A weaker dollar would benefit those with northern exposure
There are a host of stocks with substantial northern hemisphere operations that can benefit from a softer local currency. These include James Hardie, News Corp, Treasury Wine Estates, Sims Metal, Cochlear and Computershare. Others cheering the Aussie lower are domestic companies competing against cheap imports. Among this group are BlueScope, Capral and Select Harvest.
SDI LtdA smaller company that should thrive in a lower-dollar environment is dental manufacturer SDI (ASX code SDI). We wrote about the company last year, emphasising the cost reduction program under way, a move that inspired a doubling of the share price. The company recently upgraded its earnings guidance for the year to June 30, 2013, to between $4 million and $5 million net profit. This places the company on a price-earnings (P/E) ratio of about 13 times.
SDI generates about 90 per cent of its income offshore, in Brazil, the US and Europe. The Aussie has been weaker against all three currencies in recent months, providing a tailwind for SDI's earnings.
A further benefit is the softness in the silver price. SDI's amalgam products require a significant amount of silver to manufacture.
Mayne PharmaAnother company that could look smart if the currency descends below US96¢ is pharmaceutical upstart Mayne Pharma (MYX), revamped with the arrival of Scott Richards as chief executive.
When the Australian dollar was trading around $US1.04 in October, the company announced the acquisition of US-based generic drug developer and manufacturer Metrics Inc for $US120 million. The deal was struck on a historical earnings before interest, tax and depreciation (EBITDA) multiple of about six times. Metrics swamped the existing Mayne business and effectively made the company a pharmaceutical play in the US.
Mayne said in its half-yearly results that Metrics was operating to budget. This has proved sufficient to push the stock up 10 per cent to 42¢, more than double where the company struck its rights issue to buy Metrics.
It is difficult to justify Mayne's valuation on 2013 earnings but with a full-year contribution from Metric in 2014 it should be able to generate EBITDA of about $30 million, for an EBITDA multiple of 8.3 times. While this is not cheap, Richards will use the Metrics acquisition as a launching pad to build a larger US operation.
K&S Corp
The Melbourne-based transport group (KSC) has been on a tear over the past year, jumping 70 per cent compared with a 15 per cent rise in the All Ords.
We wrote about the stock last year when the share price was $1.60, believing it offered the dual attraction of a cheap entry into a cyclical upswing in the economy and the injection of fresh management. Today it's $2.30.
The company lived up to its word by announcing earnings of 11.3¢ a share for the first half, up 37 per cent on the previous corresponding period, achieved on a modest 8 per cent increase in revenue, showing how leveraged a transport business can be. It also benefited from a robust performance of K&S's West Australian Regal Transport.
It must be remembered that besides the strong results in WA, few areas are firing for K&S. It has a major exposure to the much-maligned domestic steel industry and the depressed housing market.
If we double the first-half result, the company is trading on a 2013 price-earnings (P/E) multiple of 10 times. This compares favourably with the larger Toll Holdings that has jumped out to a P/E of 13.
matthewjkidman@gmail.com
Fairfax Media does not take responsibility for stock tips.
Frequently Asked Questions about this Article…
A weaker Australian dollar boosts the translated value of offshore earnings when those revenues are converted back to AUD, giving a currency tailwind to profit and cash flow. The article notes many ASX stocks with substantial northern-hemisphere operations — including James Hardie, News Corp, Treasury Wine Estates, Sims Metal, Cochlear and Computershare — can benefit because sales in dollars, euros or reals become worth more in AUD when the local currency softens.
The article highlights exporters and northern-exposure stocks such as James Hardie, News Corp, Treasury Wine Estates, Sims Metal, Cochlear and Computershare. It also names smaller exporters like SDI Ltd and Mayne Pharma, plus domestic companies that can compete better against cheap imports — BlueScope, Capral and Select Harvest.
SDI generates about 90% of its income offshore in Brazil, the US and Europe, so a softer Aussie boosts the AUD value of those sales. The company upgraded guidance to a $4–$5 million net profit for the year to June 30, 2013, implying a P/E of roughly 13 times. The article also flags that a softer silver price helps SDI because its amalgam products require significant silver, reducing input costs.
Mayne Pharma bought US generic drug developer Metrics Inc for US$120 million when the AUD was about US$1.04. The article suggests Mayne could look smarter if the dollar falls below about US96¢ because the US acquisition becomes relatively cheaper in AUD terms. Metrics was reported operating to budget, the Mayne share price rose about 10% to 42¢, and a full-year contribution from Metrics could help Mayne generate around US$30 million EBITDA in 2014 (an EBITDA multiple of about 8.3).
K&S jumped about 70% over the past year to $2.30 (from $1.60). It reported first‑half earnings of 11.3¢ a share, up 37% on the prior corresponding period, achieved on an 8% rise in revenue. The piece notes K&S's strong performance in Western Australia helped results, but it also has major exposure to the domestic steel industry and a weak housing market. If you annualise the first half, the company would trade on roughly a 2013 P/E of about 10 times, versus Toll Holdings at about 13.
Domestic manufacturers and producers competing directly with imports can benefit from a softer Aussie because imported goods become relatively more expensive. The article specifically names BlueScope (steel), Capral (aluminium products) and Select Harvest (agri/food) as examples of companies that could cheer a lower currency because it reduces import price pressure.
The article uses P/E ratios and EBITDA multiples to put stock prices in context. Examples include SDI on about a 13x P/E based on upgraded guidance, Mayne’s Metrics acquisition implying an estimated 8.3x EBITDA multiple looking ahead, and K&S trading near a 10x P/E if first‑half results are annualised. These metrics help everyday investors compare relative valuation and acquisition pricing.
Besides currency moves, commodity and input prices matter. The article highlights that a softer silver price is a further benefit for SDI because its amalgam products use significant silver — lower silver reduces manufacturing costs. So investors should watch both exchange rates and relevant commodity/input prices for industry-specific impacts.
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