4 STOCKS TO BUY AND 4 TO SELL IN FY19 - BROUGHT TO YOU BY - Switzer Super Report
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4 STOCKS TO BUY AND
4 TO SELL IN FY19
BROUGHT TO YOU BY
1
Contents
Introduction 03
4 stocks to buy 04
Caltex Australia 05
G8 Education 06
Australian Finance Group 07
Paragon Healthcare 08
4 Stocks to sell 09
Kogan.com 10
Reliance Worldwide Corporation 11
Afterpay Touch Group 12
Pushpay Holdings 13
Important Information 14
2
Happy new financial year!
Yes, I know it’s not as exciting as the beginning
of a new calendar year, (unless you’re an
accountant of course!) but it’s a pretty good
time to reconsider your investments. Given
that we’re often caught up with a whole lot of
other ‘resolutions’ in January, a new financial
year is the perfect time to review your portfolio.
And that’s why we’ve put together another
beginning of financial year (BOFY) investment
eBook for you, with a bunch of fantastic
stock ideas to buy, plus a few to offload too.
Never forget that being a successful investor
means letting go of some stocks. Or maybe
just lightening your holdings of a few good
companies that might be very overpriced as
your profits could be better spent elsewhere.
We did this for you last year and I just wanted
to recap on some of our better picks. One of
our buy suggestions was IPD Education, a This year we’ve asked Switzer Report
provider of international student placement contributors James Dunn to pick his best four
and English-language testing services. This time value stocks for the year ahead, and Tony
last year it was just $4.93 but by late June it had Featherstone has come up with four sell ideas.
more than doubled and was trading at $10.59.
Another one of our buys was the PM Capital But in addition to James’ buys, I’d also like to
Global Opportunities Fund (PGF), a listed add the big four banks. I’ve been in their corner
investment company that offers exposure to for a couple of weeks and we’ve seen them
global equities, and it is up 30% to $1.28 over start to rise but I suspect there’s more to come
the past year. because the Oz economy is on the rebound.
They’ve been beaten down plenty in the wake
Our sells for last year included integrated of the Royal Commission, and sure, they do
energy provider AGL. It was trading at just deserve to be punished for some not great
$12 as recently as late 2014 and more than behaviour, but they are still good profit-turning
doubled to $25.72 towards the end of last businesses which are not going to disappear.
financial year. It is a classic story of a well-run Even if they’re not at their bottom yet, if you
stock in an attractive sector that had soared start dollar-cost averaging in now, you should
too high. This time last year would have been be able to get some good stocks at very good
a perfect time to sell, as it has fallen to $21.90 prices.
since then. Sydney Airport was another one of
our sell suggestions and is down slightly over
the financial year as well.
3
4 value buys for the
next financial year
By James Dunn
Value is certainly in the eye of the beholder on proving to have been good buying.
the stock market. Too often, investors treat the
search for value as a simplistic task, where they Investment is not wholly a numbers game.
look for the lowest price/earnings (P/E) ratio as There needs to be a “story” in the company’s
possible – preferably, in single-digits – and buy business that gives you some idea of why and
in, planning to ride the P/E to a re-rating into how the numbers will change in your favour.
double-digits. Of course, these stories always come back to
the numbers in the end, but numbers alone
In practice, it doesn’t always work that way, won’t help you find these situations.
with often low-P/E stocks staying that way –
indicating that the P/E was low for very good Here are four low-P/E situations where I think
reasons – and conversely, high P/E stocks often the story justifies the numbers.
4
1. Caltex Australia (CTX) Developing the convenience retail business
is hugely important for the company,
Caltex Australia has transformed its business because its traditional fuel business is under
over the last decade, with a couple of big heavy pressure. Caltex’s long-term partner
decisions. The first was to move from being Woolworths, with which it operates 530 service
primarily a petrol refiner, and become an stations/convenience stores, has struck a deal
upmarket convenience retailer, shifting the to sell these to BP in a deal worth $1.8 billion.
strategy away from the volatility of refining – If that sale goes through – the Australian
which couldn’t compete with more modern, Competition and Consumer Commission
bigger and more efficient refineries in the (ACCC) has blocked it, saying the merger would
Asian region – and tie its future to leveraging have reduced competition and pushed up fuel
its 800-plus outlets nationwide. The second prices – Caltex stands to lose 16% of its pre-
was to change the business model of its retail tax earnings. Longer-term, Caltex has plenty of
operation from having franchised outlets, to options to create value for its shareholders by
having all the service stations and convenience spinning off its petrol stations, fuel terminals,
stores directly operated by the company. depots and pipelines, or selling them into a
Caltex has developed its own supply chain for real estate or infrastructure trust, or keeping
its stores, and is now rolling-out its Foodary them. Analysts are backing the company’s
upmarket convenience retail concept. management team to build the value, and see
the stock as highly attractive at these levels,
backed by a grossed-up yield of 5.7%.
5
2. G8 Education (GEM) year results in August, but in the meantime,
Thomson Reuters’ analysts’ consensus puts
Childcare operator G8 Education shares have FY19 EPS at 25 cents, with a dividend of 19
halved since December, but that fall has cents: FN Arena puts it at 26.4 cents, with a
opened up significant value for prospective dividend of 19.5 cents.
investors. The market became concerned that
the supply of childcare places was exceeding The key to assessing GEM at current levels is
demand growth: in 2017 supply growth ran the effect on its business of the Government’s
ahead of demand growth by about 2.5%, and new Child Care Funding package, which comes
this flowed into reduced occupancy levels at into effect on July 1. This package is expected
G8’s centres. G8 says its like-for-like occupancy to benefit lower- and middle-income families,
level is down by about 2.5%–3% so far in 2018. which is G8’s sweet spot. Accounting firm PWC
The company cites data (from building industry has advised G8 that 95% of existing G8 families
research firm Cordells and the Australian will be better off because of the new package.
Children’s Education & Care Quality Authority EPS growth – while expected to be subdued in
[ACECQA]) showing that supply growth has 2018 – should start to pick up again in 2019.
slowed in 2018, to be running at 1%–1.5%
ahead of current demand growth. Childcare remains a highly fragmented industry,
with the top five participants accounting for
In April, G8 admitted that the market only 24%. It is a growing industry, driven by
environment and the impact on occupancy rising female participation in the workforce
would mean that the company’s earnings per and greater government support for this
share (EPS) target of 40 cents per share by 31 trend, and parents’ increasing support for G8’s
December 2019 (G8 uses the calendar year as concept of “early education.” The company
its financial year) would not be met. However, is Australia’s largest for-profit provider, with
the company said it expected the market a network of around 500 centres across the
environment would become more favourable country, and is in a strong position to lead the
from July 2018, and that delivery of its strategy expected consolidation. At current price levels,
would enable it to deliver significant growth for even on revised earnings expectations, GEM
shareholders. G8 will provide a more specific looks poised for a rebound, with a strong yield
three-year EPS target when it releases its half- outlook.
6
3. Australian Finance Group technology and the right to use AFG’s credit
licence, if they choose, in return for a cut of
(AFG)
commissions. AFG maintains the primary
relationship with the lenders, while its broker
The $344 billion mortgage broking industry
customers remain independent operators.
was heavily scrutinised under the Royal
AFG is also more diversified than Mortgage
Commission into Misconduct in the Banking,
Choice, conducting home and small business
Superannuation and Financial Services
lending in its own right. AFG is actually a poster
Industry, and like many areas of the named
child for greater completion and choice in the
industries, did not come out smelling of
mortgage industry: at present, 37% of loans
roses. The effect of that can be clearly seen in
arranged through its brokers come from banks
the share price of Australian Finance Group
outside the big four.
(AFG): anticipation of, and actual experience
in, the Royal Commission, stripped more than
It is not only the royal commission that has
30% from AFG’s share price. Fellow mortgage
caused problems for mortgage brokers –
broker Mortgage Choice (MOC) fell more than
disputes with the banks, regulation in general,
40%.
slowing lending and disruption by newer,
technology-savvy players are all headwinds for
This discrepancy in punishment could be
the industry. But while AFG will see a period of
explained by the different business models.
lower profit growth over FY18 and FY19, for a
Where Mortgage Choice is a franchisor –
company with net cash on the balance sheet, it
franchisees buy-in to a designated territory
appears to have been sold down too far – and
– AFG is a support service for independent
to levels that make its expected dividends very
brokers, who pay AFG for services such as
alluring.
7
3. Paragon Healthcare (PGC) announced a flurry of acquisitions, funded
by a recent $70 million capital raising and an
Paragon Healthcare is emerging as an increased debt facility with National Australia
excellent exposure to the healthcare sector, Bank. The company has a strong balance
which is poised to grow in coming years as sheet to allow it to pursue additional growth
health spending rises on the back of an ageing opportunities, with the ability to use its scrip
Australian population. Paragon provides for acquisitions. FY17 revenue was up 25%,
integrated services to hospitals, medical to $117.2 million, but Paragon has a strategic
centres and aged care facilities, supplying items target to lift that to $250 million. At the half-
such as beds and specialist furniture, medical year result, revenue was down 4.5% at $52.5
refrigerators, storage systems and service million and net profit was 24% lower at
carts, highly specialised medical devices and $2.8 million, but in explanation, there were
consumables. Providing the equipment and significant investment costs booked, and there
the consumable items positions Paragon as a is also a big second-half skew to Paragon’s
provider of end-to-end solutions, and thus an results because of the seasonal nature of
essential component of the Australian and New hospital procurement.
Zealand healthcare market, which translates
for investors into a lower-risk healthcare With natural business growth and recent
exposure. acquisitions starting to contribute in FY19,
Paragon has solid earnings and dividend
In the last couple of years Paragon has growth prospects, and looks to be exceptional
value at current price levels.
8
4 value buys for the
next financial year
By Tony Featherstone
When commentators talk of contrarian their position and lighten it as the price rises.
investing they usually mean buying unloved They might exit their position if the price runs
stocks, preferably when they scream value. too high, but typically do not buy or sell in one
Owning stocks the market detests takes guts. swoop.
Another form of contrarian investing is harder: This observation is not meant to blunt the
selling stocks the market loves. Having bought ‘sell’ ideas below. Or fence-sit. Rather, it is to
the stock early and been rewarded many times provide context that each idea below is for a
over, you can’t let go. Greed takes over and you high-quality company that looks overvalued
forget that every stock has its price. after recent price gains.
Each warrants profit-taking at the current
I know this first-hand. Whenever I identify ‘sell’ price, not a wholesale dumping. Early investors
ideas, criticism follows. Some readers detest in these companies could lighten their position
the idea of media “talking down” a company to protect capital gains and reinvest in cheaper
they own. Others are so blinded by the stocks. True believers, who are willing to take
company’s success they do not recognise that higher valuation risk, might maintain a smaller
its future growth is priced into the stock. position to share in any further upside.
I have also encountered readers who Always seek financial advice, or do further
misinterpret the notion of sell. They equate research of your own, before acting on such
it to dumping all their stock in the company ideas. Selling stocks has tax and portfolio
immediately and avoiding it. Or they believe implications. It’s one thing to identify attractive
a sell recommendation implies something stocks for all readers, and another to identify
is wrong, when the idea might be purely on stocks to sell, because that narrows it to
valuation grounds; that is, a great company investors who own the companies or short-
is overvalued because the market is too sellers who punt on share prices heading
optimistic. lower.
Professional investors take a different Caveats aside, here are four overvalued stocks
approach. They look to buy high-quality that warrant profit-taking.
companies when they are undervalued, add to
9
1. Kogan.com (KGN)
Also, Kogan founders have been selling shares,
Kudos to Kogan.com and founder Ruslan a move that sent the price lower this quarter.
Kogan. The online retailer has starred in an Founders, like everyone, have bills to pay, but
ailing sector. Amid hype about Amazon’s entry selling big parcels of shares is never a good
into Australia, and how that will crush retailers, look because it implies management believes
Kogan.com has soared from a $1.80 issue price the stock is overpriced.
in its 2016 float to $7.20, after peaking at $10.
Further price weakness is likely as the market
Kogan.com has not missed a beat. Earnings uncertainty in Kogan.com, at the current
have exceeded market expectation, customer valuation and with Amazon ramping up
numbers have leapt, the service is popular operations, grows.
and the company is well run. Kogan.com is
superbly leveraged to the boom in online At $7.20, Kogan.com is on a trailing price-
retailing and has a first-mover advantage in its earnings (PE) multiple of 42 times. The stock
key categories. is not widely covered among broking firms,
making consensus forecasts unreliable. Suffice
Kogan.com initially welcomed Amazon’s entry to say the market believes Kogan.com’s rapid
into Australia, saying it would quicken the earnings trajectory will continue well into the
move to online retailing. Amazon’s impact future, despite rising competition from Amazon
here has been somewhat lacklustre, but it and traditional retailers in e-commerce.
would be crazy to write off one of the greatest
companies in history.
102. Reliance Worldwide given the deal’s valuation metrics, was about
half of Reliance’s market capitalisation before
Corporation (RWC)
the deal. That’s a huge bite for any company
to swallow. Too many Australian firms over
Reliance is hard to include on this list. I have
the years have come unstuck with overly
highly rated the plumbing products innovator
aggressive acquisitions offshore that failed to
since it listed on the ASX at $2.50 and
deliver and weighed on the core business.
commented on it favourably several times for
this Report and on Peter Switzer’s Money Talks
I do not think that will be the case with Reliance
program on Sky. Reliance is now $5.34.
but its valuation, after soaring gains over 12
months (a 67% total return), leaves little room
I still rate Reliance’s market position,
for error. Early investors in Reliance should
management and capacity to expand overseas.
take some profits and maintain a smaller
It is one of the best mid-cap floats in years.
holding to benefit from any further upside.
But the $1.22-billion acquisition in May of
John Guest, a global leader in push-to-connect
It is hard to see Reliance soaring in the next
plumbing fittings, strengthens the case for
few months as the market digests the deal.
profit-taking.
Morningstar values Reliance at $3.40. I’m not
that bearish but am wary of small and mid-cap
The UK-based John Guest looks like a good deal:
companies that bet the farm on big overseas
it makes strategic sense, given the product
acquisitions. Too many have burned investors.
crossover between the two companies. The
market liked the news, driving Reliance sharply
An average price target of $4.46, based on the
higher.
consensus of five broking firms (too small to
rely on) suggests Reliance is overvalued at the
The John Guest acquisition cost, reasonable
current price.
113. Afterpay Touch Group But Afterpay’s moat (its competitive advantage)
is not as defendable as other tech companies
(APT)
with sky-high valuations. I’ve noticed rival
lenders increasing their presence in this
The financial technology (fintech) company
market, and Afterpay’s success will surely
has rocketed from $3 in early 2017 to $8.47.
attract extra attention in the US.
Afterpay’s lay-by concept, where products are
paid for in four instalments, has caught on with
Third, some good judges I know are concerned
young consumers and retailers eager to reach
by Afterpay’s bad-debt provisions. They think
them.
it’s too low given this form of lending and
Afterpay’s target market of younger consumers
Afterpay has a valuable first-mover advantage
(who don’t always pay their debts). I’m not as
in retail and terrific potential to expand in the
concerned, but it’s something to watch, if levels
US, having signed up the giant Urban Outfitters
of bad debt climb.
there as a partner in the concept.
Fourth, Afterpay founders sold some shares
The company will be several times larger if it
recently, a move that did not seem to concern
replicates its Australian success in the US and
the market. Regulatory risk is another issue, if
early signs are encouraging.
greater disclosure is required in late fees and
other compliance issues. The market might be
However, I have four main concerns, given
underplaying this risk at Afterpay’s valuation.
Afterpay’s valuation. First, the market is already
factoring in strong growth in the US and any
In fairness, Afterpay is one of the best floats
disappointment could crunch the share price.
in years and deserves its status as a fintech
Goldman Sachs this year reportedly attributed
poster company. But a forward PE multiple
$1.50 of its $6.30 price target for Afterpay to
of more than 70 times, based on consensus
the US operations. The market believes the
estimates, is high even by tech standards. The
US business is worth a lot more at Afterpay’s
valuation, based on earnings-per-share growth
current price.
of about 100%, leaves no room for error and
makes Afterpay susceptible to heavy price falls.
Second, Afterpay’s form of lending (lay-by) is
hardly new or unique. That’s not to downplay
As with others on this list, early investors in
Afterpay’s innovation in finding a form of
Afterpay could take some profits and maintain
lay-by that appeals to the psyche of young
a smaller holding to share in any further
consumers, or its first-mover advantage as it
upside. Should a correction occur, they will
quickly signs up more retailers to the service.
have cash to buy back in at lower prices in a
Having a larger network of retailers using the
stock that has excellent long-term prospects
service can be a “barrier to entry” in itself.
but has run too far and fast for now as the
market embraces fintech.
124. Pushpay Holdings attracting 50% of the medium and large church
segments, a market it says is worth more than
The New Zealand-based tithing tech company US$1 billion in annual revenue. The company
has a terrific product in a growing global has many growth options and is doubling
market. Churches, schools and charities are revenue each year as user numbers soar.
using Pushpay software to accept payments.
More than 7,000 customers, including 54 of The issue is valuation. The market is ascribing
the top 100 churches in the US, use its echurch a billion-dollar valuation to a loss-making
product. company. Pushpay has a good chance to
justify and grow that valuation in time, but the
Bible Belt churches in the US south-west and market may have run ahead of itself for now.
south-east have embraced tithing technology Pushpay, like other high-growth, loss-making
and they report rising donations from tech stocks, is hard to value. My concern is co-
parishioners and more of them signing up to founder and executive director, Eliot Crowther,
regular giving plans. An “e-collection plate” is announcing in late June that he had sold his
highly effective. entire 9% holding in the company – a move
that could unnerve investors.
Pushpay dual-listed on ASX in October 2016
through a $54-million IPO. The $2.10 issued Tech founders are entitled to exit their
shares have raced to $3.92, capitalising company and cash in at some stage, but the
Pushpay at just over $1 billion. The stock has sale suggests executives are either losing the
gone sideways for much of this year after faith or believe Pushpay’s valuation is inflated.
soaring gains in 2017. Either way, insiders taking profits in high-flying
tech stocks is often a signal for others to do
Pushpay expects to be cash flow breakeven the same.
by the end of 2018 and the long-term goal is
13Important Information
This material has been issued by Switzer Financial Group Pty Ltd ABN 24 112 294 649 AFSL 286 531
(Switzer) and provides general information only. It has not been prepared having regard to your
objectives, financial situation or needs. Before making an investment decision, you need to consider
whether this information is appropriate to your objectives, financial situation and needs. Past
performance is not a reliable indicator of future performance.
Switzer, its officers, employees and agents believe that the information in this material and the
sources on which this information is based (which may be sourced from third parties) are correct
as at July 2018. While every care has been taken in the preparation of this material, no warranty of
accuracy or reliability is given and no responsibility for this material is accepted by Switzer, its officers,
employees or agents.
Any investment is subject to investment risk, including delays on the payment of withdrawal proceeds
and the loss of income or the principal invested. While any forecasts, estimates and opinions in this
material are made on a reasonable basis, actual future results and operations may differ materially
from the forecasts, estimates and opinions set out in this material.
No part of this article may be reproduced or distributed in any manner without the prior written
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