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July, 2018 5:32 AM



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Best of breed offshore earners

Best of breed offshore earners

By Bob Kohut 18.06.2018


Long-suffering Aussie investors have only to gaze afar in admiration at the outperformance of share markets in other countries.  While the ASX 200 has yet to regain its pre-GFC status, the US Dow Jones Industrial Average (DJIA) and Japan’s Nikkei Index have soared. 

A March 2018 article appearing in Business Insider Australia looked at a research note from the analyst team at Macquarie Bank that highlights some opportunities for Aussie Investors.

The Macquarie note compared the price performance of a basket of ASX stocks deriving substantial offshore revenues to the ASX 200.  Here is what they found.

A report from the IMD Think Tank - Swiss-based International Institute for Management Development - found the US economy regaining its position as the most competitive economy in the world.  Fueled by business-friendly policies and a massive corporate tax cut, the US economy is performing well, with expectations it should continue to do so.  

Adding the weaker AUD versus the USD supports a case for focusing on ASX stocks with significant revenues coming from the US as potential investment opportunities.

To that end, from the offshore earners basket cited by Macquarie we selected ASX companies deriving more than 40% of their revenues from the US, adding one not on the list – software design provider Altium Limited (ALU).  As of the end of 2016 Business Insider Australia showed Altium with 45% of its revenues coming from the US.

In an effort to create a “crème de la crème” target list, we limited our selections to those stocks with 2-year earnings growth forecasts in excess of 20% along with solid historical earnings and total shareholder returns.  The following table lists the five stocks meeting those criteria, presented alphabetically.

Altium’s flagship product, Altium Designer, is a CAD (Computer Aided Design) software program for creating PCBs (Printed Circuit Boards) for a variety of customer applications.  According to the company, 6,000 new customers each year adopt the Altium Designer platform.

The company clearly benefits from at least one characteristic of an economic moat – switching costs.  Altium customers are unlikely to incur the cost and effort associated with changing a CAD platform.  

In addition, Altium sells team-based designer platforms as well as community-based and beginner offerings.  The company also offers data management and integration services and training courses.  

The company’s Half Year 2018 Financial Results reported on 19 February sent the stock price soaring 25% in a single day.  Revenues increased 30% while net profit after tax (NPAT) was up 51%, with the Altium Designer adding 2,650 new customers.

The company has been in business since 1985, starting in Tasmania and moving its headquarters to the US in 1991.  The stock price appreciation over the last ten years has been nothing short of phenomenal.

Ardent supporters point to the performance of biotechnology company CSL Limited (CSL) as one of the best Blue-Chip stocks on the ASX.  Yet it seems a predictable outcome of share price jumps is the onset of analyst opinion decrying the stock as “too expensive.”  

The share price is up about 350% over the last ten years and an unfathomable 2400% increase since listing on the ASX in May of 1994 at $0.77.

The company is broadly diversified, with treatments for neurological and bleeding disorders, immunodeficiencies, hereditary angioedema -- severe swelling -- and Alpha-1 Antitrypsin Deficiency – an inherited condition leading to lung or liver disorders.

This is an already hugely successful company about to grow stronger with the tailwinds of ageing populations at their backs.  The company’s Plasma division is the largest plasma collector in the world, from which a variety of medicines for the treatment of the critically ill are created.

Seqirus, a recent CSL acquisition, is the second largest producer of the influenza vaccine in the world, with operations in more than 20 countries.  

The Half Year 2018 Results released in February saw a 12% increase in revenue along with a 35% bump in NPAT.  The company continually invests heavily in Research & Development, with stem cell therapy and treatments of organ transplant rejection on their drawing board.

James Hardie Industries (JHX) is the ultimate offshore earner, with a reported 80% of revenues originating in the US, where the company has substantial production capacity.  Hardie operates in residential and commercial construction and as such is susceptible to swings in the housing and construction markets, especially in the US where the company commands 77% of the market with its fibre cement line of walls, ceilings, floors, external siding, and soffits.  The volatile share price is up close to 350% over ten years.

The company is considered the world leader in fibre cement products, with the 77% US market share adding to its 23% share of the global market.  To maintain its preeminence, Hardie invests heavily in research and development of new materials and products.

The company recently acquired the largest producer of fibre gypsum board in Europe, Fermacell, with a dominating 70% European market share in gypsum board.

The company’s Full Year 2017 Results were adequate, with a 7% rise in revenue and a 17% profit increase.  Along with its US, Australian, and European operations, Hardie also has a presence in New Zealand, Canada, and the Philippines.

The company is expanding beyond its core fibre cement offerings, with a fiberglass window business in North America.

Lend Lease Group (LLC) has three operating divisions – property development; construction; and investment. The company prides itself on its community-based approach to development, focusing on mixed use developments in the world’s major cities.  

Lend Lease serves the infrastructure, defense, commercial, residential, and defense sectors with services required for project design and construction.  The investment division serves large institutional investors from pension to sovereign wealth funds, offering investments in company – owned property and infrastructure projects – from retirement living to US military bases and other large scale Lend Lease assets.

The company website has an impressive list of completed and in progress projects – 277 in total, with 107 in the US; 57 in Australia; and others in China, France, Italy, Japan, Malaysia, New Zealand, Singapore, and the UK.

The share price took a heavy hit from the GFC followed by a protracted recovery period.

Over the past five years the share price is up 100%.  Between FY 2016 and FY 2017 the company more than doubled its revenue, rising from $11.4 million to $23.3 million while NPAT went up from $631 million to $807 million, a 28% increase.  Lend Lease is the exception in our table with only 25% of its revenue from the US.

Treasury Wine Estates (TWE) is global in scope, offering multiple brands of premium and other wines in Australia and New Zealand, the Americas, Europe, the Middle East, Africa, and Asia.  The company is a major exporter of wine to China, as well as to Korea, Taiwan, Singapore, Hong Kong, Malaysia, and Thailand.

The company listed on the ASX in 2011 at $3.30, rising steadily to the current price of $17.55.  The share price took a stutter step in the last month on the news of potential problems with the company’s Chinese export certificates.  It seems a perceived oversupply of imported wines into China has led Chinese customs officials to stricter enforcement of existing export certificates, leading to delays and overstocking awaiting customs approval.  Treasury Wine management has assured shareholders all is well.

The company is already the largest publicly traded winemaker on the planet, with ambitious plans for growth.  Treasury Wine Estates expects its Asian business to surpass the Americas and Australia/New Zealand as the company’s largest profit centres.  Over the past five years the Chinese business has exploded as the rising Chinese middle class developed a taste for finer wines, which TWE was only too happy to supply. As of now China makes up about half of the company’s sales in Asia, but 80% of Asian growth can be traced to China.

The company has grown both revenue and profit in each of the last three fiscal years, with revenue jumping from $1.8 billion in FY 2015 to $2.4 billion in FY 2017 along with NPAT more than tripling over that period, from $77 million in 2015 to $269 in 2017.

The company could get caught in the middle of a potential trade war between the US and China, with the Chinese threatening a 15% tariff on imported wines.  Treasury Wine Estates has vineyards and production facilities in the US state of California for export into China.

>> BACK TO THE NEWSLETTER: Click here to read other articles from this week's newsletter

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.



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