August company reporting season has just wrapped up. This is the time when those ASX companies that have a June or December balance date (about 80% of listed companies) report their full year or half year earnings. It is a critical time, as they also share with the market an outlook of how they are faring and likely to fare. Here are my three top picks from reporting season.
CSL gets a gong because it is probably Australia’s best company. When the government owned Commonwealth Serum Laboratories was privatised and floated in 1994, investors paid the princely sum of $2.30 per share. A few years’ later, the shares were split into three which reduced the effective cost price to $0.77. Yesterday, the shares closed at $236.45, meaning that investors in the original float have enjoyed a gain of over 30,000%.
Year-after-year, CSL has met or exceeded profit guidance, delivering sales growth in excess of 10% and profit growth even higher. Financial year 2019 was no different, with a profit of US$1,919m up 11.0% on FY18 and towards the higher end of earlier guidance of US$1,880m to US$1,950m. Adjusting for the impact of exchange rates, profit rose by 17% to US$2,015m. This came on the back of an increase in sales of 11%.
A highlight was CSL’s fairly bullish forecast for FY20 which was better than the market had been anticipating. Notwithstanding a change to its distribution arrangements of albumin in China (which will see CSL move to a direct distribution model rather than deal through third parties), CSL has guided for total sales growth of 6% (up 10% when adjusted for the change in China) and profit growth in the range of 7% to 10%. This translates to a NPAT for FY20 of US$2,050m to US$2,110m.
As befits a stock of this calibre, CSL is not cheap, particularly in relation to some of its global healthcare peers, trading on a forecast multiple of around 35 times FY20 earnings and 31 times forecast FY21 earnings. But it is Australia’s third largest stock by market capitalisation, the global leader in blood plasma products and one of the few large cap Aussie stocks with consistent double digit top line growth. The brokers, according to FN Arena, have a target price of $241.98 for CSL, about 2.3% higher than last night’s close of $236.45.
A core stock for portfolios. Buy in market weakness.
2. WiseTech Global (WTC)
Logistics software solutions provider, WiseTech Global (WTC) is now capitalized at over $11.0bn and is heading towards the top 50. WiseTech develops, sells and implements software solutions that enable logistics service providers to facilitate the movement and storage of goods and information, domestically and internationally.
With its CargoWise One software platform and other products, it provides solutions to more than 12,000 logistics organisations from 150 countries. 25 of the top 25 global freight forwarders use WiseTech’s solutions, as do 43 out of the top 50 global third party logistics providers.
Revenue for the year to 30 June surged by 57% to $348.3 million, well above the guidance range it had given in March of 47%–53% growth. EBITDA (earnings before interest, tax, depreciation and amortisation) rose 39% to $108.1m, while net profit rose by 32.7% to $54.1 million.
Looking ahead to FY20, WiseTech said that it expected revenue growth of 26% to 32% ($440m to $460m) and EBITDA growth of 34% to 42% ($145m to $153m).
WiseTech’s growth strategy is built on multiple drivers — greater usage by existing customer (more transactions, users and modules), new customers to the platform, stimulating the network effect, innovation and expansion of the global platform, and accelerating organic growth through acquisitions. It says that it can benefit from trade wars, Brexit and other geo-political uncertainties, as these just increase complexity in moving freight between borders and potentially drive the uptake of CargoWise.
The problem for investors is that WiseTech is super, super expensive. According to FN Arena, it is trading on a multiple of 126 times forecast FY20 earnings and 92 times forecast FY21 earnings. The consensus broker target price is $30.00 (individual broker targets range from a low of $26.69 to a high of $36.00), some 20% lower than last night’s close of $37.41.
As much as I would like to say it is a “buy”, I just can’t get there to pay these sort of multiples.
3. Nanosonics (NAN)
Shares in medical equipment company Nanosonics surged on the day it released its profit result, jumping from $4.90 to $6.50. Its major product is Trophon, automated technology for the disinfection of ultrasound probes. Nanosonics reported revenue growth of 39% to $84.3m and profit before tax of $16.1m, up 208% on the prior period.
The global installed base of Trophon grew by 18% to 20,930 units. North America accounts for about 90% of these, which Nanosonics estimates gives it a 46% market penetration. Potentially, this mean that there is an enormous opportunity for Nanosonics outside North America in Europe, the Middle East and Asia Pacific where their penetration is around 2% to 4%.
Nanosonics strategy is to establish Trophon as the “standard of care” for all semi-critical probes across hospital departments and private clinics, enter new markets (in FY20 Japan, Denmark, Finland, Spain, Portugal and Switzerland) and an expanded product portfolio. In this regard, Nanosonics announced that it was targeting the “introduction of the next significant new product towards the end of FY20, subject to regulatory approval”. Nanosonics didn’t release any details about the product, but its description as “significant” got everyone quite excited.
The company says that the FY20 profit will be heavily weighted towards the second half as it accelerates its investment in growth (sales and marketing, new product launch readiness, corporate infrastructure expansion, business development and new product development). Operating expenses are expected to jump from $49.2m in FY19 to $67m in FY20.
This hasn’t stopped the market from putting a “sky high” valuation on the company. According to FN Arena, the brokers have Nanosonics trading on a multipole of 130 times FY20 earnings and 84 times forecast FY21 earnings. Overall, valuations are a bit mixed, with Citi down at $4.40 a share and UBS at $7.25. The consensus target price is $5.93, about 10% lower than yesterday’s closing price of $6.57.
For the speculative part of the portfolio. High risk given the market’s current valuation, but on track record, a stock to consider buying.