Every year HHG is asked by media to provide our top 5 picks for the following year. We have selected the stocks below for their broad exposure. Each has its own pros and cons, so any investor considering them should contact their adviser to see if it is appropriate for their situation/portfolio.
EBOS GROUP (EBO)
Ebos operates a conglomerate business offering a range of products and services targeting the healthcare and animal-care markets in both Australia and New Zealand. Ebos has grown primarily via acquisition during the past 2 decades.
Its transformational Symbion acquisition in 2013 propelled Ebos to the second-largest and most diversified pharmaceutical wholesaler and the largest hospital distributor in the Australian market. Ebos Group’s competitive advantage is predicated on the efficient scale it enjoys in the Australian pharmaceutical wholesaler market. The competitive advantage is best shown by a recent contract win, taking The Chemist Warehouse contract off their direct competitor, Sigma Healthcare Limited.
We believe Symbion provides an attractive growth platform and opportunity to improve operating leverage through bolt-on acquisitions and additional contract wins in the hospital logistics division. Ebos will benefit from the aging population, and from the increasing demand from a more informed populace looking for instant results.
Ebos had a strong result in August and reported first quarter profit up 15% at their AGM in October. The uncertainty that prevails across the market prevented the company from giving earnings guidance for the year. Our research providers forecast is for earnings growth of 12/13%, with double digit earnings growth possible for the foreseeable future.
Mainfreight Limited (MFT-NZ) offers managed warehousing and international and domestic freight forwarding. With team and branches across Australia (26% of revenue), China/Asia (3%), Europe (22%), New Zealand (24%) and the United States (25%). The company has produced solid growth over a number of years by offering superior service, and a quality product.
Mainfreight Ltd had their Annual Shareholder’s Meeting on the 30th of July, announcing strong revenue growth of 8% and profit before tax up 20%. Australia was the country driving the largest gains in profitability, up 167% on the prior year, followed by Asia up 63%. Australia generated a larger profit than New Zealand, in contrast to last year, where profitability in NZ was 2.7 times that of Australia. The main reason for this change relates to the strict lockdown in New Zealand relative to Australia. Profitability of the company is split between NZ 42% and Offshore 58%. The company’s gearing sits comfortably at only 11%, with undrawn credit facilities of $220m. In regards to industry concentration, top customers operate in a diverse range of industries, DIY/Homeware 16%, FMCG/Food/Beverages 15%, Technology/Electronics 11%, Retail 11% and medical/healthcare 7%. Mainfreight has continued to deliver impressive growth in contrast to difficult worldwide economic conditions. Mainfreight is an extremely well managed operation with over 8,000 employees in 26 countries. Their resilience and growth in profitability during a period of economic distress (COVID-19) is a testament to their management and the strength of the company. We are long term holders of Mainfreight for clients.
Mainfreight is a high growth company, rather than an investment for dividend income.
On the 15th of October, Mainfreight updated the market with their 26 week results, indicating revenue growth of 7.2% and pre-tax profit is up 23%.
SPARK LIMITED (SPK)
For Spark New Zealand, the medium-term outlook is solid, with mobile market share increasing and growth in fixed wireless helping to partly offset the decline in fixed-line broadband share. The regulator’s rejection in 2017 of the Sky-Vodafone merger has also, at the very least, substantially delayed the threat of a convergent juggernaut for Spark to grapple with. Coupled with a relatively benign regulatory environment, there is breathing space for Spark to consolidate its market position and canvas opportunities to reignite earnings growth, for instance, in the New Zealand IT services industry. Spark’s strong balance sheet also furnishes the group with defensive appeal and dividend security. Currently the company has a dividend yield of 7%, which is very attractive in this market.
THE A2 MILK COMPANY (ATM)
A niche dairy operator, ATM differentiates itself from the wider dairy industry through its ‘a2’ brand premium products, which are based around the use of the A2 beta-casein protein. The company offers solid growth prospects, supported by significant intellectual property and inroads in China.
A2 Milk’s COVID-19-related disruption has worsened, but shares in the narrow-moat name now screen as undervalued. A slower rebound in both daigou and online channels has led management to reduce near-term guidance to below our expectations. A2 now forecasts fiscal 2021 revenue of NZD 1.4 to NZD 1.55 billion, down from NZD 1.8 to NZD 1.9 billion, with EBITDA margins between 26% and 29%, versus 31%. We’ve reduced our revenue forecast to about NZD 1.5 billion, with EBITDA margins of 27%. This suggests a top-line fall of 14% versus fiscal 2020, and EBITDA declining a sharper 26%.
However, we maintain our fair value of NZD 16.30 per share (AUD 15.20), as we view the ongoing issues as temporary. The primary challenge has been a2’s push to sell more infant formula through e-commerce sales in China amid the pandemic, which has proven more competitive than anticipated versus the daigou channel. This has led to greater online product discounting than a2 expected, leaving little room for daigou sellers to compete and limiting their recent rebound. Management now plans to refocus on corporate daigou, providing direct incentives and holding back e-commerce volume to maintain a2 Platinum’s premium price position. While this strategy will likely slow near-term sales volumes and dampen margins, we’re encouraged by the focus on brand health, and forecast double-digit annual revenue gains in the four years from fiscal 2022 through 2025 (albeit at a slower pace than previously), alongside EBITDA margins increasing to nearly 32%.
Meanwhile, Chinese-language labelled infant formula sold through retail stores in China remain a bright spot for a2, with 12-month rolling market share sitting at 2.3% in October 2020, per management, up from 2.2% in September 2020 and 1.7% in December 2019. This supports our view that underlying consumer demand for a2’s formula remains strong.
RYMAN HEALTHCARE (RYM)
Ryman Healthcare is well placed to benefit from an expanding elderly cohort in New Zealand and Australia, given its strong reputation, impressive pipeline of new facilities, and successful track record of developing and operating retirement villages and aged care facilities.
Ryman ramped up their development levels 5/6 years ago. The average stay at a Ryman facility is 6/7 years, so we expect the company to begin to see the benefits of their previous developments in terms of resales, and the subsequent booking of the capital gains and deferred management fees.
Headwinds could come due to substantial development and land acquisition spending, COVID-19 mitigation costs, and slower house price growth (if that occurs). We forecast earnings growth momentum in the medium term as Ryman’s substantial development pipeline bears fruit, particularly in Australia.
Disclaimer: Hamilton Hindin Greene did not take into account the investment objectives, financial situation or particular needs of any particular person in the preparation of this publication. Accordingly, before making any investment decision Hamilton Hindin Greene recommends that you seek professional assistance from your investment adviser.
This is general information only. For personalised investment advice please contact your investment advisor on 0800 104050
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