The author and publisher would like to thank Alan Hull (author of Active Investing, Revised Edition, Trade My Way and Invest My Way; www.alanhull.com) for generating the five-year share-price charts.
This twenty-fifth edition first published in 2019 by Wrightbooks
an imprint of John Wiley & Sons Australia, Ltd
42 McDougall Street, Milton Qld 4064
Office also in Melbourne
First edition published as Top Stocks by Wrightbooks in 1995
New edition published annually
© Martin Roth 2019
The moral rights of the author have been asserted
ISBN: 9780730363927 (pbk.)
9780730363958 (ebook)
All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All enquiries should be made to the publisher at the address above.
Cover design: Wiley
Cover image: Financial Chart © monsitj / Getty Images
Charts created using TradeStation © TradeStation Technologies, Inc. 2001–2015. All rights reserved. No investment or trading advice, recommendation or opinions are being given or intended.
Disclaimer
The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.
This latest edition of Top Stocks arrives at a time when many investors are concerned about the direction of the stock market. Reasons for a potential fall — possibly a big fall — seem to abound.
Political instability is on the rise and trade wars could be looming. There are renewed concerns about the Euro and about Brexit. House prices are falling in Sydney and Melbourne. Interest rates might start to rise. There are fears that the US, or indeed the whole world, could fall into recession.
Top Stocks is written for times such as these, when the future is cloudy. Because, no matter the direction of the stock market, numerous fine companies continue to emerge in Australia, offering investors great potential. Top Stocks 2019 showcases many such companies.
They are often smaller to medium-sized corporations. Some will be unfamiliar to investors. But all meet the stringent Top Stocks criteria, including solid profits and moderate debt levels.
Of course, such stocks could not withstand the tidal wave of a substantial market sell-off. They too would be affected. But they should be affected less. And if they are good companies they will continue to thrive and to pay dividends. And they will bounce back faster than many others.
This is the 25th annual edition of Top Stocks, and guiding investors towards value stocks has been one of the paramount aims of the book from the very first edition. Indeed, one of the rationales for the book has always been to highlight the truth that Australia boasts many excellent companies that enjoy high profits — and growing profits — regardless of the direction of the markets. Despite the title, Top Stocks is actually a book about companies.
Right from the start it has been an attempt to help investors find the best public companies in Australia, using strict criteria. These criteria are explained fully later. But, in essence, all companies in the book must have been publicly listed for at least five years and must have been making a profit and paying a dividend for each of those five years. They must also meet tough benchmarks of profitability and debt levels. It is completely objective. The author’s own personal views count for nothing. In addition, share prices have never been relevant.
Of the 95 companies in Top Stocks 2019 — four more than in last year’s edition — fully 74 reported a higher after-tax profit in the latest financial year (June 2018 for most of them), including 44 that achieved double-digit profit growth. In addition, 71 achieved higher earnings per share and 69 paid a higher dividend.
And though, as I wrote above, share prices are not relevant for selection to Top Stocks, more than half the companies in the book have provided investor returns — share price appreciation plus dividends — of an average of at least 10 per cent per year over a five-year period.
Each year I try to identify trends among the companies of Top Stocks. As this book was being written the dollar was weakening. This will benefit exporters and companies with extensive overseas business.
Investors have on occasion been sceptical about Australian companies taking a big plunge into offshore activity, believing that such moves have a high chance of failure. These doubts have sometimes proven correct. Some local corporations, successful at home, have done poorly abroad. Look at Wesfarmers and its disastrous Bunnings UK venture. But others have performed very well, including some that are in Top Stocks.
For investors interested in this theme, here are companies in Top Stocks 2019 that generate a substantial amount of their revenues abroad. Do note, however, that this does not automatically mean they are beneficiaries of a weaker dollar. Some have in place a hedging program — or some other arrangement — that limits the potential gains from a weak dollar.
Another trend that has been growing is the rise of listed financial advisers and fund managers. Several, like Perpetual, have been in the book for many years. But others, like CVC and Fiducian Group, are new.
These companies are beneficiaries of the huge — and steadily growing — pool of superannuation money in Australia. Nevertheless, it must be recognised that their fortunes are linked to the financial markets. Their profits will take a hit if the markets fall badly. But they should also recover quickly once investors become active again.
Money management companies
| Year-on-year after-tax profit growth (%) |
Dividend yield (%) | |
| CVC | 1.8 | 5.2 |
| Fiducian Group | 22.4 | 4.1 |
| IOOF Holdings | 13.0 | 6.5 |
| Magellan Financial | 7.9 | 4.9 |
| Pendal Group | 3.8 | 4.9 |
| Perpetual | 1.5 | 6.4 |
| Platinum Asset | 1.7 | 5.9 |
It was back in Top Stocks 2011 that I first alerted readers to the phenomenon of a growing number of high-tech companies making it into the book. Ten years earlier only one technology company — Computershare — had been in Top Stocks. But since 2011 a dozen or so have regularly made it.
The information technology sector represents only around 2.5 per cent of market capitalisation in Australia (in the US it is about 38 per cent), yet some of these companies have been outstanding performers. In mid September 2018 Australia’s information technology sector was up 35 per cent from a year earlier.
They are generally small companies and it can sometimes be difficult for outsiders to understand just how they make their money. In addition, some are on high price/earnings ratios with low dividend yields. Thus, many investors avoid them.
But technology has infiltrated virtually every facet of our lives, and the best of these companies are set to grow. It is worth taking the time to learn more about them.
Information technology companies
| Year-on-year after-tax profit growth (%) |
Dividend yield (%) |
|
| Altium | 33.5 | 1.0 |
| Codan | –4.5 | 2.6 |
| Data#3 | –8.4 | 5.2 |
| DWS | –9.9 | 7.6 |
| Hansen Technologies | 20.8 | 1.7 |
| Infomedia | 7.9 | 2.3 |
| Integrated Research | 3.6 | 2.7 |
| IRESS | 0.5 | 3.3 |
| Objective | –10.0 | 1.8 |
| REA Group | 10.7 | 1.2 |
| Technology One | 7.6 | 1.4 |
Another trend, an unfortunate one perhaps, is highlighted by the return to the book this year of two debt collection agencies, Collection House and Credit Corp Group. Both these companies could see business expand if the economy starts to falter and borrowers become increasingly unable to repay their debts.
Consumer lending companies too, like Money3, could see demand for their services grow if the economy starts to weaken, although they could also find borrowers struggling to repay. But note the comment of Money3 management that, in the event of a recession, the major lenders, such as the big banks, might tighten their credit controls, thus generating new business opportunities for the smaller lenders.
With interest rates remaining low, many investors have been seeking stocks offering high dividend yields. These are still a worthy target, as they should offer a degree of protection if the market is falling.
Five years ago, in Top Stocks 2014, with investors looking for smaller companies with high dividend yields, I published a list of smaller companies from the book — a market capitalisation of below $450 million — with a dividend yield of at least 5 per cent.
There were 22 such companies in Top Stocks 2014. In Top Stocks 2015 the number fell to 15, with 16 in Top Stocks 2016, 11 in Top Stocks 2017 and just six last year. This year there are 10.
Dividend yield: small companies
| Dividend yield (%) | |
| Mortgage Choice | 11.7 |
| Villa World | 8.9 |
| GR Engineering | 8.0 |
| Vita Group | 7.7 |
| DWS | 7.6 |
| Servcorp | 6.5 |
| MyState | 6.0 |
| Ruralco Holdings | 5.3 |
| CVC | 5.2 |
| Data#3 | 5.2 |
Top Stocks is written for all those investors wishing to exercise a degree of control over their portfolios. It is for those just starting out as well as for those with plenty of experience but who still feel the need for some guidance through the thickets of nearly 2300 listed stocks.
It is not a how-to book. It does not give step-by-step instructions to ‘winning’ in the stock market. Rather, it is an independent and objective evaluation of leading companies, based on rigid criteria, with the intention of yielding a large selection of stocks that can become the starting point for investors wishing to do their own research.
A large amount of information is presented on each company, and another key feature of the book is that the data is presented in a common format, to allow readers to make easy comparisons between companies.
It is necessarily a conservative book. All stocks must have been listed for five years even to be considered for inclusion. It is especially suited to those seeking out value stocks for longer-term investment.
Yet, perhaps ironically, the book is also being used by short-term traders seeking a goodly selection of financially sound and reliable companies whose shares they can trade.
In addition, there are many regular readers who buy the book each year, and to them in particular I express my thanks.
The criteria for inclusion in Top Stocks are strict:
It is surely a tribute to the strength and resilience of Australian corporations that once again, despite the volatility of recent years, so many companies have qualified for the book.
A total of 12 companies from Top Stocks 2018 have been omitted from this new edition.
One company, Sirtex Medical, was in the process of being acquired as this book was being published. (Sirtex did not pay a dividend during the latest financial year, so is also excluded for that reason.)
With interest rates remaining low some corporations expanded their borrowings, and five companies from Top Stocks 2018 saw their debt-to-equity ratio rise above the 70 per cent limit for this book:
The remaining six excluded companies had return-on-equity ratios that fell below the required 10 per cent:
There are 16 new companies in this book (although eight of them have appeared in earlier editions but were not in Top Stocks 2018).
An interesting returning company is Gold Coast property developer Villa World. It appeared in the very first edition of Top Stocks, published in 1995. Back then it was a star, having given investors a 42.8 per cent annual average return (share price plus dividends) over the previous five years. It was one of the top performers in the book.
In 1997 a survey in The Australian newspaper named Villa World as Australia’s top-performing stock over a 10-year period. According to the newspaper, a $5000 investment in the company in July 1987 would 10 years later be worth around $230 000, or an annual average increase of more than 46 per cent. This return came despite not only the stock market crash of October 1987 but also the severe housing industry downturn of the mid 1990s.
The new companies in this book are:
This is the 25th edition of Top Stocks. Just three companies have appeared in each one of those editions:
Once again it is my hope that Top Stocks will serve you well.
Martin Roth
Melbourne
September 2018
* Companies that have not appeared in any previous edition of Top Stocks.
The 95 companies in this book have been placed as much as possible into a common format, for ease of comparison. Please study the following explanations in order to get as much as possible from the large amount of data.
The tables have been made as concise as possible, though they repay careful study, as they contain large amounts of information.
Note that the tables for the banks have been arranged a little differently from the others. Details of these are outlined later in this Introduction.
At the head of each entry is the company name, with its three-letter ASX code and the website address.
Under the company name is a five-year share-price chart, to September 2018, provided by Alan Hull (www.alanhull.com), author of Invest My Way, Trade My Way and Active Investing.
Under the share-price chart is a small table with the following data.
This is the closing price on 4 September 2018. Also included are the 12-month high and low prices, as of the same date.
This is the size of the company, as determined by the stock market. It is the share price (again, as of 4 September 2018) multiplied by the number of shares in issue. All companies in this book must be in the All Ordinaries Index, which comprises Australia’s 500 largest stocks, as measured by market capitalisation.
The NTA-per-share figure expresses the worth of a company’s net tangible assets — that is, its assets minus its liabilities and intangible assets — for each share of the company. The price-to-NTA-per-share ratio relates this figure to the share price.
A ratio of one means that the company is valued exactly according to the value of its assets. A ratio below one suggests that the shares are a bargain, though usually there is a good reason for this. Profits are more important than assets.
Some companies in this book have a negative NTA-per-share figure — as a result of having intangible assets valued at more than their remaining net assets — and a price-to-NTA-per-share ratio cannot be calculated.
See Table M, in the second part of this book, for a little more detail on this ratio.
This is the total return you could have received from the stock in the five years to September 2018. It is based on the share price appreciation (or depreciation) plus dividends, and is expressed as a compounded annual rate of return.
A dividend reinvestment plan (DRP) allows shareholders to receive additional shares in their company in place of the dividend. Usually — though not always — these shares are provided at a small discount to the prevailing price, which can make them quite attractive. And of course no broking fees apply.
Many large companies offer such plans. However, they come and go. When a company needs finance it may introduce a DRP. When its financing requirements become less pressing it may withdraw it. Some companies that have a DRP in place may decide to deactivate it for a short time.
The information in this book is based on up-to-date information from the companies. But if you are investing in a particular company in expectations of a DRP, be sure to check that it is still on offer. The company’s own website will often provide this information.
The price/earnings ratio (PER) is one of the most popular measures of whether a share is cheap or expensive. It is calculated by dividing the share price — in this case the closing price for 4 September 2018 — by the earnings per share figure. Obviously the share price is continually changing, so the PER figures in this book are for guidance only. Many newspapers publish each morning the latest PER for every stock.
This is the latest full-year dividend expressed as a percentage of the share price. Like the price/earnings ratio, it changes as the share price moves. It is a useful figure, especially for investors who are buying shares for income, as it allows you to compare this income with alternative investments, such as a bank term deposit or a rental property.
It is sometimes useful to compare a company’s price/earnings ratio and its dividend yield with those of its sector.
Figures used in this book are those of the S&P/ASX sectors from September 2018.
Each commentary begins with a brief introduction to the company and its activities. Then follow the highlights of its latest business results. For the majority of the companies these are their June 2018 results, which were issued during July and August 2018. Finally, there is a section on the outlook for the company.
Here is what you can find in the main table.
These are the company’s revenues from its business activities, generally the sale of products or services. However, it does not usually include additional income from such sources as investments, bank interest or the sale of assets. If the information is available, the revenues figure has been broken down into the major product areas.
As much as possible, the figures are for continuing businesses. When a company sells a part of its operations the financial results for the sold activities are now separated from the core results. This can mean that the previous year’s results are restated — also excluding the sold business — to make year-on-year comparisons more valid.
Earnings before interest and taxation (EBIT) is the firm’s profit from its operations before the payment of interest and tax. This figure is often used by analysts examining a company. The reason is that some companies have borrowed extensively to finance their activities, while others have opted for alternative means. By expressing profits before interest payments it is possible to compare the performance of these companies more precisely. The net interest figure — interest payments minus interest receipts — has been used for this calculation.
You will also find many companies using a measure called EBITDA, which is earnings before interest, taxation, depreciation and amortisation.
This is the company’s EBIT expressed as a percentage of its revenues. It is a gauge of a company’s efficiency. A high EBIT margin suggests that a company is achieving success in keeping its costs low.
The gross margin is the company’s gross profit as a percentage of its sales. The gross profit is the amount left over after deducting from a company’s sales figure its cost of sales: that is, its manufacturing costs or, for a retailer, the cost of purchasing the goods it sells. The cost of goods sold figure does not usually include marketing or administration costs.
As there are different ways of calculating the cost of goods sold figure, this ratio is better used for year-to-year comparisons of a single company’s efficiency, rather than in comparing one company with another.
Many companies do not present a cost of goods sold figure, so a gross margin ratio is not given for every stock in this book.
The revenues for some companies include a mix of sales and services. Where a breakdown is possible, the gross profit figure will relate to sales only.
The profit before tax figure is simply the EBIT figure minus net interest payments. The profit after tax figure is, of course, the company’s profit after the payment of tax, and also after the deduction of minority interests. Minority interests are that part of a company’s profit that is claimed by outside interests, usually the other shareholders in a subsidiary that is not fully owned by the company. Many companies do not have any minority interests, and for those that do it is generally a tiny figure.
As much as possible, I have adjusted the profit figures to exclude non-recurring profits and losses, which are often referred to as significant items. It is for this reason that the profit figures in Top Stocks sometimes differ from those in the financial media or on financial websites, where profit figures normally include significant items.
Significant items are those that have an abnormal impact on profits, even though they happen in the normal course of the company’s operations. Examples are the profit from the sale of a business, or expenses of a business restructuring, the write-down of property, an inventory write-down, a bad-debt loss or a write-off for research and development expenditure.
Significant items are controversial. It is often a matter of subjective judgement as to what is included and what excluded. After analysing the accounts of hundreds of companies, while writing the various editions of this book, it is clear that different companies use varying interpretations of what is significant.
Further, when they do report a significant item there is no consistency as to whether they use pre-tax figures or after-tax figures. Some report both, making it easy to adjust the profit figures in the tables in this book. But difficulties arise when only one figure is given for significant items.
In normal circumstances most companies do not report significant items. But investors should be aware of this issue. It sometimes causes consternation for readers of Top Stocks to find that a particular profit figure in this book is substantially different from that given by some other source. My publisher occasionally receives emails from readers enquiring why a profit figure in this book is so different from that reported elsewhere. In virtually all cases the reason is that I have stripped out a significant item.
It is also worth noting my observation that increasing numbers of companies seem to be presenting what they call an underlying profit, in addition to their reported (statutory) profit. This underlying profit will exclude not only significant items but also discontinued businesses and sometimes other related items. Where all the relevant figures are available, I have used these underlying figures for the tables in this book.
Earnings per share is the after-tax profit divided by the number of shares. Because the profit figure is for a 12-month period the number of shares used is a weighted average of those on issue during the year. This number is provided by the company in its annual report and its results announcements.
The cashflow per share ratio tells — in theory — how much actual cash the company has generated from its operations.
In fact, the ratio in this book is not exactly a true measure of cashflow. It is simply the company’s depreciation and amortisation figures for the year added to the after-tax profit, and then divided by a weighted average of the number of shares. Depreciation and amortisation are expenses that do not actually utilise cash, so can be added back to after-tax profit to give a kind of indication of the company’s cashflow.
By contrast, a true cashflow — including such items as newly raised capital and money received from the sale of assets — would require quite complex calculations based on the company’s statement of cashflows.
However, many investors use the ratio as I present it, because it is easy to calculate, and it is certainly a useful guide to how much funding the company has available from its operations.
The dividend figure is the total for the year, interim and final. It does not include special dividends. The level of franking is also provided.
The NTA per share figure tells the theoretical value of the company — per share — if all assets were sold and then all liabilities paid. It is very much a theoretical figure, as there is no guarantee that corporate assets are really worth the price put on them in the balance sheet. Intangible assets such as goodwill, newspaper mastheads and patent rights are excluded because of the difficulty in putting a sales price on them, and also because they may in fact not have much value if separated from the company.
As already noted, some companies in this book have a negative NTA, due to the fact that their intangible assets are so great, and no figure can be listed for them.
Where a company’s most recent financial results are the half-year figures, these are used to calculate this ratio.
The interest cover ratio indicates how many times a company could make its interest payments from its pre-tax profit. A rough rule of thumb says a ratio of at least three times is desirable. Below that and fast-rising interest rates could imperil profits. The ratio is derived by dividing the EBIT figure by net interest payments. Some fortunate companies have interest receipts that are higher than their interest payments, which turns the interest cover into a negative figure, and so it is not listed.
Return on equity is the after-tax profit expressed as a percentage of the shareholders’ equity. In theory, it is the amount that the company’s managers have made for you — the shareholder — on your money. The shareholders’ equity figure used is an average for the year.
This ratio is one of the best-known measures of a company’s debt levels. It is total borrowings minus the company’s cash holdings, expressed as a percentage of the shareholders’ equity. Some companies have no debt at all, or their cash position is greater than their level of debt, which results in a negative ratio, so no figure is listed for them.
Where a company’s most recent financial results are the half-year figures, these are used to calculate this ratio.
The current ratio is simply the company’s current assets divided by its current liabilities. Current assets are cash or assets that can, in theory, be converted quickly into cash. Current liabilities are normally those payable within a year. Thus, the current ratio measures the ability of a company to repay in a hurry its short-term debt, should the need arise. The surplus of current assets over current liabilities is referred to as the company’s working capital.
Where a company’s most recent financial results are the half-year figures, these are used to calculate this ratio.
The tables for the banks are somewhat different from those for most other companies. EBIT and debt-to-equity ratios have little relevance for them, as they have such high interest payments (to their customers). Other differences are examined below.
Operating income is used instead of sales revenues. Operating income is the bank’s net interest income — that is, its total interest income minus its interest expense — plus other income, such as bank fees, fund management fees and income from businesses such as corporate finance and insurance.
Banks borrow money — that is, they accept deposits from savers — and they lend it to businesses, homebuyers and other borrowers. They charge the borrowers more than they pay those who deposit money with them, and the difference is known as net interest income.
These are all the costs of running the bank. Banks have high operating expenses, and one of the keys to profit growth is cutting these expenses. Add the provision for doubtful debts to operating expenses, then deduct the total from operating income, and you get the pre-tax profit.
Banks have traditionally made most of their income from savers and from lending out money. But they are also working to diversify into new fields, and this ratio is an indication of their success.
As noted, the banks have high costs — numerous branches, expensive computer systems, many staff, and so on — and they are all striving to reduce these. The cost-to-income ratio expresses their expenses as a percentage of their operating income, and is one of the ratios most often used as a gauge of efficiency. The lower the ratio drops the better.
Banks have enormous assets, in sharp contrast to, say, a high-tech start-up whose main physical assets may be little more than a set of computers and other technological equipment. So the return on assets — the after-tax profit expressed as a percentage of the year’s average total assets — is another measure of efficiency.
| ASX code: ONT | ||
|
||
| Share price ($) | 6.21 |
|
| 12-month high ($) | 7.00 |
|
| 12-month low ($) | 5.97 |
|
| Market capitalisation ($mn) | 147.0 |
|
| Price-to-NTA-per-share ratio | 14.7 |
|
| 5-year share price return (% p.a.) | 2.2 |
|
| Dividend reinvestment plan | No |
|
| Sector: Health care | Company |
Sector |
| Price/earnings ratio (times) | 19.3 |
35.4 |
| Dividend yield (%) | 3.9 |
1.4 |
Townsville-based 1300SMILES, founded in 2000, runs a chain of more than 30 dental practices in 10 major population centres of Queensland, and has also expanded to South Australia and New South Wales. Its main role is the provision of dental surgeries and practice management services to self-employed dentists, allowing them to focus on dental services. It also manages its own small dental business. The founder and managing director, Dr Daryl Holmes, owns around 60 per cent of the company equity.
A series of newly acquired dentistry practices joining the company helped 1300SMILES to a firm rise in revenues and profits. However, expenses associated with the acquisitions meant that revenues rose at a faster rate than earnings. The company also reported what it calls over-the-counter revenues, which represent the amount actually received by its dentistry businesses before the deduction of patient fees by self-employed dentists. On this basis — which the company believes gives a fairer measure of the scale of its operations than its reported statutory sales figure — total company revenues rose to $55.8 million in June 2018, from $51 million in the previous year.
The dental business in Australia is fragmented, with a majority of dentists working in their own private practices. A gradual consolidation is taking place, which has led to the rise of what has become known as the Dental Service Organisations sector, and 1300SMILES is one of the leaders in this trend. The company buys dental practices
| Year to 30 June | 2017 | 2018 |
| Revenues ($mn) | 35.5 |
38.5 |
| EBIT ($mn) | 10.2 |
10.4 |
| EBIT margin (%) | 28.7 |
27.0 |
| Profit before tax ($mn) | 10.3 |
10.7 |
| Profit after tax ($mn) | 7.3 |
7.6 |
| Earnings per share (c) | 30.7 |
32.2 |
| Cash flow per share (c) | 39.6 |
42.0 |
| Dividend (c) | 23 |
24 |
| Percentage franked | 100 |
100 |
| Net tangible assets per share ($) | 0.44 |
0.42 |
| Interest cover (times) | ~ |
~ |
| Return on equity (%) | 20.7 |
20.6 |
| Debt-to-equity ratio (%) | ~ |
~ |
| Current ratio | 1.2 |
0.9 |