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The two big themes for Aussie investors

08072019_two themes

The two big themes for Aussie investors

What do A2 Milk and Nine Entertainment have in common? They represent two key themes that Australian investors should focus on to potentially enhance their long-term returns.

These themes are: businesses with global growth opportunities, and those exposed to the booming demand for software and data.

Exposures to companies growing overseas makes sense. Over the long run, fast growth rates and long runways, particularly off a low base, can help to produce returns that defy the economic and business cycles that plague many mature businesses.

And in the short term, Australia’s economy is beset by imbalances that are generating speculative misallocations of capital at one end, and pressure on sales and margins at the other.

Finally, there’s a benefit that stems from having exposure to multiple geographies and currencies.

Software and data will remain a growth area for many years. From manufacturing and design to sales and marketing, there is almost no aspect of commerce that doesn’t produce it, need to store or it or use it. Data, it seems, is akin to an oil discovery. And of course, software is the essential transmission mechanism for that data to communicate an intention.

The following companies are all growing their overseas businesses, ensuring Australian investors benefit from a growing global economy and currency diversification. Keep in mind however that getting the theme right is only half the battle. Investors must also ensure a reasonable price is paid rather than a high one.

A2 Milk (ASX:A2M)

A strong third quarter trading update from infant milk formula marketer A2 Milk revealed a 44 per cent lift in revenue. The company however announced no material changes to its full year 2019 or 2020 outlook, and this is partly due to pulling forward some fourth quarter orders.

A2M continues to grow its market share and its product lines. In China, market share now sits at 6 per cent, up from 5.4 per cent at December 2018. In the United States the company has added 300 stores to its distribution network, which included a new Costco geography.  New products are also part of the growth story and after previously announcing its coffee creamer product for the US market, the company announced its Smart Nutrition fortified nutritional milk powder for kids aged between 4-12, in Australia and China initially.

Recent share price strength implies expectations of greater-than-40 per cent revenue growth and an EBITDA margin of more than 30 per cent. These are lofty numbers to deliver long term and without setback.

Macquarie Group (ASX:MQG)

Macquarie Bank’s strong full year result announced in early May was driven by more volatile gains on sale and performance fees. Importantly, the international businesses now account for two-thirds of Macquarie’s income. Equity capital market volumes disappointed as did foreign exchange turnover. But the company also reported higher assets under management – reaching a record half-a-trillion dollars – and mergers and acquisition activity. Coming off strong prior numbers might mean that the near-term growth outlook is more challenging, and management forecast a slightly lower profit for 2020, but what we have learned is that at this early stage of the year, management’s guidance is typically conservative because it is difficult to predict revenue when so much is based on market conditions.

Macquarie trades at a premium to global investment banks but is in line with global fund managers. Investors should remember shares in the bank are ‘levered’ to the market.  If the market falls, Macquarie could fall further.

ARB Corp (ASX:ARB)

The ARB third quarter 2019 trading update revealed 2.2 per cent Australian aftermarket sales growth. Australian aftermarket sales are 63 per cent of total sales. This was slower than the growth reported for the first half, which was up 4.1 per cent. Particularly slow were QLD and NSW. Unlike domestic sales, export sales, which represent 29 per cent of total sales, accelerated and were up 9.2 per cent year-on-year in the third quarter, compared to the 6.9 per cent growth reported in the first half of 2019. Export sales strength was attributed to the weaker Australian dollar. ARB remains one of the higher quality companies listed in Australia and management reiterated their desire to act conservatively when it comes to using their strong balance sheet for acquisitions.

CSL (ASX:CSL)

Like ARB, CSL is one of the highest quality companies listed in Australia. Management continue to see global sales, particularly in Flu Vaccines near term and in the US, as the primary source of growth. It is estimated that in the US and Europe only 30 per cent of total potential patients are receiving plasma treatment. In some part of Europe and in emerging markets immunisation rates are low, which means CSL has a long runway of growth.

CSL’s growth and quality is currently fully recognised by the market and it will pay investors to wait for the company to slip, for example by failing to beat the market’s lofty expectations.

 Costa Group (ASX:CGC)

This berry, banana and avocado supplier owns the dominant brands in Australia and is now expanding overseas. It is also investing in research and development that reduces the seasonality in production and ultimately increases yields. Costa is looking to China and Morocco for growth. In China it has planted 110ha of berries and plans to more than double plantings to 240ha within five years. More than 25 per cent revenue growth and double-digit earnings growth is expected from China over the next three to five years. In Morocco almost 300ha of blueberries have been planted. The company hasn’t completely escaped seasonality and climate and difficulties or hard times should be assessed for the temporariness.

The next group of companies are taking advantage of a booming need for technology and software.

Software is currently the sexiest place to invest for many professional investors thanks to what is being referred to as the ‘digitisation of the economy’ tailwind. Companies such as Afterpay, Seek, IDP Education, Wisetech Global, Jumbo Interactive and NextDC are all beneficiaries of the current popularity in software.

But while in many cases the tailwind is helping to drive revenue growth, in many cases there is limited if any profit. It’s too easy to say NextDC will continue to roll out new datacentres to take advantage of the growth in data and communications, but investors must also remember that competitors will emerge, and unit prices will decline.

Low interest rates and steady economic growth however are allowing investors to defer the date that profit is delivered but eventually returns on capital need to be positive.

IDP Education (ASX:IEL)

IDP Education is benefitting from the increasing mobility of international students. Through the company’s 2017 acquisition of HotCourses, the company is leveraging a platform to deliver leads, penetrate new markets and introduce its value-added services, ultimately increasing revenue. Through digitisation, such as the roll-out of its computer-based IELTS the company’s already-impressive economics and margins are expected to improve. Like many companies benefitting from software tailwinds, the share price appears fully valued.  In the absence of disappointment or an exogenous event, continued top line growth should remain supportive.

Nine Entertainment (ASX:NEC)

I have previously written about the structurally-shrinking audiences and profits suffered by free-to-air-television networks. Nine however is transforming itself with Stan, 9Now and Domain part of an integrated monetisation platform. Some analysts now describe Nine as an attractive growth story. The streaming service, Stan, is on an annualised revenue run rate of approximately $200 million and continues to grow subscribers. Stan is now also profitable and is projected to incrementally add circa $30 million to EBITDA in 2020. Revenue at 9Now grew by 75 per cent – admittedly off a very low base – and the real estate portal Domain is being held up as a beneficiary of a major cross selling program within the group.

Nine recently announced the sale of its Australian Community Media and Print business to focus on its core digital strategy jettisoning 160-plus regional titles and agricultural publications as well as 130 community-based websites.

Seek (ASX:SEK)

Seek is still seen by many analysts as being tied to Australian employment cycles and while much of its profits are derived from Australia, revenue from overseas businesses is already greater.  Seek however is reinvesting heavily overseas which means, at the profit level, Seek looks dependent on Australia.  The reality is however vastly different and Seek continues to articulate a very long runway for growth.  Price increases locally are also a strong possibility and the company believes revenue growth of circa 20 per cent out to 2025 is not unrealistic.

WiseTech Global (ASX:WTC)

While only listed for three years, Wisetech has been operating for more than two decades. The company operates in over 125 countries and is used by three quarters of the world’s top third-party logistics operators and 100 per cent of the worlds freight forwarders.

After more than two decades in operation, the company grew its 1H19 revenue by almost 70 per cent and generated average revenue growth of nearly 50 per cent over the last four years. At a recent conference, the company noted that in the last six years it has witnessed less than one percent attrition for its CargoWise platform, indicating the service is entrenched into its customers systems. Forty four percent of revenue is reinvested in product development and marketing and sales, split ¾’s and ¼ respectively.

The Montgomery Fund and Montgomery Private Fund owns shares in Macquarie Group, IDP Education and Seek. This article was prepared 05 July with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these stocks you should seek financial advice.

 

INVEST WITH MONTGOMERY

Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. Roger
    You often give REH a massive plug but I don’t think that any of your funds own them. Your funds seem overweight RWC. The founders are out margins are shrinking as competition bites. Can you explain this dichotomy please.
    Thanks

    • Hi Robin,

      Its all about valuation. RWC’s issues currently seem cyclical rather than structural and the founders have been uninvolved in the business for a very long time.

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