These two tech stocks are worth buying now

b0575c_6544113b74514e2d86bf07f48be465af~mv2.png

 In this section, we will look at two tech stocks that we really like. We’ve been keen followers of the tech industry and we’ve written about both these stocks before. For one reason or another both stocks have caught our attention and we think investors should look to buy either of these stocks because the upside is compelling. When assessing them we look at the story behind these two companies and we assess them both fundamentally and technically. As with all stock, these too do carry risk which we urge you, as always, to consider.

Company Overview TechnologyOne (TNE) – Is the country’s largest enterprise software company. That is computer software that is developed to satisfy the needs of another organisation rather than an individual. TNE develops solutions that help transform businesses and make life simple for the customers they service. TNE has proven to be one of the most successful Australian companies in the space and since it became profitable in 1992. Earnings growth has been impressive. Like most software companies TNE has had to alter its strategy as the world advanced towards cloud-hosted software as a service rather than traditional on-premise systems paid for on long term licenses. TNE has made the shift and the quality of its products, the benefits of its consistent research and development spending, and the strength of its staff and management are all top notch.

NextDC (NXT) – Put simply, NXT is a data centre operator. Last year I attended a tour of NXT’s Melbourne Data centre (M1). The building is more secure than Tullmarine Airport. It’s bomb proof, bullet proof, nuclear proof and water proof. There are over 160 cameras that constantly monitor the building. Remember that thing called the ‘cloud’… this is where the cloud lives. Where a lot of personal data isstored. Cloud is basically a slang word for storing and assessing data programs over the internet instead of your computer’s hard drive. A data centre is a massive facility that holds computing equipment such as servers for an organisation. This allows a company to keep all its IT operations, equipment (where it stores, manages and disseminates its data) in one place. Consequentially the security and reliability of data centres and their information is a tip top priority for organisations. The company offers its services to a corporate, government and IT services companies. Its data centres are designed to address the market’s growing need for energy-efficient, independent data centers in which organisations can host their critical IT infrastructure, and also to address the growth of cloud computing. The M1 centre uses massive solar panels which generate enough electricity to power 88 Homes and will significantly reduce NEXTDC’s running costs in terms of energy. Here’s an interesting fact – NextDC uses more energy to power itself than the entire Crown Casino. It’s all about power. Here are the things data centre operators need to consider, floor space and total power available. They tend to charge more for the same space if the power density (kilowatts per rack) is higher. NXT charges a standard rate across all of their data centres for power usage. It’s charged per kilowatt.

Fundamentals

On the StockOmeter both stocks rate in the Not Bad category and are almost identical in StockOmeter rankings. TNE on 58 and NXT on 56. TNE rates slightly higher. It trades on a PE of 42x but its easily justifiable sitting on a steady yet rising ROE of 32%. Yield is skinny but there next to no debt. NXT on the other hand is sitting on a lofty PE of 56x and has only just started to make money. It’s no-where near as profitable as TNE but its ROE is rising and fast. EPS growth in NXT is up 332%. Both companies are of similar market cap.

Technical Analysis

Funnily enough, both charts are quite similar. NXT has recently broken out on the upside and looks to be making higher highs. It is trading with bullish momentum and is in a solid uptrend. TNE is showing a similar sort of chart. The upside break out hasn’t been as distinct and is in its early stages of its break out. So it’s probably better bang for your buck as its trading closer to its support line.

Broker Views

TechnologyOne (TNE) – 2 Neutrals & 1 Buy

  • Macquarie has an Outperform recommendation with a target price of $6.30. The company’s recent 16% profit increase was above expectations and came with a final & special dividend. Which was a bit of a surprise. Cloud revenue is going well, it also provides the company with the opportunity to up-sell clients to a higher stickier solution.

NextDC (NXT) – 6 Buys

  • Citi has a Buy recommendation with a target price of $5.18. Following NXT’s latest debt raising, Citi believes the company’s financial positon is a lot stronger. There are favourable projections for the cloud data industry globally and it bodes well for the company.

Unconventional View
Both companies are on a similar footing, yet their businesses are very different. TNE is a software enterprise whilst NXT is a physical data centre operator. Both companies are in a prime position to leverage from a growing tech sector. So you really can’t go wrong buying either stock. On fundamentals TNE is probably the better out of the two. It has posted 17 years of record revenues, continuing unprecedented growth of its SaaS business and the barrier to entry into its sector are very high. TNE looks after a niche market – Australian local government and higher education sectors and its revenue model is strong – it generated revenue by charging members an annual fee which is stable and recurring. It’s only competitive threats come from SAP and Oracle. Some of the company’s new customers were – TAFE Queensland, La Trobe University, the University of Dundee and the UK’s Leicester City Council. Its products continue to beat rivals and win big contracts against multinationals and government entities. NXT on the other hand grows via the opening of new data centres. It’s very cost intensive process as data centres aren’t cheap. From its humble beginnings and shakystart, NXT has done a great job. The company continues to raise a combination of debt and equity to increase investment in land and the development of new infrastructure in Melbourne (the most profitable site) and Brisbane. It recently secured a site for a Melbourne M2 and Brisbane B2 data centre. The stock is trading on a PE of 56x which is a lot lower than its PE of 206x a year ago. Most of it is due to its share price rally. ROE is quite skinny under 5% and there is no yield. So why would you invest in such horrible numbers? NextDC is a long term put in your back cupboard capital growth story. The company has spent big bucks on building these Fort Knox data centres. The capital outlay is huge and the earnings is little and slow. The company is slowly but surely turning a profit. Its HY profit was $19.3m up 18.6%. FY outlook is for revenue to hit $115m-$122m and EBITDA in the range of $46m-$50m. S2 is also under contract with development approvals in progress and completion expected towards the end of 1H18. With the relentless demand for data set to explode in the coming years, NXT will continue to expand and benefit from this thematic. All in all, the company is in the right space.

Both stocks are technically attractive albeit a touch expensive. Therefore, we advise investors buying TNE or NXT to set a trailing stop loss of around 15%, so in the event that the company disappoints, you’re out and the downside is protected.

Looking for a Green Fund? – Impax Leaders Fund

b0575c_b164f6318153469685c6955cee09d57a~mv2.png

 Tell me a bit about the fund Everyone is going green — or thinking about it. Following Japan’s Fukushima disaster, climate change, Hurricane Katrina, rising gas prices, closure of coal power plants and the BP oil spill in the Gulf of Mexico, there is an urgent need to become more green and that’s now playing out in the investment world not just in real life. So how does one invest green or in a socially responsible way? Green investments are investments in which the underlying business is somehow involved in operations aimed at improving the environment. This can range from companies that are developing alternative energy technology to companies that have the best environmental practices. But it’s all a bit of a grey area because everyone has their own beliefs on what constitutes a green investment. The real problem with green investments The Impax Environmental Leaders Fund is a long-only, all-cap global equity fund that invests in resources efficiency and environmental markets. It seeks to achieve sustainable, above market returns over the longer term by investing globally in these two markets. These markets address a number of long term macro-economic themes: growing populations, rising living standards, increasing urbanisation, rising consumption, and depletion of limited natural resources. Investments are made in companies which have >20% of their underlying revenue generated by sales of environmental products or services in the energy efficiency, renewable energy, water, waste and sustainable food and agriculture markets.

The Investment Process
The company’s investment philosophy is to invest in companies that operate in markets where there are long term themes that underpin growth and where those companies are poorly understood and, therefore, inefficiently priced to provide opportunities for a specialist active manager to add value. Impax’s listed equity funds seek out mispriced companies that are set to benefit from the long-term trends of rising global populations and wealth, changing demographics, urbanisation, increasing consumption, and the resultant increases in resource demand. Investment is focused on a small number of deeply researched global equity strategies across energy efficiency, renewable energy, water, waste/resource recovery, food and agriculture related markets. Companies in these markets are generally characterised by high levels of corporate activity, low levels of sell-side coverage, rapid technological innovation and regulatory momentum. Impax looks to exploit mispricing in certain sectors because they are complex to understand and challenging to navigate.

Here are a few dot points about the fund:

  • Long only global equity fund
  • Investment style is Bottom up GARP + top down
  • It looks at a 1500 company universe
  • The fund drills down and holds only 40-60 stocks
  • AUM = $2.5bn
  • Return objective is 2.5% over the MSCI ACWI
  • Turnover date 30-50%
  • Launch date March 2008
  • Performance YTD 12.4% in 2016
  • Performance YTD 1.3% in 2016

Top ten shareholdings

  1. SUEZ – France – Water Utilities
  2. Siemens – Diversified Energy Efficiency – Germany
  3. Delphi Automotive – Transport Energy Efficiency – US
  4. Ecolab – Water Treatment Equipment – US
  5. Danaher Corp – Diversified Water Infrastructure & Tech – US
  6. East Japan Railway Company – Public Transport – Japan
  7. Thermo Fisher Scientific – Environmental Testing & Gas Sensing – US
  8. Sealed Air Corp – Logistics, Food Safety & Packaging – US
  9. Xylem – Water Infrastructure – US
  10. Ingersoll-Rand – Buldings Energy Efficiency – US

Unconventional View – Whilst there are quite a few ethical funds that claim to be socially responsible, it’s hard to value how green they really are. Some are stacked with renewable energy and others are filled with companies that uphold best practice in the environmental space. This fund seems to be one that is stacked with renewable energy and water infrastructure. Green investing in its purest form means that most companies in the ASX 100 wouldn’t make it into a portfolio not even the banks. Many of you that are attracted to “green” investments by the promise of good returns attached with the care for the environment need to be weary. There are risks. In the past energy investments have been known to perform quite poorly and low returns. Energy investments can be hard to sell because they involve funding projects that can last several years. Also keep in mind as oil gets cheaper, it becomes harder for green energy to compete. But as time has gone, ethical funds are becoming more and more popular especiallywith ethically minded investors and returns are getting better. Just today Blackrock came out and said coal is dead as it eyes renewable power splurge. Fund managers are beginning to realise that to attract investors they must prove that their fund can help save the world without sacrificing returns. For that reason, this fund isn’t for everyone, it does carry a certain level of risk but those that are looking for green exposure, this fund gives that exposure.

3 stocks from the herd – WOW, ALL, APE

b0575c_fd11b1341e214ec6a9a5b57dca31e76c~mv2.png

In this section we provide readers with three stocks that have attracted the interest of the broking community or the ‘herd’. Broker recommendations tend to be biased and highly optimistic. We try and breakdown these barriers and give our own honest opinion. It is important to keep in mind that technical analysis is only one part of the investment process and any recommendations do not give consideration to the underlying fundamentals of each business.

Woolworths (WOW) – Current Price $26.06 – Back in March the company delivered a solid Q3 with Australian Food sales up 5.1% to $9.3 billion with comparable sales growth of 4.5%. There has also been a significant ramp-up in Supermarket renewals run-rate with 49 planned for second half. New BIG W team and turnaround plan in place with tactical initiatives are underway. The business is expected to report a loss before interest and tax of $115m-135m for H2’17.

Broker View: Deutsche Bank (BUY $29.00) – The broker finds it interesting that 4 out of 8 members of the board have started buying stock over the last 3 weeks since the March Q update. They have almost doubled their holdings. It’s left the broker somewhat perplexed as to why the stock hasn’t rallied since its market beating sales report. As a result the broker is still positive on the stock and is confident it ticks all the right boxes.

Unconventional View: We agree with Deutsche. We’ve been fans of Woolies since June last year when the stock was trading around $21.00. WOW is the largest supermarket company in the country and holds a 35.7% stranglehold on the sector. Coles trails closely behind with a 33.2% stake. Over the last decade though, the entrance of aggressive competitors has caused WOW to up the ante. Both Aldi and Costco have stolen market share and have forced WOW to compete more aggressively on price. 2016 was a disastrous year for WOW. The company’s share price tumbled by 22% and it was forced to offload its doomed Masters JV, a $1.9bn write down announced, a new CEO installed, earnings guidance cut and poor 3Q sales numbers released. Anything that could have gone wrong, did. But once the large Masters write down was announced and new CEO Brad Banducci at installed was set for a stellar turnaround. The new CEO effectively cleared the decks and all the bad news was out. Banducci gave WOW new directive and vision. He gave Woolies a ‘fresh’ start. Pardon the pun. WOW put in place a strategy to emphasise that they “make eating & living well affordable & easy”. The turnaround strategy has proved successful and WOW is on the road to recovery. It recently delivered a solid Q3 sales result with Australian Food sales up 5.1% to $9.3 billion with comparable sales growth of 4.5%. There has also been a significant ramp-up in Supermarket renewals run-rate with 49 planned for second half. New BIG W team and turnaround plan in place with tactical initiatives are underway. The business is expected to report a loss before interest and tax of $115m-135m for H2’17. Woolworths is back and with a vengeance. A big transformation is at play and it’s about time. After investing more than $1 billion cutting grocery prices and delivering its strongest supermarket sales growth since 2010, the grocery chain is working hard to not only steal back market share lost to Coles and Aldi but to protect it from the entry of Amazon and Lidl. The recent sales update only highlights that how successful the turnaround strategy has been. WOW posted one of its strongest results thanks to higher supermarket sales. Sure significant discounting was helping drive sales growth and investing in prices, staff incentives and training costs money. Nevertheless its positive and a big improvement. There’s still a lot of work to do in the grocery space before it can take Amazon head on. The only laggard left is BIG W. FY losses are expected to blow out to $160 million. Something needs to be done and soon. On fundamentals WOW trades on a PE of 22.27x but this is more than justifiable with its rising ROE of 16.45%. Its EPS growth is 221% and yield is thin but OK. The company has a strong balance sheet supported by an extensive store network. Gearing stands at around 51%. Large cash flow with significant negative working capital. Cash flow comfortably finances capital expenditure. WOW is not without its risks. As with every supermarket player, the entire space has too many supermarkets and competition is hot. With the entry of Amazon, things will only get worse. It could lead to an all our price war and thinner margins. All in all – WOW is the dominant player in the supermarket and grocery world with first class management and experience. If it can continue to retain and expand its market share and rollout improved store formats which serve customers in a new and enticing way, it should be able to weather the Amazon effect and rival competition. We think investors should be loading up on Woolies and making it a core part of their portfolio. The stock has reversed and is in a short-term uptrend.

Aristocrat Leisure (ALL) – Current Price $21.35 – Has posted a solid set of HY results it also confirmed profit expectations for the full year to 30 September 2017. NPAT was $272.9m representing growth of 49% in reported terms and 53% in constant currency, compared to the $183.2m in the pcp. It reflected the strong performance delivered across the Group’s global portfolio, particularly growth in Aristocrat’s Americas, Digital and International Class III businesses, supported by sustained momentum in Australia. Dividend of 14c.

Broker View: Credit Suisse (NEUTRAL $23.50) – The broker agrees that the first half results were OK. It envisages solid growth in EPS out to FY20 but has kept its Neutral rating. Unconventional View: We disagree with Credit Suisse. We’re a lot more bullish on ALL. The company absolutely smashed profit expectations and reaffirmed guidance. You couldn’t ask for a better result. HY underlying NPAT was up 53% to $272.9m which beat expectations for a $253m profit. Revenue was up 24.6% to $1.2bn. The result was boosted by a robust performance from its US business which is winning market share thanks to its machines and gaming content. The company also reaffirmed FY guidance for earnings growth of 20%-30%. Macquarie thinks this guidance is actually conservative. The profit beat will trigger a series of broker upgrades. There are currently 5 Buys. The dividend also came in as expected. It wasn’t just the US that performed well, the company recorded strong performances in Malaysia, Philippines and South Africa, although some of these have been one off openings. We’re confident this strong momentum can continue in the second half especially with the US humming along. On the StockOmeter the company rates quite high at 86. That is a clear Buy indication. The stock is sitting on a high PE of 36x but its very high ROE is tipped to rise from 39% to 42%. On the chart the stock has your hockey stick formation and is in a solid uptrend since 2014. This recent upside break out has triggered a bullish buy indicator. The stock is making higher highs. We think investors should be buying on this trigger.

AP Eagers (APE) – Current Price $7.59 – Issued market guidance this week. Queensland state wide vehicle sales are off 5.9% January – April 2017, which is the 2nd worse performing state behind Western Australia, and national vehicle sales are off 2.8%. The industry expectations for the first 4 months of the year were for an equal or better market than last year’s. The whole industry has been caught out by an unexpected decline in private, business and government purchases off 3.6%, 2.0% and 8.1% respectively. Queensland operations represents 45% of the company’s trading result and as such has resulted in a decline in profit. These factors will result in a likely decline in 1H of between 7-9%.

Broker View: Morgan Stanley (UNDERWEIGHT $7.57) – The broker has a bearish view on the stock and believes headwinds in the short term will place pressure on earnings especially given the negative momentum in QLD. But the broker prefers APE to Automotive Holdings (AHG) because of its focus on automotive dealerships and no logistics. Despite this – outlook is negatve. Unconventional View: We agree with Morgan Stanley. The automotive space is going through a world of trouble. Aussie consumers are cutting back on spending on discretionary and luxury items as the economic cycle changes. It’s the threat of a downturn in the property market that’s causing it. When property is booming people go out and buy cars because of the wealth effect. With job uncertainty and flat wage increases, the first to get hit is the retail and automotive sectors. APE has a heavy exposure to QLD almost half its revenue comes from the state. The company owns 120 dealerships around the country and also holds a 23% stake in AHG – who also own a similar amount of dealerships. With tighter credit standards and weaker economic conditions, people are simply buying less cars. This profit downgrade only further highlights the tough conditions the company is undergoing. With guidance for NPAT to be down 9% from its previous half it’s not a good sign and it’s not just APE that has downgraded but AHG has also warned of weaker conditions to come. For that reason, we think this is the start of a sector wide downturn and we advise investors to stay away from automotive stocks. APE rates rather poorly on the StockOmeter – 39. Its ROE is dropping and it’s becoming less profitable. Debt to equity is high and its EPS is negative. Trend is also horrible. There’s no reason to be here.

 

X factor stocks – These two Ag stocks are worth buying now

b0575c_323f1b075a124ded9e31c7a4597e694f~mv2.jpg

In this section, we’ve looked at two Agricultural stocks that we really like. Because we’re on the topic of Agriculture, it was only fitting that we selected two stocks that investors can buy right now. For one reason or another both stocks have caught our attention and we think investors should look to buy either of these stocks because the upside is compelling. When assessing them we look at the story behind these two companies and we assess them both fundamentally and technically. As with all stock, these too do carry risk which we urge you, as always, to consider.

Company Overview
Graincorp (GNC) – Is Australia’s second largest grain handler after ABB Grain. GNC is involved in the: storage logistics, marketing and processing of grains. It supplies grain and processed grain products to customers in domestic and international markets, with a focus on wheat, barley and canola. GNC also exports/imports grain and other bulk commodities. It services approximately 30,000 grain producers in QLD, NSW, VIC and SA. Approximately 175 country received sites with over 20 million tonnes of storage capacity and 7 port terminals with 15 million tonnes of elevation capacity. GNC Malt offers deep grain expertise and tailored relationships with the advantage of a single point of contact worldwide. GrainCorp Oils is an edible oils, bulk liquid terminals, feeds and used oil collection businesses in Australasia.Elders (ELD) – Is in rural services and automotive components. The company has a rich history and has over 175 years of agribusiness knowledge, experience, and advice. Started in 1839, Elders has been an integral part of Australia’s rural business landscape. It provides variousservices to primary producers, supporting their needs throughout the entire production cycle. From finance, banking, and real estate services to wool, grain and livestock trading, Elders provides innovative solutions and is heavily involved in all aspects of primary production. Rural Services operations supply the physical, financial and advisory inputs and marketing options to help Australian and New Zealand farmers. Automotive operations are conducted through Futuris, an Australian automotive components supplier and an emerging supplier to the Asia Pacific automotive industry. The company also provides real estate services which involves the marketing of farms, stations and lifestyle estates and insurance services for regional, rural, and metropolitan clients.

Fundamentals

On the StockOmeter both stocks rate quite well. Both GNC and ELD come in at 73 but for different reasons. GNC looks more profitable and pays a dividend. It’s also a much larger company with a market capitalisation of $2.33bn. GNC’s ROE whilst not particularly high is rising whereas ELD’s ROE is falling. That’s a bit of a concern. This makes GNC a touch more expensive sitting on a PE of 23.15x versus ELD’s 7.64x.

Technical Analysis
GNC has broken out on the upside and is looking particularly attractive. Whilst the stock has been trading sideways since 2014, it looks like it may have finally broken this trend and is heading upwards. Investors should be buying on this break out. ELD on the other hand has been in a strong uptrend formation since 2014 and continues to track along this support line. The stock is starting to move away from its support line. We advise investors to buy at these levels before it gets away.

Broker Views

GrainCorp (GNC)

  • Credit Suisse has a Neutral recommendation with a target price of $9.48. The broker says the 1H results were above expectations and there is significant upside to guidance due to crop projections for FY18. The oils business has also improved but market conditions remain challenging.

Elders (ELD)

  • Morgans has an Add recommendation with a target price of $5.05. 1H results were strong than expected and FY17 guidance has been upgraded. EBIT guidance is $66m from $60m. The broker thinks the stock is undervalued.

Unconventional View
Both companies have their merits and as a result we like them both. Graincorp’s HY result really put it back in the game. Its earnings roared back boosted by a larger than expected Australian grain harvest and a lift in export volumes. NPAT rose to $90m from $20.4m a year earlier. That’s an increase of 341%. Earnings hit $236m up from $134m a year ago. The result was in line with its FY profit guidance for underlying profit of $130m-$160m. The company even doubled its interim dividend compared to last year’s payout. Revenue was up 19% to $2.46bn up from $2.07bn. The malt business is also kicking goals. GNC expects FY EBITDA to be up between $385m-$425m from $256m. GNC is a touch expensive on a PE of 23.15x but that’s OK because its ROE is forecast to rise from 2.97% to 8.57%. The stock is also paying a dividend following the largest crops ever recorded. Margins have normalised and FY guidance is conservative. GNC is now looking at free cash flow for the first time in 6 years. Most brokers are tipping a good crop for FY17. But it will all come down to weather, so its hard to predict. The chart is attractive following the upside break out. We suggest investors should buy now.Elders shares have also risen due to a bumper crop and record livestock. The same summer crop conditions that have helped GNC also helped ELD. Rising wool and livestock prices have helped boost the bottom line helping the company post a 1H profit rise of 56% to $38.3m up from $24.6m which was above expectations. The company said it is looking likely that it will pay dividends at the completion of this financial year. CEO Mark Allison says the resumption of dividends after a decade is the final step in the remaking of the company. Low interest rates and rising livestock prices were the perfect mix to boost demand for cattle farms and broad-acre cropping properties. This helped the company’s real estate division. The question is, will these high prices continue? Elders believes the high prices for sheep and cattle should push through into the 2H but may soften as volumes rose later in the year. There is also concern that rainfall to June could be lower thanexpected and temperatures warmer than expected. ELD expects FY earnings to be on the upper end of its previous forecast for $54m-$66m. Overall, Elders is back. It almost collapsed during the GFC under $1.4bn in debt. Since then it has managed to pull its Net debt to $170.4m. On fundamentals think ELD ticks all the right boxes. It trades on a high and stable ROE of 27% and the stock is relatively cheap on a PE of 7.64x. It has no yield but that might change at its next results in November this year. The chart is also attractive, ELD is in a solid uptrend formation and is tracking higher.

As we mentioned before, both stocks are weather dependent. If the weather persists, expect another bumper crop from both. We think either stock will make a great addition to your portfolio.

Fundie Review – Betashares HACK

b0575c_860663b287894176a77545fdd520b61d~mv2.jpg

 This week the world was hit by the biggest cyberattack it has ever seen with the virus still spreading unabated and threatening to create even more havoc. The virus is called WannaCry and it’s a real pain in the neck. It’s called ransomware. Once downloaded via email, the virus attacks all the files on your PC and encrypts them. That means all your documents, excel files and pictures become useless. When you attempt to open them, a message is displayed requesting a decrypt key in exchange for a monetary sum payable via Bitcoin. The vulnerability it exploited was a weakness in Windows’ file-sharing protocol. WannaCry changes the computer’s wallpaper with messages asking the victim to download the ransomware from Dropbox before demanding hundreds in bitcoin to work. If it is even unlocked after the ransom is paid is another issue altogether. WannaCry doubles the ransom amount and threatens loss of data, at a predetermined time creating a sense of urgency and greatly improving the chances victims will pay the ransom. It’s almost like you’ve been robbed at gunpoint.

 On May 12 the virus struck. It affected nearly 300,000 computers in at least 150 countries, victims had to decide whether to pay $300. You can only imagine how many did actually pay. The three bitcoin wallets the hackers had setup, would start to fill up as payments started roll in. The virus was sent to computers Hospitals, major companies and government offices into chaos. Chinese universities and global firms like Fedex also reported they had come under assault. They all were forced to shut down. Here’s the good news: This virus has been contained. Here’s the bad news: Another major global cyberattack is underway and it’s tipped to be bigger than the WannaCry ransomware attack. What was interesting is that tech the cybersecurity industry’s valuation rose billions over last weekend. There is now an urgent need for cybersecurity to beef up their defences. Companies across the globe will be updating their malware and virus scanners to protect from such an attack going forward. Investors are betting on an increase in cyberattacks driving business to those who know how to defend against it. Shares of Symantec added $750m to its market cap since Friday. On Monday morning a US cyber security ETF, which tracks 40 companies in the industry, rose 3.3% in trading, beating the S&P 500’s rise. Its five biggest companies are Cisco (+2.8%), Symantec (+4%), Check Point Software (+2.4%) and Palo Alto Networks (+3.7%). Can I gain exposure to the cybersecurity space? You sure can. Betashares launched a cybersecurity ETF in 2016 called HACK. About the ETF

  • The Betashares HACK ETF provides simple and transparent exposure to the leading companies in the global cybersecurity sector. A core component of a global equities allocation providing transparency and diversification benefits.

Advantages Because there are no pure-play cybersecurity firms on the ASX, you will need to look offshore. The tech sector only accounts for less than 2% of ASX market capitalisation. That’s why HACK is uniquely placed to give investors diversified exposure to leading global cybersecurity firms. The Fund is also structured to reduce the tax andadministrative burdens that can be associated with certain international investments. HACK invests in around 30 of the world’s largest global cybersecurity firms outside of Australia, which at end-June 2016 had an average market capitalisation of $A15 billion. Here are some advantages:

  • Access – simple and cost-effective way to access a diversified portfolio of the world’s leading cybersecurity companies
  • Diversification – with a single trade, investors can get exposure to a diversified portfolio of cybersecurity companies from a range of global locations
  • Cost effective – Fund aims to track the performance of an index (no ‘active manager’ fees)
  • Invest in global giants and emerging leaders – strategy invests in both existing marquee names as well as emerging players in the cybersecurity industry
  • No W-8 BEN forms and no US estate tax implications for investors – simplified tax administration, unlike cross-listed alternatives
  • Liquidity – available to trade on ASX like any share

Holdings

 How to Invest It’s simple. You can buy or sell units just like you’d buy or sell any share on the ASX. The code is HACK.AXW. The fund requires no minimum investment. We think HACK is a great way to gain exposure to the strong overall outlook for the global cybersecurity sector without taking undue stock specific risk and incurring costs with trading overseas companies.

 

Under the Microscope – CSL

b0575c_f04d03862427471f83fb5799ec4e55f2~mv2_d_3264_2448_s_4_2.png

Company Overview CSL Limited (CSL) is a biopharmaceutical company that researches, develops, manufactures and markets products to treat and prevent human medical conditions including coagulation disorders, viral and bacterial diseases, bleeding disorders and other diseases. The operational businesses include CSL Behring and bioCSL. CSL has manufacturing operations in the United States, United Kingdom, Germany, Switzerland Bern and Australia Parkville and Broadmeadows.

This week I attended a site visit at the CSL Behring Broadmeadows site. It looks after plasma protein therapeutics. It manufactures and markets a range of plasma-derived and recombinant therapies worldwide. Therapies are used to treat coagulation disorders including hemophilia and von Willebrand disease, primary immune deficiencies, hereditary angioedema and inherited respiratory disease, and neurological issues. It also manufactures immune deficiency product immunoglobulin (Ig). Immunoglobulin is a component of healthy human blood plasma. Some people are born with low levels of Ig in their blood or with an immune system that does not function properly. Such a condition makes fighting off germs and infections difficult. Immunoglobulin therapy replaces Ig that is present in an insufficient quantity. The body’s immune system can then work more effectively. Some of the products in the CSL Behring portfolio include Privigen, Hizentra and Carimune. The site is a 24/7 production facility that resembles the likes of a milk factory. There are numerous stainless steel tanks that are connected via intricate network of steel tubes. Like oompa loompa’s off Charlie and the Chocolate factory, workers are dressed head to toe in protective gear and scuttle around the factory floor. The place is absolutely spotless, including the ceiling. You could almost eat off the floor, it’s that clean. If there was anything contaminating the place, it was me.

Fundamentals

On fundamentals, CSL ticks almost all boxes. The stock does lose a few points because of its high PE of 34x, but that’s expected because of its ROE. It shouldn’t be a concern as the company has a very high, stable and rising ROE. Put simply, CSL is very profitable and continues to be. Its dividend is low and should be considered a growth stock. The company’s earnings are forecast to grow in line with industry rates. Overall this makes CSL a high quality, strong, defensive like growth stock. The only downside is that fundamental analysts consider the stock to be overvalued.

Broker Views – 4 Buys and 2 Neutral (Citi has highest target price of $148)

  • Ord Minnett has an Accumulate recommendation with a target price of $130.00. CSL recently hosted a briefing where the president of Seqirus (flu vaccine business) said the business remains on track to reach breakeven in FY18 as revenue is boosted by the roll-out of highervalue quadrivalent vaccines and operating costs are reduced. Ords sees potential for the performance of the division to exceed estimates this year in light of the relatively strong ‘flu season’ in the US.

Technicals Since CSL’s HY profit result, the stock has gone on a bumper rally rising from below $100 to $130 in the space of a few months. Whilst the stock is trading with bullish momentum, we all know what happens to high PE stocks when they disappoint. For any reason if CSL disappoints, it could easily pull back to $99 as it did earlier this year.  So we think CSL is for the traders not for investors. The downside risk is too great. For traders that buy at these levels, ensure you set a suitable stop loss to exit the minute there is a downturn.

 

Unconventional View I came away from the site tour more than impressed. The CSL Behring plasma facility was top notch. The amount of blood plasma that passed through the centre was mind boggling 800 kilolitres per year. By and far the plasma business is CSL’s main strength. Demand on average is around 6%-8% but it has been stronger. Plasma collection has been especially strong. Most blood plasma ends up at CSL via Red-Cross centres. CSL is cost-competitive given its manufacturing scale and broad range of plasma products that reduce unit production costs. The company spends big on R&D ($2.3bn) and has years of experience. It is truly a giant in its space, and is one of the three biggest players along with US Baxter International and Spanish Grifols. There three players account for 90% of the US market for immunoglobulin derived products. CSL is the lowest cost producer of plasma out of the three. Just two years ago it bought the Novartis influenza vaccine business for US$275m which was integrated with bioCSL to form Seqirus. It’s the world’s second largest influenza vaccine company and a major partner in the prevention and control of influenza globally. It is a reliable supplier of influenza vaccine for Northern and Southern Hemisphere markets and a transcontinental partner in pandemic preparedness and response. It operates state-of-the-art production facilities in the US, the UK and Australia, and manufactures influenza vaccines using both egg-based and cell-based technologies. CSL is in a unique position. Global plasma supply and fractional abilities are limited. A stable oligopoly exists between the three giants. There are huge barriers to entry for new entrants as the industry is very capital intensive. A plastic bag coated by plasma at atmospheric pressure is used to cultivate cells. Every single bag costs a staggering $12k-$16k. We think CSL will maintain this advantage and will continue to expand. With the Seqirus business, CSL will only strengthen. Seqirus is now the second largest influenza vaccine company in the world. With extensive research and production expertise and manufacturing plants in the US, UK, Germany and Australia, Seqirus is a transcontinental partner in pandemic preparedness. CSL’s is a stock that continues to deliver year after year. Its recent results were robust. Underlying NPAT was up 36% to US$806m thanks to blood fractionation. An interim dividend increased to US$0.64. CSL Behring remains the company’s core stronghold. It recorded sales up 18% to US$3.0bn boosted by rising demand for immunoglobulins. These help boost one’s immune system. The division manufactures three products Hizentra, Privigen and Carimune. Sales of Privigen were up 34%. Specialty Products were up 25%, and albumin sales increased 19%. For CSL’s business outlook, it expects solid ongoing demand particularly for immunoglobulins, specialty products and albumin. CSL is well positioned with the recent launches of its differentiated innovative recombinant coagulation factor products and it has consistently stayed one step ahead of demand by increasing the number of US collection centres by 18% a year. One of CSL’s competitive advantages is its constant, reliable source of plasma. With over 160 collection centres, it means there is enough supply of plasma so that manufacturing can keep up with increases in demand for antibodies, while its competitors struggle.

 The real question is: Would you buy CSL at these lofty levels? The short answer is “possibly”. When CSLwas trading around $80, you would have said it was expensive. It’s now trading at $130 and it’s still expensive. But that doesn’t mean it can’t continue along its solid upward trend and hit $200. Blackmores (BKL) did it back in 2015. It can. The sole reason we think this is possible is because CSL’s fundamentals are rock solid. Looking at the chart below, its EPS has been increasing. It not only has a competitive advantage, but it is one of the biggest players in its industry. It has a robust balance sheet and with an aging population the demand for its products will only continue to rise. It trades on a ROE of 43.39% which is forecast to rise to 49.83%. There was a point where the market was worried that Seqirus would turn out to be a lemon, but this proved wrong. Seqirus has turned around and has been one of CSL’s biggest bets that has paid off. The acquisition has boosted CSL to number two in flu vaccines in the US. This adds a powerful second earnings stream to CSL’s core plasma business. Since CSL’s HY profit result, the stock has gone on a monster rally rising from below $100 to $130 in the space of a few months. Whilst the stock is trading with bullish momentum, we all know what happens to high PE stocks when they disappoint, they drop like a falling bus. For any reason if CSL disappoints, it could easily pull back to $99. Whilst CSL has many defensive qualities, it’s a growth stock. It’s for the traders not for investors. The downside risk is too great. It’s not a stock you can simply set and forget. Its yield is also thin. For traders that buy at these levels, ensure you set a suitable stop loss to exit the minute there is a downturn. Otherwise jump on and enjoy the upward ride.

 

Looking for an Office Property Fund? – Centuria Sandgate Road Fund

b0575c_e9f6b431b2be42d096dd6715ae2f6d30~mv2.png

Tell me a bit about the fund

The Centuria Sandgate Road Fund is a closed-ended, unlisted, single-asset fund with an initial term of 6 years to 1 July 2023. The fund holds an A-Grade Office asset with rental income underpinned by government leases. The fund is seeking to raise $68.9M through the issue of 68.9m units at $1.00 per unit. Bank debt will also be used buy 1231 Sandgate Road Nundah Qld for $106.25M. The office building is situated in Nundah Queensland not far west of Brisbane Airport and 10kms north of Brisbane CBD. It been dubbed as an up and coming business district that is close to a railway station and shops (Woolworths). It’s a new property and its tenants are safe government agents – Energex and Powerlink. That makes up 81% of rental income. The remainder is shops, gym and other retail businesses. The Weighted Average Lease Expiry (WALE) of 9.4 years (as at 1 July 2017). The current leases have fixed rent increase of 3.5% – 4.0% p.a which provide upside support to valuations. The Fund will have an initial LVR of 44.3%,against a 57.5% bank covenant. It has a forecast a distribution in FY18 of 6.5 cents per units (6.50% pa) increasing in FY19 to 7.0 cents per units (7.00% pa).  

The Investment Process

Centuria has a proven track record and invests only in high quality assets. The company says it is an asset-driven investor and so it looks for quality properties that can provide its investors with stable yields and strong returns over time in any market. Centuria’s business has two key areas of focus – Centuria Investment Bonds which delivers innovative solutions to help clients meet their investment goals and Centuria Property Funds which specialises in listed and unlisted property investments. Centuria Unlisted Property Funds presently own and manage a portfolio of 17 individual properties with a combined value of approximately $1.3 billion in 18 unlisted funds. This division was established in 1999 with the specific objective of purchasing high-quality, growth-oriented commercial property investments. The company has managed 33 funds to completion totalling approximately $1.3bn and with an average total return to investors of 13.2% per annum.

Why Invest in Centuria Sandgate Road Fund? Here are few of the benefits from the fund:

  • Secure yield focused investment opportunity
  • Fund is purchasing a $106m institutional-grade Brisbane office asset
  • Long 9.4 year weighted average lease expiry (WALE)
  • 100% occupied with 81% of income underpinned by state government tenants
  • Minimum 3.5% p.a. rental uplifts in leases
  • Modern office building (2012 build) with low capex requirements
  • Conservatively geared with an initial 44% LVR (debt is 100% hedged for 5 years)
  • 7.34% p.a. average distribution yield (paid monthly)
  • Strong forecast tax deferred benefits (85% year 1; 70% year 2)
  • Brisbane property market has bottomed – market forecast is for prime office vacancy rates to fall followed by moderate rental growth
  • Initial 6 year fund term (no redemption facility) – Centuria employs a “best endeavours” approach to put buyers and sellers together if an investor seeks to exit the fund early
  • Centuria is an experienced property fund manager with a successful 19-year track record
  • Fees – 2.0% acquisition fee.
  • Performance fee of 20% over 10% IRR.
  • Disposal fee 1%.
  • Base management fee of 0.8% pa (of GAV).
  • Leasing fee of 6.5% (renewal). 20% (new lease).

Negatives

  • The fees are quite high for this fund.  
  • Rising interest rates is a headwind.

We think the fund is pretty straight forward, simple office fund that gives investors quality exposure to an office building that has a secured government tenant. It has a secure yield and would make a great addition to diversify any portfolio and income investor. The fund isn’t correlated to the share market and the unlisted property space can provide investors with both capital growth and income. But as with everything a property investment means you move up the risk curve in the expectation of higher return. Unlisted property is risky, you only have to flick back to the GFC to remember what happened to property. Unlisted property trusts also have a lot more fees than your normal managed fund – as you can see above. An illiquid asset can make it hard for investors to get out early. So as with everything we advise investors to take note of the risks.