Cutting through the noise of the ASX200 – Which stocks to look out for?

Which stocks made it to Guy’s Stock Watchlist?

As the investment analyst at Prime Financial Group I have the opportunity to research a number of stocks as well as execute client trades.

Until now I hadn’t penned anything to paper. So going forward I’ll aim to write a piece monthly – stocks I found interesting and any changes I’ve made to my watchlist.

Cutting through the noise

September was an extremely volatile month. The ASX200 shed 3.5% and could not manage to string together consecutive days of gains on more than three occasions. With such instability, the emphasis on timing and stock selection is crucial. This volatility has not been restricted to Australia but has had widespread ramifications on global markets and comes about as a result of China’s slowdown and the Feds action or inaction in raising rates.

It is easy to get lost in and amongst this noise as investors tend to safeguard cash in times of uncertainty. However, buying opportunities do exist in these fluctuating markets, it is just a matter of doing your due diligence and identifying them.

Mantra Group Limited (MTR)

At the beginning of September I started looking at Mantra Group. Mantra is a hotel provider in Australia and New Zealand, providing accommodation in major cities with a significant presence in the eastern states. Mantra’s CBD hotels target business travellers and it also is a strong player in the leisure travel market with resorts in QLD, NSW, VIC and NZ.

With a weakening Australian dollar Mantra appeared to be a suitable company to add to my watchlist. A depreciating AUD implies increased domestic travel for Australians. On the flip side, as our dollar falls relative to other currencies, an increase in international travellers visiting Australia becomes more likely – a perfect market for Mantra to operate in. I added this to my watchlist at the beginning of September and since doing so have watched it add ~17% for the month in a market that has fallen ~3.5%. That is more than 20% outperformance. Its market cap is now $1.1B and in September was added to the ASX200 index.

At current prices of $4.10 and on nearly 24x 2016 P/E, MTR appears to now be a little expensive. Since its listing in June 2014, MTR has added 11 new properties to the portfolio and now accommodates over 2 million guests a year and employs in excess of 4,000 people.

Its FY2015 results were very impressive with earnings at the top end of the already updated guidance figures. Mantra’s EBITDAI and NPAT forecast of 69.5M and 32.6M was exceeded in FY2015 with EBITDAI of 73.1M and NPAT of 36.2M. It is currently yielding 2.4% fully franked.

I can’t help but feel frustrated with the missed opportunity here. I still remain very interested in Mantra. With total assets in excess of 600M and strong cash flow generative capabilities MTR is well placed to continue delivering value to shareholders in FY16.

G8 Education Limited (GEM)

Childcare centre operator G8 Education is one I’ve become less interested in during September and have subsequently removed it from my watchlist. Having peaked in February this year the stock has fallen 38%. I initially began tracking G8 in August as the stock was on its way to falling 8% for the month. Having waited patiently before acting with G8, I was partly vindicated during September when the stock fell a further 6%.

My growing concern with G8 is that to my mind it is only a matter of time before increased competition makes its play in the childcare market and subsequently consumes a large portion of G8’s market share.

G8 is currently a dominant player in the childcare space. It is an acquisition based business and has added 21 new centres in the first half of 2015 alone. It has also had a free run at the childcare market since the collapse of Eddie Groves’ ABC Learning centres in November 2008.

However, with essentially no barriers to entry the idea of increased competition continues to weigh heavily on my mind. Affinity Education Group (AFJ) listed in late 2013 and is likely to limit G8’s growth potential. AFJ was recently the subject of a takeover bid from GEM which went awry after G8’s chairperson failed to disclose a conflict of interest when bidding for Affinity, resulting in her resignation.

The final point to make in this space is the idea that either Affinity or any other new players in the market need only pay more than 4x EBIT for its acquisitions (which is the upper limit G8 is willing to pay) and they will still make solid returns whilst gaining market share. So the window of opportunity for a well-capitalised buyer to enter the market is indeed wide open.

The stock currently trades on a 16x P/E multiple and maintains quarterly distributions which are currently yielding 8.1% fully franked. Underlying EBIT for the first half of 2015 compared to last year’s prior corresponding period increased by 73% and cash flows from operating activities are strong following their growing list of acquisitions.

However, its share price has been steadily declining since September last year and despite its initial appeal I have now reconsidered. I cannot foresee a future without increased competition and I cannot trust a company to do right by shareholders once a board member has arguably breached the Corporations Act.

In light of all this G8 no longer appears as attractive to me as it once did.

Corporate Travel Management Limited (CTD)

The final addition to my watchlist this month is in keeping with the Mantra thematic – Corporate Travel Management Limited. CTD provides travel management services to the corporate market in Australia and New Zealand and currently has a growing presence in North America, Asia and Europe through its M&A strategy.

CTD reported FY15 EBITDA up 70%, after having already revised upgraded guidance in February this year and it reported underlying NPAT up 76% exceeding market expectations. It delivered record profit in all regions and increased its final dividend to 10cents per share.

On the back of this positive data, guidance for FY16 indicates 25-30% EBITDA growth, based on currency assumptions of 0.75AUD/USD. The weaker than anticipated currency assumptions will actually provide a further boost for CTD’s FY16 results. The current economic climate should provide a hospitable year ahead for CTM, which has plans to continue its acquisition-based approach in its attempt to capture greater market share going forward. This is positive and provides scope for further growth given current estimates show CTM has a:

  • 12% share of the Australian & New Zealand AUD$7.5B market
  • 1% share of Asia’s USD$650B market
  • Less than a 1% share of Europe and the United States’ USD$500B and USD$320B markets.

CTD is currently trading on a 26x 2016 P/E with a 1.5% fully franked dividend. It is debt free and will benefit from the depreciating AUD, given its offshore earnings. Whilst it may appear expensive I do wonder whether it’s possible in the short-term to find good companies with decent performance that trade on a cheap multiple – perhaps we may just need to pay a premium in the current economic environment?

In its five years since IPO CTM (Corporate Travel Management) has expanded beyond Australia to New Zealand, Asia, Europe and the United States. CTM has grown from an Australian business employing 300 staff to now operating in 56 cities and 32 countries which employs over 1800 people.

I added CTD to my watchlist having noted its sharp pull back in price from $11 at the end of August to $9.20. It has since added another 15% and for the time being continues to interest me.

Closing thoughts

The level of volatility that plagued our market throughout September was nothing I had seen before. The overall reluctance to trade was clear from the outset. I typically execute more trades in one week than I had come across my desk during the entire month.

However, despite the overall reluctance to engage in September’s market activity, opportunities to acquire stocks at relatively cheap levels do exist – we just need to cut through the noise.

It is for this reason that I began to look more closely in September at Australian service businesses, more specifically medium sized companies. I think opportunities exist for these types of businesses to make significant progress in the coming months and believe these businesses may be the main beneficiaries in our current economic environment.

Disclaimer:

This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

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