Get your Flybuys Card, we’re going global stock shopping again

In the middle of last year, I wrote an article highlighting the advantages of shopping for stocks globally.

Equities
The advantage of shopping globally for micro-caps

To illustrate, I showed the valuation discrepancy between US medical equipment stock, Lantheus (NASDAQ: LNTH), and Australian equivalent, Telix (ASX: TLX).

Since that article, Lantheus' total shareholder return in USD has been 134.9% to the 25th of April. Telix, in comparison, has returned -23.0% in USD.

Source: Spheria
Source: Spheria

The relative performance of Lantheus over Telix was even better than we anticipated. So much so, that we have sold out of Lantheus, on the view that little is being factored in for execution risk and increasing competition over the coming years.

Over such a short time frame (less than a year), it would be remiss of me not to acknowledge the input of lady luck in such a payoff, though few would admit it. Nevertheless, we were able to tilt the odds in our favour since Lantheus was factoring in little for its new product, which was about to hit market, while the Australian equivalent Telix, was already baking in a fair bit.

Aside from taking the opportunity to boast about this great call (and I’ll admit there might not be a third edition to this global versus local face-off if my stock idea falters), I thought I should take the chance to offer another example of global discrepancy.

Global microcaps vs ASX microcaps: the second edition

This time we compare Australia’s third-largest pathology company with Japan’s second-largest equivalent. 

In some respects, it is unfair to compare any stock with its Japanese peer since Japan on the whole trades at a large discount to other countries. However, the reasons for Japan’s steep discount may not hold in this case.

Japan has a rapidly ageing population, with 29.1% over the age of 65. This figure is expected to hit 35.3% in 2040 according to the National Institute of Population and Social Security Research. In Australia, the Australian Institute of Health and Welfare estimates 15% of the population in Australia are over the age of 65 years, and this is expected to grow to 22% by 2056.

While this ageing population is terrible news for economic growth and hence stock multiples in Japan, it is nirvana for pathology testing volumes. Australia’s own Medicare data, compiled by The Centre for International Economics shows the direct and persistent link between patient age and testing volumes. Patients aged over 65 years have close to double the average testing volume and over 75’s have greater testing still (something for us younger folk to look forward to!). This data pre-dates COVID testing to eliminate any distortions.

Ok, time for our stocks to weigh in for the match. 

First up, we have Australian Clinical Labs (ASX: ACL). Consensus for ACL sensibly has the COVID PCR testing tailwind unwinding in FY23 and beyond. On this basis the FY23 EV/EBIT multiple using consensus forecasts for ACL is 13.6x.

Using a similar simplistic template to our June 2021 article, ACL’s metrics are below. By looking out to FY23 we are hopefully avoiding the majority of COVID PCR testing distortions as they wash through.

Now, lets introduce our Japanese contender, BML (TYO: 4694). BML is Japan’s second-largest pathology testing company. Like Australia, the majority of pathology in Japan is Government funded and the regulatory environment has been stable for some time. Regulators share in ongoing pathology efficiencies every couple of years through price cuts. BML’s margin, excluding COVID, has been stable over time. 

Unlike ACL, which has only been listed a short while out of private equity and hence its balance sheet, capex run-rate, and margins should be viewed with scepticism, BML has been listed since 1999.

In my opinion, given these factors and BML’s net cash balance sheet, BML has far lower risk than ACL. The company also benefits from a much more favourable demographic industry tailwind. So, what might an investor pay for BML if ACL trades on 13.6x FY23 EBIT? 

BML trades on an FY23 EV/EBIT of only 5.3x. This is a 61% discount to ACL.

The table above is somewhat misleading since BML’s FY22 free cash flow is impacted by a larger than normal capex bill as the company is reinvesting some of its COVID windfall into a new super lab. Also, by using operating profit and capex as a proxy for free cash flow, we are over-stating ACL’s free cash flow since it is net debt and paying interest. Nevertheless, the conclusion is the same, BML is insanely priced relative to ACL.

We don’t expect BML to produce anything near the return of Lantheus. However, given the opportunity to buy the second-largest pathology testing company in Japan for a lower EV than the number three player in Australia, recently spun-off by private equity and with greater regulatory risk, we think this comparison again highlights the advantages of shopping globally. 

Learn more about how Spheria constructs a portfolio of growing global microcaps, underpinned by exceptional fundamentals. 

Visit the Spheria website or keep up to date with the Spheria team on LinkedIn

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Gino Rossi
Portfolio Manager
Spheria
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