particularly from China – driven by TWE’s focus on its “global priority brands,” a group of 15 super-brands from its 70-brand portfolio. TWE’s interim result showed a 16% increase in revenue to $1,507.7 million: on a constant-currency basis, that was a 13% lift, which the company described as the strongest organic growth rate in its history. Net profit rose 17% to $219.2 million, with earnings per share (EPS) up 19%, to 30.5 cents. Treasury maintained its full-year FY19 guidance of approximately 25% growth in EBITS (earnings before interest, tax, the agricultural accounting standard SGARA and material items), and growth the following year in the range of approximately 15%–20%.
- Boral (BLD, $4.88)
Market capitalisation: $5.7 billion
FY20 forecast yield: 7%, 50% franked
Analysts’ consensus price target $6.00 (FN Arena), $6.10 (Thomson Reuters)
With 40% of its revenue coming from the US and one-third coming from Asia, building and construction materials heavyweight Boral is big offshore earner, and at present, a combination of Australian infrastructure exposure, a strong Asian growth story through the USG Boral joint venture and potential for upside from the US. Earlier this month, Boral downgraded its FY19 guidance, although EBITDA (earnings before interest, tax, depreciation and amortisation) is expected to be higher than that reported in FY18, for continuing operations. The exposure to a deteriorating Australian housing market is the obvious concern for Boral, but for investors who can look beyond that, the Australian infrastructure and US growth channels would appear to more than compensate at current price levels.
- Flight Centre (FLT, $43.48)
Market capitalisation: $4.4 billion
FY20 forecast yield: 4.4%, fully franked
Analysts’ consensus price target $54.07 (FN Arena), $53.00 (Thomson Reuters)
Travel agency chain Flight Centre now generates just under half of its total transaction volume (TTV) outside Australia. In FY18, FLT made record profits in nine of the countries in which it operates, including the two largest businesses, the USA and UK. The EMEA (Europe, the Middle East and Africa) and Americas businesses are driving profit growth. Although the company sticks to what many people see as an outmoded model – relying on bricks-and-mortar outlets rather than online – the stores are cheap to run, and in any case, Flight Centre has a substantial online presence as well. The company is a business of exceptional scale and has very strong buying power across all areas of the travel market. Flight Centre has given guidance for full-year profit growth of about 7%, and is also an attractive (fully franked) yield stock.
- Aristocrat Leisure (ALL, $25.09)
Market capitalisation: $15.8 billion
FY20 forecast yield: 2.4%, fully franked
Analysts’ consensus price target $31.85 (FN Arena), $30.50 (Thomson Reuters)
Aristocrat Leisure is one of Australia’s true global leaders, being one of the world’s largest makers of poker machines and gaming consoles. The company’s gaming operations in America are by far the largest contributor to profit: home base of Australia represents only 11% of earnings, so a weaker currency is a huge plus for ALL. More recently, the company has been quick to adapt to the growth of digital, mobile and social media gaming, which also brings in a mostly US$ revenue flow. The digital earnings growth in FY19, at about 26%, is expected to be about triple the company’s rate of overall earnings growth. A dominant market position and weaker home currency is a good position to be in, and analysts are suitably bullish on Aristocrat.
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