Author: therawinformant

Is the Challenger Ltd (ASX: CGF) share price a buy?

Investors were thrown a curve ball today after the annuity business announced a capital raising.

The capital raising part of the announcement

Here are the details of the raising. 

The first part of the raising comprises a fully underwritten institutional placement of $270 million. The second part is a non-underwritten share purchase plan (SPP) which is looking to raise up to $30 million.

The placement will be conducted at a fixed price of $4.89 per new share, which represents an 8.1% discount to the last traded price of $5.32 and a 5.7% discount to the volume weighted average price (VWAP) of Challenger shares traded on the ASX during the five days leading up to 19 June 2020.

The placement will mean 55 million new shares will be issued. This is approximately 9% of Challenger’s existing shares on issue.

Eligible retail shareholders can apply for up to $30,000 of new Challenger shares. The price will either be the Challenger placement share price of $4.89 or a 2% discount to the weighted average share price in the five days up to the closing date of the share purchase plan (being 21 July 2020).

According to reporting by the Australian Financial Review, the $270 million placement was covered by institutional investors by early afternoon.

MS&AD, Challenger’s major shareholder and strategic partner, has said that it won’t be participating in the capital raising. The investor said it supports the raising and remains committed to its strategic relationship and will remain a major shareholder.

I think it’s a shame this raising is being done at a much lower share price compared to a few months ago. This is the case for many businesses doing capital raisings during this period. 

The dividend part of the announcement

As part of the capital raising, Challenger said: “Given the uncertain economic conditions, investment market volatility and intention to maintain a strong capital position while optimising earnings, the board’s intention is that no final FY20 dividend will be paid by Challenger in September 2020.”

This is very disappointing. Of course, it wouldn’t make sense to do a capital raising and then pay out a large dividend a few months later. That would be dilutive for shareholders and the Challenger share price. 

However, before this announcement, Challenger had a reliable dividend record that went back further than the GFC with no cuts. This decision ends that streak. 

Challenger may well bring back a pleasing dividend in FY21. But I don’t think it can be called a reliable dividend share any more.

What will Challenger do with the raised capital?

The equity raise will strengthen Challenger Life’s capital position during this period of market uncertainty, with $300 million to be used as common equity tier 1 (CET1) regulatory capital.

Challenger said that investment grade fixed income asset risk premiums have widened significantly following the COVID-19 pandemic market sell-off. The annuity company thinks that there is a significant opportunity to generate pre-tax return on equity (ROE) returns of more than 20% on the capital backing the investments. The capital will be progressively deployed and expected to be ROE accretive once fully deployed.

Is Challenger a buy at this share price?

The company is expecting normalised profit before tax to be at the bottom end of its $500 million to $550 million guidance range. However, the statutory net profit after tax (NPAT) is expected to be impacted by the market sell-off. At the end of May 2020, it’s showing a loss of $483 million for FY20 to date.

I see why Challenger is doing the capital raising, particularly for boosting Challenger Life’s CET1 ratio. The prospect of earning strong ROE returns is also alluring.

The capital raising price does look attractive for eligible shareholders and Challenger may be cheap. But the cancellation of the final FY20 dividend makes Challenger less appealing to me now. Will a solid dividend return? Investors will have to hope that Challenger is able to utilise the new funds in a very effective manner to make up for the lost dividend income. The last couple of years have been disappointing for Challenger shareholders.

More reading

• Why Challenger is launching a $300 million equity raising
• 3 long-term ASX 200 shares I’d buy right now
• What are the best ASX shares for dividends?
• ASX 200 jumps almost 4%, Webjet share price soars
• 2 unloved ASX shares that could stage a big turnaround

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Austal Limited (ASX: ASB) share price has surged 9.52% today after the shipbuilder announced a US$50 million agreement with the US Government. The US Department of Defense has entered into an agreement with Austal to maintain and protect its domestic shipbuilding and maintenance capacity.  

What does Austal do?

Austal is a shipbuilder that designs, constructs, and supports defence and commercial vessels. The company produces high speed passenger ferries and passenger-vehicle ferries, as well as frigates, high speed military transport vessels and patrol boats. Austal operates from shipyards across the US, Western Australia, Vietnam, and the Philippines.

What does the new agreement mean?

The new agreement is part of the US Government’s national response to COVID-19 and aims to protect and expand critical domestic shipbuilding capacity. Austal intends to use the funds to invest in the development of additional capacity for steel naval vessel construction at its shipyard in Mobile, Alabama.

Austal says it is likely to match the US$50 million investment, bringing the total investment to around US$100 million. The company reports that this should benefit US Navy shipbuilding and accelerate pandemic recovery efforts in the Gulf Coast region.

How has Austal been performing?

The Austal share price was crunched in the March correction, falling 47% to $2.31 at its lowest. Since then the Austal share price has regained much of this ground, with shares currently trading at $3.68. The Austal share price was also boosted by upgraded guidance last month along with a US$43 million contract modification last week.

In May, Austal increased its FY20 earnings guidance to group revenue of approximately $2 billion and group earnings before interest and tax of no less than $125 million (up from $110 million). The upgraded guidance was issued as a result of COVID-19 having a more limited impact on performance than anticipated, along with the sustained strength of the US dollar, and the award of a new vessel construction contract announced in May.

Commenting on the upgraded guidance, Austal CEO David Singleton said: “Austal’s continued strong performance across our shipyards in the USA, Australia, Philippines, and Vietnam during the COVID-19 pandemic has provided confidence to increase the Company’s FY2020 earnings guidance.”

In 1H FY20, Austal reported a 22% increase in revenue which reached $1.04 billion. The shipbuilder made a net profit after tax of $40.8 million, up 72% on the prior corresponding period. Austal finished the half with net cash of $152.4 million.

More reading

• Why Austal, James Hardie, Northern Star, & Ramelius are storming higher
• ASX 200 flat: Altium update disappoints, Metcash posts full year loss
• A $73m boost sends the Austal share price to the top of the ASX 200 today
• Top fund manager reveals some of the best ASX shares to own
• ASX 200 falls 0.9%, Afterpay share price hits new record

Motley Fool contributor Kate O’Brien has no position in any of the shares mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Austal Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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With the Australian share market home to a large number of quality growth shares, it can be hard to decide which ones to buy.

To narrow things down for you, I have picked out three top ASX growth shares which I think would be great buy and hold options. Here’s why I like them:

Kogan.com Ltd (ASX: KGN)

The first ASX growth share to consider buying and holding is this ecommerce company. Kogan’s shares have been on fire this year thanks to its explosive earnings and sales growth over the last few months. And while its shares are certainly not cheap, I believe they justify this premium because of its increasingly positive outlook thanks to the structural change that is happening in the retail industry. Another positive is that Kogan announced a $115 million capital raising earlier this month. It intends to use these funds to acquire businesses that add value and drive further growth.

ResMed Inc. (ASX: RMD)

Another growth share to consider buying is ResMed. It is a sleep treatment-focused medical device company which has delivered consistently strong earnings growth over the last decade. The good news is that I’m confident this positive form can continue over the next decade thanks to its high quality masks and software solutions and its growing market opportunity. Management has previously estimated that only ~20% of sleep apnoea sufferers have been diagnosed.

SEEK Limited (ASX: SEK)

A final growth share to look at buying and holding is SEEK. I think the job listings giant has the potential to grow materially in the future. This is largely due to its growing Zhaopin business in China. Given its massive opportunity in the lucrative market, I expect the Zhaopin business to be the key driver of growth over the next decade. Another positive is that earlier today the company released a trading update which showed that trading conditions are improving. This could make it an opportune time to invest.

More reading

• ASX 200 flat: Altium update disappoints, Metcash posts full year loss
• SEEK share price edges lower after trading update and impairment charge
• Why Kogan, Sezzle, & Splitit shares just hit record highs
• Which shares to buy if the ASX tumbles
• Brokers just upgraded these ASX 200 stocks to “buy” today

Motley Fool contributor James Mickleboro owns shares of SEEK Limited. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd. The Motley Fool Australia has recommended ResMed Inc. and SEEK Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The EHR Resources Ltd (ASX: EHX) share price closed 20% higher today at 12 cents on the back of a strongly supported capital raising.

EHR is a mineral resources exploration company with an increasing focus on diamond exploration and project development.

Just this month, the company announced an earn-in agreement over a diamond project in Nunavat, Canada, as well as an exploration alliance agreement with a privately-owned company focused on diamond exploration in Botswana. 

EHR Resources also owns 625 mineral claims located in northern Quebec through its wholly-owned subsidiary Nanuk Diamonds, and an 18% interest in the La Victoria Gold-Silver Project in Peru.

Details of the capital raising

This morning, EHR announced it has received commitments for a $10 million institutional placement. New shares will be issued at 9.6 cents per share, which represents a 4% discount to EHR’s last closing price of 10 cents.

On top of the institutional placement, EHR will also conduct a share purchase plan (SPP) to raise up to an additional $2 million. New shares under the SPP will be issued at the same price as the placement.

The funds raised will be used to meet expenditures on existing projects, for potential incremental transactions in line with the company’s strategy, and for general working capital.

Commenting on the capital raising, managing director Peter Ravenscroft said:

“EHR has made very good progress since adding a focus on diamonds to its mineral resource project strategy, and the capital raising positions the Company to meaningfully progress the projects we have acquired.”

“Importantly, a raising of this size allows us to fully focus on adding value to our existing investments, while also strengthening the Company’s position with regards to other potential project acquisitions,” Mr Ravenscroft added.

Recent developments

At the beginning of the month on 2 June, EHR announced it had secured an option agreement with North Arrow Minerals to earn a 40% interest in the Nuajaat diamond project in Canada.

In return for the interest, EHR will fund a C$5.6 million preliminary bulk sample of 1,500 to 2,000 tonnes to be extracted in 2021. The project represents the largest underdeveloped diamond property in Canada not under the control of a major mining company.

EHR Resources followed up this announcement with another diamond-related ASX release on 9 June. It revealed it had entered into a diamond exploration agreement with Diamond Exploration Strategies, a privately-owned company with diamond licenses in Botswana.

Under the terms of the alliance, EHR will provide funding of US$1.5 million over three years to finance exploration activities. In return, EHR will earn 50% ownership of any discoveries made.

The alliance is initially over five areas that have existing prospecting licenses, but extends to cover other prospective areas of Botswana that may be identified.

The EHR Resources share price closed at 12 cents today, taking the company’s current market capitalisation to around $17 million. If you’d rather invest in much larger and more liquid companies, check out the top ASX growth shares in the free report below.

More reading

• ASX Stock of the Day: Austal share price surges 9% on US Government agreement
• 3 quality ASX growth shares to buy and hold
• 3 dividend shares I’d buy to boost my income
• Apparently free brokerage is to blame…
• Top brokers are urging you to buy these 3 ASX stocks today

Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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There are a number of dividend shares on the ASX that I’d buy to boost my income.

It’s getting harder to find good sources of income these days. Interest rates from bank accounts are now incredibly low after the RBA cut interest rates to just 0.25%.

Business earnings are also uncertain at the moment due to COVID-19 impacts. I think there’s a certain number of dividend shares that would be solid picks to boost my income, but others may not be as good as some investors expect.

Here are three dividend shares I’d go for:

Dividend share 1: Naos Emerging Opportunities Company Ltd (ASX: NCC)

The listed investment company (LIC) structure is great for investors who want income. It enables the LIC to generate investment profits from capital gains and investment income, the LIC can then pay out a smoothed dividend to shareholders.

But I only think certain LICs are worth investing in. Plenty of LICs just offer index-like returns with higher fees.

Naos Emerging Opportunities is a LIC that invests in ASX shares with market caps under $250 million. It is a good dividend share because it has maintained or grown its dividend every year since FY13. It currently has a grossed-up dividend yield of 12%.

If the LIC can continue to generate solid returns then the dividend can at least be maintained. It holds a portfolio of high-conviction shares, it only has around 10 positions. It aims to be a long-term investor with each investment choice.

Dividend share 2: Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)

Soul Patts is probably my favourite dividend share on the ASX. It has increased its dividend every year since 2000. The first thing I look for with dividends is reliability. I don’t think there’s much point having a big dividend yield one year and then suffering a large cut one year later. Soul Patts has paid a dividend every year since its inception in 1903.

The investment conglomerate has a diversified portfolio of shares which sends a flow of quality dividends to Soul Patts each year. Some holdings include TPG Telecom Ltd (ASX: TPM), Milton Corporation Limited (ASX: MLT), Bki Investment Co Ltd (ASX: BKI) and Brickworks Limited (ASX: BKW).

The business funds its dividend from the investment income it receives, less operating expenses. In FY19 it retained around 20% of its regular net operating cash flow to re-invest into more opportunities.

The dividend share has already guided that the final FY20 dividend will be an increase on FY19’s final dividend.

It’s steadily making new investments to diversify the portfolio further. New investments include agriculture, retirement living and regional data centres.

Dividend share 3: WAM Leaders Ltd (ASX: WLE)

WAM Leaders is another LIC. This one is managed by the high-performing team at Wilson Asset Management (WAM). It looks to make good returns from the larger businesses on the ASX.

The dividend share has grown its dividend each year since FY17. It currently has an annualised grossed-up dividend yield of 8.7%.

Since inception in May 2016, its investment performance (before fees, expenses and taxes) has outperformed the S&P/ASX 200 Accumulation Index by 3.8% per annum. Over the past year its gross portfolio performance has been 11.4% better than the benchmark. I think that’s an impressive performance from the dividend share.

Some of its top 20 holdings are similar to the ASX 20. But some holdings at the end of May 2020 were different, like Downer EDI Limited (ASX: DOW), Fortescue Metals Group Limited (ASX: FMG), OZ Minerals Limited (ASX: OZL), QBE Insurance Group Ltd (ASX: QBE), Ramsay Health Care Limited (ASX: RHC) and Santos Ltd (ASX: STO).

As a bonus, WAM Leaders is trading at a 7% discount to the 31 May 2020 net tangible assets (NTA).

Foolish takeaway

Each of these dividend shares would be really good options to boost your income. Naos clearly has the biggest dividend yield, but that doesn’t leave much room for share price growth over time. Soul Patts is my preferred choice because of its low operational costs and ultra-long-term record of dividends and reliability.

More reading

• 3 long-term ASX 200 shares I’d buy right now
• What are the best ASX shares for dividends?
• Forget bank interest, try these ASX 200 dividend shares!
• 2 ASX blue chip shares I think every portfolio should hold
• 3 ASX dividend shares to buy and replace a term deposit

Motley Fool contributor Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Brickworks and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Apparently, the problem with the stock market is that retail investors are screwing things up.

Apparently, they’re taking advantage of free brokerage, and causing merry hell.

Apparently, if we only stopped those ‘know nothing’ investors, all would be okay again.

And in reality?

In reality, it’s a nice combination of ‘bait and switch’ and a fig leaf to cover the sins of the supposed professionals.

Those professionals would have you believe two things:

1. DIY investors are the problem; and

2. Highly-paid professionals are the solution.

I know.

I was as shocked as you are.

Imagine that. We can’t be trusted, but they can!

Well, for a fee, of course.

Have you ever read anything so ludicrous?

Or self- serving?

I mean, it’s not like they’re worried about their fees, right?

Or that they’d benefit (handsomely) from convincing us that we should leave it to the ‘big boys’.

Or maybe they’re just trying to find plausible excuses for getting their stock-picking calls wrong?

Yes, dear Foolish reader, it’s like an adult version of Scooby-Doo:

“I would have been right, if it wasn’t for those meddling kids”

See, all we have to do is stop normal people making their own decisions and…

(Sorry, I fell off my chair in hysterics).

Ah, but you’re biased, Phillips. You just want to get more customers.

Maybe.

I sure as hell want more people to take control of their finances.

To spend less.

Save more.

Invest regularly.

Benefit from the compounding machine that is the ASX.

Yep, guilty as charged.

I just want people to be better off.

So, sue me.

Can’t that be done by those complaining about the ‘distortion’ of the market by retail investors?

I guess.

If they have a long-term track record of beating the market — after fees.

But if that’s true, they have no need to worry about the rest of us.

Indeed, if they’re that good, any so-called ‘distortion’ will just be a massive money-making opportunity for them.

They should be cheering it on!

Confused?

Me too.

I mean, those people did realise the market would recover, right?

And they’ve made a fortune since, right?

Oh….

—–

All of that said — and without stepping back from the criticism one iota — I do worry about the rise of free brokerage but from a very different perspective.

I’ve written about it before, but when even ASIC feels compelled to step in and say something, we need to be careful.

It’s an unpopular view, to be sure: “You actively want me to have to pay higher fees????”

Just put the pitchforks down for a second, and hear me out.

See, any time you consider an issue, you need to think not just ‘rationally’, but through the lens of behavioural psychology.

Let me give you a simple example:

Last time I wrote about this, the subject line of the email I sent included the word ‘free’ (as in ‘free brokerage’).

Such is the power of that word, the email open rates (the number of people who opened the email) doubled.

Yes, doubled.

From — and I’ll use the technical terms here — ‘a lot’ to ‘a helluva lot’.

Shedloads of people opened that email.

(I was so surprised, I actually checked with our tech team to make sure there wasn’t a problem with the report.)

I mean, I’m good. But not that good. (Not even as good as I like to believe. But that’s a whole other issue.)

‘Cheap’ is good.

But ‘Free’ is catnip.

Now, let’s turn our gaze to the free ‘thing’: brokerage.

If something costs money, we value it. We treat it carefully, weighing up our options.

When it’s free? Well, we don’t really care about the object at all, do we?

If I told you something that was previously $2 was now $1, you’d probably buy more of it.

If I told you it was free?

I’d get knocked over in the rush.

The difference is so disproportionate, there is no possible rational explanation.

The ‘extra’ bit? Pure psychology.

And the problem with that?

It’s not rational. We do it because some part of our subconscious brain overrides the rational bit.

Which is fine if I’m giving away lollies.

But if it (unintentionally) encourages people to abandon all caution and day trade like banshees?

Well, I don’t think you need me to tell you how that ends, do you?

And if you think I’m speculating, you’re right.

But I do have some history on my side.

You reckon Australians buy and sell investment property too much?

If you said ‘yes’, you should have seen the Yanks before the GFC.

In activity which fuelled the pre-GFC madness, Americans were flipping property like they were pancakes.

(‘Flipping’ is buying a house, renovating it (or not) and getting it back on a fast-rising market as quickly as possible before doing it all again. The emphasis here is on speed.)

There were TV shows called, I kid you not, First Time Flippers, Flip This House and plenty more.

(An Australian version was tried, and thankfully only lasted a handful of episodes!)

The difference between here and there?

Lots, probably.

But one thing that kept the lid on house flipping here was Stamp Duty.

And yes, I hate paying stamp duty as much as you do.

But I’m pretty sure it saved us — at least in part — from the worst excesses of the GFC (and probably since, as well).

Economists hate ‘friction’ — anything that slows down the rate of activity in a market.

And God help anyone who stands between a hard-core economist or free-marketeer and the chance to remove some friction.

Of course, economists also count hospital visits, panel beaters, and earthquake damage repair in GDP, even though they’re just restoring the status quo (and the ‘cost’ of the damage is never deducted), so let’s just say economic fundamentalism has some, well, issues.

The solution?

I’m not sure I know, with certainty.

The last thing I want is to put a barrier in front of people who would otherwise invest, but for whom the brokerage is a stumbling block, either psychologically or financially.

Perhaps removing the flat “$X per trade” and replacing it with a set percentage would work.

Or maybe we charge people to buy, but let them sell without brokerage.

And you can give the fee to charity for all I care. I have no interest in making stockbrokers rich, but I’m pretty set against making new investors poor by giving them both the incentive and the ability to trade too often, robbing them of the very best part of investing:

Long-term compounding.

Fool on!

More reading

• Top brokers are urging you to buy these 3 ASX stocks today
• Why Morgans is urging investors to buy ASX big bank stocks today
• Here are 3 ASX 200 shares with dividend yields over 8%
• ASX 200 flat: Altium update disappoints, Metcash posts full year loss
• Is the Domino’s Pizza share price a good buy at $68?

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It’s hard to keep the bulls at bay! The morning market sell-off reversed at lunch with the S&P/ASX 200 Index (Index:^AXJO) trading 0.7% higher in the last hour of trade.

It’s not too late to join the party either. Leading brokers have just named three ASX stocks that are trading at a significant discount to fair value.

While it’s the iron ore majors like Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) that have been dominating the spotlight in the sector, Goldman Sachs points to a lesser known buy idea.

New iron ore champ

The stock is Canadian miner Champion Iron Ltd (ASX: CIA). The broker initiated coverage on the stock with a “buy” recommendation and 12-month price target of $3.50 a share.

Champion’s main asset is its 100% owned Bloom Lake iron ore mine in Northern Quebec. Management is aiming to double production to 15 million tonnes a year by the second quarter of 2023 and Goldman thinks is one of the lowest capital intensity iron ore expansions globally.

“Previous owner Cliffs had already spent US$1.2bn before Phase II was placed on hold,” said the broker.

“Remaining capex requirements for CIA for the expansion from 8Mtpa to 15Mtpa is C$634mn (US$480mn) and equates to a capital intensity of just US$69/t.”

That’s well below the US$144 a tonne for Rio’s IOCC expansion and US$118 a tonne paid by FMG for its Iron Bridge project.

Price target upgrade

Meanwhile, Morgan Stanley upgraded its price target on Charter Hall Group (ASX: CHC) by a massive 28.2% to $11.60 a share and reiterated its “overweight” call on the property group.

Not only is the group relatively unaffected by the COVID-19 pandemic, it’s using the opportunity to acquire assets in the turmoil.

“One of the under-appreciated points about CHC is the expansion of its Funds Management margin – increasing from c.40% in FY15 to c.70% in FY19,” said the broker.

This margin expansion is sustainable thanks to scale, a focus on lower-touch assets like triple-net properties and lower exposure to the troubled retail segment.

Trading at a discount to peers

Finally, Credit Suisse reiterated its “outperform” recommendation on the Healius Ltd (ASX: HLS) share price after it compared it to its closest rival Sonic Healthcare Limited (ASX: SHL).

The review comes in the wake of the sale of Healius’ medical centres to a private equity consortium for $500 million. This will allow management to focus on turning around its underperforming pathology business.

“We estimate HLS pathology has on average, operated at ~300bp lower EBIT margin to SHL, yet this did widen in FY19 to ~400bp,” said the broker.

“In our view, HLS is less profitable relative to SHL due to a larger collection centre footprint, higher rents and less complex test mix.”

Credit Suisse thinks Healius can narrow this gap and pointed out that the stock’s price-earning multiple is at a 10% discount to the ASX200 Industrials (excluding financials).

The broker’s price target on the stock is $3.25 a share.

More reading

• Why Morgans is urging investors to buy ASX big bank stocks today
• Here are 3 ASX 200 shares with dividend yields over 8%
• Iron ore prices: Are the Rio Tinto, Fortescue and BHP share prices a buy?
• ASX 200 flat: Altium update disappoints, Metcash posts full year loss
• Is the Domino’s Pizza share price a good buy at $68?

Motley Fool contributor Brendon Lau owns shares of Rio Tinto Ltd. The Motley Fool Australia has recommended Sonic Healthcare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It’s quite rare that the Altium Limited (ASX: ALU) share price is among the worst performers on the S&P/ASX 200 Index (ASX: XJO).

It is even rarer for the electronic design software company’s shares to be the worst performer on the index.

But that is the case on Monday, with the Altium share price down over 8% to $33.31 in afternoon trade. At one stage its shares were down almost 13% today.

Why is the Altium share price sinking lower?

Investors have been selling the company’s shares after it released a disappointing trading update.

Despite the company launching attractive pricing and extended payment terms during the pandemic, it hasn’t been enough to offset the tough market conditions it is facing.

And although the company expects to deliver “solid” sales growth in FY 2020, it will fall short of the consensus estimate of US$192.5 million.

This is because traditionally Altium closes a significant amount of its second half business in the final two weeks of June. But with increased COVID-19 infection rates in the United States and a recent lockdown in Beijing, this won’t be the case this year.

Is this a buying opportunity?

While today’s share price decline is disappointing, I think it has created a buying opportunity for investors that are looking to make a long term investment.

I’m confident that Altium’s underperformance this year is strictly pandemic-related and expect it to bounce back once the crisis passes.

Overall, I believe that industry tailwinds remain very supportive of its long term growth and expect it to achieve its 100,000 subscribers target by FY 2025.

Combined with its other promising businesses, such as Octopart and NEXUS, I expect Altium to grow its earnings at an above-average rate for many years to come. This could make it a market-beater over the 2020s.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Altium. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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