Local stocks enjoying growth offshore provide a rare shining light in a market exposed to our weakening economy. In this episode of Buy Hold Sell, we look at stocks exposed to this thematic, including A2 Milk, which is on a high P/E but has an attractive growth runway, and Altium, which faces significant upside from its cloud-based software.
We also look at Corporate Travel Management and a small-cap Kiwi competitor, as well as one company operating in a volatile sector that is struggling to find a middle ground.
Jeremy Hook: Welcome to Buy Hold Sell. I'm Jeremy Hook from TMS Capital. Joining me today is Michelle Lopez from Aberdeen, and Shane Fitzgerald from Monash. And what we're going to talk about today is with the slowing domestic economy, the move of investors off-shore to find growth. It's been happening for some time. Let's look at a few stocks and see how their prospects are. If we start with Michelle, A2 Milk, it's had a great run. What do you think of that now? Buy, hold, sell?
Michelle Lopez: It's a hold for us. It is a decent quality company in the sense of the product, the management, the board, the balance sheet. And they've had very good consistent execution in China. They're looking now to the US with their milk. However, the evaluation is reflecting all of this. So, on a PE of almost 30 times on FY20, there's not much room for error here.
Jeremy Hook: Big move up Shane, A2 Milk. Buy, hold, sell?
Shane Fitzgerald: Yeah, we'll go for Buy on that one. Yeah, we echo the same thing about the quality of the company, and they've really done a ... I'd say A2 is a marketing company. Yeah, they really prosecute the A2 protein very, very well. The market share is still accelerating, going very nicely in China. They're up to what, 10,000 stores I think over in the US? If they can sustain this sort of runway of growth, I think there's consensus earnings upgrades to come. So, yes the PE is quite high at the moment, but I think there's still a bit of runway for this business.
Jeremy Hook: Okay, Altium, an outstanding report, they're now eyeing off half a billion dollars of revenue by 2025. Buy, hold, sell?
Shane Fitzgerald: That's a Buy for us as well. Altium's a 10+ year overnight success story. Yeah, they have really established themselves very strongly in the printed circuit board ... I always get that wrong ... marketplace. They command something like 80% market share, with new licences going into that market, so they are becoming the dominant player there. So yeah, the company's very strong in its outlook, the real upside of this company however comes if they can somehow bring themselves into the heart of the electronics industry and bring the giver the design, the manufacture and the parts.
Jeremy Hook: Collaborate, yeah.
Shane Fitzgerald: For the Altium 365 product, that's going to be the real thing that's going to drive the company forward.
Jeremy Hook: Excellent, now, Michelle. It's gone up 60% in a year. Is Altium notwithstanding all that Shane likes about it, is it a buy, hold, or sell?
Michelle Lopez: I'm with Shane on this one. It's a buy. The migration to the cloud with their new product, they are actually first to market. And they are starting to see early gains weaning off the competitor there. A really important thing to understand about Altium is that it is a differentiated product, but it's embedded in the user workflow. They have developed all their IP and technology organically, and they conservatively expense all of their R&D as well. So, from the fundamental point of view, it's a very strong company, and then overlay that with the thematic. So, there's a very clear tailwind for them, so we've got 5G coming in soon, and you've got the Internet of things, so clearly there's a strong tailwind.
Jeremy Hook: Okay, company I'm going to move into with a bit of a chequered sort of reputation right now. Corporate Travel. What do you think of that? Buy, hold, sell?
Michelle Lopez: That's a Sell, for us, and the reason being there's clearly disclosure issues with the company. So, from the government's perspective we don't own it, however there's a very interesting way to play this game, and there's a New Zealand small cap company called Serko. And Serko actually owned the IT ... sorry, the IP and the tech that sits behind these corporate managed travel booking systems, and it's not just them, it's the likes of Flight Centre and ATPI. They have about 70% of the market in ANZ but the opportunity's actually in the US. So, they've landed their first US contract.
Jeremy Hook: Without the concerns you've got with corporate travel, you share in the concern, Shane? Or …
Shane Fitzgerald: Well, we're shareholders of Serco as well, actually, so I echo those comments. We're a hold on Corporate Travel. I think when looking at the short seller attack on it, it was all about cash flow. I think the company's done a pretty decent ... fist of explaining why that cash flow works the way it does, but we have to wait for the full-year result to get final confirmation, but for us, our issue with the company is more about the organic growth in the business. Yeah, it's not clear to us exactly where the organic growth has come from, and where it's likely to come from, from here. So, we want more information on that.
Jeremy Hook: Well taking that one up to Blackmores our next one, and growth is an issue there. Bit of a brick wall in the February report. How do you see that now. Buy, hold, sell?
Shane Fitzgerald: We're going to say Sell on that one. It's come back a long way, but I still think the earnings growth is still rebasing. Yeah, they're spending more money on the advertising and marketing, and it's just not getting traction at the moment. Very competitive market, yeah. And as a general rule, we don't like when we see CEOs suddenly move on, right? So …
Michelle Lopez: Not a good signal. Not a good signal.
Jeremy Hook: Michelle, Marcus Blackmore in charge in an acting basis. Blackmores, buy, hold, sell?
Michelle Lopez: It's a hold for us. We had the same concerns, and when there's a vacuum in your management, that's a key signal they haven't executed. It's the reverse, I think of A2 Milk in the sense of the quality has deteriorated, they haven't executed consistently in China, however their other Asian businesses continue to do well. Australia continues to do well, and the valuation is supportive. So, for us, we're not there yet to move it to a buy, so it's a hold.
Jeremy Hook: Hold for Blackmores. Credit Corp. It's done very well. Its US growth is obviously there, is it well priced? Buy, hold, sell?
Michelle Lopez: It's a hold. It's not one that we currently own, and the most recent capital raising that they did to launch into ... well, launch the growth into the US could well prove to be a very strategic one to do, given the domestic market for us and why we don't own it, it's very mature, they're not growing. It's very competitive where as in the US it's post the GFC, the three major buyers ... sorry, sellers over there have moved out of the market, so from a competitive dynamic it looks to be an interesting acquisition but we'll watch this one from the sidelines.
Jeremy Hook: Okay, well thanks for that. What about yourself, Shane? They just done a placement haven't they? Buy, hold, sell?
Shane Fitzgerald: It's a very volatile stock, it's a hold for us. It's had a great run of late. The thing about this company, it all comes down to what's happening in their purchase market, and funnily enough that market has been either very good, or very bad. It never seems to be middle ground anytime, and it always surprises me how quickly it can swing from one to the other. So, yeah at the moment it's looking pretty good but yeah, I've seen this turned down too many times in the past, so I'm going to say hold.
Jeremy Hook: Okay, well there's some great ideas from our panel. Don't be afraid to travel offshore with your investments.
Great to see a woman on the panel. More please
You mention NZ company as another way to play the market rather than Corporate Travel - what is the company ?? Circo?
Serenella, it's ASX SKO (Serko).
Nice to see a longer format video. Keep it up.
Great panel. Well balanced approach and interesting analysis