3 Stars from this reporting season


The information in this article is market commentary only and reflects Lincoln's views and beliefs at the time of preparation, which are subject to change without notice. To obtain up-to-date information, please contact us.

The reporting season post-mortem to date has focused on the larger number of companies that missed expectations, and the imminent challenges a number face within a slowing global environment.

There were, however, companies that did deliver, and in our view will continue to do well in the current climate. Let’s discuss the results of three of the real stars from this reporting season to learn why they shone brightest amongst their peers.

1. Altium Limited (ALU)

ALU is a developer and seller of software and hardware used for the design and development of Printed Circuit Boards (PCB). The company’s ambition is to become a market leader in PCB by 2020 and ‘market dominator’ by 2025 and is rolling out new products and pursuing strategic partnerships to build market share.

ALU remains financially healthy with no debt, strong growth in operational cashflow. FY19 was another strong year of growth, with revenue and net profit rising 23% and 41% respectively. Recurring revenue came in at 56%, and margins improved from 32% in FY18 to 36.5% in FY19.

The company continues to invest heavily in research and development and plans to more than double revenue and subscribers by the end of 2025. Assuming no adverse impact on the economic climate, we believe ALU should comfortably meet FY20 expectations.

Much of ALU’s future success though is dependent on the company gaining and maintaining market leadership in the PCB market where competition is intense. Reassuringly, the current CEO, Aram Mirkazemi, continues to hold a significant stake in the business at c7%.

2. Jumbo Interactive Limited (JIN)

JIN is an online platform which powers the Ozlotteries.com site, enabling it to have exclusive distribution agreements with leading lottery companies. The website provides lottery players with a convenient service where they can buy a range of domestic lottery games, including Powerball, TattsLotto and OzLotto lotteries.

The FY19 result was a beat on market expectations, having delivered revenue growth of 64% to $65.4m and NPAT growth of 124% to $26.4m. Underpinning the strong result was a 106.6% increase in online accounts and a 74.1% increase in active online customers who also increased the amount they spent on games.

JIN remains highly cash generative and has no debt on the balance sheet. The company generates steady free cash flow per share, which supports management’s target dividend payout of 85% of profits. Furthermore, we estimate the company has ample surplus cash, which may be used to support the distribution of special dividends.

There is, however, a direct correlation between large jackpots and lottery sales and since it is impossible to forecast how many jackpots will occur in any year, this result will impact future revenue forecasts. Their existing arrangement with Tabcorp Holding Ltd is also due to be renegotiated shortly, and that may be a catalyst for volatility.

3. Nanosonics Limited (NAN)

NAN is a mid-sized healthcare company that manufacturers Trophon, a high-level sterilisation tool for sensitive medical instruments in hospitals and clinical practices.

NAN produced a strong result, outperforming market expectations with revenue up +39% to $84.3m and NPAT up ~92% to $13. As a result, we noticed a marked improvement in full-year ROE from 6.3% to 13.3% while net profit margins remained high at 15.8%.

As is the norm, management did not provide any quantitative guidance.  Though they expect FY20 growth in the North American installed base to echo the pace in FY19 with a target market share of 75% for that division within three years. Positive commentary around the launch of a new product in FY20 also contributed to the bullish share price sentiment, though at current prices this is factored in.

Although the non-Executive Director and Chairman, Maurie Stang has gradually sold his shares from FY15-18, he (together with close family members) still hold a significant stake in the company and remains the third largest shareholder.

Some points to conclude on:

First, these companies leading into the reporting season carried lofty expectations and remained so. Even a small miss on future numbers or a softening of expectations could result in a significant sell-off. It is an active risk many investors still need to consider.

However, to have held these businesses would have meant that you were buying/holding at premium prices to be exposed to these high-quality businesses. This is something we were comfortable to do, and their results proved why.

And finally, there were other candidates that were unlucky not to make this list such as ProMedicus Ltd (PME) and Infomedia Limited (IFM) to name a few. This is good news for those looking to build a diversified portfolio of quality businesses, because investors should hold 15-20 stocks in order to reduce unsystematic risk and avoid over concentration in one business company. Because while focusing on three outperforming stocks may make headlines, they on their own do not make create a portfolio.

Code Company Financial Health Rating ROE (%) Net Profit Margin (%) 1 Year EPS Growth (%) Rev Growth 1 Year (%)
ALU

Altium Limited

Strong

32.3

30.9

46.3

28.3

JIN

Jumbo Interactive Limited

Strong

42.4

40.2

93.9

63.9

NAN

Nanosonics Limited

Strong

13.3

15.8

135.1

39.5

Source: Stock Doctor