Author: therawinformant

Many of Australia’s top brokers have been busy adjusting their financial models again, leading to the release of a large number of broker notes this week.

Three broker buy ratings that have caught my eye are summarised below. Here’s why brokers think these shares are in the buy zone:

Costa Group Holdings Ltd (ASX: CGC)

Analysts at UBS have retained their buy rating and $3.25 price target on this horticulture company’s shares. According to the note, the broker expects Costa to provide investors with a positive update at its annual general meeting next week. It feels current trading conditions support its earnings forecasts and there could even be upside risk to them if weather conditions and foreign exchange remain favourable. I think UBS makes some great points, but I would suggest you wait for the update before making a move.

IDP Education Ltd (ASX: IEL)

A note out of Goldman Sachs reveals that its analysts have retained their buy rating and trimmed the price target on IDP Education’s shares slightly to $18.00. According to the note, the broker expects volumes to remain constrained across both its student placement and English language testing businesses in the second half of FY 2020 and the first half of FY 2021. However, it is very positive on its long term prospects and has forecast a big rebound in earnings in FY 2022. I agree with Goldman Sachs and would be a buyer of its shares.

Newcrest Mining Limited (ASX: NCM)

According to a note out of Citi, its analysts have retained their buy rating and lifted the price target on this gold miner’s shares to $35.00. Citi lifted its price target on the belief that the gold price will be stronger than expectations over the long term. It feels this will be supportive of Newcrest’s shares. While I think Citi is spot on and Newcrest is quality miner, I think there are better value option in the industry.

More reading

• Is the Newcrest Mining share price in the buy zone?
• 3 shares now trading at crazy cheap prices
• 5 things to watch on the ASX 200 on Tuesday
• ASX 200 up 1.35%: Gold miners and Fortescue rocket higher, big four banks tumble
• Meet the ASX 200 company that just posted a 90% surge in profit

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 Idp Education Pty Ltd. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. 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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This morning, home builder and building products company Fletcher Building Limited (ASX: FBU) provided a market update on trading conditions in the wake of COVID-19.

The Fletcher Building share price is down more than 3% at the time of writing, however, its commentary on the outlook for the Australian building market may be of more interest to many investors.

For those unfamiliar with the company, Fletcher Building is an S&P/ASX 200 Index (ASX: XJO) share that operates across the entire building supply chain – from raw materials right through to construction. It’s headquartered in New Zealand and is dual-listed on the NZX.

What did Fletcher Building announce?

This morning, Fletcher Building disclosed that it generated virtually zero revenue from its New Zealand operations during the country’s level 4 restrictions. These restrictions began in late March and remained in place through to late April. On a more positive note, revenue from its Australian business ran at around 90% of pre-COVID-19 expectations.

While Australia at least managed to break even, Fletcher Building’s New Zealand operations reported an operating earnings before interest and tax loss of NZ$55 million for April.

Since New Zealand made the move to level 3 on 28 April, conditions have been improving. The company’s New Zealand businesses are trading at around 80% of forecasted revenues in May. Australia continues to trade at around 90% of pre-COVID-19 expectations.

Bracing for impact

Commenting on COVID-19 and its impact on Fletcher Building’s markets in New Zealand and Australia, CEO Ross Taylor said:

While there is a lot of uncertainty over the economic outlook, we expect COVID-19 will lead to a sharp downturn in FY21 and potentially beyond. Looking to the next financial year, we are planning for an environment that will see a shrinking economy, substantially reduced customer demand across all our businesses and sustained lower levels of productivity.

As a result, the company will look to reduce its workforce by approximately 10% – around 1,000 positions in New Zealand and 500 in Australia – in order to get ahead of the anticipated slump in construction activity.

According to Mr Taylor, prior to COVID-19, residential approvals in Australia had been showing signs of renewed growth from a base of around 150,000. However, the company now expects approvals to fall by a further 15% to 129,000 in FY20.

In addition, Fletcher Building is factoring in a 15% decline in the value of commercial work put in place in FY21 due to a reduced project pipeline in the private sector. Meanwhile, it also expects a 10% drop in infrastructure spending as new projects take time to ramp-up.

What does this mean for ASX construction shares?

On the whole, Fletcher Building’s market outlook certainly paints a bleak picture of the near-term state of our economy and housing market. It’s also a warning to other ASX construction and building products shares like Boral Limited (ASX: BLD), CSR Limited (ASX: CSR), and Adelaide Brighton Ltd (ASX: ABC).

Recently, Boral reported subdued concrete volumes and revenue for the 4 months ended April 2020. Meanwhile, CSR released its full-year FY19 results last week and assured investors it is monitoring lead indicators to allow for an adjustment in production and cost profile as early as possible. 

In any case, a shrinking economy and significant pullback in construction activity will put pressure on the share prices of ASX construction shares until the sector shows sustained signs of improvement.

Fletcher Building’s decision to reduce its workforce also serves as a reminder that while thousands of jobs were saved at the height of the pandemic, they can still be lost during the recovery phase.

More reading

• 5 ASX 200 dividend shares for an economic recovery
• This is the latest ASX 200 stock to unveil double digit profit growth
• 4 ASX 200 shares exposed to a fall in house prices
• ASX 200 finishes up 1.4%, gold miner share prices surge
• Why Boral, Corporate Travel Management, United Malt, & Xero are dropping lower

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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The TPG Telecom Ltd (ASX: TPM) share price has been a strong performer on the S&P/ASX 200 Index (ASX: XJO) on Wednesday.

In afternoon trade the telco’s shares are up 5% to $7.64 following the release of its merger scheme booklet.

What did TPG Telecom announce?

Late on Tuesday TPG released its scheme booklet for the proposed merger with Vodafone Australia. This follows the receipt of FIRB approval earlier this month.

Should the merger be approved an implemented, TPG shareholders will own 49.9% of the merged company, with Vodafone Australia shareholders owning the remaining 50.1%.

TPG shareholders will also receive a dividend if the merger goes ahead. The company’s board revealed that it intends to pay a fully franked cash special dividend prior to the implementation of the scheme for those that hold shares on the special dividend record date.

At this point the amount of the dividend and the record date are unknown. But further details will be released at least 10 days prior to the scheme meeting on June 24.

A note out of Goldman Sachs today reveals that its analysts believe the dividend could be as high as 67 cents per share.

They commented: “Based on our current FY20E Net Debt estimate of A$1,688mn for TPM and the previously published estimate of $200mn in Singapore funding/Transaction costs, we calculate TPM would have capacity for up to a 67c fully franked potential special dividend (A$813mn franking credits at FY19).”

Demerger plans.

TPG also advised that it intends to undertake a separation of its Singapore business. This will see the business listed on the ASX under the name Tuas Limited and with the ASX ticker code “TUA”.

The company explained that all of the shares of Tuas Limited will be distributed to TPG shareholders. Further details on this separation will be despatched to shareholders on or around May 25.

Should you invest?

While I still have a preference for rival Telstra Corporation Ltd (ASX: TLS) at current prices, I do think this merger makes TPG Telecom a force in the industry and an interesting option for investors.

The special dividend certainly will be a nice bonus for shareholders, but it is unclear at this stage just what it will pay. In light of this, I wouldn’t rush in purely for that until more is known.

More reading

• ASX 200 down 0.2%: Big four banks lower and TPG announces demerger plans
• 3 safe and strong ASX dividend shares to buy right now
• Macquarie picks the best stocks to buy for the post COVID-19 rebound
• 2 ASX 50 shares for retirees to buy right now
• 2 ASX shares I would buy for growth and income

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra 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 Altium Limited (ASX: ALU) and Xero Limited (ASX: XRO) share prices both experienced falls following the release of their business updates. Despite both having partially rebounded since then, they are still trading below their pre-market update prices. Given the strong historic share price performance of these 2 market darlings, could this sell off still represent an opportunity to buy for the long term? 

Altium business update 

In Altium’s most recent business update on 12 May, the company’s CEO Aram Mirkazemi commented:

As the governments of the US and Western Europe continue to wrestle with containing the virus, we believe that the prolongation of restrictions is likely to impact Altium during May and June. While engineers are actively doing prototype designs, and the electronics industry is holding up relatively well, the cash preservation priorities of small to medium size businesses are likely to affect the timing of closing sales in our typically strongest months of the year being May and especially June.

The update also went on to state that Altium is highly unlikely to achieve its long-term aspirational goal of US$200 million revenue for the full year. 

So is the Altium share price in the buy zone?

Following this disappointing yet not entirely unexpected news, the Altium share price fell a little over 5% last week before rebounding this week to close the gap to only 3% lower than its pre-market update price. Its market darling status allowed the company to avoid what could have otherwise been a more significant sell off.

The key risks facing prospective Altium investors are the company’s current expensive valuation and the unknowns regarding its May and June performance. I would personally avoid Altium shares at this point in time and wait for more concrete information regarding how it fares over the coming months. Having said that, I also believe its high profile market status could result in investors largely ignoring the company’s short-term headwinds. This may allow Altium’s share price to remain more stable during this volatile period. 

Xero’s full year earnings 

At face value, Xero delivered a strong full year result that highlighted a 30% increase in operating revenue, a 26% increase in subscribers and a maiden net profit of NZ$3.3 million. However, the company outlined the difficult times ahead for many of its clients due to the ongoing economic fallout of the coronavirus pandemic. 

Xero noted that March trading resulted in some reduction in annualised monthly recurring revenue as many of its small business customers were hit hard by COVID-19 restrictions. That said, many other fintech companies such as Afterpay Ltd (ASX: APT) and Tyro Payments Ltd (ASX: TYR) also witnessed sales and transaction values trough in March, before rebounding in April. 

Is the current Xero share price in the buy zone?

There are plenty of growth avenues and areas of planned strategic investment to support Xero’s continued success over the long term. This was outlined in its full year presentation, with key areas of strategic focus including driving cloud accounting, expanding its small business platform and building the company for global scale and innovation.

Personally, I believe its future opportunities and global expansion still make Xero an appealing long-term investment, despite its current, eye-watering valuation. 

More reading

• 3 fantastic ASX shares to buy now to get rich later
• Should you throw $3,000 into Altium shares today?
• Are Xero shares a top long-term buy?
• 2 millionaire-maker ASX internet growth shares
• Where to invest $500 in ASX shares right now

Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Tyro Payments and Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO and Altium. 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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ASX share prices have been hit hard in 2020, and we’ve seen price to earnings (P/E) ratios plummet. The P/E ratio is a classic metric used by investors around the world to judge the relative value of different shares. But in the current climate, does the ratio tell us anything about ASX shares?

What is the price to earnings ratio?

As the name suggests, a P/E ratio is calculated by dividing a company’s share price by its earnings per share (EPS). EPS can be measured as either a trailing EPS (from the last reporting period) or a forward EPS (projected for the next reporting period). Depending on which of these is used in the denominator, we can derive either a forward P/E or trailing P/E.

Do P/E ratios tell us anything about ASX shares in 2020?

Now, ASX share prices have been hammered in 2020 which means the ‘P’ in the ratio is falling lower. On top of that, earnings look set to slump in the wake of the coronavirus pandemic and subsequent economic shutdown.

This means it’s logical that P/E ratios for ASX shares are falling across the board. This is particularly the case in the hardest-hit sectors like media and travel.

For instance, the Southern Cross Media Group Ltd (ASX: SXL) shares are trading at just 3.38 times earnings. Similarly, Flight Centre Travel Group Ltd (ASX: FLT) trades at a P/E ratio of 6.10. Webjet Limited (ASX: WEB) is trading at 15.61 times earnings which, whilst higher than Southern Cross and Flight Centre, is still lower than the S&P/ASX 200 Index (ASX: XJO) average.

Under normal circumstances, this would suggest that all three of these ASX dividend shares could be great value buys. However, thanks to COVID-19, I think the earnings component (E) will be slashed lower in 2020. The pandemic response has reduced earnings for many of these groups to a trickle of what they were in 2019. That means that P/E ratios (and dividend yields) may not help you to value your favourite ASX shares right now.

In other words, because P/E ratios are often a lagging indicator, valuing shares like Webjet, Flight Centre and Southern Cross based on this metric can be misleading. 

So… how should we value ASX shares?

If we can’t rely on P/E ratios right now, what’s the alternative? 

One quantitative option is to look at the balance sheet strength of companies instead of earnings. Low levels of debt and a strong asset base could pay dividends in the current climate. Companies with a combination of these two things are in a more stable position with less strain on their finances from other parties, like banks.

Another option is to sit tight and wait for the August earnings season. This will provide a better idea of expected and actual earnings, but it would mean staying out of the market for 3.5 months. 

Foolish takeaway

P/E ratios can be misleading at the moment, but that doesn’t make them useless. Some companies’ earnings will remain steady despite COVID-19 but I’d be treading lightly when valuing ASX shares in this market.

More reading

• Why this ASX funeral share is well positioned for future growth
• ASX 200 down 0.2%: Big four banks lower and TPG announces demerger plans
• Positive signs for Australia’s jobs market as ABS data points to a recovery
• Is the Newcrest Mining share price in the buy zone?
• Are ASX bank shares worth buying despite dividend cuts?

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group 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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