Marketing outfit shows value but triggers are tricky to find
THE iconic advertising and marketing group remains part of a shrinking group of value stocks in Australia. Earlier this month the company reported a solid 6.5 per cent increase in earnings a share (EPS) for the year to December 31. Analysts are now forecasting STW (ASX code SGN) can earn 13¢ a share for the 2013 year and pay a fully franked dividend of close to 9¢ a share. This puts the stock on a price-earnings multiple (P/E) of 10.4 times and a fully franked yield of approximately 6.5 per cent.
While the current valuation and circa 10 per cent earnings should give investors comfort it is more difficult to identify a catalyst to buy the stock. The first buy trigger could be a pick-up in marketing spend as 2013 unfolds following lower interest rates. Advertising lags other parts of the economy and can take up to a year to respond.
A second opportunity to buy the stock could be the long-awaited sell-down by the group's major shareholder, global advertising outfit WPP. The UK-based WPP currently owns about 20 per cent of STW and with the recent uptick in the Australian sharemarket there is an increasing chance the stake could be sold.
AtCor Medical Holdings
AT THE micro end of the market one of the better results this season came from AtCor (ACG), a medical device company that specialises in early detection of cardiovascular disease. The company posted a half-yearly profit of $2.3 million, well ahead of forecasts.
AtCor is highly unusual for an Australian medical development company with no blue sky embedded in the valuation. Refreshingly, the company has recently cut costs and states it will only ramp up expenditure when revenue is secured. This effectively means there will not be a major cash burn that is typically associated with other medical development outfits.
AtCor has a market value of $14 million and net cash on the balance sheet of $2.1 million. The first-half profit was boosted by a $700,000 grant and analysts are expecting a break-even result for the second half. Despite this, it is only trading at about seven times earnings.
The company supplies product for the clinical trials and research markets. Its devices measure central aortic blood pressure non-invasively for blood pressure and arterial stiffness.
There have been a number of recent encouraging signs for AtCor, including the US approval of the new SphygmoCor System Excel device. Not only is the device a quantum improvement in terms of functionality but it has also been granted a reimbursement code for clinicians. The addressable market is estimated at $US100 million a year. On this segment alone the firm could easily be valued 50 per cent higher at 22¢ a share.
Webjet
IT IS dangerous to stand in the way of a runaway bus, or on this occasion a jet plane. However, closely scrutinising the dynamics of a business and questioning the share price should be a daily occurrence when playing the sharemarket.
Online booking group Webjet (WEB) has enjoyed a staggering 33 per cent surge in its share price since raising $25 million to buy rival Zuji last December. The acquisition was highly accretive given Webjet only paid 4.6 times earnings before interest, tax, depreciation and amortisation (EBITDA) for the Asian-based operation.
There are some concerns and a lot of blue sky baked into the share price today. Webjet's traditional online business has slowed significantly over the course of the past year, and only price rises saved the group from anaemic growth in the December half. The price increases, though, did not disguise poor operating cash flow for the period and no explanation was given in the commentary.
Not only has the company hit a poor cash flow period, it also continues to capitalise software costs and amortise them over 25 years, a strange decision given that software rarely lasts 25 years in any business. If we cost the software development the company is trading on a hefty 33 PE multiple and about 50 times current operating cash flow.
If cash flows and earnings are disappointing at the June 30 results, it could be better to look elsewhere.
Matthewjkidman@gmail.com
Fairfax Media takes no responsibility for stock tips.
Frequently Asked Questions about this Article…
STW (ASX: SGN) was reported trading on a price‑earnings (P/E) multiple of about 10.4 times based on analysts' forecasts. Analysts were forecasting roughly 13¢ earnings per share for the 2013 year and a fully franked dividend close to 9¢ a share, which implied a fully franked yield of around 6.5%.
Two possible buy triggers mentioned are: 1) a pick‑up in marketing and advertising spend as the year unfolds (ad spend typically lags the economy and can take up to a year to respond), and 2) a potential sell‑down of the major shareholder WPP’s stake, which could increase market liquidity and buying opportunities.
WPP, the UK‑based global advertising group, owns about 20% of STW. The article suggests that if WPP decides to sell some or all of its stake—particularly with a stronger Australian market—that sell‑down could create a trading opportunity or catalyst for STW’s shares.
AtCor (ACG) reported a half‑year profit of $2.3 million—well ahead of forecasts—boosted by a $700,000 grant. The company had a market value around $14 million, net cash of about $2.1 million, and analysts expected a break‑even result for the second half. The stock was trading at roughly seven times earnings at the time.
AtCor’s new SphygmoCor System Excel received US approval and a reimbursement code for clinicians, which improves commercial prospects. The article estimates the addressable market for that clinical segment at about US$100 million a year, and suggests the stock could be valued roughly 50% higher (to about 22¢ a share) on that opportunity alone.
Webjet (WEB) enjoyed about a 33% share price rise after it raised $25 million to buy travel rival Zuji—an acquisition described as highly accretive. However, concerns remain: its traditional online business had slowed, recent growth relied on price increases, operating cash flow was weak in the December half, and the company capitalises software costs and amortises them over 25 years, which raises questions about underlying cash profitability.
Because Webjet capitalises software costs (amortised over 25 years), reported earnings can look stronger than if those costs were expensed immediately. The article notes that if the software development costs were expensed, Webjet would be trading on a much higher valuation—about a 33 P/E—and roughly 50 times current operating cash flow—highlighting a potential mismatch between reported earnings and cash generation.
For STW (SGN): watch marketing spend trends, upcoming earnings and dividend confirmations, and any news on WPP’s shareholding. For AtCor (ACG): monitor H2 revenue guidance, whether revenue secures planned expenditure, and cash position given low cash‑burn strategy. For Webjet (WEB): look for June results on operating cash flow, explanations for the software capitalisation policy, and whether recent price rises are sustainable without hurting demand.
Call 1300 880 160
Start a chat
Schedule a call
