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Tuesday 11

December, 2018 9:03 PM



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Top stocks for 2018

Top stocks for 2018

By Bob Kohut 11.12.2017


Aussie investors who favour expert opinion for selecting stocks look forward to the annual listings of top stock prospects for the upcoming trading year.

This year, UBS analysts were first in line with their favorite prospects for 2018. Here is their list.


The table includes growth estimates and to their credit, UBS highlighted the difference between them and the analyst consensus for FY 2018.  A quick perusal of the table shows these are not exactly “under the radar” picks, with asset management firm Janus Henderson Group (JHG) the only stock with an average trading volume under 1 million shares per day.  

Growth investors might gravitate towards the leaders, with four of the ten sporting compound annual growth rates (CAGR) for earnings per share (EPS) at or above 15%.  The following table adds year over year share price performance and historical earnings and dividend growth performance for the top four UBS picks by growth rate.


AGL Energy (AGL) and rival Origin Energy (ORG) are both integrated energy companies generating electricity from power stations using a variety of energy sources.  Both have benefited from the 2009 deregulation of the electricity market here in Australia which has led to consumers paying more for electricity, the opposite effect expected from deregulation, according to some experts.  Some go so far as to call for reregulation.  

The issue is hotly debated with claims Australians now pay the highest prices in the world for electricity.  Industry spokespersons point to preliminary findings from an October report from the Australian Competition and Consumers Commission (ACCC) that found that deregulation of Australia’s retail electricity markets is not the main driver of higher bills.  Growing concerns over the energy “crisis” here might cause some investors to ignore the UBS view the two utility giants are worthy of their investing dollars.

While government intervention in any market comes with shareholder risk, AGL and ORG control huge market share across Australia and are not going anywhere.  Electricity demand could skyrocket should the bullish predictions about adoption of electric vehicles (EVs) come to pass.  

AGL has been in business since 1837, originating under the name The Australian Gas Light Company and was the largest energy retailer in Australia until overtaken in market cap by Origin recently.  However, AGL is classified as a utility while Origin is in the energy sector.

The difference stems from Origin’s oil and gas exploration and production operations.  The other significant difference between the two is AGL’s lead with a renewable energy portfolio.  The following table from marketforces.org.au is dated as it depicts conditions at the close of 2014.  However, some experts say AGL is still in the lead, although Origin is making strides to close the renewable energy gap.


AGL claims to be the largest investor in renewable energy on the ASX with Australia’s largest portfolio of renewable electricity generating assets.  Currently the company has one new solar farm under development along with two in operation as well as four wind farms and a hydroelectric generating operation.
In 2014 the company established a New Energy business unit to promote new energy generating sources for both commercial and residential customers.

According to the company website, AGL is considering importing LNG (Liquefied Natural Gas) as a generating source.  Involvement in LNG is perhaps the single biggest difference between the companies, leading to investors favoring AGL over the last five years.  The following price movement chart compares the performance of the two.


Origin made a huge bet on the now deceased belief LNG would usher in a “golden age of gas.”  The stock price began to suffer as the company’s 37.5% joint venture investment in the Gladstone APLNG project began to experience massive cost overruns and production delays.  The original cost estimate of around $23 billion quickly ballooned to $24.7 billion.

The company’s Full Year 2017 Financial Results included a staggering $3.2 billion-dollar one-off asset writedown on APLNG along with assets in the Browse Basin gas fields.  The company’s reported statutory net profit, including the massive one-off charges, came in with a loss of $2.2 billion.  However, the underlying net profit, without the writedowns, rose 51% to $550 million.  

The strong underlying net profit along with strong management guidance for 2018 gas production and underlying EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) may well account for UBS including Origin in its Top Ten, despite the company’s weak historical performance over the last five years.

Link Administration Holdings (LNK) has the distinction of being the only stock to appear on both the UBS Top Stocks to Watch List and the recently released High Conviction Buy List from Morgans.  The company bills itself as a “technology-enabled provider of fund administration and securities registration” along with related services.  Link has four operating divisions:

• Fund Administration
• Corporate Markets
• Information, Digital, and Data Services, and
• Asset Service

Although the company has clients around the world, Link derives around 90% of its revenue here in Australia.  The company debuted on the ASX in 2015; one of the largest IPO’s of that year.  The listing was met with some skepticism due to the high price and recollections of the troubled IPO of Myers Holdings.  Link was owned by Pacific Equity Partners (PEP).  Concerns apparently surrounded the decision by PEP to retain a 30% stake in the company until Link reported financial results for FY 2016.

To the surprise of the naysayers and the delight of its investors, Link’s Full Year 2016 Financial Results beat its own Prospectus forecasts.  Revenues rose 32%, beating its forecast by 3%.  EBITDA improved by 29%, beating the forecast by 5%.  Investors were further pleased by a 25% increase in operating margins.  

Aristocrat Leisure (ALL) develops, manufactures, and distributes a wide variety of gaming content and systems, from games and electronic gaming machines to social, web and mobile based gaming.  The company offers casino management systems to its business clients.

Aristocrat gaming solutions exist in 100 countries around the world, fully licensed in 291 jurisdictions. The company’s digital presence is expanding rapidly with online gaming websites coming in India, Asia, and an EMEA (Europe, the Middle East, and Africa) in addition to the existing sites in Australia and the US with a Video Gaming Technology site in the US as well.  Aristocrat derives 58% of its revenue in the US, making it subject to currency fluctuations.  As you may know, the US is on the cusp of a dramatic reduction in the corporate tax rate, which would help Aristocrat.

The company’s financial performance of late has been outstanding.  Half Year 2017 Results announced in June showed a 22% revenue increase and a 57% rise in profit.  Aristocrat also trades in the US where results are reported quarterly.  For the September Quarter revenue rose 9.5% over the previous corresponding period while net income increased 28.2%.  Full Year 2017 Results announced in November continued the stellar performance with a 68.7% increase in underlying net profit, crushing analyst expectations, along with a 34.5% revenue increase.  Analysts expected revenues of $383 million, dwarfed by the actual results of $2.13 billion. 

Aristocrat has an aggressive acquisition strategy and the surprising results this year reportedly were boosted by the company’s acquisition of US based Video Gaming Technologies.  Aristocrat added two new “jewels to its crown” – Israeli based game developer Plarium and another US based social gaming company, Big Fish.

The Aristocrat share price appreciation over the past five years could well continue into the future with these two new acquisitions.




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