One of history’s all-time great investors – US based Warren Buffett, of Berkshire Hathaway – coined the term “economic moat” to characterize a company’s competitive advantage in its operating sector. High on the list of business practices that constitute a competitive advantage are cutting-edge technologies.
For the past seven years, the Australian Financial Review’s Most Innovative Companies List, awarded annually, provides investors insights into that coveted attribute of economic moats – cutting edge technologies.
From an initial applicant list of approximately 1,000 ANZ companies, the Final 2018 Award List of 100 companies, includes four ASX listed companies among the top ten; all worthy of investor interest.
The selection process is rigorous, beginning with company leaders nominating their own company for the award, detailing internal innovations they feel merit recognition, followed by completion of an online survey from a representative sample of company employees.
The process goes beyond the identification of innovative technologies to include aspects of the corporate culture that foster a climate conducive to innovation.
The 2018 winner – GroundProbe – was acquired by ASX mining services provider Orica Limited (ORI) in December of 2017. Orica, now a multibillion dollar company spanning the globe, began in 1874, providing explosives to the gold miners of Victoria. The company has expanded significantly beyond its commercial explosive and blasting systems origins, now offering mining chemicals and adhesives, agricultural fertiliser, and a cloud-based technology platform for pre-blast monitoring and post-blast measurement and data analysis – BlastIQ™.
The GroundProbe acquisition is expected to supplement Orica’s BlastIQ™ platform along with the operations of an Orica subsidiary, Nitro Consult. The GroundProbe GML platform – Geotechnical Monitoring LiDAR (Laser Imaging, Detection, and Ranging) – was named ‘Best Overall Innovation’ of the year. With other GroundProbe products along with Orica’s offerings, miners can evaluate site risks and monitor ongoing mining operations for risk of collapse as well as enhancing mining productivity.
The following table lists price movement information along with other relevant indicators for interested investors for Orica and the other three Top Ten ASX listed Most Innovative companies.
Orica was hit hard, first by the GFC and following a solid recovery in the share price, the declining fortunes of the mining boom send the stock price lower again.
Over the past two years the share price is up more than 20%, despite a significant drop following a broker downgrade and disappointing financial results. The company CEO, however, sees brighter days ahead, citing higher production and improved contract pricing.
Third place winner on the 2018 Most Innovative list, New Zealand-based Xero Limited (XRO), offers a cloud-based accounting software platform for SMEs (Small to Medium Enterprises). The company listed on the ASX in November of 2012 and within 15 months its share price rose more than 800% before falling back to earth following a series of events of concern to investors – from the resignation of a key executive to worries about the company” expansion into the US and its excessive valuation.
The amazing ride for shareholders resumed in early 2016 and the stock price has now eclipsed its 2014 highs.
Xero’s award-winning platform serves the needs of accountants and bookkeepers in their own client work, as well as Xero’s dedicated corporate clients. Operating as a Software as a Service (SaaS) business, Xero offers its customer three service options, starter, standard, and premium. The company supports its platform with an impressive array of educational resources for users, from specialised guidebooks, an extensive video library, user blogs, client case studies, podcasts, and educational courses through the company’s dedicated Xero University.
Xero has a global network of more than 100 banks that feed customer transactions directly into their Xero platform. The company has increased revenue from all geographic locations in each of the last three Fiscal Years, but remains unprofitable, although the net loss for FY 2018 improved on the FY 2017 result by 60%.
Within the last month Xero announced a strategic partnership with a US payroll full-service platform, extending Xero’s reach to all 50 states in the US. On 1 August the company announced the acquisition of a Canadian data management firm, in business to simplify financial administrative tasks, such as data entry and document collection.
Xero won the award for best service innovation, with its revolutionary Xero Learn, a “life-long learning platform”, an online program allowing educators and training organisations to use the Xero platform to teach finance.
Finishing in eighth place, MYOB Group Limited (MYO) is a direct competitor of Xero. Once heralded as the accounting software of choice for the SME segment, MYOB has been in business since the 1980’s with desktop software programs. While Xero introduced its cloud-based platform in 2006, MYOB was late to the game, not launching its cloud offering until 2014.
MYOB came on the ASX in 2015 and has been handily outperformed by Xero in the last two years.
Xero’s early start in cloud-based offerings may have given the company a “first mover advantage” over MYOB. In addition, investors may prefer the more focused business model at Xero, with MYOB expanding to large scale enterprises and entering the payment solutions market. The company recently dropped its bid to acquire accounting software firm Reckon Limited (RKN) following competition concerns voiced by the ACCC (Australian Competition and Consumer Commission).
This acquisition strategy may benefit MYOB in the longer term, but for now it seems investors are more excited about growth at Xero compared to MYOB. For FY 2018 MYOB increased revenue by 12% while Xero’s revenue rose 42%. However, MYOB has reported a profit in each of the last two Fiscal Years, with a 12% rise from FY 2017 to FY 2018.
Ninth place winner, GUD Holdings Limited (GUD) made the list for its innovative Microlene Farm, a cleaning technology to ensure contaminant free water in farming. Microlene is a water treatment branded product, available through a GUD wholly owned subsidiary, Davey, for use in improving water quality in residential, commercial, and agricultural settings.
The company has diversified product offerings in two sectors – Automotive and Water. GUD exports products to Europe, the Middle East, South East Asia and North America.
The Automotive operating segment features a wide variety of after market brands ranging from gasket replacement to filtration to brake parts to lighting and electrical components, and many more.
The Water operating segment features Microlene branded pool and spa products from chemicals to pumps and filtration; and water supply and filtration products for urban, rural, and commercial applications from pumping to water conservation and treatment, available through Davey. GUD is also actively involved in product design and development, offshore sourcing of products, and supply chain management.
GUD Holdings recently sold off its Oates® cleaning supply business, substantially improving its FY 2018 Full Year Profit, reported at $101.8 million. For FY 2017 the company posted a loss of $7.3 million. Underlying net profit for FY 2018 from continuing operations came in at $55.2 million, a 20% increase over the previous year. Revenues were up 11%, attributed to the Automotive operation with revenue from Daveys Water down 1%.
Automotive sales make up the lion shares of GUD revenue, with Daveys Water normally accounting for 30%. The poor showing from Daveys was attributed to dry winter conditions depressing sales of the company’s products for rain water capture and treatment.
During the year GUD made some key acquisitions to enhance its Automotive business, with the expectation of full year revenue contributions from two of the company’s major acquisitions.
GUD’s fully franked dividend has increased in each of the last four Fiscal Years and is forecasted to continue its increases over the next two years.