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.
Flight Centre (FLT) – Current Price $43.57 – Issued atrading update this week. It expects 2017 fiscal year guidance to achieve an underlying profit between $325m-$330m for the 12 months to June 30 after achieving record full year sales and solid second half profit growth. Underlying 2H PBT is expected to surpass the PCP’s result by 2.5%-4.9%, leading to an underlying full year PBT. FLT has also announced a separate deal to acquire – Olympus Tours, a leading Mexico-based destination management company (DMC) and Bespoke Hospitality Management Asia (BHMA), an emerging Thailand-based regional operator of design and lifestyle leisure hotels.
Broker View: Macquarie (UNDERPERFORM $28.70) – The broker acknowledges the profit guidance upgrade but still maintains the view that there will be continued softness in airfares in FY18 and medium term margin decline coupled with valuation pressure. It suggests the risks are now skewed to the downside.
Unconventional View: We disagree with Macquarie. This guidance update is a complete turnaround. After 5 consecutive profit downgrades, FLT looks to be getting its house in order. Not only do they expect higher earnings but they announced two separate acquisitions. FLT has snuggled up with Airbnb and inked a deal to gain more corporate customers with Airbnb hosts across Australia. The deal means customer booking stay through FLT’s corporate brands, including Corporate Traveller and Campus Travel but will have access to Airbnb for Business. FLT’s corporate clients will now have access to more than three million listings worldwide, an unrivalled accommodation pool. The relationship makes perfect sense. It allows travellers to charge stays to their company directly rather than go through their own Airbnb account. It’s a win for both companies. FLT now expects an underlying profit of $325m-$330m. That will be the figure to watch at its next results. We think FLT will hit this mark especially with its recent acquisition. There is upside potential from here on in. Corporate travel is expected to boom for the foreseeable future. FLT has now broken out on the upside and out of its downtrend. That’s a bullish buy indicator. We advise buying on this break out.
Xero (XRO) – Current Price $24.44 – Xero is a New Zealand-based software company that develops cloud-based accounting software for small and medium-sized businesses. Its products are based on the software as a service (SaaS) model and sold by subscription, based on the type and number of company entities managed by the subscriber. Its main rival is MYOB. Shares have rallied this week after the company announced its net loss had shrunk to NZ$69.1m from NZ$82.5m a year earlier. The company said it now has 1,035,000 subscribers, after adding 318,000 over the past year.
Broker View: Citi (BUY $) – The broker has changed its view on Xero. It now longer is expecting a decline in subscriber numbers from FY21 and has lowered their margin projections. Buy / High risk rating kept.
Unconventional View: We agree with Citi. Whilst the StockOmeter ranks XRO quite poorly it’s only because the company isn’t making money. But when has a company not making money ever stopped its share price from rising? I.e. Spapchat. As a result its PE, ROE and Dividend Yield are all Null or negative – which results in a poor ranking. So the StockOmeter is largely irrelevant at this point. So let’s ignore it. This story isn’t a fundamental one. We’ve like XRO for quite some time, but the stock has been trading largely sideways and has been overlooked by brokers because it still is at a loss. But now, we think the company turned the corner and is very close to booking a profit. The New Zealand company posted a Net loss of NZ$69.1m from NZ$82.5m last year. While it is still a loss, it’s a huge improvement and makes us even more confident that it’s heading towards profitability. We think this is something investors should really be looking at. As the market starts to realise and take into account that XRO will be profitable in a few years, more and more brokers will start to jump on board and the share price will start to move higher. Now Citi have jumped on board and it won’t take long for the rest. The other big tick was that XRO pushed past the 1.04 million paying subscribers mark compared with 862,000 at the end of September. XRO is really kicking goalsand moving customers onto its platform in leaps and bounds. On the chart, XRO has broken out on the upside of what looked like a pennant flag. This bullish break out looks to have formed a new short term uptrend. For the moment the uptrend has stalled a little, but we think it will continue. Investors should look to buy at these levels.
Suncorp (SUN) – Current Price $14.65 – Is one of Australia’s largest insurers. Its services are based in QLD which includes retail and business banking, general insurance, life insurance, superannuation and investment products in Australia and New Zealand. SUN has following five core businesses: Personal Insurance, CommercialInsurance, Vero New Zealand, Suncorp Bank and Suncorp Life. The company’s brands include: AAMI, GIO, Bingle, APIA, Shannons, CIL Insurance, Asteron Life, and Vero.
Broker View: UBS (BUY $15.50) – The broker has quite a positive view on Suncorp. It has made minor changes to its FY17 forecasts and prefects Suncorp over the other domestic general insurers given the improving domestic rate cycle.
Unconventional View: We agree with UBS. The last time we wrote about Suncorp was back in March when Tropical Cyclone Debbie hit the North Queensland coast. If history is anything to go by, when cyclone Yasi hit in 2011 both QBE and SUN nose-dived afterwards but soon recovered there-after. So for that reason we advised clients to stay out of SUN just in-case of any adverse damage claims. The impact of cyclone Debbie is now long gone and SUN is blistering through. SUN is well capitalised and with cyclone season now over, it should be smooth sailing. SUN says it has finalised over half the claims lodged by its customers for Debbie which left a an overall insurance bill of over $1 billion. Of the 18,921 claims received by Suncorp, 9,845 have been finalised, including 7,777 full or partial cash settlements. The company’s costs associated with Debbie and the impact of claims received will be included in its full year financial results, to be released on August 3. It is also set to expand its NZ operations via the takeover bid for Tower Limited via its subsidiary Vero. Tower has entered a scheme of implementation with SUN to acquire shares at $1.40. SUN will inherit NZ$750m worth of gross written premiums and the New Zealand life insurance market is considered a lucrative asset. On the StockOmeter, SUN stacks up quite well. The reading comes in at 63 which is a buy. Whist the stock is not cheap on a PE of 18.47x, its ROE and EPS are rising. That’s a good sign. On the chart the stock has recently broken out on the upside. Investors should be buying at these levels, the stock is making higher highs and rising with bullish momentum. We advise buying into the lead up to results.