4 stocks on the comeback trail in 2018

Reporting season always throws up stocks on the comeback trail, and this year was no exception. Here are four companies that came out of their profit announcements with their reputations enhanced.
 

1. Macmahon Holdings (MAH, 25 cents)

Market capitalisation: $536 million

FY19 forecast yield: n/a

Analysts’ consensus target price: 31 cents (Thomson Reuters)

Mining contractor Macmahon Holdings confirmed fairly emphatically that it was on the comeback trail, almost doubling operating revenue in FY18, to $710 million, and posting a $31.3 million net profit, turning around a $23 million loss from the year before.

The main drivers of the result were the start and ramp-up of new projects and a turnaround in performance at Newcrest’s Telfer gold-copper open-pit mine in the Pilbara. The revenue surge was driven by the award and commencement of three new surface projects and two underground projects during the year. What really showed that Macmahon was on the rebound was that the company almost tripled net profit in the second half of the year, with $23.1 million earned in the second half, versus $8.2 million in the December half.

Moreover, Macmahon gave a very positive forward outlook, forecasting earnings before interest and tax (EBIT) from continuing operations of $70 million–$80 million in FY19 – compared to $41 million in FY18 – and guiding for revenue of $950 million–$1.05 billion. The company said this revenue guidance was based on $1 billion of contracted work for FY19, and said at the result that its monthly revenue was now consistent with this run-rate.

New projects are giving major drive. In Australia, Macmahon started work during the financial year on the Byerwen open-pit coking coal mine, for QCoal, and on the Mount Morgans open-pit gold mine, for Dacian Gold. Its biggest new contract, the Batu Hijau copper-gold open-pit mine in Indonesia, got under way in April and Macmahon expects it to be worth US$1.8 billion in revenue over the next five years.

Analysts expect strong earnings growth from Macmahon over this financial year and next, with dividends resuming in FY20 – Macmahon last paid a dividend in 2012. From earnings per share (EPS) of 1.5 cents in FY18, Thomson Reuters’ collation has analysts expecting 2.9 cents in FY19, rising to 3.2 cents in FY20.
 

2. Baby Bunting (BBN, $2.42)

Market capitalisation: $305 million

FY19 forecast yield: 3.3%. fully franked

Analysts’ consensus target price: $2.68 (Thomson Reuters), $2.65 (FN Arena)

We tipped specialist baby goods retailer Baby Bunting as a potential “resurrection stock” back at Easter in what was a bad year for the company in FY18. BBN issued three profit warnings in just seven months, as the company’s sales and gross margins were hammered by massive discounting in the sector and stock clearance by desperate rivals. Just how bad the situation was in the sector was starkly illustrated by the collapse of Baby Bunting’s biggest competitor, Toys ‘R’ Us Australia, in June, after its US parent went under earlier in the year. The carnage also claimed the third- and fourth-largest players in the market, Baby Bounce and Baby Savings, in April. These followed the demise of Bubs Baby Shops and Baby Bounce WA in late 2017. The looming entry of Amazon’s “Prime” offering also destabilised the $2.4 billion baby-goods market.

But being Australia’s largest baby goods chain allowed Baby Bunting to ride out the troubled times – although the FY18 result was weak, with total sales up 9%, to $303.1 million, same-store sales flat, and net profit down 29%, to $8.7 million. The fully franked dividend was cut by 25%, to 5.3 cents.

The market was expecting this, and what was more important was that BBN came out with an upbeat outlook. The company said trade so far in the new financial year had been strong, with same-store sales up 9.8%. Baby Bunting projects its earnings before interest, tax, depreciation and amortisation (EBITDA) for FY19 to be in the range of $24 million–$27 million, versus $17.5 million in FY18, with the gross margin tipped to recover to 34%, after slipping to 33.3% in FY18.

The share price leapt 39% on the result, to an 18-month high. While that absorbed much of the value available in BBN, analysts still see room for the share price to move higher as the company strengthens its market-leading position.
 

3. Sims Metal Management (SGM)

Market capitalisation: $2.6 billion

FY19 forecast yield: 4.3%, fully franked

Analysts’ consensus target price: $14.65 (Thomson Reuters), $15.00 (FN Arena)

 Scrap metals merchant and electronics recycler Sims Metal Management – the world’s largest listed metals recycler – had a very sound FY18, with sales revenue up by 27% to $6.45 billion, and net profit before one-off items surging by 60%, to $192.1 million. The fully franked dividend was lifted to 53 cents. Sims’ earnings grew in its North America Metals, Australia and New Zealand Metals and Global E-Recycling business units, as well as in its joint ventures SA Recycling (US scrap metal) and LMS Energy (Australian energy-from-landfill waste), but fell in the Europe Metals business.

Sims said when announcing its result that it remained positive about the remainder of FY19, but gave the caveat of the possibility of further escalations in global trade wars potentially having an impact on commodity prices and volumes. The company generates about 55% of its revenue from operations in North America, so there is always currency risk attached to its earnings.

There are risks for Sims in China, which is considered likely to ban all scrap imports by December 2020, but the company is adapting to this by upgrading its scrap to a semi-refined product, and it expects “continued profitable business into China.”

SGM was sold off before and after its profit announcement, falling from levels above $17 in August. That has opened up considerable value, with the company expected to deliver healthy profit growth in FY19.
 

4. Adairs (ADH, $2.41)

Market capitalisation: $400 million

FY19 forecast yield: 6.2%, fully franked

Analysts’ consensus target price: $2.77 (Thomson Reuters), $2.765 (FN Arena)

 I’ve been interested in manchester and homewares specialist retailer Adairs for quite a while. Back in January 2017, ADH was a “stock to watch in 2017” – at $1.55 – and it was also a “high-yielder to consider” in July this year, at $2.22. Sure, memories were still prominent of the stock being hammered 42% in a single day in November 2016, after slashing its full-year profit guidance, but Adairs gave every indication of being a good-quality business under that. Earnings did fall 23% in FY17, but the company has rebuilt its EPS determinedly since then. Like many retailers, Adairs struggled with investor perception of Amazon Prime laying waste to the sector, but it seems finally to have regained investor confidence.

The FY18 result was impressive, with sales up 19% to $314.8 million and net profit rising 45% to $30.6 million. Comparable sales rose by 14%, while online sales surged 75%, to account for 13% of total sales. The full-year fully franked dividend increased by more than two-thirds, to 13.5 cents. Adairs said growth came from increased transaction volume, more customers choosing to shop at Adairs and existing customers, including the growing Linen Lovers membership base, shopping more frequently.

The company said sales growth was a good mix of growth across its core categories and growth in its “expansion categories,” in particular home décor, furniture and soft furnishings. Adairs lifted its gross margin by 1.1 percentage points to an enviable 60.3%. Also notable was controlled spending, with five less new stores opened in FY18: Adairs opened eight new stores, and refurbished seven, with five of these increased in size.

Adairs has got its business back to a sound growth position. From 18.4 cents in FY18, analysts expect 20.9 cents in FY19, rising to 23 cents next year. Adairs is still an attractive yield stock, with plenty of scope for share price growth.