Last trading year 2013 provided investors with some respite from the doom and gloom years. Even the poorest performing sector on the ASX in 2013 – Materials – finished the year down, but only by 3.7%.
Investors were treated with a bountiful harvest of winners, many up over 100% for the year. The following table lists the top ten share price performers on the ASX for 2013.
See table at the end of the article.
There is a school of investment thought characterised by the axiom “Buy High, Sell Higher.” The notion is that stocks in strong upward trends with good prospects will go even higher. Regardless of whether or not you agree or disagree with the strategy, there is evidence to suggest stocks reaching new 52 week highs and beyond should not be rejected out of hand. With that in mind, let’s look at the ASX 2013 Top Ten and consider what may be in store for these outperformers in 2014.
Looking at the table as a whole, we notice that with the exception of the enigmatic Arrium Limited (ARI), all of these stocks have been solid performers over the last five years. While six of the stocks are in the Consumer Discretionary Sector, they operate in different Industry Groups. The two Consumer Services stocks, law firm Slater & Gordon (SGH) and education and child care provider G8 (GEM) obviously serve different markets. The same could be said of the two retailers in the table, electronics provider JB Hi Fi Ltd (JBH) and Kathmandu Holdings (KMD), a provider of outdoor clothing and equipment. Arrium defied the trend in the Materials Sector with its impressive outperformance, which suggests organic growth.
Investors who place high value on analyst opinion have reason to believe Slater & Gordon can continue its superior performance. Forward looking analyst estimates are impressive, from the Price Earnings (P/E) Ratio to the Price to Earnings Growth (P/EG) ratio to the 2 year earnings growth forecast. However, analyst coverage is modest, with 6 analysts showing 3 Strong Buys, 2 Buys, and 1 Underperform. Macquarie has an Outperform recommendation with a $4.75 price target.
Slater began in Australia in 1935 and has gone multi-national. The Macquarie analyst noted the significance of Slater’s latest acquisitions in the UK, since the marketin the UK is significantly larger than Australia.
On 6 December 2013, SGH was added to the ASX 200 Index. The company’s fully franked dividend yield is small – 1.5% – but dividends have increased every year for the last 3, from $0.055 per share in FY 2011 to $0.066 in FY 2013. A 2 year performance chart for SGH shows a steady upward trend:
REA Group Limited (REA) owns and operates 13 real estate websites in Australia, Italy, France, Germany, Luxembourg, and Hong Kong. The company offers online advertising to commercial and residential buyers and renters. Additional sources of revenue include advertising space for advertisers of real estate related products and website stgelopment services as well. Concerns about the Australian real estate market hindered the share price in 2012, but over 10 years REA is up an amazing 6000%. Here is a 10 year share price performance chart:
Eleven analysts cover the company, with 3 at Strong Buy, 1 at Buy, and 7 at Hold. Housing data in Australia is seemingly positive and REA is sure to benefit. All 7 major analyst firms in Australia have the stock at Neutral or Hold, citing reasons from recent management resignations to overvaluation. The current P/E is about 44. However, the company is getting ready to expand into China and its 1.1% dividend yield reflects the high stock price. Dividends increased from $0.26 per share in 2012 to $0.415 in FY 2013.
On 16 January 2014 Credit Suisse upgraded once beleaguered JB Hi Fi Ltd (JBH) from Neutral to Outperform. Analysts expect the retail sector to outperform in 2014 and was impressed with JBH’s holiday results, especially the company’s ability to maintain pricing without massive discounting. Not long ago JBH sat atop the ASX Top Ten Shorted Stocks list, largely due to the perception cutthroat competition from foreign online retailers would crush JBH. The following 5 year price performance chart shows the impact of those concerns on JBH stock:
There are 15 analysts covering the company, with 1 Strong Buy and 1 Buy, 9 Holds, 3 Underperforms, and 1 Sell. It appears the analyst community at large remains unconvinced but JBH management responded well to past threats with strategic discounting, new store openings, and product line expansions. For investors with some risk tolerance, they could continue to surprise. Remember, this stock went from number one on the short list to top performing retailer in 2013. The company also had a respectable dividend yield for FY 2013 of 3.6%.
Magellan Financial Group Limited (MFG) is a fund management company for the upper stratosphere of investors, that is, high net worth retail investors and institutional investors. Magellan and its shareholders have benefited handsomely from the solid 2013 share market performance globally. In fact, MFG has been wildly successful over the last 3 years. Investment income went from $3.3 million in FY 2011 to $3.6 million in FY 2012 and $30.1 million in FY 2013. Net profit after tax was also stellar, rising from $5.8 million in FY 2011 to $13.7 million in FY 2012 and $66.6 million in FY 2013. The current dividend yield is 1.9%, with dividends increasing from $0.015 per share in 2012 to $0.215 in FY 2013. Four analysts cover the stock, with 2 Strong Buys and 2 Buys. The following chart compares the price performance of Magellan with the other diversified financial that outperformed in 2013, Henderson Group Ltd (HGG):
With a market cap of 4.7 billion, Henderson Group is about two and a half times the market cap of Magellan, at 1.74 billion. Henderson is UK based and began trading on the ASX in 2008 as a holding company for Henderson Global Investors. Henderson serves a broader client base with more diversified offerings, including fixed income and property. The company’s dividend yield is 3% but it is unfranked. Henderson has more analyst coverage than MFG with 2 Strong Buys, 4 Buys, 7 Holds, and 1 Underperform.
TPG Telecom (TPM) provides telecommunication services to consumers and corporate customers, both large and small. Its corporate division serves government agencies as well as large private corporations. Note that TPG has an astounding 5 year total shareholder return of over 100%. Telco goliath Telstra (TLS) had a rate of return over that period of 16.7%. While TLS pays a higher dividend, TPM’s share price appreciation over the last two years is far superior. Here is the chart:
Over five years TPG’s performance is even more impressive, up about 3000% while Telstra has been relatively flat. Ignoring its past glory, 5 of the 12 analysts covering the stock have Underperform or Sell ratings on TPM, including analysts at BA-Merrill Lynch and JP Morgan. Three analysts are at Strong Buy, 2 at Buy, and 4 at hold. Much of the current skepticism regarding TPM has to do with the run-up in share price and the current P/E of 28, despite the recent acquisition of New Zealand Telecom’s corporate and wholesale operation, AAPT, and fibre optic company PowerTel. Some market experts are predicting the expansion of TPG’s infrastructure through this acquisition could give the company a competitive edge as the “internet of everything” grows.
Outdoor clothing and equipment retailer Kathmandu Holdings Ltd (KMD) began trading on the ASX on 09 November, 2009 at $1.70 per share. Despite a rocky start and a dismal year in 2012, the stock price has climbed 80% since its arrival on the ASX. Here is the chart:
Seven analysts cover this company and 6 are bullish with 3 at Strong Buy and 3 at Buy along with one Hold. Macquarie, CIMB Securities, and Deutsche Bank have Outperform and Buy recommendations. KMD operates in Australia, New Zealand, and the United Kingdom. It has plans to open new stores and is expanding its online presence. Kathmandu has a respectable dividend yield of 3.1%, fully franked. The company’s NPAT for FY 2012 came in at $26.8 million, down from $30.9 million in 2011, but rebounded to $39 million in FY 2013.
The remaining three stocks did not quite make the century mark in share price appreciation but it is not likely the shareholders are complaining! Theme Park and Cinema operator Village Roadshow Ltd (VRL) was up almost 95% and has handsomely rewarded its shareholders over 5 years. The company has a fully franked dividend yield of 4% with a 2 year dividend growth forecast of 10.4% to complement its respectable 14.7% earnings growth forecast. Village Roadshow’s Cinema operation includes producing films as well as exhibiting them and VRL has entered the Asian market with two successful films in 2013. On the theme park front, the company has sold off some of its US assets to focus its attention on emerging markets in Asia. On 03 December BA-Merrill Lynch issued a High Risk Buy on the stock and raised its price target to $8.45 from $7.50. Deutsche Bank has a Buy recommendation. Here is a five year price chart for VRL:
G8 Education Ltd (GEM) owns and operates child care and early education facilities through a variety of brands both here in Australia and in Singapore. The company went public under a different name (Early Learning Services LTD) in December of 2007 and after a negative start turned positive in mid-2012 and has been climbing ever since. Since its inception, GEM stock price has appreciated about 250%. Here is the chart:
Three analysts cover GEM; 2 with Strong Buys and 1 with a Buy. If you believe in organic growth, the financial results of GEM do not match the share price performance. For FY 2010 the company reported $66 million in revenue and $4.5 million in NPAT. Following a merger with Payce Child Care, G8 was born and revenue and NPAT for FY 2011 jumped to $136 million and $13.9 million. GEM continues to make acquisitions making it difficult to isolate any real organic growth. However, an analyst at Citi is positive about the acquisitions and sees more upside to come. The company will be reporting Full Year Earnings on 24 February, 2014.
Finally, there is the surprise of the year – Arrium Limited (ARI) the former OneSteel reborn. While the Materials Sector dropped 3.7%, ARI was up 92.3%. The company can trace its history back to 2000 when OneSteel spun off from BHP and began trading on the ASX. In 2005 the company added iron ore mining to its steel making capability and later made acquisitions of additional iron ore mining assets as well as mining consumable businesses. Since OneSteel as of 2012 operated in two additional segments as well as steel manufacturing – mining and mining consumables – the decision was made to change the company name to Arrium. The business model now calls for Arrium to become a major exporter of iron ore, which could explain the rise in share price as the price of iron ore held firm in 2013. Here is a 2 year chart for Arrium:
Arrium appears to be a play on the future, not the past nor the present. Revenues and NPAT have fallen for the last 3 years, with a loss of $694 million reported for FY 2013. However, investors were buoyed by the company’s record iron ore shipments for the September Quarter of 2013 but analysts are decidedly mixed in their views on Arrium. On 13 September 2013 Citi re-initiated coverage on Arrium with a Sell rating, pointing out the company is transitioning to mining as its primary business and the 10 year outlook for iron ore is cloudy. On 19 November 2013 Credit Suisse downgraded Ari to Underperform and UBS recommended Selling, both citing the continued drag on the company from the steel-making operations. The latest recommendation comes from BA-Merrill Lynch on 17 January 2014, downgrading ARI to Underperform due to the jump in the share price. However, the analyst raised the price target to $1.40 from $1.20. Macquarie is alone with an Outperform rating, as of 09 December 2013. The analyst there believes the steel-making business will improve and the company will be able to pay down its debt. As of end of year FY 2013 Arrium had $2.5 billion in long term debt with gearing at 68%.
In December of 2013 a presentation to the shareholders at the Annual General Meeting included the following regarding Arrium’s 2014 outlook:
• Average iron ore prices expected to remain at solid levels over balance of FY14, particularly given impact of outlook for sustained lower AUD
• Underpinned by continued strong demand from China.
If Arrium management is correct with that statement, the company’s decision to move heavily into mining and its increased production should pay off. However, as has happened before, analysts and experts are far from unanimous in their outlook. Iron ore dropped to its lowest level in five months a few days ago and some analysts now see a range of US$110 per tonne to US$150 per tonne by end of year 2014 while others see the price dropping below US$100. If you are bullish on iron ore, Arrium may be worth a look.
2013 % Increase
2013 Closing Share Price
Current Share Price
2 Year Earnings Growth Forecast
5 Year Estimated P/EG
5 Year Total Shareholder Return
Slater & Gordon
REA Group (REA)
TPG Telecom (TPM)
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