With the Melbourne Cup stopping the nation tomorrow, it’s time to look at the stock market in terms of a Melbourne Cup field.
The stone-cold certainty
Tabcorp (TAH, $4.44)
Market capitalisation: $3.7 billion
Estimated yield FY18: 5.5%, fully franked
Analysts’ consensus price target: $4.80
Source: ASX
The only real certainty about the Melbourne Cup is that Tabcorp Limited (TAH) will win on it – as it does on every race meeting. Tabcorp is a guaranteed winner tomorrow because it keeps about 17 cents of every dollar wagered: about one-third of this is paid to the relevant state government, about one-third to the racing industry, and the company keeps the rest. After covering costs – including an expensive ‘bricks and mortar’ retail channel – and taxes, more than 2 cents of every dollar bet is clear profit to Tabcorp.
Last year, across the four-day Victoria Racing Club (VRC) Melbourne Cup carnival, Tabcorp took 35 million individual bets, holding almost $100 million on the Melbourne Cup and more than $400 million on the carnival. This year, the betting and gaming giant projects turnover in the coming four days at Flemington will be $440 million. As the Cup runners are paraded in the mounting yard tomorrow afternoon, Tabcorp will be processing 2,000 transactions a second.
Tabcorp has been trading sideways for the best part of a year as it attempts to execute an $11 billion merger with fellow gaming and wagering business Tatts Limited (TTS), which is more well known for its Tattslotto gaming brand. The merger has been in progress for almost a year, but has experienced plenty of legal hindrances, including protests by the Australian Competition and Consumer Commission (ACCC) and the James Packer-backed corporate bookmaker CrownBet. The merger looked dead and buried in September, when the Federal Court quashed the approval of the proposal: but the merger has since gone to the Australian Competition Tribunal (ACT) for review, which will take on-board the considerations of the ACCC and CrownBet. If the tribunal approves the deal it may still be possible to execute the merger before Tabcorp’s scrip-and-cash offer for Tatts expires on December 31.
But regardless of whether their long-drawn-out courtship results in marriage, TAH and TTS will be winners tomorrow.
The champion stayer
CSL (CSL, $142.26)
Market capitalisation: $64.4 billion
Estimated yield FY18: 1.4%, unfranked
Analysts’ consensus price target: $144.59
Source: ASX
Australia’s biotech champion, CSL, has been a simply outstanding investment on the stock market since it was privatised by the federal government – which owned it as Commonwealth Serum Laboratories – in June 1994.
CSL was floated at $2.30 a share: a three-for-one share split in 2007 means that was effectively 77 cents. CSL now trades at $142.26 – meaning original shareholders have made 185 times their money, just on the share price.
But original CSL shareholders have also received $14.48 in dividends, which swells their total return to more than 200 times their investment.
From a government-owned vaccine maker, CSL has become a global biotech leader, the world’s largest maker of plasma-based therapies. That is its main business: CSL collects blood, either from voluntary donors in countries like Australia or paid donors through a network of collection centres in the United States, and separates it into its constituent parts through a process called fractionation, at its plants in Australia and Switzerland.
In 2004, CSL bought global plasma therapeutics business Aventis Behring, which made it a truly global business, with R&D and manufacturing operations in Switzerland, Germany and the USA. In 2015, CSL bought the influenza business of Novartis, merging it with its own vaccine subsidiary, bioCSL, to become the second-largest player in the $US4 billion flu vaccine market, after Sanofi. Now named Seqirus, the business manufactures influenza vaccines at state-of-the-art production facilities in the US, the UK and Australia. The business was a loss-maker under Novartis, but CSL says it is on track to break even in FY18 – meaning that it should become a new source of upside for the company.
CSL has been responsible for a string of major therapeutic products, such as Gardasil, the human papillomavirus (HPV) sold by Merck and Co., which protects against cervical cancer, and the immune treatments Privigen and Hizentra. It has a strong range of new potential winners, such as haemophilia therapies Idelvion and Afstyla, its Berinert and Haegarda treatments for hereditary angioedema, and Kcentra, a treatment for perioperative bleeding. Also in the pipeline is the company’s CSL112 (post-heart attack drug), which is in the phase III trial stage: a decision is expected by end of 2017. CSL112 could represent a big potential revenue boost. Longer-term, CSL is also a potential China play, as the increasingly affluent Chinese market looks for Western therapies.
At the moment, CSL sells albumin in China – its sales there surged 35% last year – but is restricted from selling most of its other plasma-related products in China. This could well change over the longer term – but CSL sees China as a growth market that will take 10 years or more to open fully to it.
CSL has reaffirmed its guidance for underlying net profit growth in the 11%–16% range for FY18 (constant-currency basis, in US$). The stock offers a strong long-term growth profile based on its competitive advantage in flu vaccines and treatment, new products and Chinese market potential. Unfortunately, CSL is not a great dividend payer – analysts estimate its FY18 yield at 1.4%, unfranked – but growth is the story investors are buying.
The European raiders
Increasingly, the Melbourne Cup is an international race, and the staying stars of the European turf are pencilling in a crack at the Australian classic. It’s the same on the stock market, where the superstars of the European bourse are available to Australian investors through exchange-traded funds. BlackRock’s iShares Europe ETF (IEU), Vanguard’s FTSE Europe Shares ETF (VEQ), ETF Securities’ ETFS Euro STOXX 50 ETF (ESTX) and the UBS IQ MSCI Europe Ethical ETF (UBE) all offer simple diversification and exposure to a range of leading European companies. Over the past 12 months, this group of stocks have been strong performers on the ASX in terms of total return (capital growth plus dividends): ESTX is up 30.1%, VEQ has returned 28.1%, IEU has gained 27.1% and UBE is up 26.8%.
The Kiwi raiders
New Zealand entries are a great tradition of the Melbourne Cup, and it is the same on the ASX, where the great bulk of the New Zealand Stock Exchange by market capitalisation is dual-listed. One of the Kiwi stars that should give a good account of itself this year is Air New Zealand (AIZ), where the competitive dynamics of the airline market appear to favour the NZ flag carrier: Macquarie has a price target of NZ$3.90, versus NZ$3.33 at present ($3.01 on the ASX).
Utility billing software company Gentrack Group (GTK), which provides “mission-critical software to gas, water and electricity utilities, as well as airports, is another star Kiwi that has come across the Tasman and done very well: GTK has returned 44.3% a year to ASX investors over the last three years. At $5.15 on the ASX, GTK looks to be at the premium end of fair value, but it has big plans – it aims to be the leader in its target markets of Australia, New Zealand and the UK for enterprise application software for electricity, gas and water utilities, as well as for airports worldwide.
Xero (XRO), the market leader in cloud accounting software in Australia and New Zealand, is another classy New Zealand outfit on the ASX: Xero wants to be a global leader in accounting software, and it has a lot of credibility in this aspiration. Xero has not yet reached break-even, but in Melbourne Cup terms, offers a bit of value.
The roughie
Poseidon Nickel (POS) – trading at 5.1 cents, and capitalised at $52 million – is seeking to take advantage of the very strong nickel market to restart production at its high-grade Silver Swan underground mine in Western Australia. At 9% nickel, Silver Swan is the world’s highest-grade nickel mine. The Silver Swan restart will be followed by Black Swan, Lake Johnston and Windarra: all up, Poseidon has a 400,000-tonne nickel resource, six independent mines and two nickel processing plants, all located in the Goldfields region of Western Australia.
Poseidon is also looking to add cobalt production to its operations, and has also entered into a joint venture with Lithium Australia (LIT) to investigate producing lithium concentrate at Lake Johnston in Western Australia, where Poseidon has achieved high lithium recoveries in tests. As the company progresses its plans to establish its Black Swan operations as a nickel and gold co-processing central hub, it is quietly putting together a multi-commodity story that is nicely exposed to the electric vehicle, alternative energy and battery storage sectors. Poseidon Nickel could move its facilities from a care-and-maintenance basis to full-scale production, across several commodities, in a very short time. POS could be the stock price equivalent of a bolter swallowing up the field in the home straight.
The horses
Here is my Melbourne Cup box trifecta:
- Almandin
- Red Cardinal
- Big Duke
- Single Gaze
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