Class Super is taking over the Super Industry

In this section we place one stock and give it the unconventional assessment.

Class (CL1) – Is the company behind a cloud-based administration software program used to administer SMSF in Australia. It’s dubbed as the most advanced SMSF / Portfolio admin system available. It also provides software to streamline the administration of investment portfolios held by non-SMSF entities such as companies, trusts and individuals. Users have the ability to manage all their SMSF administration and reporting needs from a single system. That’s everything from set up to lodgment. Using Class Portfolio, accountants, administrators and financial advisers can manage the administration, accounting and reporting needs for clients’ investment portfolios. Class has three products: Class Super, Class Portfolio and SuperStream Solution.

Fundamentals

On fundamentals, the company rates very high. The StockOmeter ranking comes in at 79 which means the stock is a clear Buy. Whilst trading on a high PE of 40x, its ROE is very high and stable at 37%. Meaning, Class is highly profitable and more than justifies its high PE. EPS Growth is 17.56% and the company has no debt. Its yield is low, but that’s ok because Class is a growth stock not an income stock. Technicals are also looking good.

Broker Recommendations

  • Ord Minnett has a Buy recommendation with a target price of $3.60. The broker has a bullish view on the stock following its investor day. Ords says the investor day was better than expects. The Dec Q to date numbers, while still reflecting a disrupted industry selling environment, were broadly in-line with expectations. The value proposition remains strong and CL1 have not yet reached a limit in terms of their addressable SMSF opportunity at their current price point. It’s an attractive entry point here, with CL1 now offering value on the SMSF business alone.
  • UBS has downgraded to Neutral from Buy recommendation with a target price of $2.85. Momentum has improved with 3,300 accounts added in the December Q so far. That’s a 50% increase in the pcp. Fees will begin on July 1 next year. That has caused the broker to believe the move will hit the top line by 2-3%. And hence the downgrade.

Technical Analysis

On the chart, Class has bounced off its uptrend support line and looks to be in the early stages of forming a short term uptrend. It’s a little too early to call it yet, we’d need to see the stock track above $2.80 to become more confident. But it does look promising. Overall the longer term trend is slightly up. RSI is neutral and MACD is Neutral.

Unconventional View: Class Super’s platform is really in a class of its own. Pardon the pun. You only have to go onto the company website to see the numerous awards it has won. It took all SMSF software awards since 2014 ranging from “BRW Most Innovative company” to “SMSF Awards Winner”. Class is the leading provider of cloud-based administration software for SMSFs and has a 25% market share of all SMSFs. More than 140,000 portfolios are administered using Class software by more than 1,100 accounting and administration practices and these numbers are growing exponentially. Its last set of results were more than impressive. Revenue was up 45% and underlying profit beat expectations rising 71%. The reason Class has done so well, is because it taps into an area that is growing rapidly. Australians love to have control and be in charge of their own Self Managed Super Fund. But compliance and accounting is hard to administer on your own. That’s where Class steps in. Class is a SMSF accounting administration tool that draws data from investment platforms such as Hub24, Netwealth, IRESS and Praemium. It also has Class Portfolio that is used for administering investments outside of superannuation. The platform is cloud based which means, customers can access live data online and from anywhere. It also means lower costs. The platform is highly popular among independent financial planners and is winning over accounting firms. Last week KPMG entered a partnership agreement with Class to better leverage new potential for growth in its SMSF administration business. It’s a big win for Class which now has a 50% market share in the cloud-based SMSF software sector.

Here are a few highlights that we thought were rather impressive from the company’s recent investor day. Between 30 September 2017 and the close of business 20 November 2017:

  • Class Super has grown by an additional 3,321 accounts, currently 150,243 SMSFs
  • Class Portfolio has grown by an additional 243 accounts, currently 3,874 portfolios
  • We had our best October ever, a +35% uplift in new accounts compared with October last year
  • Total Class customers increased by 45 subscribers, currently 1,249
  • Net new accounts added for the quarter to date are +50% up on this time last year

On the downside, AMP has voiced its intention to terminate its contract. It has SuperConcepts, which makes up 6% of Class revenues. AMP has consolidated to its four licences into one, which does suggest the wealth manager will terminate soon and transfer to a competing platform. Despite the rather large loss, most brokers are still optimistic that Class will quickly fill the gap through new clients. In-fact UBS expects 23,000 additions for FY18 and 29,000pa for FY19-21. Market share rising to 45.5% by FY27. Its plan to penetrate the financial planning industry will only expand its reach even further and grow its bottom line.

Shares in CL1 have come off their $3.56 highs following their AGM and Quarterly update. Whilst the company increased accounts by 6,232 to 146,922 and capture a 25% of the estimated 598,000 SMSFs, it may have been a little the markets high expectations, especially running on a PE of 44x. Its Class Portfolio was also up 21% to 3,631 accounts. All in all, we think Class is a quality stock that that is in its infancy and has significant upside potential. Customers are usually quick sticky and it retains a 99.4% retention rate. Its competitors are Xero (XRO), GBST (GBT), Reckon Group (RKN) and MYOB (MYO). The recent fall from $3.56 to $2.69 has put CL1 in an attractive position. It’s taken some of the heat out of the stock and brought it back to a more respectable valuation. As long as the stock stays above this support line, we think its good value buying here. But you will need to be patient as there is no momentum in the stock, so it may trade sideways for some time.

Telstra and the $50bn lemon

What to do with Telstra? It’s still lagging behind. Peddling backwards into oblivion. Telstra’s listing price was $3.60 via three tranches. The last payable in 2008. With Telstra sitting on $3.40, you’d be underwater if you’re still holding on. For one of the Australia’s most well-known brands, it’s been a horrible year for this Aussie icon. Sure it has provided investors with a handy dividend over the years but that too was cut. It’s unfortunate for retirees who bought the stock solely for its fat yield. The telco’s ability to maintain its premium pricing on mobile phones and keep its high profit margins is coming under pressure.

So why are investors still keen to buy Telstra? Well they think there’s value in a beaten up stock. Morgans even slapped a Buy with a target price of $4.15. Well Telstra is cheap trading on a PE of 10x. But does cheap mean it’s worth buying? I’ve always been dubious of buying things on the cheap. If it’s cheap, it’s usually broken.The question is – Is Telstra broken?

In this article I’ll try and answer just that. We’ll see if there really is value in Telstra that the market has overlooked and whether we can warrant a reason for buying it. At its last result the telco was savaged after it lowered its dividend. But after paying a dividend it couldn’t afford, maybe it was the right move. Telstra was in need of a capital restructure to become more competitive. The outcome of a capital allocation review included a change to the dividend policy to reduce the payout ratio to 70%–90% of underlying earnings. Telstra expects total dividends in respect of FY18 to be 22c fully-franked down from 31c. Whilst it wasn’t a welcomed move, it frees the company up and allows it to transition to better reflect the challenges in the industry. If you haven’t noticed the entire telco space is heating up with intense competition entering from all angles.

There are two catalysts that will either make or break Telstra – 5G and changes to regulation regarding the NBN.

So far the NBN has been a complete lemon. It’s not only failing but there are wide spread reports of delays and poor download speeds with mixed quality. Regional Australia is reporting slow speeds and numerous media reports are showing incompetency in construction and rollout. Since day one, there has been a lack of integration and planning by the NBN Co mixed with political instability. The result is a sub-par broadband project that fails to deliver on its promises. But here’s where things get gnarly. The Government has not accepted responsibility for delivering this lemon, but is intent on making wholesalers pay for it. This financial return is looking less likely. Why? As new customers transition onto the NBN, they have a myriad of services providers to choose from. Competing on the same playing field, they are all very aggressive on price and how they play. Each internet provider has to purchase how much bandwidth they need per month from the NBN Co. The more they buy, the less likely their speeds will slow down during peak hours. It’s called the Connectivity Virtual Circuit (CVC) and that charge is what the Government is hoping will cover the costs of the NBN. So for internet service providers to preserve their profit margins, they are forfeiting on capacity from their wholesaler. That means consumers are paying for NBN but receiving a slow service. Some poor souls are getting NBN internet speeds that are slower than their previous ADSL or cable broadband connection yet they’re paying a higher monthly charge. There is a high level of dissatisfaction with the NBN because of this.

The Government can do two things from here. Introduce regulation so that this is prevented or write-down the value of the NBN and admit they were wrong. If the latter occurs, it will be a boon for Telstra and other service providers. The margin pressures will be removed and consumers will receive what they were promised. I was reading a Morgans report this week and it was mildly bullish on Telstra. It made three important points:

  • FY18 will be challenging but Telstra will make it through. The board has reaffirmed guidance. EBITDA $10.9bn & $4.5bn Free Cash Flow.
  • The 22c dividend should be as low as it goes for shareholders. That means no dividend cut.
  • NBN will be the main challenge but it looks like Telstra will battel down the hatches and fight. No large acquisitions.

Morgans also believes the stock is priced to disappoint. A lot of the bad news is already factored in. That means any positive announcement will see the stock re-rate. What makes us slightly confident is the ACCC’s recent report, its findings and recommendations. The ACCC recently concluded that the NBN is an obsolete lemon that will be forced to upgrade because it’s built on Telstra’s old copper wire network. Competitive technologies such as 5G and offer better value. Technologies such as 5G will threaten the NBN. There is as Morgans says “light at the end of the tunnel”. The NBN won’t squeeze margins, in-fact the NBN will be almost forced to write-down its costs to avoid an internet price surge and telcos going broke. The ACCC has strongly urged our stubborn Government to write down the cost of its $50bn lemon and save the NBN Co so that it can charge lower wholesale prices. They need roughly $53 just to recoup costs and are only collecting $43 a month from wholesale service providers at the moment. An asset write down seems the logical step. Take it on the chin and admit the NBN is a lemon. A big part of the transition will be the challenge for Telstra to lower its cost base so that it can be competitive in what has become a very competitive NBN space. It has to lower its cost base to compete with more nimble players. Shroders its labour costs are around 20% of sales (more than $5bn). Its labour costs are a greater percentage of revenue than any other telco. TPG has labour costs of 10% and Vocus 7%. If Telstra can match TPG it will save them $2.5bn.  Shroders believes for Telstra to do this it needs dismantle the business into smaller pieces.

The other upside catalyst is – 5G available in 2020. Whilst industry experts claim the technology won’t directly compete with the NBN, but it will have a knock on effect. 5G will provide convenient broadband access for some internet users. If Telstra can achieve speeds of 10 gigabits per second it could very well undercut the NBN Co. But I’m no Telstra technician nor do I claim to know 5G’s knock on effects. So let’s take a wait and see approach.

Unconventional View: Telstra is a tough one. On technicals you wouldn’t go near Telstra with a ten foot ski pole, it’s in a perfect down trending ski slope and that’s a clear avoid. On fundamentals though, it’s damn cheap trading on a PE of 10.53x. ROE is also high on 25% rising to 26%. Yield is still great and its outlook is looking a lot rosier especially after it reaffirmed guidance. With the current NBN pricing at play, telco’s will most definitely go broke. For that reason, we think the Government has no other option than to write-down the value of the NBN.

So Telstra isn’t a screaming Buy but it is worth Adding if you already hold it. We agree that the stock is cheap but it could fall further from where it is today. There is simply no sign that it has reached its bottom. Therefore we advise those wanting to Buy Telstra to hold off until there is a clear change in trend and catalyst at play. For those that already hold Telstra and want to average down, now is the perfect time. First live 5G trials starting in Gold Coast 2018. It won’t be long before we know whether 5G is quicker than our $50bn lemon.

Under the Microscope – iSelect (ISU)

In this section we place one stock under the microscope and give it the unconventional assessment.

iSelect (ISU) – Is the broker of all brokers. The company is a Comparison website engaged in health, broadband, energy, life, car insurance policy sales, mortgage broking and financial referral services. The Group is organised based on its products and services and has two reportable segments as follows: Health and Car Insurance segment and Household Utilities and Financial segment. Health and car insurance offers comparison services across private health insurance and car insurance categories. Household Utilities and Financial segment offers comparison services across a range of household utilities and personal finance products including retail energy products, broadband, life insurance, home loans, savings accounts, term deposits, credit cards and personal loans.

Fundamentals

On fundamentals, the company stacks up OK. ISU trades on a PE of 23.42x which is forecast to fall to 19.46x next year. Whilst its ROE isn’t high on 7.13% it is forecast to rise to 8.29% which is a positive. EPS growth is 1.06%. Dividend is ok at 4.80%. The company’s PEG ratio is 0.82 which is below 1 and considered undervalued. iSelect also has no debt which is a positive. Its balance sheet is solid. It scores rather high on the StockOmeter mainly because all its fundamentals and technicals pass.

Broker Recommendations

  • Credit Suisse has an Outperform recommendation with a target price of $2.00. The broker is quite positive on the stock following its recent trading update provided at the AGM. Underlying operating earnings guidance implies growth of 13%-26%.

Technical Analysis

On that chart iSelect is volatile but OK. It’s not a great chart, but it isn’t bad either. If you look back to when the stock listed in 2015, it’s been a bumpy ride. The stock fell the moment it listed and later travelled all the way back to 63.5c after missing its prospectus forecasts. After a rough year, iSelect managed to get its act together and what followed after that was a near tripling of its share price all the way up to $1.99 mid last year. Then in August 2017 it dropped by 21% due to a poor performance from its Life and General insurance segment. It has since stabilised at $1.63. Since listing the trend as you can see has been sideways. Its listing price was $1.85. The stock looks to have bounced off this support line, which we don’t think will be breached. Investors should be buying at these levels.

Unconventional View: Dubbed one of most exciting young companies of this era, iSelect is an interesting place to work. Just prior to its listing, the company moved its entire operations to Bay Road in Cheltenham. From what I’ve heard, its offices resemble a Google like interior with an out of the box styled layout. From bright coloured walls to a ball pit with a slide, ping pong tables and a separate chill out room for staff to rest, the company definitely has thought outside the square. But does it really matter? It seems to have been done to create a vibrant place to work and to foster a lively atmosphere between staff across all floors. I mean who wouldn’t like full service 300sqm cafe and entertainment precinct? The only problem, is that iSelect’s share price should reflect all this, but it doesn’t. Today’s price is lower than when the company first listed and that’s not a good thing.

Why is that you might ask? Well firstly it’s to do with insurance and stiff competition. iSelect aren’t the only ones out there selling insurance, so is Finder, Compare the Market, Choosi and Canstar and let’s not forget all the insurance companies themselves. It’s the most brutally competitive industry around and it’s even worse when it comes to digital marketing i.e. SEO, clicks and all that. If you Google “private insurance”, iSelect are midway down the page. Then comes the hard part, nobody wants private insurance, especially Gen Y. And why on earth would they, with premiums rising higher than the rate of inflation, it’s too damn expensive. Naturally there has been a lower take up in private insurance and because of this Federal Health Minister Greg Hunt announced a major shake-up of the system, with those under 30 expected to be the biggest beneficiaries. What iSelect do, is compare insurance products. But since insurance comparison powerhouse, “Compare The Market” entered the scene competition has gone bananas. iSelect is losing market share and really needs to step up its game and it’s not just Health its Life & General.  When you buy insurance through websites such as iSelect over the phone, the insurance company pays an upfront commission to iSelect. Usually a percentage of the premium. Telephone consultants are usually commission driven which means they receive a bigger commission with a policy that has a higher premium, regardless if it’s suited to you or not. But that’s a discussion for another day. Comparethemarket.com.au receives a standardised flat fee of 27.75% of the first year’s premium on a policy sold through its website where as iSelect is keeping its fees tight lipped. What we need to determine is how well iSelect is at comparing insurance products and selling. Because iSelect competes with relatively low barriers to entry in the insurance comparison market, it makes it really hard to stand out from the rest. And just by watching TV, all I’m seeing is finder.com.au. The iSelect advertisements are another story altogether.

At this week’s AGM, the company said growth was being delivered across its key businesses. Unique visitors to the website were up 800k to 9.8 million, conversions were up 0.65pp to 10.5% and revenue was up 8% to $185.1m. Operating cash flow was up 184% to $30.6m. Here is the break down per business:

As you can see, Health is barely alive up only 4% and Life & General Insurance went marginally backwards. Ouch. On the other hand Energy & Telco is up a whopping 25%. Maybe iSelect needs to turf its Life & General Insurance business if it can’t bring it back to life. In its near term outlook statement the company said “Expecting continued growth in our Health segment with the broader market displaying signs of stability. Energy & Telco growing strongly as anticipated. Life & GI still seeing challenging conditions”. That statement doesn’t give us confidence that Health, Life and General are going to perform any better than the previous corresponding period.

However there are a few things that we see in a positive light. The company announced that it has increased its shareholding in Malaysia-based platform of similar service iMoney to 51.5%. It’s a smart move tapping into a booming middle class in the heart of Asia. Malaysia, Singapore, Indonesia, and the Philippines are high growth areas. If you look at SEEK and Carsales both have expanded into Asia via a similar growth strategy. It works. “iMoney was recently named in the top 10 fastest growing FinTech businesses in Malaysia”. The company is however expected to post a FY18 loss in the range of $1.5m-$2.1m as it scales to profitability. Which is to be expected. Put that aside, iSelect expects FY18 market guidance of between $23m-$26m EBIT and underlying business EBIT FY18 market guidance of between $26m-$29m. If iSelect can continue to grow its Energy and Telco arm and maybe even decide to enter the Superannuation space it could really offset the dismal returns from Health, Life and General. At its AGM the company said it would launch at least four new verticals in 2018 after moving into the travel insurance, credit cards, mobile phones and pet insurance markets over the past 12 months. Now that excites us especially superannuation. Canstar are about the only company that compare Super properly so it could be an attractive opportunity for iSelect because superannuation is quite complicated.

All in all, with the new iMoney purchase and its intention to enter these new areas, we think iSelect is a Buy. Whilst the recent result didn’t shoot the lights out, we think it was enough for the company to realise that Health, Life and General aren’t as profitable as they used to be and it needs to step up its game. What it does from here on in, will be the real test. If it can grow Energy, Telco, iMoney and enter a few new areas profitably, the company is an attractive buy at these levels. We suggest investors Buy but be aware of the risks.

Under the Microscope – Boral Limited

In this section we place one stock under the microscope and give it the unconventional assessment.

Boral (BLD) – Stands for Bitumen and Oil Refineries Australia Limited and the company has been in operation since 1946. The company has grown to now become Australia’s largest building and construction materials supplier in and has significant operations in the USA and in Asia. Boral has over 12,000 employees working across over 600 operating sites. Boral was demerged from the ‘old’ Boral Limited in February 2000. The ‘old’ Boral Limited comprised energy assets. It was renamed Origin Energy. The spin-off which housed building and construction materials was the ‘new’ Boral Limited. Boral and Origin Energy are now separately listed companies on the ASX. Boral now has businesses in the building industry, asphalt, road line marking, concrete, plasterboard, timber, windows, quarry, landfill, transport, roof tiles, bricks and pavers. Boral also produces cement via Boral Cement. Today it operates in Australasia, North America, Asia and the Middle East under three operating divisions: Boral Australia, the USG Boral joint venture and Boral USA.

Fundamentals

On fundamentals, the company stacks up OK. BLD trades on a PE of 29.13x which is a little on the expensive side but is forecast to fall to 18.25x. ROE is increasing and stable at 7.56% but not high. With ROE a touch below average, it means that higher level of investment is required on fixed assets can be a negative for free cash flow. Dividend is ok at 4.84%. EPS Growth is charging ahead at 23.73%. What is interesting is that the intrinsic value of the company is $8.60. So judging by the current share the stock is slightly undervalued.

Broker Recommendations

  • Morgan Stanley has an Overweight recommendation with a target price of $8.50. It says the company offers the best combination of exposures. Combine that with US$125m in targeted synergies and the stock has a solid growth outlook.
  • Deutsche Bank has a Buy recommendation with target price of $7.68. The broker has upped its earnings forecasts but lowered its FY18 net profit estimates.

Technical Analysis

 

On that chart Boral is looking OK. The stock is however trading at the upper end of its uptrend channel making it look a touch peaky. Ideally you’d want to wait for it to bounce of its upper resistance level then buy. Overall this uptrend has remained since 2013. Watch for an upside break out.

Unconventional View:  We like the Boral story and have been followers for some time. Despite most predictions that the property market in both Sydney and Melbourne will start to cool from next year onwards, investors aren’t taking into account the next wave of major infrastructure projects that are about set to be unleashed very soon. And this also includes new projects in the US as well.  Just about every broker for that matter has a Buy on Boral so we’re with the herd on this one. The StockOmeter ranks BLD in the Buy section with a reading of 71. Not Bad. ROE is a little low, but it is increasing. On a PE of 29x some may say that it is a little high but we don’t think so, Debt is low and its yield is ok. So overall its fundamentals are so so. Nevertheless, we think Boral will benefit from the $75bn infrastructure funding package. It includes funding for rail, a second airport in western Sydney, highway funding and for Snow 2.0. Boral is also involved in Warrego Highway stage 2 and Kingsford Smith Drive and Sydney Metro. All of these projects should provide a large increase in tendering opportunities for Boral as well as other infrastructure plays. According to a Macquarie report BLD has significant revenue exposure to infrastructure development activity going forward. We think this provides upside potential for the stock. Pundits say Australia is only 20% into its infrastructure boom with another 80% left to go.

Boral posted a ripper of a result this year. NPAT was up 16% to $296.9m driven by higher building activity in Australia and improved earnings from its US operations. Results were supported by Boral Australia, Boral North America and USG Boral Joint Venture. With the US economy in full recovery mode, Boral USA is perfectly position to reap the benefits. So on that basis, we think Boral’s outlook is quite rosy. On the chart, BLD looks to have bounced following the budget release. It is however trading at the top of its uptrend channel. We advise investors wait to see if it bounces of breaks this resistance line. Either way though, BLD is in a strong uptrend channel and is worthy of a place in your portfolio. Boral is one of the few materials players that can really capitalise on its US exposure via its Headwaters acquisition.

It has spare capacity at most plants and is ready for any improvement I’m building and construction activity. But one must remember that Boral operates in a cyclical industry so earnings can be volatile. For the moment though the US housing and infrastructure markets are doing well and the Australian infrastructure sector is in expansion mode. The basic message is: Buy Boral and ride the Australian and US infrastructure boom and negate the upcoming Australian housing downturn. With analysts saying the infrastructure boom has the muscle to last longer than the mining boom you’d be silly not to add Boral to your portfolio.

Under the Microscope – ALS Limited

In this section we place one stock under the microscope and give it the unconventional assessment.

ALS Limited (ALQ) – Is the former Campbell Brothers Limited. ALS Limited is one of the world’s biggest and most profitable testing companies. It also specialises in inspection, certification and verification services, head quartered in Brisbane, Australia. It services multiple industries globally and employs over 13,000 staff in over 65 countries and has been around for 40 years. The company initially provided laboratory services to the oil shale and mineral exploration industries but has since expanded its services. In the past, 60% of earnings were tied to commodity markets. But the end of the resources boom caused it to diversify into other industries such as industrial, environmental, food testing and asset maintenance. This has reduced its minerals exposure to 40%. The company operates in these four divisions:

  • ALS Life Sciences: Comprises four primary analytical testing areas: Environmental, Food and Pharmaceutical, Electronics, and Consumer Products.
  • ALS Minerals: Provides testing services for the global mining industry in four key service areas: Geochemistry, Metallurgy, Mine Site Services and Inspection. Mineral services cover the entire resource life-cycle from exploration, feasibility, production, design, development through to trade, and finally rehabilitation.
  • ALS Energy: Delivers quality technical solutions to the coal, and oil and gas industries through an expansive range of analysis and certification testing services supporting exploration, production and cargo shipment.
  • ALS Industrial: Provides diagnostic testing and engineering solutions for the energy, resources, transportation and infrastructure sectors.

Bulls

  • ALS has a strong brand, skilled staff and good relationships with large clients.
  • The company has diversified away from just minerals and energy (cyclical commodities). This helps offset any downturn in the market.
  • ALS now has exposure to food, pharma testing as well as inspection and certification markets.
  • It’s exposure to minerals and energy could once again provide upside earnings potential if there is another mining boom.

Bears

  • 40% of its earnings are tied to minerals and energy. Any severe downturn will hit the bottom line.
  • Lower demand for commodities will also mean scale benefits will start to dry up contributing to lower margins.
  • ALS charges a premium for quality work. Competitors may enter and undercut ALS on price.

Fundamentals

On fundamentals, the company is neither good nor bad. The company trades on a rather high PE of 41.72x but it is forecast to drop to 26.83x next year. ROE isn’t overly high, but it is stable and rising from 9.58% to 12.26%, which is the main thing. Dividend is low. EPS growth is 44% and high. Debt to Equity is at 63%, which isn’t bad. The intrinsic value is below the current share price, so some might argue that the stock is somewhat overvalued.

Broker Recommendations

  • Deutsche Bank has a Hold recommendation with a target price of $7.73. The broker says there is a definite recovery in minerals testing which is a positive for the company. Hold rating kept.
  • Macquarie has an Outperform recommendation with a target price of $7.80. The broker believes ALS’ guidance for 1H18 is a little conservative. It has also factored in acquisitions of $450m for Life Sciences. This means there will be a small increase to its forecasts.

Technical Analysis

Looking at the chart, ALS seems to have reversed and is sitting towards the upper end of its uptrend channel. Ideally you’d want to be buyng near the channel’s support line i.e. around $7.30. Of-course waiting for a dip that may never come is a hard game to play. So we recommend buying around the $8 mark. If this trend continues, over the longer term the stock will move higher.

Unconventional View:  We quite like the ALS Limited story. The company has a long and rich 40 year history that has enabled it to become a market leader in laboratory resting for the minerals and oil and gas space. It has a strong brand, skilled staff and is scalable across the markets it is exposed to. It also has strong relationships with large clients that give it a key competitive advantage. The company however recently completed the sale of its oil and gas business to Chicago-based Madison Industries for $109m. This gives it some $300m in the bank for bolt-on acquisitions that could boost returns for shareholders. Shares have been on a tear despite there being no notable news or upgraded broker reports. All indications point to a solid FY result which was later followed up with a 1H18 guidance upgrade. The company expects NPAT to be in the range of $70m-$75m up from $60m in FY17.

Overall we think ALS has built itself a great reputation around technical innovation, quality and a deep client understanding. We think it will continue to kick goals and its upcoming profit result should impress on the upside. At the moment the stock is sitting on 68 on the StockOmeter. That means it’s both its fundamentals and technicals are at a Buy. But as mentioned before the stock is looking a touch ritzy. Ideally you’d want to be buying on a dip. So we recommend buying around the $8 mark. If this uptrend trend continues over the longer term, the stock will move higher.

SEEK

In this section we place one stock under the microscope and give it the unconventional assessment.

SEEK (SEK) – Is a market leading website for job advertisements. The company runs an online employment classifieds platform providing in 12 countries with three main business divisions: SEEK Employment, SEEK Learning and SEEK International. It entails a strong portfolio of employment, education and volunteer businesses which span across Australia, New Zealand, China, South East Asia, Brazil, Mexico, Africa and Bangladesh. SEK receives over 450 million visits to its sites every month and has over 4 million job opportunities available at any given time and relationships with over 150 million candidates.

  • EMPLOYMENT: Provides online employment classified advertising services through the SEK website.
  • LEARNING: Markets, sells and distributes vocational training and education training courses in Australia.
  • INTERNATIONAL: JobsDB (South East Asia), Zhaopin (China), Brazil Online (Brazil) and OCC (Mexico).

SEK was founded by Andrew Bassat, Paul Bassat and Matt Rockman.

Bulls

  • First mover advantage. In Australia SEK has a monopoly position on the employment recruitment space. There is still significant opportunity for SEK to expand through volume and price increases.
  • New Corp and Fairfax have both been unable to disrupt SEK’s dominance. SEK now captures some 90% of total time people spend online looking for jobs. It dominates the Australian market.
  • Is expanding globally via acquisitions. This business offers strong upside growth potential. There is a low internet penetration in many of the countries it has exposure to. If one takes off, earnings could be substantially higher than that of Australia.

Bears

  • SEK’s business is ripe for disruption. Companies such as Livehire, Airtasker, Linkedin and other social media platforms are pulling business away from SEK.
  • The online job advertisement market could break apart due to specialist sites that offer differentiated industry opportunities.
  • The internet landscape can change rapidly. Whilst SEK has dominance, big tech firms such as Google or Apple can enter the job advertising space and cause disruption. 

Fundamentals

On fundamentals SEK stacks up OK. The StockOmeter ranking came in at 68 which is just shy from the Buy mark. The stock is trading on a PE of 16.97x which means it’s neither cheap nor expensive. SEK’s ROE is relatively high but is dropping which is a little concerning. Dividend yield is OK and debt is quite low. Intrinsic value is lower than its share price, which suggests the stock is overvalued. EPS growth is also positive. On fundamentals, we’d say the stock is fairly valued. 

Technical Analysis

On the chart, SEK looks to be in an up-trending pennant flag. The stock has held its uptrend support line for quite some time. We don’t think it will disappoint on the downside and break support. Instead we think it might bounce at around $15.50-$16.00. For that reason, we suggest investors buy at these levels. The stock is attractively priced and should continue to track along this uptrend support line.

Broker Views

  • Morgans has a Hold recommendation with a target price of $17.39. We broker has a positive view on SEEK. The company offers investors exposure to the global rising hiring cycle and the increasing migration of employment advertising to the online market. So far SEK has risen and responded to competitive threats.
  • Citi has a Sell recommendation with a target price of $13.75. The broker believes SEK is tied too much towards the Australian housing cycle. Job ads for architects have subsided a while ago. Citi sees this as a problem, hence the downgrade. 

Unconventional View: SEK’s August reporting season didn’t shoot the lights out. In-fact it missed expectations and its guidance was a little short of consensus forecasts. Australian & New Zealand Employment revenue was up 14% to $313.1m, EBITDA up 11% to $197.9m due to 4% vol growth. Seek International revenue was up 6% to $629. Zhaopin was flat, Brazil Online down 8% and Asia steady. Seek Education revenue up 9% to $109.4m. Its outlook guidance is for NPAT to be flat despite expecting revenue growth of 20-25% in FY18. EBITDA growth of approximately 10% and reported NPAT in the range of $220m to $230m. Its Chinese Online Zhaopin job portal has signed a deal with two private equity firms to privatise it and delist it from the NYSE. This is now complete. Zhaopin is the largest and most popular Chinese jobs portal, with about 36.9 million job postings in the year to June, 2016. SEK currently owns 61.2% of Zhaopin. Despite what has been a choppy market, SEK has held up quite well. Revenue is still growing and the company appears to be expanding internationally. But its market leading position in Australia is at risk of disruption from startups, social media such as Linkedin and other small players such as Livehire (LVH). What keeps us optimistic is its international exposure. Its Seek Asia and Zhaopin stake will be the main driver of growth going forward. Zhaopin already generates more revenue than the Australian business, $372.9m vs $355.9m. The company has said it will provide an update on its outlook at its AGM on 24 November.

With its Zhaopin venture, SEK is entering a new phase and growth channel. We think the move to privatise the Chinese jobs website was a positive one and the upside potential is huge. Zhaopin is now the most popular career website in China and it’s very probable that it will soon become a much bigger business than the Australian business. Its Australian business is mature so it’s all about Zhaopin. On fundamentals, SEK has really traded sideways for the last two years. But in that time its earnings have gone up. That means its PE has dropped from 32x earlier this year to roughly 16.97x. We like the SEK story and we think it’s trading at an attractive level, but we advise investors to hold off until the AGM in November. SEK will provide further clarity on its outlook and there will be ample time to buy then. Otherwise we think it’s a solid stock to have in your portfolio.

Under the Microscope – Computershare

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In this section we place one stock under the microscope and give it the unconventional assessment. Computershare (LHC) – Is an Australian-based administrative company that provides corporate trust, stock transfer and employee share plan services in a number of different countries. CPU is a global firm with offices in 20 countries, including Australia, the United Kingdom, Ireland, the United States, Canada, the Channel Islands, South Africa, Hong Kong, New Zealand, Germany, and Denmark. Computershare built its share registry business by successfully expanding into employee equity plans, stakeholder communications, corporate governance, fund services, class action administration, deposit protection and most recently, mortgage servicing. ​​They now manages over 125 million customers records worldwide with 16,000 staff across all major financial institutions.  

Bulls

  • CPU holds a 60% stake in the Australian share registration market and is the market leader. Link Market Services is its closest competitor.
  • Economies of scale – CPU has a global footprint that gives it financial strength to undertake acquisitions, has transnational IT capabilities that also give it a competitive position and the ability to scale.
  • Sticky customer base and high retention rate – barriers to entry.
  • Low margin and stable recurring core registry revenue
  • Tailwinds – Increasing interest rates in the US and UK. CPU earns interest on client balances. Rising US dollar.
  • Its platform is competitive and highly scalable providing low cost growth opportunities globally.

Bears

  • Growth by acquisition has its limitations. The sheer size of Computershare means it cannot grow by the same amount every year.
  • Risk of start-ups disrupting the share registry industry.
  • Computershare will need to look for growth outside the share registry environment once acquisitions dry up.
  • Low interest rates around the globe is a headwind because Computershare earns interest on client balances.

Fundamentals

On fundamentals Computershare stacks up well. The StockOmeter ranking came in at 72 which is just shy from the Buy mark. The stock is trading on a PE of 26x which is near its PEhigh but isn’t overly expensive if you compare it to Link Market Services which trades on a PE of 32.65x. CPU’s ROE is stable and high reflecting its defensive stable recurring revenue, whereas LNK is forecast to fall from 35% to 18%. So on that basis, we’d say it’s attractively priced.Debt is a little on the high side due to recent acquisitions, but it’s not a problem due to high interest cover and good cash flow. Yield is thin but it isn’t really a dividend stock.

Technical Analysis
On the chart, CPU has had a very bullish short term rally. Shares have gone on a super run since the 3Q 2016 at $8.83 to $14.26 which is a good 60% rally. Can it continue? Going by technicals, if the stocks keeps to its support line and continues to trade with this bullish momentum, then yes it can. But we warn investors to be wary, that any disappointment and CPU could pull back to $9. 

Broker Views

  • Morgans has an Add recommendation with a target price of $15.42. The broker says CPU has reaffirmed its FY17 guidance at its investor day. Both the US and UK divisions are on trach to hit their respective targets and margin income could become a slight tailwind.
  • Deutsche Bank has a Hold recommendation with a target price of $14.90. It likes the business but believes CPU does benefit from higher interest rates via its investments. But the broker is concerned about customer attrition in the core share registry business and thinks CPU is fairly valued at its current levels.

Unconventional View We conducted a site visit early in June at the company’s Abbotsford office. Whilst a great company in the making, the site visit was quite a boring affair. Computershare is basically a huge office with desks, computers and of course people. No real colour or vibe unlike say the iSelect or Medibank buildings. From what we’ve been hearing the company is an OK place to work but there are a lot of internal problems. A lot of interesting people but because of the lack of competition, there is little to no chance of being promoted. Complaints of too many project managers, and hierarchy. Bad communication amongst staff and a bit of micro managing is also prevalent. Besides all that, we’ve been keen followers of the stock since November last year. We said: “We are confident the company will continue to grow and retain its dominant market position. The chart is attractive. We suggest investors look to buy on the recent upside break out.” That was back when the stock was trading at $11.52. If you bought back then you’d be sitting on a 25% profit and no doubt you’d have quite a smile on your face. We certainly do. We got this one right. Our advice to those holding CPU – is probably lock in profits. Computershare has had a mammoth run since and is up 60% from its bottom to top, that’s $8.83 to $14.26. The turning point was the bottoming of the US and Australian interest rate curve. Bond yields have soared since the Trump election and the Federal Reserve has raised rates.

Computershare is a beneficiary of rising interest rates. It acts as a tailwind for Computershare as it will benefit from higher interest on client accounts. These balances total US$16bn – so they are quite significant accounting for roughly an additional US$80m. Put that all aside – CPU is also a high quality defensive stock that has a highly scalable and competitive platform. It is a market leader in its industry and has a stick client base. All of these qualities make it a star stock. Its February profit result beat expectations. Revenue was up 7% to $999m, free cash flow was up 4% to $150m, NPAT was up a whopping 78% to $150.2m and its shares shot up 6% on the day. CPU confirms that will cut costs further by delivering between $85m – $100m of annualized savings. CPU held a recent investor day presentation where is confirmed its FY17 EPS guidance to be between 56-58c. The real catalyst for the stock, as you’ll see from the below chart is the expectations of further US rate hikes. A 1% uplift in average interest rates translates to a 20% uplift in profits. The yield curve has pulled back, slower jobs growth and overseas geopolitical events has prompted the Federal Reserve to keep rates unchanged and trim back its longer-term interest rate forecasts. Forecasts are for two rate rises this year, however some are now expecting that to be pared back to just one rate rise this year. Looking at the bond yield curve below, it’s pulling back. For that reason – if you hold CPU, we think now is the time to lock in profits. Otherwise those looking to buy, should buy on a dip. It’s simply too ritzy to buy now.