5 great stocks under $5

Financial journalist and commentator on 3AW and Sky Business
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Key points

  • Tatts is a strong source of earnings to have in your investment portfolio, and that is reflected in the healthy dividend yield.
  • GBST Holdings is a little-known financial software business that is following in the footsteps of Computershare in becoming a global leader.
  • While CSR did not offer earnings guidance for FY16, brokers expect another strong year, with further improvement in housing starts.

With the August stock market slump still fresh in the memory, and the stock market down again today, there remain plenty of stocks still significantly cheaper – and yielding more – than they were at the end of July.

It’s even better when these are good businesses with healthy prospects. Here are five such stocks, priced under $5.

Primary Health Care (PRY)

Consensus estimated FY16 yield 4.8% fully franked

The pathology, medical centres and imaging group has gone through what brokers considered a transitionary financial year, which incorporated the departure, through ill health, of founder and managing director Edmund Bateman (who sadly passed away earlier this month), and a shock earnings downgrade in July that triggered a share price fall of 11%. That, and the August correction, have taken Primary back to levels the shares last touched in late 2012, but from here, the analysts that follow Primary see large scope for a recovery, with the consensus target price of $4.91 implying 22% upside.

The FY15 result – revenue up 6% to $1.6 billion, net profit up 3.9% to $119.1 million, dividend maintained at 20 cents – had been expected since the July downgrade. Management gave no guidance, with analysts expecting the company to clarify its FY16 expectations at the annual general meeting in November. But after a stoush with the Australian Taxation Office (ATO), Primary is expected to change its doctor remuneration model, which has traditionally been the upfront payment plus a 50:50 share of billings, and establish a new real estate investment trust (REIT) to provide a more efficient structure for the company to fund and operate its pipeline of new medical centres.

Earnings are predicted to be under pressure in FY16 but grow in FY17. Primary is trading on a consensus forecast fully franked yield of 4.8%, rising to 5.1% in FY17.

20150921 - PRY

Tatts Group (TTS)

Consensus estimated FY16 yield 5.6% fully franked

The gaming and wagering giant fell more than 14% in the August correction, from $4.06 to $3.47, but managed to creep back to $3.61. At that price, Tatts’ dividend expectations put it on a 5.6% fully franked yield for FY16. Tatts brought out a solid result for FY15, with earnings up 25% and the dividend up 22%: however, these results fell short of expectations because of a weak result in the wagering businesses. But the lotteries business did very well, and continues to vindicate the company’s decision in 2005 to move into this area – the lotteries business now generates 60% of Tatts’ earnings. The lotteries licences are long-life assets and give Tatts a highly dependable core earnings base. And analysts expect the rebranding of the wagering business as UBET – which was launched in April – to rejuvenate it.

There are digital threats to Tatts, but it is a strong source of earnings to have in your investment portfolio, and that is reflected in the healthy dividend yield. Analysts are looking for a consensus target price of $3.97.

20150921 - TTS

GBST Holdings (GBT)

Consensus estimated FY16 yield 2.4% fully franked

This little-known financial software business is following in the footsteps of Computershare in becoming a global leader. GBST’s main products are the Composer funds administration and registry platform software, which it sells to the pension and wealth management industry in Australia and the United Kingdom, and its GBST Syn~ capital markets platform, provides new-generation technology to process transactions in shares, derivatives, fixed income products and managed funds. In Australia, GBST also offers the GBST Shares platform, which is the country’s most widely used middle- and back-office system.

GBST was hammered in August, losing 22% to $4.41. The shares have recovered somewhat, but still give investors an opportunity to buy into an emerging global leader at a good discount. In FY15 the company lifted revenue by 16%, net profit by 52% and its fully franked dividend by 24%. This year will see heavy investment and mounting costs as GBST looks to lock-in potential new business in Asia, Japan and the US – the latter of which is going to be both (a) tough to crack, and (b) potentially transformative.

This investment load means that GBST is a relatively miserly dividend payer, with 2.4% fully franked expected this year and 2.7% in FY17. But broker Morgans sees the stock reaching $6.10, which is about 25% higher than the current price.

20150921 - gbst


Consensus estimated FY16 yield 6.8% unfranked

Building materials company CSR lifted its FY15 result ahead of market expectations, buoyed by strong Australian residential construction activity, particularly on the east coast. CSR’s range of building products includes Monier roof tiles, Hebel high-performance masonry, Gyprock plasterboard, Bradford insulation systems, Edmonds ventilation products, PGH bricks and pavers and Viridian glass (the only Australian manufacturer of architectural glass). CSR also owns 36% of the Tomago aluminium smelter, near Newcastle in New South Wales.

While CSR did not offer earnings guidance for FY16, brokers expect another strong year, with further improvement in housing starts. The company believes the housing market should remain strong until FY17, given that the lag between approvals and completions is now nine months. The future of aluminium – which was a strong performer in FY15 – may weigh on some investors, but as broker Macquarie points out, Tomago represents less than one-fifth of CSR’s market valuation.

CSR lost almost 20% in the August rout, but is up from its low point, and is now priced on an (unfranked) expected yield of 6.8% in FY16, rising to 7.7% in FY17. The analysts’ consensus target price of $4.17 would represent a very nice 28.6% gain from here, if achieved.

20150921 - csr

Mortgage Choice (MOC)

Consensus estimated FY16 yield 8.4% fully franked

Mortgage and loan broker Mortgage Choice entered August at $2.28 but then fell as low as $1.89. The housing recovery is clearly a plus for Mortgage Choice. Home loan approvals in April hit their highest level since October 2009, when the boosted first-home-owner grants were coming to an end, but new lending restrictions from the regulator APRA – aimed at dampening investment levels – have had an impact more recently.

Mortgage Choice’s share price slipped on the back of this, despite the company’s low exposure to investment loans. Broker Macquarie believes market concerns over tighter APRA mortgage controls have been overblown. With that out of the way, continuing strength in Australian housing, and cost controls, should be able to drive further earnings growth – which is expected to be double-digit percentages both in FY16 and FY17.

At present, on current dividend expectations, the share price fall has pushed MOC to a fully franked prospective dividend yield of 8.4% in FY16 and 8.5% in FY17. The analysts’ consensus target price of $2.91 implies significant upside potential.

Adding further interest to MOC is the fact that Commonwealth Bank owns just over 20% of the stock, and could move to take control as it did with Aussie Home Loans in 2012.

20150921 - moc

All charts sourced at: Yahoo!7 Finance, 21 September 2015

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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