There is value everywhere you look on the share market at present; as long as investors understand that how and when the world returns to anything resembling normal, especially in terms of what companies earn, will be a path that is fraught with the odd stumble. There is not as much value as there was in late May, but investors must accept that only the brave pick-up the best returns when the market is shell-shocked after a crash.
Here are 4 examples of stocks returning to levels that still imply plenty of value:
1. Service Stream (SSM, $2.04)
Analysts’ consensus target price: $2.765 (FN Arena, based on May updates), $2.63 (Thomson Reuters)
Any investor wanting a stable, high-yielding stock that offers services that are essential in the Coronavirus-affected economy, Service Stream would be one of the first that popped up. Service Stream builds, operates and maintains the country’s essential telecommunications and utilities infrastructure, including water and gas distribution networks. As would be expected with many people working from home, demand for the company’s services has remained strong throughout the pandemic. However, Service Stream has not been totally unaffected itself. It has had the issues that most companies have had in terms of making sure its employees can work safely, and it has had clients delaying projects because of the need to make sure the system copes – both in the telecommunications networks and utility fields.
These delays did see Service Stream reduce its EBITDA (earnings before interest, tax, depreciation and amortisation) guidance for FY20, in May, to about $108 million. The company was going extremely well before Covid-19, with first-half EBITDA up 50%, net profit up 28% to $32.2 million, and earnings per share (EPS) up 14% to 7.96 cents. The company is close to a net cash position and knows that its workload will grow once Australia emerges further from the pandemic. At current prices, you’re buying an estimated fully franked dividend yield of about 5% in FY21, or 7.1% grossed-up, and you’re buying that on about 13.9 times earnings. That’s pretty good for a high-yielding essential services provider.
2. Worley (WOR, $8.40)
Analysts’ consensus target price: $10.84 (FN Arena, based on May updates), $10.82 (Thomson Reuters)
Global engineering firm Worley has seen its business shrink in the downturn, with customers delaying and even cancelling work, particularly on the field-based side, and more specifically, in lower margin construction-related activities. In response, the company has cut 5% of its staff
Through a series of acquisitions over the last three years Worley is a much more diversified business than before. It has added work in the energy, chemicals and resources sectors, while reducing exposure to the oil and gas industry where it made its name.
About 20% of Worley’s revenue now comes from its customers’ upstream and midstream oil and gas capital spending, down from 65% in 2017. Meanwhile, Worley generates 45% of its revenue from its customers’ operating expenditure, up from 10%–15% before it started its diversification process. Op-ex contracts tend to be longer-term, multi-year contracts, compared to capital-spending work. Also, about 37% of Worley’s revenue is now derived from the chemicals sector, up from less than 10%. Worley says the chemicals sector is less cyclical than others. These acquisitions were very well-timed, given the slump in the oil price. This year, Worley has renewed existing debt and established new facilities worth a combined $945 million, which gives it a lot of headroom. Demand for oil will take some time to recover, but meanwhile, the crash has created plenty of value in Worley, with the stock now selling at less than 13 times expected FY21 earnings. However, the expected 4.3% yield will be unfranked.
3. IPH (IPH, $7.56)
Analysts’ consensus target price: $9.69 (FN Arena), $9.69 (Thomson Reuters)
IPH Limited is a services group consisting of law firms that specialise in intellectual property, patents and trademarks, across Australia, New Zealand and Asia. The company listed on the ASX in December 2014 at $2.10 and stretched that to $10.22 before the Covid-19 crash, from which it fell below $7, before strengthening back to $7.56.
As broker Macquarie points out, if one were to look at the last big downturn, in the GFC, patent filing volumes and revenues actually constitute a fairly defensive business. The long lead-times of the cases that IPH handles give it some degree of ability to ride-out the downturn and the weaker currency should also help it over the next couple of years. Even with some element of softer revenues, IPH looks to be reasonable value at current prices, and with analysts expecting a yield of about 4.1% in FY21, which grosses-up to about 5.5% with the franking level of just over 80%, there looks to be solid total-return value available here.
4. Sandfire Resources (SFR, $4.38)
Analysts’ consensus target price: $5.439 (FN Arena), $5.25 (Thomson Reuters)
Local copper (and gold) miner Sandfire Resources has recovered some ground from the halving of the share price in the Covid-19 crash, but there is still significant value in SFR.
Copper is a metal that is ticking a lot of boxes as the world looks at how many aspects of life must change. In particular, copper’s anti-bacterial properties are going to make it the material of choice in areas where people are always touching surfaces, such as in hospital fittings and stairways and rails in high-traffic areas. Further out, demand from the electric vehicle (EV) revolution should also boost the red metal.
The copper price has been trending downward for several years, but that is starting to change. Sandfire is a good exposure to copper, with its high-grade De Grussa mine in Western Australia churning out the stuff, as well as not-insignificant gold to help the earnings. The end of minelife is at sight at De Grussa, but Sandfire has taken steps in the last year to expand its production profile beyond its flagship mine, acquiring the promising Tshukudu copper-silver deposit in Botswana and progressing its mining permits for the Black Butte copper project in Montana, US – which is regarded as one of the world’s highest-grade undeveloped copper projects. In the meantime, the cash flow from De Grussa enables a handy fully franked dividend that analysts expect to amount to 3.2% in FY21, or 4.6% grossed-up. The stock is an interesting play on a rising copper price over the next few years.
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