If a good starting point for buying a stock is the expectation of a 20% return, here are four such situations on the ASX right now where analysts think that can be achieved – if all goes according to plan, which is the essential caveat for any stock investment. Remember, with three of these, there is an expected dividend that can help push the total return above 20%.
- Xero (XRO, $135.00)
Market capitalisation: $20.6 billion
12-month total return: 22.8%
3-year total return: 0.6% a year
Forecast FY25 dividend yield: no dividend expected
Analysts’ consensus price target: $147.84 (Stock Doctor/Refinitiv, 17 analysts)
New Zealand-born accounting software provider Xero quickly conquered the market in its home country and Australia; it was an early adopter of “the cloud” and left established competitors, including MYOB and global player Intuit (QuickBooks), in its wake. With 1.77 million subscribers in Australia (up 13% on the previous year) and 605,000 in New Zealand (up 7%), it is now the largest player.
It has also been rapidly growing offshore, with 1.08 million subscribers in the UK and 422,000 in North America, and 285,000 in the “rest of the world” (mainly South Africa at present, although South-East Asia is also a growth market for XRO). Overall, it grew subscribers in FY24 by 420,000 to 4.16 million.
Originally dual-listed in New Zealand and Australia, Xero moved its listing solely to the Australian Securities Exchange (ASX) in February 2018.
Xero was an early reporter of its 2023-24 full-year result, because its financial year ends on 31 March. Revenue rose by 22%, to NZ$1.7 billion; adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) rose by 75% to NZ$527 million, highlighted by a strong second half, which generated NZ$322 million compared to NZ$205 million in the first half; and gross profit swelled by 24%, to NZ$1.51 billion, at a gross margin of 88.2% (up 0.99 percentage points). Xero reinvested 73.3% of its operating revenue in the business, with 30.7 percentage points going back into product design and development.
Net profit came in at NZ$174.6 million, a huge improvement on the NZ$113.5 million net loss in FY23. The net margin expanded from 21.6% in FY23 to 30.7% in FY24.
CEO Sukhinder Singh Cassidy made a particular point of stressing that Xero delivered the “Rule of 40” in FY24: the rule of 40 is a metric often used by analysts to assess a high-performing global SaaS (software as a service) businesses. The rule suggests that revenue growth (in %) plus free cash flow as a % of revenue should add up to more than 40%. In FY24, Xero delivered revenue growth (in constant currency terms) of 21%, plus free cash flow of 20%, summing to 41%, an improvement of 9.1 percentage points on FY23.
Revenue momentum came from a net increase of subscribers of 11%, plus an increase in ARPU (average revenue per unit) due to price increases and favourable foreign exchange movements. Churn remained low.
All in all, it was a good result from probably the best large-cap tech stock on the ASX, and analysts see Xero as very well-placed to take advantage of how its core market of small-to-medium-sized businesses (SMBs) around the world are going digital, driven by compelling efficiency benefits and regulatory tailwinds. Broker Goldman Sachs says there are more than 100 million SMBs worldwide, representing a total addressable market (TAM) for Xero of more than NZ$100 billion in size. Goldman Sachs sees current price levels as “an attractive entry point into a global growth story,” and the firm has a price target of $164.00 on the stock.
- Domino’s Pizza Enterprises (DMP, $38.71)
Market capitalisation: $3.5 billion
12-month total return: –18.2%
3-year total return: –28% a year
Forecast FY25 dividend yield: 3.4% unfranked
Analysts’ consensus price target: $45.75 (Stock Doctor/Refinitiv, 14 analysts)
Domino’s Pizza is a former market darling that surged above $160 a share in late 2021, as locked-down households ordered pizza during the pandemic. But the re-opening was not kind to Domino’s, as inflation soared, and fast-food consumers switched to cheaper options. This was compounded by the company’s ongoing problems in France, where the company has 488 stores, and is the takeaway pizza market leader.
The ASX-listed company is the master franchisor of Domino’s in Australia, New Zealand, France, Germany, the Netherlands, Belgium, Luxembourg, Taiwan, Japan, Malaysia, Singapore and Cambodia. The company has 3,837 stores, with 1,521 of them in Asia; 1,415 in Europe; and 901 in Australia/New Zealand. Domino’s has set an ambitious target of almost doubling its total store numbers by 2033, to 7,100 stores, with 3,000 in Asia; 2,900 in Europe; and 1,200 in Australia/New Zealand.
Dominos franchises its stores to franchisees who run the stores and pay the day-to-day costs. Dominos earns 7% of gross sales in royalties, and a further percentage (of up to 6%) towards national advertising. Dominos pays a royalty to the parent company in the USA of 2%—3% of sales, subject to market conditions.
At the moment, online sales account for almost 80% of sales. Domino’s aspiration statement says it wants to be the “dominant sustainable QSR (quick service restaurant) in every market in which it operates, by 2030.
But recent performance has been patchy, mainly due to the poor performance of its French operations and weaker-than-expected growth in Japan. DMP has given its shareholders four profit downgrades in three years: the latest, in January, saw the company withdraw its guidance on the back of slumping sales from its Asia stores, and the share market showed its displeasure with a 31% haircut on the day.
For the six months to 31 December 2023, Domino’s reported a 10.2% rise in revenue, to $1.27 billion, but a 9.2% fall in net profit to $58 million, with sagging returns from its operations in France and Japan dragging down a solid performance in Australasia. On an EBIT (earnings before interest and tax) basis, Asian earnings slumped 42.5%. The company cut its dividend payout to shareholders by 18%, to 55.7 cents a share.
But on the whole, analysts are prepared to give the company the benefit of the doubt – no mean feat for DMP given a poor couple of years for the share price – and they back chief executive Don Meij and his team to show positive progress in the current financial year, with strong earnings growth and a boost to the dividend. On consensus target prices, DMP looks an attractive buy at current levels: Morgan Stanley has a price target of $52.00 on the stock.
- Qantas Airways (QAN, $6.15)
Market capitalisation: $9.5 billion
12-month total return: –7.5%
3-year total return: 9.3% a year
Forecast FY25 dividend yield: 3.7% unfranked
Analysts’ consensus price target: $6.90 (Stock Doctor/Refinitiv, 15 analysts)
Qantas has come a long way from the COVID lows of $2.36, when it faced the fact that air travel was not going to be happening for a while. The stock has rebounded back to $6.15, and analysts see plenty of room for it to move higher.
Of course, COVID was not the only drag on the Qantas share price – more recently there was the acrimony over the airline’s poor service and allegations it was selling flights it had already decided to cancel, to help it preserve lucrative landing rights at Sydney Airport. Polarising CEO Alan Joyce left the airline in early September, months earlier than scheduled, and handed over to chief financial officer Vanessa Hudson.
Investors have been able to look through those clouds and see the airline industry returning to normality in the wake of the pandemic. In the December 2023 half-year, Qantas got its capacity back to 90% of pre-COVID levels, and with all international routes restarted, the company says the international arm will return to 100% of pre-COVID capacity by the end of the current quarter.
For the December half, both domestic and international revenue ran at almost 20% above pre-COVID levels. But pre-tax profit fell by 13%, to $1.25 billion, in the first half of the 2023-24 financial year, and net profit fell by the same proportion, to $869 million. Total flying increased by 25 per cent on an available seat kilometre basis and Qantas carried 3.3 million more passengers compared with the December 2022 half-year.
Qantas has some big-ticket spending to do on its fleet in the coming years. But analysts think it has the capacity to do this, while it takes more costs out of the business and strengthens it – based on earnings continuing to improve. Some analysts (notably Goldman Sachs) also believe Qantas will be able to resume paying dividends, as soon as the current financial year, and return capital (Qantas has not paid a dividend since the June 2019 half-year). Goldman Sachs expects pre-tax profit to be 51% above pre-COVID levels in FY24 and 61% higher in FY25. Analysts see healthy capital growth for QAN – Goldman Sachs, in particular, has a 12-month price target of $8.05 on the stock.
- Santos (STO, $7.63)
Market capitalisation: $24.8 billion
12-month total return: 10.6%
3-year total return: 8.7% a year
Forecast FY25 dividend yield: 4.5%, unfranked
Analysts’ consensus price target: $8.22 (Stock Doctor/Refinitiv, 18 analysts)
Santos is Australia’s second-largest independent gas producer, behind Woodside Energy, operating a diversified portfolio of LNG, natural gas, crude oil, LPG and condensate operations based in Australia, Indonesia, PNG and Vietnam.
Santos has some long-life assets running down, but it also has major growth projects coming online, in Barossa and Pikka (Alaska’s North Slope). Both projects remain on schedule and budget. Barossa, a $4.6 billion offshore gas and condensate project that proposes to provide a new source of gas to the existing Darwin liquified natural gas (DLNG) facility in the Northern Territory, is more than 70% complete, with first gas on track for the first quarter of 2025 (Santos owns 50% of it). Pikka, a $6.7 billion project (Santos 51%, jointly owned with Repsol of Spain) is 47% complete, and Santos expects first oil production from Pikka in 2026. Barossa and Pikka will deliver meaningful earnings growth.
Santos also has its two-thirds share of the US$220 million Moomba carbon capture and storage (CCS) project in South Australia – the company describes its three growth projects – progressively coming online in 2024, 2025 and 2026 – as world-class projects that will be transformative for Santos and set the company up with long-term, stable cash flows for the next 10-15 years at least.
The first phase of the Moomba CCS project is now 80 per cent complete. Built adjacent to the Moomba Gas Plant in the Cooper Basin, the project, a joint venture between Santos and Beach Energy (33%), is one of the biggest and lowest-cost carbon reduction projects in the world. Scheduled to enter service in 2024, the CCS project will capture CO2 from the Moomba gas plant operated by Santos and transport it through an underground pipeline for permanent storage in the depleted gas reservoirs of the Cooper Basin in South Australia. The project aims to safely and permanently store 1.7 million tonnes of carbon dioxide per year (with actual volumes depending on availability of CO2 for storage) in the same reservoirs that held oil and gas in place for tens of millions of years. Subject to future expansions, Moomba CCS could have an ultimate storage capacity of 20 million tonnes of CO2 a year.
CCS is a proven technology that could reduce emissions from critical fuels such as LNG and from hard-to-abate sectors such as steel, aluminium and cement. This is good news for customers in Asia who still rely on LNG as a critical energy input to their economies and will do for decades to come. And, because Moomba CCS is targeting about US$24 per tonne lifecycle breakeven storage costs, that would make it one of the lowest-cost CCS projects globally, and very competitive with other carbon-abatement technologies and opportunities. Storing 1.7 million tonnes of carbon dioxide per year is equivalent to delivering – every year – about 28% of the total emissions reduction achieved in Australia’s electricity sector last year.
Analysts are quite bullish on Santos, with the most bullish being Macquarie, which has a 12-month price target well ahead of consensus, at $9.20.
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