An active investor engages in a never-ending quest for sources of prospective stocks. One such source is a list of holdings of Australia’s high performing share funds. As an example, let us consider the Smaller Companies Fund from Perpetual Investments.
Perpetual is a recognised leader in wealth management services. On 25 February 2013 the company was named Fund Manager of the Year by Morningstar Australia for achieving “commendable returns across its broad business.”
From the Perpetual website we find comparative data for the company’s many funds in FY 2011. The top two funds for that year were the Global Property Securities Fund, with 28.94% total return, and the Global Resources Fund at 28.88%. Right behind them was the Smaller Companies Fund with a 24.29% share price appreciation and 2.02% dividend yield for a total return of 28.76%.
The Smaller Companies Fund is all Australian but surprisingly not all small companies. The fund is part of the company’s Wealth Focus Investment Advantage (WFIA) family of 75 funds. One criterion for selection for the Smaller Companies Fund is shares which when first acquired do not rank in the ASX 50 Index. Consequently, you find companies in the fund that started small and have since grown to market caps in the billions. The following graph shows the 10 year performance of the WFIA Smaller Companies Fund:
The performance of this fund certainly justifies investigating its holdings for potential individual stock picks. So let’s look at the top ten shares in the index by weight. Fund managers “overweight” a stock with higher allocations when they believe the stock will achieve excess returns, strengthening the overall performance of the fund. Here are the top ten holdings in the Perpetual WFIA Smaller Companies Fund:
52 Wk % Change
5 Year % Change
Prime Media Group
Most “Buy and Hold” investors feel 5 years is a minimum holding period, so we included 5 year share price appreciation as well as one year in our table. Perpetual fund managers also advise 5 years as a minimum holding period. On a 5 year basis, only the two Media companies, Prime Media Group (PRT) and STW Communications (SGN) showed negative returns. Alacer Gold (AQG) has only been trading under its present name on the ASX for two years. On a one year basis, only two of the top ten were negative. Note also that the top two contributors to fund performance, G8 Education (GEM) and TPG Telecom (TPM) have led the fund with outstanding capital growth over five years.
The question for active investors is can these top performers continue outperforming in the future? With the exception of New Hope Corporation (NHC), none of these stocks have outsized Forward P/E’s. Let’s take a deeper look at each company and its prospects.
G8 Education (GEM) provides educational and developmental child care services through its expanding chain of five different branded child care centres. Founded in 2006, GEM began trading on the ASX in 2007 and its share price has been on a non-stop upward trend.
The company has used a combination of debt and capital raises to pursue an aggressive acquisition strategy, with more than 135 centres now operating here in Australia. In addition, GEM now owns and operates 20 centres in Singapore with an additional 51 franchisees. The company has plans to acquire an estimated additional 70 centres.
Performance has been outstanding, with a 22% revenue increase and an 11% profit increase for FY2012. As solid as that result is, it pales in comparison to the FY 2011 results that saw a 205% NPAT increase and a 115% revenue increase over FY 2010. Both operating and profit margins have increased every year since the company began trading in 2007. The obvious risk here is paying for the acquisitions, but G8 has moderate gearing at 22% and recently renegotiated a long-term debt facility to fund further acquisitions. Here is a one year chart comparing GEM to the ASX Consumer Discretionary Index, the XDJ:
TPG Telecom (TPM) has taken its investors along on an exhilarating ride over the last five years, with the share price up 800%. The company offers a wide range of telecommunications services to every segment in the market – residential users; small, medium and large companies; and government organisations.
TPG Telecom recently reported Interim Results showing an impressive 41% profit increase on revenue increase of only 10%. The results included healthy increases in both Internet and Mobile subscriptions, prompting target price increases across the board from major analyst firms. Citi upgraded the shares to a BUY along with raising its target price and forward estimates. CIMB Securities and BA-Merrill Lynch maintained NEUTRAL ratings while raising both target prices and forward estimates. Macquarie and Credit Suisse maintained OUTPERFERFORM ratings and also raised their targets and forward estimates, with Credit Suisse commenting that TPM is “the top pick in the sector.”
The Telecommunications Sector has performed well year over year but TPM has done even better. Here is a one year chart:
Prime Media Group (PRT) operates in regional television and radio broadcasting as well as online media. The “free-to-air” media space in which PRT operates has been subject to considerable speculation about potential mergers. On 13 March 2013 the government announced a substantial reduction in licensing fees, which is a good thing for the players, but also announced a national test for mergers of major players, which is not so good. The 50% reduction in licensing fees did not lead to a spike in PRT’s share price, nor in the price of other companies in the space like Southern Cross Media (SXL), Seven West (SWM), or Ten Networks (TEN).
For FY2012 the company reported a net profit of $27.7 million, up from FY 2011 net profit of $27.2 million, but one-offs led to less than stellar results for the recently reported Interim results. For the first half of 2013 statutory net profit after impairments, taxes, and other charges dropped 71%. However, revenues were up 3.9% and the company reported a 4.2% increase in “core” earnings.
Despite the uncertainty over advertising revenue in the sector and the modest financial performance, the shares have risen 42% year over year. Analysts at CIMB Securities, Macquarie, Deutsche Bank, and JP Morgan reiterated BUY and OVERWEIGHT ratings following the Interim results release and all raised their price targets for Prime Media. JP Morgan claims PRT remains the ”preferred regional exposure.” Analysts at CIMB and Deutsche Bank like the stock because of potential “corporate activity” and “changes in media ownership laws.” Here is the company’s year over year price chart compared to the Consumer Discretionary Index:
STW Communications Group (SGN) is another media company that saw its price targets and growth estimates raised by some major analysts following the February release of Full Year 2012 results. The company reported a 10.9% increase in revenue, a 6.5% increase in NPAT, and a 4.6% increase in earnings per share. STW calls itself a “marketing communications” company, offering advertising, design, and digital and specialist communications services to both industry and government.
Given the challenging advertising environment, the company’s results and expansion into Asian markets impressed analysts at Deutsche Bank, CIMB Securities, and Macquarie enough to warrant maintaining BUY and OVERWEIGHT ratings. Credit Suisse, however, downgraded the stock from BUY to NEUTRAL due to the strong run-up in share price. Despite this, Credit Suisse raised its price target on SGN to $1.45 from $1.24. Here is the price chart for SGN compared to the XDJ:
ResMed Inc (RMD) is a US-based company that trades both on the NYSE and the ASX. The company designs, manufactures, and distributes medical devices for breathing related sleeping disorders and other respiratory problems. ResMed is global in scope, with manufacturing operations Australia as well as in Singapore, France, Germany, Malaysia, and the United States. Primary sales and distribution operations are located in the United States, Germany, France, the United Kingdom, Switzerland, Australia, Japan, Norway and Sweden. ResMed is a once “smaller” company that now boasts a market cap of $6.3 billion, the largest among the top ten holdings in the Perpetual WFIA Smaller Companies Fund.
On 24 January 2012 the company announced record-breaking Half Year results. Revenue rose from US$647 million to US$716 million while net income rose from US$114 million to US$149 million. Despite this performance, major analysts here are mixed in their recommendations for the stock, largely due to potential changes in medical equipment reimbursement under the US Medicaid/Medicare system, with some suggesting the possibility of a 47% cut.
CIMB Securities, BA-Merrill Lynch, UBS, Credit Suisse, Deutsche Bank, and Macquarie all are at NEUTRAL or HOLD on RMD shares. Citi and JP Morgan are decidedly bullish with BUY and OVERWEIGHT recommendations and JP Morgan calling ResMed a “compelling long-term investment opportunity“. Here is the company’s chart compared to the ASX Health Care Index, the XHJ:
The Henderson Group (HGG) is a holding company for Henderson Global Investors, an international investment fund and asset manager based in the United Kingdom. The company provides a broad array of products to a diverse customer base, including retail and high net worth investors, and institutional investors. Products offered range from private equity and hedge fund investments to property, fixed income, and equities.
Global investors have been shedding equities at a breathtaking rate over the last few years, making the stock price appreciation for HGG a testament to the value of diversification. Henderson’s wide range of investment opportunities appears to have shielded the company from the outflows in equities markets, at least in the eyes of investors.
While not direct competitors across all product and market segments, it is interesting to compare Henderson’s 5 year run against Australia’s own Perpetual Limited (PPT). Here is the chart:
To say the least, analyst opinion is divided on HGG, with UBS downgrading the stock from BUY to NEUTRAL on 28 February following the release of Interim results while BA-Merrill Lynch maintained its BUY rating. Prior to the release Citi upgraded the stock from NEUTRAL to BUY on 21 January in anticipation of cash on the sidelines returning to equities and funds in growing numbers.
Brickworks Limited (BKW) is primarily a manufacturer of building products such as bricks, blocks, pavers, flooring and roofing tile, and precast floor and wall panels. However, the company has two other business segments, a Property Division and an Investment Division. The Property Division is engaged in exploring opportunities for land owned by the company and the Investment Division invests in the ASX.
Despite tough conditions in the construction industry, on 21 March the company reported Interim results showing a 14.7% increase in revenue along with a 13.1% increase in NPAT. Management attributed the result to the company’s diversification, with stable results from building materials and strong earnings from property offsetting weak results from investments.
Brickworks stock price has outperformed the ASX Materials Index by a wide margin; although it should be pointed out the battered mining companies are also part of that sector. Here is the chart:
Macquarie currently has an OUTPERFERFORM recommendation on BKW.
Cardno Limited (CDD) is a global engineering and consulting firm specialising in infrastructure and environmental services. On 19 February the company reported record profit of $40.1 million for the half year, an 11% increase over the previous corresponding period. Revenue rose 34.7%. Cardno shareholders have had a bumpy ride over the past year, as evidenced by the company’s price chart compared to the ASX Industrials Index:
The sickening roller coaster drop in November of 2012 followed the company releasing a profit warning. Management stated the company would show a net profit in the range of $36 to $40 million, but the market was more worried about the litany of worries expressed by management from increasing competition, and higher costs to constrained rates on some projects.
While the Interim results met profit guidance, earnings per share fell 11%, largely due to margin pressures and a capital raise. Following the report, UBS maintained its BUY rating and raised both its target price and forward growth estimates. Macquarie and Deutsche Bank maintained NEUTRAL and HOLD recommendations with both raising target prices and Deutsche raising 2013 forecasts.
New Hope Corporation (NHC) saw its share price appreciation reverse course in the face of falling coal prices, dropping 27% year over year. While the company also has infrastructure operations, its fortunes rise and fall with the price of coal and the value of the Australian dollar. Right now the company suffers from low coal prices and a high dollar, and the recent earnings release showed the impact.
Interim results through 31 January saw a 31.9% drop in net profit and a 16.9% decline in revenue. A one month price chart shows market reaction to the news:
The share price recovered somewhat, perhaps in response to company management announcing its intention to seek oil and gas opportunities. With zero debt and $1.29 billion total cash on hand as of the most recent quarter; New Hope can afford to go shopping.
Alacer Gold (AQG) is one stock the Perpetual fund managers may regret buying, with a 52% decline in price over 5 years. However, they might yet prove to be right. The company is US based with mining and processing operations in Australia and Turkey. It trades on the ASX and the TSX. On 14 March Alacer announced Full Year results and the market liked what it heard. Here is a one month chart showing the trend reversal:
The company took substantial impairment charges during the year, but net profit without the charges rose 43.4%. The company also announced a special dividend to be paid following the sale of its minority interest in the Frogs Leg Mine in Western Australia. Following the release BA-Merrill Lynch, UBS, Citi, Deutsche Bank, and Credit Suisse all maintained BUY or OVERWEIGHT recommendations on the stock citing its solid asset base for future growth. Alacer Gold has a 2 year earnings growth forecast of 51.1%.
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