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 lifts the reported earnings of companies that generate much of their sales in the US, Europe or other northern-hemisphere markets because offshore revenue converts into more Australian dollars. The article highlights ASX stocks that can gain from a softer Aussie, including James Hardie, News Corp, Treasury Wine Estates, Sims Metal, Cochlear and Computershare.
The article names several stocks likely to benefit from a weaker Australian dollar: James Hardie, News Corp, Treasury Wine Estates, Sims Metal, Cochlear and Computershare (for northern-hemisphere income). It also points to domestic businesses that gain versus cheap imports, such as BlueScope, Capral and Select Harvest.
SDI generates about 90% of its income offshore (Brazil, the US and Europe), so a softer Aussie provides a currency tailwind to earnings. The company recently upgraded full‑year net profit guidance to about $4–$5 million to June 30, 2013, implying a price‑earnings ratio around 13. The article also notes that softer silver prices help SDI because its amalgam products require significant amounts of silver.
Mayne Pharma could look stronger if the Aussie falls below about US$0.96 because it now has major US operations after acquiring US generic drug manufacturer Metrics Inc for US$120 million. The deal was struck when the AUD was around US$1.04. Metrics is operating to budget, which helped push Mayne’s stock higher, and with a full‑year contribution the article estimates Mayne could generate roughly US$30 million EBITDA in 2014, giving an EBITDA multiple near 8.3 times.
K&S Corp (KSC) rose strongly—about 70% over the past year—after reporting first‑half earnings of 11.3 cents a share, up 37% on modest revenue growth and helped by a robust performance from its West Australian Regal Transport operations. However, the company still has major exposure to the domestic steel industry and the depressed housing market, which are areas not performing strongly and could temper future gains.
The article points to domestic manufacturers and commodity‑linked businesses that benefit when the Australian dollar is lower because imported goods become relatively more expensive. Examples given include BlueScope (steel), Capral (aluminium profiles) and Select Harvest (agriculture/food processing), which can gain market share against cheaper imports when the currency softens.
Currency moves and commodity prices can work together or against each other. For example, SDI benefits from a weaker AUD because it earns offshore, and it also benefited from softer silver prices since its amalgam products use a lot of silver—lower silver reduces manufacturing costs and boosts margins. Investors should watch both the currency and key commodity inputs for each company.
Based on the article, investors should check how much of a company’s revenue is earned offshore, any recent or planned foreign acquisitions (and the currency in which they were priced), exposure to input commodity prices (for example silver), and domestic industry risks that could offset currency gains (such as weakness in steel or housing markets). Also look at valuation metrics cited, like P/E or EBITDA multiples, to see how market pricing reflects growth expectations.
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