Negotiations over a Free Trade Agreement between Australia and China have been ongoing for a decade, but on 20 October the final hurdle fell away and now a deal is done.

The benefits to selected ASX listed companies include:

•    Phased elimination of tariffs on agricultural products including dairy, beef, wine, and processed foods;

•    Approvals for Australian businesses to establish operations in China, including hospitals and aged care facilities, legal firms, education providers, and service industries such as fund managers and insurance companies.

Although there are many ASX stocks from which to choose, prudent investors would be well advised to focus on businesses operating in “mega-trend” sectors.  Ageing populations and the burgeoning middle class in China are prime examples.

It is no secret Chinese consumers are looking for better quality food products, making some Australian agricultural providers worthy of interest.  Existing importers to China will benefit over time from reduced tariffs, which could also attract newcomers.

China’s ageing population is burdened by the decline in the young mainly due to the country’s “one-child” policy.  The following graph shows the situation.

Although both sectors should benefit from the China FTA, healthcare stocks come with a higher risk from the capital expenditures required to physically expand into China.  Agricultural importers may face capex costs to expand production capacity here and distribution outlets in China, but likely less than what would be needed to build hospitals and aged care facilities.  So let’s first look at four agricultural providers that have positive earnings growth forecasts and solid balance sheets right now.  Here is the table in alphabetical order.

Company

(CODE)

Share Price

(52 Wk % Change)

Forward P/E

2 Year

Earnings Growth Forecast

Total Cash

(MRQ)

Total Debt (MRQ)

Gearing

Bega Cheese

(BGA)

$5.65

(+6%)

23.5

+71.8%

$10.3m

$68.9m

22%

Clean Seas Tuna

(CSS)

$0.053

(-35%)

+33.3%

$1.5m

$250k

0.48%

Tassal Group

(TGR)

$4.31

(+15%)

13.06

+6.1%

$13.3m

$79.3m

21.2%

Treasury Wine Estates

(TWE)

$7.28

(+57%)

21.4

+59.9%

$122.1m

$337.4m

11%

 

Bega Cheese (BGA) has a trailing twelve month (TTM) P/E of 69.2, which is astronomical when compared to the current Sector P/E of 18.8.  However, the Forward P/E of 23.5 suggests the possibility of better days ahead.  There are analysts who feel the stock is expensive, but look at the growth forecast – at 71.8% it is the highest of any of the stocks in our table. For 2015 the company reported earnings of $0.081 per share which is expected to grow to $0.238 by FY 2017. 

Despite challenges with milk pricing and procurement, Bega grew revenues by about 5% in FY 2015 but net profit after tax (NPAT) fell 27%.  Bega pays a fully franked dividend with a current yield of 1.6%, with the dividend forecasted to grow by 14.2% over the next two years.

Bega makes a variety of cheese products as well as butter, cream cheese, and an assortment of healthy snacks.  Experts tell us what Chinese consumers want more than anything else is foods high in protein.  Cheese meets that need, generally ranked third on lists of foods highest in protein.  At the top of those lists are the products offered by two of the other companies in our table – seafood.

Clean Seas Tuna (CSS) has had rough times since suspending its program to breed Southern Bluefin Tuna in 2010.  The company now farms Hiramasa Yellowtail Kingfish, which it sells here and exports around the world, with Japan being its only Asian customer at this time.  Clean Seas reported a steep decline in NPAT for FY 2015 – from $11.1 million to $4.1 million.  The company is now searching for a new CEO with plans to expand its export market, especially in Asia.  The Bluefin Tuna project has been relegated to maintenance R & D status. 

Over five years, the share price comparison between Clean Seas and salmon producer Tassal Group (TGR) is stunning.  Here is the chart.

 

Tassal actually improved its situation by scaling back on its exports back in late 2012 since the company could not keep up with the more profitable demand here in Australia.  You can see from the chart that decision appears to have sent the share price on a sustained upward trend.

Like Clean Seas, Tassal is an “aquaculture” company, which is a fancy term for fish farmer.  Earlier in the year the company’s share price suffered as government regulators cast their eyes on aquaculture operations in Tasmania.  The inquiry is over with no negative effects and Tassal recently acquired wholesale seafood operator De Costi Seafood.   The De Costi acquisition moves Tassal from a pure play salmon producer to a diversified seafood company. 

The company’s Full Year 2015 Results were solid, with a 16.3% rise in revenue and a 21.7% increase in NPAT.  Tassal’s CEO was recently quoted in a Wall Street Journal report saying, ““The Tasmanian story in China is good and it’s growing. They want Tasmania’s fresh products, and the first thing they ask for is salmon.”

Tassal has already signed a deal to supply its smoked salmon products to Ikea stores in China, with the company expecting the “scope of the order to expand in the coming years.”

Australia’s second largest salmon farmer, Huon Aquaculture (HUO), is a newcomer to the ASX, listing in late October 2014.  That company is contemplating a capital raise to increase its market share.

Finally, Tassal pays a 50% franked dividend with a current yield of 3.8% and a two year dividend growth forecast of 19.5%.

Treasury Wine Estates (TWE) exports to China were already booming before the FTA was finalized. Full Year 2015 Results saw a modest 3.5% revenue increase but a dramatic turnaround from last year’s loss of $100 million to a net profit after tax of $77.6 million.  Buried in the results were a 36% volume rise in the company’s Greater China Region and a 53% increase in profit.

Over the next four years the current 14% tariff on bottled wine and 20% tariff on bulk wine will go away. Treasury currently has a dividend yield of 2%, unfranked, with a two year dividend growth forecast of 19.5%.

We have four stocks in the healthcare sector to consider and although all have substantial potential to grow in China at some point in time, only one is currently poised to move right now.  As you might expect, that company is Ramsay Health Care (RHC), one of the most successful stocks on the ASX now and indeed since it listed in 1997 with an opening price of $2.20 and a first day close of a mere $1.06.  Here is a price movement chart for Ramsay compared to the ASX 200. 

In late August the company announced yet another year of stellar results – a 49.9% revenue increase and a 27% rise in profit.  At that time Ramsay’s CEO commented that getting into China was an “exciting option” for the company.  In early November that option came to pass as Ramsay announced a joint venture agreement with China’s Jinan University allowing Ramsay to build hospitals in China’s Pearl River Delta.  In 2014 Ramsay acquired a 25% stake in the Chinese hospital operator Jinxin, its first foray into China. 

While the company’s trailing twelve month P/E of 35.11 leads some to claim it is an expensive stock, the Forward P/E of 24.59 compares favorably to the current Sector P/E of 20.98.  In addition, Ramsay has a two year earnings growth forecast of a robust 20.98%.  The company pays a fully franked dividend with a current yield of 1.7% and a two year dividend growth forecast of 15.9%.

The following table includes Ramsay and three newcomers to the ASX, all listing in 2014.  They operate in the hospital and aged care space and are currently focused on building market share here in Australia. 

Company

(CODE)

Share Price

(52 Wk % Change)

Forward P/E

2 Year

Earnings Growth Forecast

Total Cash

(MRQ)

Total Debt (MRQ)

Gearing

Ramsay Healthcare

(RHC)

$64.41

(+21%)

24.59

+20.8%

$315m

$3.17b

172.6%

Estia Health (EHE)

$7.60

(+60%)

21.34

+143.5%

$47.09m

$525m

93%

Healthscope

(HSO)

$2.79

(+10%)

23.33

+13.3%

$217.7m

$1.18b

21.2%

Japara Healthcare (JHC)

$3.09

(+26%)

23.77

+20.2%

$53.8m

$22.3m

4.2%

 

Estia Health (EHE) listed on the ASX on 5 December of 2014, closing its first day of trading at $4.61.  Healthscope Limited (HSO) began trading on the same day, closing at $2.55.  Healthscope owns and operates hospitals and medical centres while Estia operates aged care facilities.  The following chart compares share price performance of the two since listing.

 

Healthscope had also operated pathology centres and laboratories but sold that division to a private equity firm for about $105 million.  The company is now focusing on growing in Australia before expanding internationally.

Japara Healthcare (JHC) debuted on 17 April with a first day closing price of $2.58.  The company operates 43 facilities around Australia following its early October acquisition of four facilities from Profke Aged Care Group.  Japara apparently has no immediate interest in international expansion as it lists its core objective as “providing the best available quality of life for the elderly population of Australia.”

Its strong balance sheet will allow continued expansion in Australia and it pays a fully franked dividend with a current yield of 3.7% and a two year dividend growth forecast of 18.4%.

Estia Health (EHE) has an aggressive goal of aged care facilities expansion, looking to add 500 to 1000 spaces per year.  That might explain the meteoric rise in the stock price.  While it may be some time before this company considers expanding outside of Australia, it has a compelling growth story right here.  For FY 2015 the company reported earnings per share of $0.059 and is forecasted to increase its EPS to $0.392 by FY 2017.  The company is already paying a fully franked dividend with a current yield of 2.7%.  The two year dividend growth forecast is also impressive – 60.8%.  The analyst consensus rating for Estia is Outperform, with one analyst at Strong Buy, five at Buy, and one at Hold.

 

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