|Summary: The sharp drop in the Australian dollar is good news for Australian companies that derive a high percentage of their revenue from the US, or that sell the bulk of their product in US dollars. A number of emerging companies in the Uncapped 100 generate almost all of their income in foreign currencies, including US dollars.|
|Key take-out: A fall in the exchange rate between the Australian and US dollars to US85 cents over the next year could represent up to a 17.5% tailwind to the US earnings for some companies.|
|Key beneficiaries: General investors. Category: Growth.|
It was sobering to see the Australian dollar tumble to fresh 33-month lows against the greenback on Tuesday evening.
This makes the Australian dollar the worst-performing major currency over the last six months, and its fall from grace is unnerving many in the market who regard the strong Aussie as a symbol of everything that has gone right with our economy.
But the weakening exchange rate leaves a good number of small cap stocks on the cusp of an earnings upgrade cycle, as highlighted by Ian Verrender last month, as analysts have been caught off guard by the sudden and vicious drop in the Aussie. It plunged to a low of US93.3 cents yesterday, but has since recovered to around US94.5 cents.
This might surprise you, but the currency impact is being just as acutely felt, if not more so, among a select group of juniors than large cap stocks.
While it is true that smaller companies tend to have far more limited offshore sales exposure than their bigger rivals, a good number of emerging companies in the Uncapped 100 generate almost all of their income in foreign currencies.
In fact, around a quarter of the Uncapped 100 stocks (you can find the full list of the Uncapped 100 at the bottom of the article) make at least half of their sales in another currency, and these aren’t just made up of resource companies that sell mineral and energy commodities to the global market in US dollars.
Industrial stocks in the Uncapped 100 with the greatest foreign currency exposure
Approx FY12 revenue in foreign $ (%)
Market Cap ($)
Astro Japan Property Group
Mayne Pharma Group
Source: Company reports, Bloomberg, Eureka Report
For instance, industrial companies like property investment company Astro Japan Property Group (AJA) and Asian real estate website operator iProperty Group (IPP) have next to no Australian market exposure.
However, it is not easy to quantify the earnings impact from the exchange rate because a number of these companies use derivatives to hedge their currency risks.
Take Acrux for example. Most of the biotech’s revenue comes from royalties that are paid in US dollars, but in its 2012-13 accounts the company said that a 10% change in the exchange rate would have an “immaterial impact” on its net profit as it uses spot and short-term forward sales of US dollars.
Further, trying forecast where the Australian dollar might go over the short term is hard enough, let alone guessing where it will average for the year, with the latter being more important in determining earnings.
With the financial year ending in just a few weeks, the Australian dollar is likely average $US1.03 for 2012-13, and a number of investment banks have been busy cutting their exchange rate estimates for the new year to between US85 cents and US90 cents. This could represent up to a 17.5% tailwind to the US earnings for some companies.
I’ll ignore the performance of the local dollar against other currencies for now, as the US dollar is the current focus. On the back of this, there are three companies that stand to benefit materially from the strengthening greenback.
When it comes to currency leverage, it’s hard to look past Nanosonics.
The stock is attractively priced, even if our dollar was at parity, and any fall-off in the Australian dollar will only make the stock more compelling.
The company has developed a device to more efficiently disinfect ultrasound probes and generates 69% of total revenue from North America.
However, unlike most of its peers, it manufactures the units and consumables (such as disinfection liquids) locally. This means a lower Australian dollar will not only increase its top line, but will pad its profit margin as well.
This can be seen if its 2011-12 accounts are used as a guide. Nanosonics’ chief financial officer, McGregor Grant, estimates that a 10% decline in the Australian dollar against the US currency would have added $1 million, or 17%, to its earnings before interest and tax.
What’s more, Nanosonics is not locked into any long-term hedging contracts and is well placed to benefit from the lower Australian dollar over the next 12 months.
The next catalyst for the stock could come in the next few weeks as GE, which has the exclusive right to distribute Nanosonics’ device in the United States, is expected to sign a new agreement with Nanosonics that could see the global conglomerate commit to a large order for the devices.
The stock is hovering close to its more than two-year high of 58 cents, but that is still comfortably under the average broker price target of 69 cents a share. The longer the Australian dollar remains on the back foot, the greater the probability that this price target will be revised upwards.
Unity Mining (UML)
Miners will be eagerly watching the declining Australian dollar, but those with onshore operations will be wearing the biggest grins.
This is because selling commodities in US dollars, but having most of your costs in Australian dollars, will enable the miner to report higher translated revenue from the stronger US currency and fatter margins as Australian dollar expenses fall relative to sales.
YTC Resources, Doray Minerals and Unity Mining are the only mining companies on the Uncapped 100 with all their assets in Australia, but only Unity is in production and can benefit from the current slump in the exchange rate.
The chief executive of the Tasmanian-based goldminer, Andrew McIlwain, told Eureka Report that a 10% fall in the $A/$US exchange rate will lift its earnings before interest, tax, depreciation and amortisation (EBITDA) margin by around 25%.
The floundering Aussie could mark a turning point for the stock, which has bounced 28.3% to 7.7 cents since hitting a record low of 6c cents in May due to the falling gold price and general market distaste for risky smaller producers.
There is value in Unity for those with a stomach for risk. The Henty gold mine, which is Unity’s flagship project, is cash flow positive and financially viable given its low cash cost of $900 plus per ounce including royalties.
Henty produced 4,831 ounces of gold in April and is on target to achieve full-year production of around 50,000 ounces for 2012-13.
All brokers polled on Bloomberg rate the stock a “buy”, with an average price target of 15 cents.
Sirtex Medical (SRX)
The market darling is starting to look fully valued after its share price doubled over the past 12 months, but the exchange rate is starting to inject some value back into the stock.
The liver cancer treatment developer is the ninth-best performer in the Uncapped 100 as investors have gotten excited that its technology is gaining serious traction around the world.
The downside to the success is that Sirtex is trading on an estimated one-year forward price/earnings ratio of over 25 times.
But with close to 98% of total revenue denominated in US dollars, brokers will probably be upgrading their profit forecasts on the stock if the Australian dollar remains under pressure.
Consensus estimates is currently anticipating a 43.5% surge in adjusted net profit to $27.4 million for 2013-14, but analysts are probably assuming that the Aussie hovers around parity to the greenback.
At US85 cents though, analysts will upgrade Sirtex’s net profit to just under $30 million as half of Sirtex’s earnings are naturally hedged because of its US manufacturing operations.
This means an 18% drop in the Australian dollar will see its bottom line increase by 9%.
This in itself won’t put the stock deep in value territory, but it will put the stock on a relatively attractive forward P/E of about 23 times, or about a 39% discount to global peers and 4% discount to Sirtex’s five-year average.
But one shouldn’t be thinking of Sirtex like a value stock. If you did, you would never buy it and would have missed out on its stellar run.
A company with Sirtex’s track record and growth projector will always command a market premium, and the trick is to get in with as small a premium as possible.
Brendon Lau may have interests in some of the stocks mentioned in the article.
The Uncapped 100
|Code||Name||Rationale||Market cap ($m)||Total return 1-year (%)||Sector (GICS)|
|MMS||McMillan Shakespeare||One of the best performers since the GFC, but doesn't get much press or analyst coverage. Good management team.||1,119||42.3||Industrials|
|NHF||NIB Holdings /Australia||Only listed health insurer. Widely held. Good performer.||1,010||57.89||Financials|
|MTU||M2 Telecommunications Group||Amazing growth story and well run company. High free float and strong insto support.||945||63.24||Telecommunication Services|
|BRG||Breville Group||Well covered but good candidate for core holding due to good track record.||928||75.47||Consumer Discretionary|
|ARP||ARB Corp||Well covered but good candidate for core holding due to quality management.||820||32.98||Consumer Discretionary|
|MRM||Mermaid Marine Australia||Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.||773||25.11||Industrials|
|GEM||G8 Education||Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.||686||172.26||Consumer Discretionary|
|SRX||Sirtex Medical||A shining star in the biotech space and one of the best performing stocks in 2012. Great product (liver cancer treatment) and bright outlook.||678||97||Health Care|
|AAD||Ardent Leisure Group||Widely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding||644||38.02||Consumer Discretionary|
|AUB||Austbrokers Holdings||The insurance broker is a strong performer. Widely held and well liked by small cap investors.||634||67.46||Financials|
|ACR||Acrux||One of the most successful Australian biotechs in recent history. Widely held by instos.||616||-14.37||Health Care|
|SGN||STW Communications Group||One of few companies able to benefit from online shift. Widely held and good insto support.||594||66.77||Consumer Discretionary|
|BDR||Beadell Resources||Will be a very big FY14 for miner as it has to prove it aims to produce 200,000 ounces of gold a year.||523||5.56||Materials|
|NXT||NEXTDC||The cloud computing company is an IT sector darling. Fairly widely held and followed.||486||55.68||Telecommunication Services|
|TOX||Tox Free Solutions||Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.||443||52.24||Industrials|
|RFG||Retail Food Group||Owns a number of well know franchise brands. Widely followed by instos.||436||31.26||Consumer Discretionary|
|HZN||Horizon Oil||One of better regarded small energy stocks that doesn't receive much media attention.||414||35.19||Energy|
|SLX||Silex Systems||Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.||414||-31.16||Information Technology|
|CCV||Cash Converters International||Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.||407||62.18||Consumer Discretionary|
|CCP||Credit Corp Group||Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.||407||60.11||Industrials|
|SEA||Sundance Energy Australia||Analysts have a favorable take on the oil & gas explorer, but stock is still under radar of most. Sundance provides exposure to prospective Eagle Ford shale.||405||60||Energy|
|BGA||Bega Cheese||Corporate interest in Australian food companies makes the cheese maker worth following.||404||68.79||Consumer Staples|
|AMM||Amcom Telecommunications||Well covered junior telco but good candidate for core holding.||399||60.61||Telecommunication Services|
|BRU||Buru Energy||Substantial size but not often covered by press. Widely held with good insto support.||371||-57.79||Energy|
|CWP||Cedar Woods Properties||Property developer with good ROE and earnings growth track record.||370||51.19||Financials|
|MYS||MyState||Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.||368||47.42||Financials|
|FGE||Forge Group||One of the better performers in its industry. Good track record and potential core holding.||366||-3.83||Industrials|
|UNS||Unilife Corp||The developer of one-use prefilled syringes is close to an inflection point as the market is expecting the company to announce a major contract with a pharmaceutical giant in the coming weeks.||334||-18.12||Health Care|
|RKN||Reckon||Fierce competition for cloud base accounting software puts it in firing line.||331||27.21||Information Technology|
|TGA||Thorn Group||One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.||314||53.36||Consumer Discretionary|
|UXC||UXC||Company has turned corner and enjoyed re-rating. What's next?||292||74.02||Information Technology|
|RCR||RCR Tomlinson||Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?||282||30.74||Industrials|
|NWH||NRW Holdings||One of the better regarded mining & civil contractors with good track record in delivering on projects.||282||-62.69||Industrials|
|MOC||Mortgage Choice||Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.||272||84.22||Financials|
|AEU||Australian Education Trust||Well performing childcare centre property owner. Good yield story and outlook.||258||57.17||Financials|
|RIC||Ridley Corp||High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.||246||-13.69||Consumer Staples|
|IMF||IMF Australia||Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.||244||59.07||Financials|
|MYX||Mayne Pharma Group||Sizeable generic drug maker with interesting board members.||242||67.53||Health Care|
|SPL||Starpharma Holdings||Noteworthy for its good pipeline of innovations. Well run, widely followed.||238||-40||Health Care|
|AJA||Astro Japan Property Group||Strong leverage to Japanese economy makes this an interesting stock to watch.||224||23.73||Financials|
|WBB||Wide Bay Australia||The building society is trying to turn its fortunes around. Also worth watching for its exposure to Queensland housing market, particularly around major resource projects.||219||9.33||Financials|
|NWT||Newsat||Potential large cap if it can launch its own satellite in 2015.||213||-50.31||Telecommunication Services|
|PFL||Patties Foods||Illiquid stock but has suite of well recognised consumer brands. Defensive yield.||211||0.63||Consumer Staples|
|DWS||DWS||Will be a big beneficiary if governments start spending on IT again.||195||13.93||Information Technology|
|SIV||Silver Chef||Strong jump in the share price of the equipment financing group has attracted a good following.||194||119.33||Industrials|
|DTL||Data#3||Well respected IT company that receives little press coverage||185||29.58||Information Technology|
|MLB||Melbourne IT||A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.||182||38.9||Information Technology|
|SHV||Select Harvests||Noteworthy for turbulent past and exposure to soft commodity market.||179||145.61||Consumer Staples|
|GXY||Galaxy Resources||Good upside potential if it can get its problem-prone Jiangsu plant back on track. Won't be easy to right this ship. Stock has been suspended for rights issue.||177||n.a.||Materials|
|GXL||Greencross||Acquisitive vetinary group. Good profit growth and share price performance, but gets little press.||176||114.03||Health Care|
|SFH||Specialty Fashion Group||In early stages of turnaround. Can the women's apparel retailer sustain the momentum?||169||72.67||Consumer Discretionary|
|CLH||Collection House||In similar space as Credit Corp. Strong stock performance has attracted a following and the stock appears to be well placed to run further||169||93.13||Industrials|
|MXI||MaxiTRANS Industries||Transport equipment maker posted good interim result. Has appealing yield and growth.||167||55.77||Industrials|
|IMD||Imdex||Drilling company is well supported by instos and should benefit from any rebound in exploration activity.||166||-56.09||Materials|
|MCP||McPherson's||The personal care and household products supplier is relatively insulated from volatile discretionary spend and online threat.||164||14.52||Consumer Discretionary|
|GID||GI Dynamics Inc||Largely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal shealth on diabetics.||160||-35.63||Health Care|
|VOC||Vocus Communications||Telecom stocks are in favour but Vocus is one of the least covered||159||13.66||Telecommunication Services|
|CKF||Collins Foods||One of the few food franchise listed companies.||158||70.3||Consumer Discretionary|
|BNO||Bionomics||One of the larger cancer treatment developers in this market.||152||22.03||Health Care|
|NAN||Nanosonics||A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.||149||12.87||Health Care|
|HSN||Hansen Technologies||Operates in a high potential/growth industry but is not covered by press or brokers.||146||6.59||Information Technology|
|IFM||Infomedia||Interesting tech play in the car parts market. Strong share price gain but gets little air play.||144||159.84||Information Technology|
|POH||Phosphagenics||Sizable biotech with a game changing FY14 year ahead. Good insto following.||138||-3.57||Health Care|
|REX||Regional Express Holdings||Well run airline that is overshadowed by Virgin and Qantas.||137||15.25||Industrials|
|IPP||iProperty Group||Worth watching as it is trying to be the REA Group of Asia.||136||-27.88||Information Technology|
|TGS||Tiger Resources||Future lies in its Kipoi copper mine expansion in the Congo but miner is fully funded with DRC govt holding 40% stake in tenement. Next 12mths will be interesting.||135||-29.82||Materials|
|RCG||RCG Corp||The footwear retailer is one of the best performing consumer stocks as online competition is not a big threat. Company has a good yield as well.||127||53.54||Consumer Discretionary|
|TFC||TFS Corp||The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.||120||-1.15||Materials|
|UBI||Universal Biosensors Inc||Well regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.||115||3.13||Health Care|
|BGL||BigAir Group||The wireless microcap has gained strong following over past year or two but is often overlooked by investors and the press.||103||74.1||Telecommunication Services|
|CLV||Clover Corp||One of the star performers in 2012. Operates in growing but relatively stable niche.||99||68.86||Health Care|
|ACL||Alchemia /Australia||One of the few biotechs with revenue stream. Good pipeline of oncology treatments.||99||-28.24||Health Care|
|ESV||Eservglobal||Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage||96||79.07||Information Technology|
|SAR||Saracen Mineral Holdings||Emerging gold producer that is widely held by instos. Hitting milestones and looks cheap. Key asset is close to gold majors, which makes it a potential takeover target.||95||-70.64||Materials|
|AOH||Altona Mining||Noteworthy copper play with Xstrata pullout of Roseby project in Australia and the good ramp up of its Finnish project.||95||-21.74||Materials|
|AMA||AMA Group||Good turnaround story but under the automotive services group is radar of most.||91||103.14||Consumer Discretionary|
|LCM||LogiCamms||Strong price performance and reasonable valuation attracting interest.||89||25.08||Industrials|
|AZZ||Antares Energy||Liquid with good insto support. Already in production with exploration upside in Texas.||86||-19.28||Energy|
|NEA||Nearmap||A stellar performer with an Interesting business that offers high quality ariel maps to companies & government.||82||493.02||Information Technology|
|PEN||Peninsula Energy||Widely held by instos and large free float. It's the only uranium miner on the list.||80||-20.59||Materials|
|CAA||Capral||An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose.||77||30||Materials|
|CUV||Clinuvel Pharmaceuticals||Interesting skin disorder treatment developer that has done reasonably well over past year||73||15.15||Health Care|
|RUL||RungePincockMinarco||IT company to resource industry. Turnaround potential under new CEO.||71||30.95||Industrials|
|DRM||Doray Minerals||Widely held by instos. One of the more favored gold explorers by brokers.||70||-42.78||Materials|
|JIN||Jumbo Interactive||Innovative small cap facing off industry dominated by giants. Worth watching to see if it can carve out a profitable global business.||65||64.55||Consumer Discretionary|
|TAN||Tandou||The only direct equity exposure to cotton prices. Also trades water rights and receives little press.||59||7.97||Consumer Staples|
|CKL||Colorpak||The small cap packaging company has grown via acquisitions over past few years.||57||19.54||Materials|
|LGD||Legend Corp||Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.||55||-12.41||Information Technology|
|BOL||Boom Logistics||Crane hire group is riding out the downturn in construction. It's widely held by instos and is very liquid.||54||-48.89||Industrials|
|UML||Unity Mining||Growing Tassie gold producer with high free float. Valuation looks compelling too.||54||-38.4||Materials|
|YTC||YTC Resources||Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.||52||-27.27||Materials|
|KOV||Korvest||The construction products and services supplier has been hit by project delays and deferrals. But its relatively high yield could give it some support.||51||33.92||Industrials|
|WDS||WDS||Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.||51||-22.96||Industrials|
|ISS||ISS Group||Good turnaround story from 2012 but the resource industry software developer under the radar of most. ISS has received a takeover offer after its inclusion in the Uncapped 100.||44||103.7||Information Technology|
|TSM||ThinkSmart||Potential turnaround story worth keeping eye on.||42||17.78||Financials|
|OTH||Onthehouse Holdings||Alternative small cap to online property leader REA Group. It is trying to use more timely housing data as a compeitive edge against REA.||33||-0.36||Consumer Discretionary|
|NTC||NetComm Wireless||Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.||33||145.45||Information Technology|
|EBT||eBet||Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.||20||121.67||Consumer Discretionary|
|PGC||Paragon Care||Emerging hospital equipment supplier that has been ignored by market.||11||34.88||Health Care|
|MBO||Mobilarm||Unique product that could change global maritime safety practices with its man-overboard location beacon.||10||-14.63||Information Technology|