Five christmas stockings stocks

There are 2,200 to choose from on the Australian Securities Exchange (ASX), but here are five stocks that I would be delighted to find in my Christmas stocking.

1. CSL (CSL:ASX)

Market capitalisation: $133.7 billion
Three-year total return: 27.9% a year
Analysts’ consensus valuation: $321.50 (Thomson Reuters), $316.81 (FN Arena)

I’d like to see some CSL shares in my Christmas stocking because it’s just such a great company – one of the best-managed companies on the ASX. In just over a quarter of a century on the stock exchange (it came out of government ownership) CSL has become a true global leader, the world’s largest maker of plasma-based therapies, a global leader in treatments for immunodeficiency and bleeding diseases such as haemophilia, and one of the world’s biggest suppliers of flu vaccines. Along the journey from 77 cents to $293.80 in share price (with an all-time peak of $338.68 in February 2020, prior to the COVID Crash), CSL has consistently rewarded investors who buy it and watch it go higher. But its share-price trajectory has not been without the odd speed-bump – most recently, the 29% fall in the COVID Crash.

The CSL Behring operation is one of the leading plasma therapies company in the world, with a suite of therapies developed from human plasma, led by Haegarda, Hizentra, and Privigen; while CSL’s other core business, Seqirus, is the second biggest influenza vaccines company globally. The development pipelines of both businesses will keep CSL at the forefront of their fields, and give the stock major long-term potential. Every year CSL invests about 10%–12% of revenue back into R&D – about $1.4 billion a year, at present – and that commitment to innovation has been one of the major drivers of the company’s growth. Gene therapies and antibodies are some of CSL’s big areas of potential.

Many investors believe the market is actually giving investors a bit of a discount at the moment, because it is too concerned with a temporary drop in plasma donations in the wake of COVID, and not looking at the long-term opportunities. CSL is trialling a new product, CSL 112, designed to prevent secondary heart attacks by scraping plaque off artery walls, and that could boost the global revenue base by about one-third on its own.

CSL has begun manufacturing both the Oxford University/AstraZeneca AZD1222 and the University of Queensland/CSL V451 COVID-19 vaccine candidates. The company recently announced plans to invest about $800 million building an advanced influenza vaccine manufacturing facility in Melbourne.

2. Pushpay Holdings (PPH:ASX)

Market capitalisation: $1.9 billion
Three-year total return: 30.1% a year
Analysts’ consensus valuation: $2.56 (Thomson Reuters), $4.45 (FN Arena)

Kiwi dual-listing Pushpay Holdings has a great commercial niche, in church donations and tithes – it has a mobile-based payments app that is used by churches to automate donations. The Pushpay technology encourages people to give more, through technological ease. The app helps churchgoers commit to regular giving, and that brings about a much more predictable stream of recurring revenue, which is good for the church client and for Pushpay. The technology helped with socially distanced giving, during COVID. Pre-COVID, Pushpay customers were getting about 40% of their donation revenue digitally; now it’s 60%.

After buying US-based church management software company Church Community Builder last year, Pushpay has added more capabilities to its technology, rolling-out its ChurchStaq system incorporating digital giving, donor development, and church management system. Over the last year, Pushpay has lifted its numbers of churches on board from about 8,000 to almost 11,000.

Pushpay’s long-term goal is to achieve 50% market share of the medium-to-large church market in the US – which would give it about US$1 billion in annual revenue.

The market in which the technology has really taken off is in the US “Bible Belt,” in the southwest and southeast of the country. Pushpay has a broader market than that – its products are also used by non-profit organisations, charities and schools in the US, Canada, Australia and New Zealand, and 19 other countries – but the “faith sector” has emerged as the company’s specialty. The company sees South-east Asia and South America as markets with high potential.

In FY20 (year ending March), Pushpay processed 25.9 million transactions, at an average value of US$195, lifted revenue by 32%, to US$129.8 million, and made a net profit of US$16 million, down 15%. Earnings before interest, tax, depreciation and amortisation and foreign currency and foreign currency (EBITDAF) surged from US$1.6 million the year before, to US$25.1 million, while the gross profit margin lifted from 60% to 65%.

Then, in the half-year to September, operating revenue rose by 53%, to US$85.6 million; the gross profit margin increased to 68%; and both EBITDAF and net profit more than doubled, to US$26.7 million and US$13.4 million respectively.

For some reason, the market did not like the interim result, despite growth in virtually every number – it simply appears that the market expected even better results than what was delivered, which can be a common thing for high-growth companies. The shares fell by 24% – and that’s the Christmas present for investors, a cheaper entry into a really impressive company. Pushpay has guidance in the market for FY21 EBITDAF of between US$54 million–US$58 million: – it has lifted that guidance three times.

3. Appen (APX:ASX)

Market capitalisation: $3.6 billion
Three-year total return: 58.2% a year
Analysts’ consensus valuation: $40.00 (Thomson Reuters), $36.58 (FN Arena)

Another stock I’d love to see under the Christmas tree is Appen, which is a global leader in the development of high-quality datasets for machine learning and artificial intelligence (AI). Appen has a unique business model of having a cloud-linked crowd of one million “independent agents” researching, evaluating and annotating data, advancing the capabilities of machine learning and AI algorithms.

Appen’s crowd takes in data from multiple sources, including speech, text and video across multiple languages – it covers more than 180 languages and dialects – and analyses and annotates it, preparing it to go into ML and AI models. These highly tech-savvy people are working from wherever they want, around the globe, crunching data for Appen’s customers, the list of which include the world’s leading technology companies, automakers and governments – who use it to improve their use of AI, and for generating high-quality training data.

For the June 2020 half-year, Appen lifted revenue by 25% compared to the same time last year, to $306.2 million, while earnings before interest, tax, depreciation and amortisation (EBITDA) was up 6%, to $49.1 million. However, underlying net profit was down 3% on last year’s result, to $28.9 million.

Appen says the pandemic is accelerating growth in sectors from which it can benefit, including tech, eCommerce, pharmaceuticals, and logistics. In truth, the long-term growth opportunity for APX is only getting started. Appen has guidance for full-year 2020 EBITDA to fall between $125 million and $130 million, up from $101 million in 2019. It looks like Appen has weathered COVID well and that growth is poised to kick off again in 2021.

4. RPMGlobal (RUL:ASX)

Market capitalisation: $302 million
Analysts’ consensus valuation: n/a
Three-year total return: 20.7% a year 

I don’t know why RPMGlobal is virtually uncovered by Australian brokers – the company is a world leader in its field, of mining software. Wherever mining is conducted around the world, miners use RPMGlobal’s suite of state-of-the-art software, such as its asset management system (AMT), HAULSIM (its mining simulation product), MinVu (shift manager software), the XPAC Solutions scheduling tool, the Underground Metals Solution (UGMS) mine planning optimiser and the Truck and Loader Productivity and Cost calculator (TALPAC) 3D truck haulage simulation software.

Most of these are enterprise software products but RPMGlobal is starting to move its products to cloud-based software-as-a-service (SaaS) applications. In October, RPMGlobal announced the acquisition of Canadian-based company IMAFS, which provides inventory optimisation software as a SaaS product, and also launched its “haulage-as-a-service product,” which gives online access to the TALPAC calculation engine. In particular, IMAFS will help RPMGlobal take advantage of AI and machine-learning capabilities – its predictive algorithms will be a very powerful addition to the AMT system, which uses a “dynamic life cycle” costing engine that forecasts, in real-time, every maintenance event for a piece of equipment, at a component level, until the end of its economic life.

The combination will help RPMGlobal’s customers be more predictive and less reliant on historical data. This is the absolute sweet spot that RPMGlobal is in – helping mining companies lower their costs and increase their productivity. It has sold its products in 125 countries.

In FY20, software subscription revenue rose more than three-fold, with total contracted value (TCV) of software subscriptions sold rising by 235%, or $24.2 million, to $34.5 million. Annual recurring revenue (ARR) from software subscriptions was $12.7 million and the ARR from perpetual maintenance revenue stood at $20.5 million – together, the recurring revenue stands at just over 41% of revenue. The company is moving towards a subscription model, and that is going to be the profit driver in years to come. Software development costs have pushed RPMGlobal into loss in recent years, but the company is poised to start converting market share to profits. RUL has racked up a return of 21.4% a year over the past five years – it’s a ripper of a stock, and I’d love to open a packet of it under the Christmas tree.

5. AVITA Therapeutics (AVH:ASX)

Market capitalisation: $553 million
Three-year total return: 59.4% a year
Analysts’ consensus valuation: $12.00 (Thomson Reuters)

I’ve been following AVITA for a while now, first mentioning it in this newsletter in September 2014, at 9.6 cents (the equivalent of $1.92 today). AVITA is a regenerative medicine company that is commercialising the RECELL technology, which was developed by plastic surgeon Professor Fiona Wood at Royal Perth Hospital to treat burns patients. RECELL takes a small sample of the patient’s own skin, from which, using a proprietary process, AVITA prepares a “suspension” of skin cells, which is then sprayed onto areas of the patient requiring treatment and regenerates natural healthy epidermis.

The beauty of the RECELL process is that because skin cells contain information to “know” what a person’s skin should look like – for example, facial skin cells “know” that they are facial skin cells – they can signal and recruit other cells, including nerve cells, to come in. This means that, apart from burns, RECELL also has applications in other skin related areas such as chronic wound care (trauma, ulcers), plastic surgery, vitiligo (an auto-immune disease that results in a loss of colour or pigmentation in patches of skin), aesthetics uses (for example, skin rejuvenation) and tattoo removal.

Because RECELL uses the patient’s own skin, the body will not reject the treatment. Besides improved healing and reduced scar formation, RECELL allows the reintroduction of pigmentation into the skin (and treating pigmentation disorders). The RECELL system was approved by the US Food & Drug Administration (FDA) in September 2018. RECELL stands a very good chance of becoming the new standard-of-care for the treatment of burn wounds in the US, because it is more effective than the incumbent, which is the skin graft. Analysts don’t see AVITA becoming profitable until about FY23, but this technology has multi-billion-dollar addressable markets and has the skin treatment world at its feet.