A company’s share price does not mean much in and of itself – only when compared against metrics such as its earnings, dividend, net asset value, or the most important number of all, what you paid for it. But we often get requests for stocks with low share prices, so here are some promising stocks trading under 50 cents. All are profitable, and three are currently paying a dividend.
I could only readily feel comfortable about suggesting 4 stocks to consider, so for the “fifth”, I thought I would provide a quick update on the performance of “Dollar dazzlers – five stocks to look at”, published last November.
1. Dollar dazzlers – 5 stocks to consider
Last November, I identified 5 stocks trading around $1 that have good prospects (see https://switzersuperreport.com.au/dollar-dazzlers-five-stocks-to-look-at/ [1]). Seven months later, here is an update on how they have fared.
*Formerly Transfield Services, changed name to Broadspectrum
2. Wellard Limited (WLD, 38.5 cents), Market capitalisation: $154 million
There is no getting around the fact that this live cattle export supply chain business has disappointed the stock market since it listed last December. Listed at $1.39, Wellard has slid all the way to 38.5 cents – and the company has lost a lot of credibility along the way, with two profit warnings in its first six months on the stock exchange, the last of which, earlier this month, stripped 15% off the share price. The problems have ranged from high cattle prices that Wellard has been unable to pass on to customers, to mechanical issues in its five-ship fleet.
But that could play into the hands of investors now.
Wellard is the world’s biggest livestock exporter, supplying live sheep and cattle to the Middle East and Asia, and is in a great position to meet the rising global demand for protein – particularly in China. The company recently commissioned its fifth ship, the MV Ocean Shearer, which is the world’s largest – and fastest – purpose-built livestock carrier. The $90 million ship carries 20,000 head of cattle and will be based at Portland, Victoria.
Following approvals last year of a live cattle trade to China, Wellard expects the Shearer to deliver at least two shipments of Australian cattle before the end of 2016. In a joint venture with Chinese-owned companyFulida, Wellard is building two feedlots – housing 6,000 head of cattle initially, but increasing to 15,000 – and an abattoir. The company cites forecasts that China will eventually consume the same amount of beef per capita as Australia – which, given it has 1.3 billion people, would require an enormous amount of supply.
The company now has six shipments scheduled to load and sail before 30 June – one of these a large shipment. There is a risk that some of these may be delayed into July, in which would affect FY16 earnings.
Longer term, Wellard has great growth prospects in the global food trade. It believes it is more efficient to convert cattle from a paddock in Australia to beef in the end-user market than it is to process meat in Australia and ship it in packaged form. That’s all good: but its FY16 net profit is not going to look anything like the estimates in its prospectus.
Analysts now expect Wellard to earn about 6 cents a share this year and 8 cents in FY17. The consensus dividend expectations sit at 1.9 cents in FY16 (there was no interim dividend, given the stock listed in December) and 3.7 cents in FY17. If the company is able to pay 3.7 cents next year, Wellard would, at the current price, be looking at a yield of 9.6% (with franking uncertain.) However, analysts have not yet updated their dividend estimates, so the dividend (and yield) will likely come in lower than that. Wellard was a poorly priced float, in hindsight, but it appears to have been beaten down to where it offers good value for a leader in a business that will grow.
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3. DTI Group (DTI, 45.5 cents),
Marketcapitalisation: $43 million
Security systems supplier DTI Group is a stock on the move, with good reason – it has a strong position in a growing industry. Listed in December 2014, DTI has proprietary advanced closed-circuit television (CCTV) technology that is proving popular with transport authorities around the world.
Just in 2016 so far DTI has won orders from the US, South Africa and Ireland. In March, two orders came in from Ireland, the first from Irish Rail for DTI’s CCTV surveillance systems on 168 of its rail cars, and the second from vehicle maker Wrightbus for CCTV surveillance systems for 80 double-deck vehicles ordered for the City of Dublin.
In April, DTI won a US$2.6 million contract (with potential to go up to US$8.9 million) with Dallas Area Rapid Transport (DART) to supply and install CCTV surveillance systems on light rail vehicles, as well as DTI’s back-end CCTV management system.
Then in May, the company took an order for the supply of its CCTV surveillance systems on metropolitan police vehicles in South Africa. The initial purchase order is valued at $220,000, but this only involves the supply of surveillance systems on 27 police cars plus additional static equipment to be delivered prior to the end of June.The tender process involved the supply and installation of up to 900 systems for police vehicles, in options of 300 and 600 vehicles over the next two financial years.
In the same month, DTI received an order for CCTV surveillance systems for trains operated by the Southeastern Pennsylvania Transit Authority (SEPTA) in Philadelphia, US. SETPA operates more than 1,300 buses, 300 regional trains, 26 light rail vehicles and 100 other vehicles. The order involves the supply of surveillance systems for 231 Silverliner rail vehicles, valued at approximately US$578,000 (A$799,000), and
DTI will also supply its back-end CCTV management system.
In the first half of FY16, DTI picked up orders for CCTV systems on trains for Sydney Metro, buses fro Brisbane City Council, light rail vehicles for the San Francisco Municipal Transportation Agency, passenger information systems for the Marseille Metro in France, automatic passenger counting systems for Merseyrail in the UK. The company has also outfitted trams in Poland.
That’s good progress – and it explains the 49% rise in DTI’s share price over the past 12 months – but it could only be the start: DTI reckons it has a “prospects list” of contracts around the world that is worth $388 million.
On Thomson Reuters’ numbers, analysts’ consensus expects earnings of 2.1 cents a share in FY16, rising to 4.3 cents in 4.3 cents in FY17. That prices DTI, at 45.5 cents, on a very undemanding 9.4 times expected FY17 earnings. DTI has very good prospects, but at this point, no dividend is in sight and the company has not expanded on when it might consider one.
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4. Alliance Aviation (AQZ, 50 cents), Market capitalisation: $60 million
Brisbane-based contract and charter air services operator Alliance Aviation supplies flight services to the resources industry – a highly competitive business that has seen plenty of cutbacks in recent years as a result of the downturn in the resources industry.
Alliance operates a fleet of 15 Fokker 100, 8 Fokker 70LR jet aircraft and 5 Fokker 50 turboprops. It has a national footprint with operations based in Brisbane, Townsville, Cairns, Melbourne, Adelaide, Perth and Auckland.
In February, Alliance won a five-year contract (off rival operator Cobham) to operate jet services from Adelaide to Moomba in the Cooper Basin, carrying workers for the gas and oil operations of Santos. The Santos job is the first material contract in the oil and gas sector for Alliance and expands its operations in South Australia, and was a major fillip for the company.
In the same month, Alliance struck a long-term strategic partnership with Virgin Australia to work together to grow their respective charter businesses in the fly-in, fly-out FIFO market. The pair is still working on the final details to be submitted to the Australian Competition and Consumer Commission (ACCC) for approval. The plan is that both keep their existing charter contracts but work together on bidding for new contracts: both airlines will benefit from the ability to leverage each other’s strengths, particularly in terms of network, brand, product and service offering, and technical expertise. This should allow Alliance to augment its customer proposition.
Despite a half-year loss at December 2015, on FN Arena’s collation, analysts expect Alliance to earn 10.2 cents a share in FY16 and lift that to 12.4 cents in FY17. Dividends are estimated at 2.5 cents a share, fully franked, in FY16, surging to 6 cents in FY17. On those numbers, Alliance appears very favourably priced, trading on 4.9 times forward FY16 earnings and 4 times FY17 earnings, and on dividend yields of 5% (FY16) and 12% (FY17). Investment bank Credit Suisse has a price target on the stock of 80 cents.
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5. K2 Asset Management Holdings Limited (KAM, 43 cents), Market capitalisation: $100 million
K2 Asset Management Holdings Limited (KAM) is the holding company of K2 Asset Management Limited, a Melbourne-based based equity fund manager that manages investment funds for institutional and retail investors, investing in Australian, Asian and international equity markets.
K2 runs four unlisted equity funds and two ASX-listed investment companies. Its funds use short-selling strategies and are absolute-return funds – meaning they are trying to achieve a long-term return that is superior in the marketplace, with no focus at all on performance relative to competitors – which the manager seeks to do by being “index unaware,” investing with high conviction and being prepared to sit in cash if it cannot find good value buying opportunities.
KAM, the management vehicle, listed on the stock market in 2009. Its revenue and profit depends on the performance of the share markets: When the funds do well, so does K2 Asset Management Holdings, given it charges a (relatively high) management fee of 2.05% and a 20% performance fee.
Last financial year, K2 Asset Management delivered its strongest underlying net profit since the GFC, earning $18.9 million, which was a rise of 15.2%. This year, however, life on the share markets is tougher: at the end of May, five of its six funds were showing a loss for the financial year to date, and five of six funds had experienced net outflows of funds (the other was static). All up, K2 Asset Management lost a net $19.5 million in funds under management (FUM) for the financial year to date, leaving $737.5 million under management.
What this means is that effectively in FY16, K2 Asset Management will be living on management fees only – and that’s not good. Generally speaking, when it gives investors returns of 6%-plus, performance fees start to flow. The half-year result saw performance fee income slump almost 90%, to barely $1 million, which drove a 52% slump in total revenue. Earnings per share fall from 3.6 cents to 1 cent and the fully franked interim dividend fall from 4 cents to 1 cent.
For the full year, investors should be looking at a 2-cent dividend – but you really would not be buying KAM on FY16 numbers. They will be poor. It’s FY17 that investors should be looking at, and the prospect of a share market recovery, and a rebound in KAM’s performance fee income. That would also help the share price, which has halved over the past year.
From its bumper FY15 result, KAM paid a fully franked dividend of 8.5 cents. If it could boost its dividend to 4 cents in FY17, KAM would be trading on a prospective fully franked yield of 9.3%. If it comes in at 3 cents, that prospective yield falls to 7% – still pretty good with full franking, which grosses it up to 9.95%. Thinking about a dividend somewhere in that range is where investors could feel comfortable about buying KAM now.
[4]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.