Equities Commentary

GUD is my next buy recommendation

by Michael Gable

Below is an extract from our recent client research report on GUD.

Fundamental View
With the stock price having been de-rated, and now trading on a 1-year forward P/E multiple of 11.2x, the market is taking a view that achieving profit growth without the benefit of cost cutting initiatives in recent years is going to be difficult and that achieving sales growth against further falls in the A$ (vs US$) is going to be challenging.
Accordingly, with GUD having executed well on profit improvement initiatives to date, the key question for investors is whether the Company can generate profit improvement on the back of revenue improvement over the short-to-medium term at least.

Indeed, the Company itself has acknowledged that profit growth now needs to come from revenue growth. Nonetheless, the profit improvement program is continuing, even though “most of the easy wins have been banked”. As an example, Dexion delivered cost savings from the closure of the Kings Park facility that were well below expectations due to timing issues (more cost benefits are expected with a full year effect in FY16).

Notably, GUD generated sales growth across all divisions in 2H15, against the headwind of a ~5% fall in the A$ (vs the US$) during this period. In the current half-year period, the A$/US$ exchange rate is down by ~8.5%, so while there may be an impact on sales in 1H16 as a result of the further fall in the A$/US$, we contend that the impact may be limited to the current half-year period, assuming no significant further fall in the exchange rate from the current level.
A further point underpinning our POSITIVE view is that the acquisition of Brown & Watson International in May 2015 (which is still in the early stages of integration) has contributed to an improved quality in the earnings profile. Post the BWI acquisition, GUD will have greater than 65% EBIT exposure to the automotive aftermarket industry, although this growth is expected to start to ramp up in late FY16. Importantly, the BWI acquisition has taken the pressure off cost cutting to generate profit growth.
Technical View
GUD had pulled back particularly sharply during October when the broader market was heading higher. It has caused it to become oversold, triggering a buy signal on the RSI (circled). We have also noticed that the pullback from the August high has been done in a 3 wave "abc" where wave "a" is equal to wave "c". So this is likely a countertrend move against the longer term uptrend. With the recent market-beating performance, there is a good chance that GUD can bounce here, at least to the mid $8's.

Why I am now buying Premier Investments (PMV)

by Michael Gable

We’re buying PMV for a number of reasons. The improving gross margin profile driven by the expansion of Smiggle and Peter Alexander, is appealing and the ability to improve this in the face of a weakening A$ is similarly impressive. The increasing contribution of Smiggle and Peter Alexander to total sales with the expanding overseas presence reduces the impact of competition on their core brands. It’s been a market concern with the number of global brands that have entered the market over the last few years. Because of this, any expansion plans outlined are likely to be well received by the market. The P/E is not unreasonable in light of PMV’s attractive earnings growth profile, and proven, superior management capability to execute strategy.

Technical View
The last few years has seen PMV trend higher, occasionally coming back to the uptrend line. After an impressive rally earlier this year, PMV once again pulled back and hit this line. Looking at the May high, we can see the shorter-term downtrend being broken. The stock looks bullish and we should now head higher.

Greencross (GXL) will continue to trade higher

by Michael Gable

I mentioned during this week's Stock Watch video that I was buying Greencross last week for our clients. Below I will share with you an extract of last week's recommendation:
While the downwardly-revised guidance for FY15 has clearly disappointed the market, the forward profit growth estimates remain very strong and are driven by the benefits of the Mammoth merger, the acquisition of City Farmers, continued LFL sales growth in the underlying operations, continuation of the new store rollout program, veterinary acquisitions and the co-location strategy. 
We consider that the current 1-year forward PE multiple of 14.8x is highly attractive for a quality growth stock such as GXL, with the market appearing to have not factored in the potential uplift in earnings in FY16 and FY17 from the initiatives referred to above. 
Accordingly, we retain a positive view on GXL, particularly in light of the significance de-rating from ~19x at the time of our earlier report in April occurring whilst the fundamentals remain strong. 
When we looked at GXL on 7 April for our clients, it was trading at $7.70 and we suggested that it could head lower, with support at $7 and then further down at $6. It has clearly gone even lower than that, but the bounce from around $5 is quite robust, in our opinion. We have seen a strong week of buying here and the stock has triggered a buy signal on the weekly RSI (pictured). The stock has not broken the downtrend that commenced a year ago, but it is showing enough reversal signs here that some investors may wish to test the waters. There was some slight resistance near $6, but beyond that we could see it head to over $7 before finding the next level of resistance.

Webjet is a buy on a dip

by Michael Gable

The following is an extract from our complete client report earlier in the week:

WEB is well placed to continue benefitting from the growth in international bookings outpacing domestic bookings, as well as its ability to capture the shift to booking international travel online, in light of the Company’s increased market share and presence.
The Company has previously experienced periods where it has struggled to gain market share in the core Webjet business, as a result of intense competition. While the latter remains a factor, the key factors underpinning the strong levels of TTV growth in core

Webjet business include:
i. The significant investment undertaken in technology and branding and
ii. The growth experienced in the Packages segment. As recently as a couple of years ago, the Company had modest success with Packages and since that time, this segment has grown significantly given that Packages are a logical extension of the aggregation of air and hotel supply, and Packages have migrated from a bricks-and-mortar model to online.

In light of the share price’s strong rally since the trading update last week, we consider that weakness from current levels would present a more attractive entry opportunity. We also note that a key share price catalyst is another accretive B2B acquisition, with the capacity for further acquisitions supported by the Company holding a net cash position of ~$30m on the balance sheet.
WEB was trending up nicely for the last year, most recently hitting that support line two weeks ago. From there it rallied impulsively, making 30% in 4 days. The stock is clearly looking bullish but we would like to grab it on a pullback instead of chasing it up here. There appears to be an obvious support level near $3.50, so if some short-term profit taking starts to take hold, then that would be the buy zone. We would then expect WEB to make a new high for the year, finding resistance near $4.50.

Why we're liking a little company called IPH

by Michael Gable

The following is extract from our complete research this week:

IPH is the holding company for Spruson & Ferguson (S&F), one of the leading Intellectual Property (IP) services firms in the Asia-Pacific region. S&F employs patent and trademarks attorneys and other professionals to assist its clients in IP-related matters, and operates as IP service hubs, offering a one-stop service into 25 countries in Asia Pacific.
The vast majority of patent applications in Australia and Singapore are sourced from offshore markets. Non-resident applicants make up 90% and 88% of applications filed in Australia and Singapore respectively.
We consider IPH to have highly attractive fundamentals: high EBITDA margins, solid earnings growth, high ROE, strong cashflow conversion and a strong balance sheet which should allow further acquisitions. Accordingly, with markets current volatile, any weakness in the share price would present an attractive point.
Key risks include:
i. Sensitivity to Currency Movements. Given the high portion of revenue derived from foreign corporate and associates, the group is highly sensitive to currency movements. A large proportion of the revenue base is generated in currencies other than A$, while the majority of operating costs are derived in A$ (~65%) and the Company does not hedge against his currency risk and will benefit materially from a weak Australian dollar.
ii. Potential changes to the Electronic Patent Cooperation Treaty. If these are implemented, it could negatively impact the group’s national phase entry filing practice. Industry feedback that this reform is likely to be implemented within three years, and expected over a 5-year period.
The Company has only been listed for eight months but we can get a rough idea that price action overall is slightly bullish. This is because the stock rallied $2 in 4 months, but then in the subsequent four months it is only down about 30c from the March high. This tells us that the bulls are still in control. We could be seeing the formation of an ascending triangle here so investors may look to buy at the bottom of the range but the better probability trade is to wait for a break out above $5 to indicate a resumption of the uptrend.



Disclaimer: Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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