Tag: Motley Fool Australia

I think it’s important to take advantage of ASX share market volatility when we can.

Volatility is a key feature of shares. Each day there are different buyers and sellers. Obviously there will be different views about what price people are willing to buy and sell at.

This coronavirus period of time has seen some of the strongest volatility in decades. I think it’s important to take advantage of the lower share prices. Collectively, investors are only willing to sell their shares at lower prices when there’s something to actually worry about. And there’s always something to worry about. Eventually that particular worry will pass, just like the GFC. 

The price we pay for our investments is the biggest factor for deciding our future returns. If you can buy during periods like this when prices are a lot lower then you’ll boost your future returns significantly.

These low share prices don’t last forever. Just look at how the ASX share market volatility has lowered and prices have recovered strongly since 23 March 2020 even though the actual economic numbers like unemployment just get worse and worse.

What ASX shares on the share market are opportunistic buys due to volatility?

A number of exciting shares like Pushpay Holdings Ltd (ASX: PPH) were a lot cheaper a few weeks ago, but I wouldn’t describe those shares as opportunistic any more. They’re still solid buys though.

I think ASX share market volatility have made these shares buys: diversified property business Brickworks Limited (ASX: BKW), water entitlement business Duxton Water Ltd (ASX: D2O) and investment business Magellan Global Trust (ASX: MGG).

More reading

• 3 ASX shares to buy for growth and income
• Double your money with these high quality ASX shares
• 3 top ASX 200 shares every investor should buy
• 3 quality mid cap ASX shares to buy with $3,000
• 1 of my favourite dividend shares just forecast growing dividends to March 2022

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ASX energy shares are poised to finish the trading week on a stronger footing after the oil price rallied overnight.

But the dramatic recovery for these stocks from their bear market low may have run out of fuel!

Morgans is sounding the warning bell even as the WTI oil price surged by US$65 to US$27.66 a barrel in less than four weeks since crashing into negative territory. I suspect that’s a record bounce over the timeframe for the WTI benchmark.

The more relevant (to Australia) Brent crude price didn’t slip into negative, but it’s staged a pretty stellar 62% climb over the same period to trade at US$31.13 a barrel.

Running ahead of the market

“We remain long-term oil bulls, but it is hard to maintain this positivity towards the sector when key energy stocks so strongly outperform oil prices,” said the broker.

By its reckoning, the jump in Woodside Petroleum Limited (ASX: WPL) share price and Oil Search Limited (ASX: OSH) share price imply an oil price of around US$47 a barrel.

Meanwhile, the Santos Ltd (ASX: STO) share price will need an oil price of US$42 a barrel to justify its recovery.

The long road to recovery

“We view this level of market optimism as dangerous given not only the massive demand impact from Covid-19 restrictions, but also because of new macro risks emerging,” said Morgans.

“Key amongst these is the growing risk of a new Trade War breaking out between the US and China, with tensions escalating from the ongoing health and economic crisis.

“Even barring a new trade war, we expect oil demand loss (currently at an unprecedented c.30mb/d) will take multiple years to recover, with the market not yet in a position to accurately analyse all of the fallout.”

Going nowhere fast

The chance of oil prices jumping back to over US$40 a barrel looks pretty slim even as Goldman Sachs sounded a positive note on the commodity.

The broker believes that the oversupplied market is heading back towards a deficit next month, according to a report on Reuters.

Oil production cuts by OPEC and Russia will limit supply as demand picks up pace from the restarting of major economies like China and the US.

Oil price forecasts

While that means we may have seen the lows for oil, Goldman Sachs thinks oil prices may be stuck at current levels for a while. It’s forecasting US$30 a barrel for Brent and US$28 per barrel for WTI during the Northern Hemisphere summer months.

“We believe that the next stage of the oil market rebalancing will be one of range-bound spot prices with the most notable shifts being a decline in implied volatility as well as a continued flattening of the forward curve without long-dated prices rising yet,” said Goldman Sachs.

Here come the downgrades

Investors may have to wait a few years to see the oil price catch up to the share prices of our major energy stocks.

On that sombre note, Morgans lowered its medium- to long-term forecasts on the Brent oil price. This meant that the broker also had to downgrade its recommendation on Oil Search, Woodside and Santos to “hold” from “add”.

More reading

• 5 things to watch on the ASX 200 on Friday
• 5 things to watch on the ASX 200 on Thursday
• LNG spot price surge benefits ASX 200 shares
• 5 things to watch on the ASX 200 on Wednesday
• How many ASX shares should you have in your portfolio?

Motley Fool contributor Brendon Lau 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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ASX 200 energy shares have been hit hard in 2020. First, there were concerns surrounding coronavirus which sent the S&P/ASX 200 Index (ASX: XJO) tumbling lower in late February. Then came an oil price war between Saudi Arabia and Russia which spooked investors even more and eventually sent the oil price into negative territory last month.

You might be looking at the markets and thinking now is not a good time to buy ASX 200 energy shares. However, I think it could be quite the opposite. Here are a couple of my top picks for energy companies that could be in the buy zone in 2020.

2 ASX 200 energy shares to buy today

I like the prospects for AGL Energy Limited (ASX: AGL) shares. AGL is one of the largest energy producers in Australia and I believe it’s in a strong competitive position.

The Aussie electricity market is largely dominated by AGL, EnergyAustralia and Origin Energy Ltd (ASX: ORG). The AGL share price has plummeted 21.28% lower this year but I feel it may have been oversold.

Sure, the oil price war has hurt most ASX 200 energy shares. However, east coast electricity prices remain high, despite the ACCC recommending further intervention. These ongoing high prices could help stabilise FY20 earnings despite potentially lower volumes.

Another issue affecting the sector is less commercial energy use. COVID-19 restrictions have forced many employers towards a remote working model which means less energy consumption by businesses in our cities. However, this also means higher residential energy use which could help to balance things out for AGL.

Aside from AGL, I also like the look of Origin Energy. Given what’s happening to oil prices and the supply-demand dynamics, I think investing in the ASX 200 oil producers is a risky bet. There’s a lot of uncertainty surrounding oil and, as such, I feel Aussie utility companies could be a better option right now. As a long-term investor, I’m happy to trade some potential upside for the defensive qualities I see in energy ‘gentailers’ like AGL and Origin.

I think Origin is in a similar position to AGL right now. Given we’re investing for the long-term, I also think both AGL and Origin could benefit from an increase in renewable energy investment. That means, moving forward, AGL and Origin could tick all the boxes as strong dividend shares with solid medium and long-term outlooks.

Foolish takeaway

Investing in ASX 200 energy shares is certainly not for everyone. Diversification is key, which means that AGL and/or Origin shares could form part of your broader portfolio construction. I would say it’s still a relatively speculative play right now which means I wouldn’t be going all in. However, I do feel there are long-term rewards on offer for investors willing to roll the dice with ASX 200 energy shares in 2020.

More reading

• Want to invest like Warren Buffett? Buy and hold these ASX 200 shares
• Broker tips 10 ASX 200 shares for a post-coronavirus recovery
• These ASX 200 shares just crashed to multi-year lows
• 5 things to watch on the ASX 200 on Friday
• Is this ASX 200 REIT a bargain right now?

Motley Fool contributor Ken Hall 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 head of research services at broker Bell Potter recently released 10 ASX 200 shares that analysts tip for a post-coronavirus recovery. All the stocks mentioned have a market capitalisation of more than $1 billion and boast strong balance sheets that could see them recover from the pandemic.  

Aristocrat Leisure Limited (ASX: ALL)

Aristocrat is a gambling machine manufacturer that has a strong recurring revenue stream from leasing machines to its customers. The company also makes revenue through outright sales of gaming machines and monetisation of online casinos and gaming.

Analysts are optimistic on the medium-term growth of Aristocrat’s land-based operations, with the company having a strong presence in the US gaming industry. In addition, the company’s online operations are a growing market that provides Aristocrat with flexibility during the pandemic.

ANZ Banking Group (ASX: ANZ)

Analysts expect that economic growth post-pandemic should provide ANZ with a solid lift in profitability. The bank is currently providing financial assistance packages for its small business and retail customers.

BHP Group Ltd (ASX: BHP)

BHP boasts a strong balance sheet and low-cost operations with earnings coming from iron ore, copper and coal. Analysts are optimistic that BHP is well positioned during the pandemic, with improving commodity prices expected to benefit the company in the future.

Flight Centre Travel Group Ltd (ASX: FLT)

The pandemic has created an unprecedented challenge for travel and leisure companies like Flight Centre. The company has completed a $700 million equity raising and reduced its annualised operating expenses by $1.9 billion. As a result, analysts estimate that the company can survive for 15 months without revenue and post a recovery following the pandemic.  

Macquarie Group Ltd (ASX: MQG)

Analysts are also optimistic on Macquarie Group to recover strongly post-pandemic. The investment bank has the ability to switch between market-facing and annuity-style operations, which makes it an attractive investment during and after the coronavirus pandemic.

Mirvac Group (ASX: MGR)

Mirvac owns and operates a commercial property portfolio that is exposed to office, retail and industrial properties, which account for 59% of group earnings. The coronavirus pandemic is expected to impact retail and other commercial rental incomes for the next 2 years. Despite this, analysts believe that Mirvac will recover post-pandemic with a secure income stream.

Origin Energy Limited (ASX: ORG)

Origin’s 2 main areas of operation are the energy markets and integrated gas, which contribute 44% and 56%, respectively, to group earnings. The energy market is expected to recover post-pandemic and analysts are optimistic that Origin energy will see a strong resurgence in energy and fuel demand.

Premier Investments Limited (ASX: PMV)

Premier Investments is the owner of prominent retail brands such as Smiggle, Peter Alexander and Just Jeans. Despite the pandemic causing havoc among retailers, Premier Investments is tipped to recover strongly. Analysts cited the company’s stance to pay adjusted rent and strong retail presence as factors that will help Premier Investments emerge stronger, post-pandemic.

Qantas Airways Limited (ASX: QAN)

With the pandemic bringing domestic and international travel to a grinding halt, airlines like Qantas have been some of the most adversely impacted companies. Despite the toll the pandemic has had on the company, analysts think that Qantas could see a protracted recovery. Analysts believe that Qantas can survive for up to 12 months with cost reductions and available liquidity of $4 billion.

Worley Ltd (ASX: WOR)

Worley is a global provider of engineering and project management services for the energy, chemicals and resource sectors. The pandemic has presented the company with a challenging operating environment, especially given the collapse in oil price. Analysts believe that the company will recover post-pandemic as activity levels improve.

Foolish takeaway

In my opinion, Bell Potter provides high quality research and analysis, However, just because analysts think these shares could recover doesn’t mean that investors should jump the gun and start buying. As we have seen, the coronavirus pandemic is an evolving situation and nothing is certain.

I think a prudent strategy would be to compile your own watchlist of champion stocks and wait for positive price action before making an investment decision.

More reading

• Got $2,000? Here are 2 ASX 200 energy shares to buy today
• 4 top ASX 200 shares for blue chip investors
• Got $5,000 to spend? Here are 5 ASX shares you can buy today
• Goldman Sachs names 5 reasons iron ore prices won’t crash
• Looking for dividend income? Try these 3 ASX shares

Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited and Premier Investments Limited. 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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Some ASX shares can provide a good mixture of growth and income for your portfolio.

In this era of ultra-low interest rates it’s hard to find good sources of income. And with the coronavirus there are few shares that cab provide good growth right now.

Here are three ideas to consider:

Ansell Limited (ASX: ANN)

Ansell is one of the businesses involved in fighting the spread of the coronavirus. It makes a number of products like gloves, masks and protective suits.

However, despite the coronavirus impacts, the company recently reaffirmed its FY20 guidance for earnings per share (EPS) to be in a range of US$1.12 to US$1.22.

Even before the coronavirus Ansell was predicting solid mid-single digit growth so I think that Ansell is well placed to grow whatever happens next. I think it’s a good, defensive ASX share to provide growth and income.

In terms of dividend income it has a trailing dividend yield of 2.3%.

Magellan Global Trust (ASX: MGG)

Magellan Global Trust is a listed investment trust (LIT) which invests in some of the best shares in the world. You get indirect exposure to shares you just don’t find on the ASX. Some examples are Microsoft, Alphabet, Visa, Mastercard, Tencent, Alibaba and Facebook.

Many of its holdings are quality growth shares with great balance sheets. If you owned them yourself you wouldn’t get much income. But Magellan Global Trust can target a 4% distribution yield by paying out a portion of the long-term capital growth each year.

As the net asset value (NAV) of Magellan Global Trust grows, the distribution will rise over time with it. This is an attractive combination of growth and income from an ASX share.

Kogan.com Ltd (ASX: KGN)

Kogan.com is an online retailer that also has a third party marketplace. It also distributes cheap services like telecommunications, superannuation, insurance and so on.

With everyone limiting their exposure to the outside world it’s eCommerce businesses like Kogan.com that are getting a lot of the pent up demand. In April 2020 Kogan.com saw revenue growth of over 100%. ‘Adjusted’ earnings before interest, tax, depreciation and amortisation (EBITDA) grew over 200%.

It also announced this morning that it has acquired Matt Blatt, a furniture and homewares retailer which generated around 20% to 25% of its $46.5 million revenue online in FY19. It will be an online only retailer under Kogan.com’s leadership.

Kogan.com has grown its dividend each year over the past few years and currently has a grossed-up dividend yield of 2.6%.

Are all of these ASX shares buys for income and growth?

Kogan.com and Ansell have both performed strongly after the initial market selloff as investors realised the strength of those businesses. I don’t think they’re not cheap any more. But my ASX share pick for income and growth is Magellan Global Trust – it’s diversified, has the biggest yield and gives exposure to many of the best businesses in the world.

More reading

• Kogan.com share price on watch following acquisition news
• ASX small-cap sector rallies strongly during April
• These ASX shares are set to dominate the post-COVID-19 economy
• This ASX growth share has rocketed 150% higher since March. Is it too late to invest?
• With Aussie wages set to fall, could ASX 200 shares follow?

Motley Fool contributor Tristan Harrison owns shares of MAGLOBTRST UNITS. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd. The Motley Fool Australia has recommended Ansell Ltd. 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 Kogan.com Ltd (ASX: KGN) share price will be one to watch today after the ecommerce company expanded its offering with an acquisition.

What has Kogan acquired?

This morning Kogan announced that it has acquired replica furniture and homewares retailer Matt Blatt.

Matt Blatt is a family-run business that was founded in 1981. In FY 2019 it recorded $46.5 million of revenue, of which ~20% to 25% came from its online business.

In March the company was in financial distress because of the coronavirus pandemic and revealed to Inside Retail that it had called in advisors to facilitate a potential sale. A number of parties were believed to be interested, but Kogan has proven to be the successful suitor.

It has acquired the company’s intellectual property and goodwill for a purchase price of $4.4 million. This has been funded by the company’s cash reserves.

Based on FY 2019’s online sales of ~$10.45 million, this represents an attractive multiple of 0.42x sales. As a comparison, Kogan’s shares are changing hands for 1.45x FY 2019 gross sales.

What now?

Kogan will relaunch the business as an online-only offering and go head to head with the likes of Adairs Ltd (ASX: ADH) and Temple & Webster Group Ltd (ASX: TPW).

Kogan’s founder and CEO, Ruslan Kogan, commented: “We are pleased to bring the iconic Matt Blatt brand into new ownership, and relaunch the business as an online-only offering. Our acquisition of Matt Blatt gives us a springboard from which to expand our reach in the furniture and homewares market.”

“We will be drawing on Matt Blatt’s decades of industry expertise and combining it with Kogan.com’s technology, systems and infrastructure to deliver a market-leading offering. We look forward to serving and delighting furniture and design lovers all over Australia,” the chief executive concluded.

More reading

• 3 ASX shares to buy for growth and income
• ASX small-cap sector rallies strongly during April
• These ASX shares are set to dominate the post-COVID-19 economy
• This ASX growth share has rocketed 150% higher since March. Is it too late to invest?
• With Aussie wages set to fall, could ASX 200 shares follow?

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 Temple & Webster Group Ltd. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd. 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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If you are looking for market-beating returns over the next decade, then the three growth shares listed below could be the ones to buy.

I think their strong growth prospects means that investors could at least double their money with them over the next 10 years.

Here’s why I would buy them:

Altium Limited (ASX: ALU)

I think Altium has the potential to deliver very strong returns for investors over the next decade. This is due to its high quality electronic design software, its massive market opportunity, and its exposure to the rapidly growing Internet of Things (IoT) market. This year Altium expects to achieve 50,000 subscribers. After which, it is aiming for 100,000 subscribers by FY 2025. Combined with its other growing businesses such as NEXUS and Octopart, I feel Altium is well-placed to grow its earnings at a rapid rate for many years to come.

Domino’s Pizza Enterprises Ltd (ASX: DMP)

Another great option could be Domino’s Pizza. Its growth other the last few years as been a little up and down, but I remain confident the long term trajectory is upwards. Especially given its same store sales and store expansion goals. Over the next five years the pizza chain operator is aiming to deliver annual same store sales growth of 3% to 6% and annual organic new store additions of 7% to 9%. If it can at least maintain its margins, this should support strong earnings growth over the next decade.

Pushpay Holdings Ltd (ASX: PPH)

A final growth share to buy for market-beating returns is Pushpay. The donor management system provider has just released its full year results and revealed a stunning ~1,500% increase in EBITDAF in FY 2020, The good news is that more strong growth is expected over the next 12 months, with management aiming to double its EBITDAF in FY 2021. But it isn’t about to rest on its laurels any time soon. The company has set itself a target of winning a 50% share of the medium and large church market. This represents a US$1 billion revenue opportunity for Pushpay. This compares to the operating revenue of US$127.5 million it recorded in FY 2020.

More reading

• 3 top ASX 200 shares every investor should buy
• 3 quality mid cap ASX shares to buy with $3,000
• ASX shares I’d invest $10,000 into today
• How to build good wealth with small investments
• Top brokers name 3 ASX 200 shares to buy right now

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended PUSHPAY FPO NZX. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Domino’s Pizza Enterprises 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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On Thursday the S&P/ASX 200 Index (ASX: XJO) followed the lead of U.S. markets and sank notably lower.

While the majority of ASX shares tumbled lower with the market, some fell more than most.

Three ASX 200 shares that hit multi-year lows are listed below. Here’s why they are down in the dumps:

Bank of Queensland Limited (ASX: BOQ)

The Bank of Queensland share price sank to a 20-year low of $4.51 on Thursday. Weakness in the banking sector, a dilutive capital raising, the deferral of its dividend, and a weak half year result have all weighed heavily on Bank of Queensland this year. In respect to its results, the regional bank posted half year cash earnings after tax of $151 million. This was down 10% on the prior corresponding period. Judging by its share price performance, investors appear to believe things will get worse before they get better because of the pandemic.

Orocobre Limited (ASX: ORE)

The Orocobre share price dropped to a multi-year low of $1.82 yesterday. This lithium miner has been sold off again this year due to weak prices of the battery making ingredient and the forced shutdown of its Argentinian operations during the pandemic. Unfortunately for Orocobre and its peers, many analysts believe that a recovery in the lithium price has been pushed back because of the crisis. This could mean another difficult 12 months for Orocobre.

Unibail-Rodamco-Westfield (ASX: URW)

The Unibail-Rodamco-Westfield share price tumbled to an all-time low of $3.65 on Thursday. This latest decline means the shopping centre operator’s shares have lost 68% of their value of the last 12 months. Unibail-Rodamco-Westfield’s shares have come under significant pressure during the pandemic because the majority of its shopping centres have been forced to close. In addition to this, it has warned that it is difficult to judge the impact on the contractual obligations of its retailers and to estimate the effect of any case-by-case support measures it may offer tenants.

More reading

• 5 things to watch on the ASX 200 on Friday
• Is this ASX 200 REIT a bargain right now?
• ASX 200 drops 1.7%, Xero reports a profit
• ASX fundie says ASX 200 was more volatile in March than during the GFC
• This ASX growth share has rocketed 150% higher since March. Is it too late to invest?

Motley Fool contributor James Mickleboro 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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While I think that Commonwealth Bank of Australia (ASX: CBA) would be a good option for income investors, not everyone is keen on the banks right now.

For those investors, I have picked out three non-bank dividend shares which I think would be good alternatives.

Here’s why I like them:

BWP Trust (ASX: BWP)

The first dividend share to consider buying is BWP. It is a real estate investment trust with a focus on warehouses. Most of its warehouses are leased to hardware giant Bunnings, which is owned by Wesfarmers Ltd (ASX: WES). I think Bunnings is arguably the highest quality retailer in the country and likely to stay in its warehouses for the long term. As a result, I believe BWP’s earnings are very defensive and it is well-placed to grow its distribution in the future. At present I estimate that it offers investors a 5.2% yield.

Coles Group Ltd (ASX: COL)

This supermarket giant could be a great alternative to the banks. Unlike the banks, it appears well-placed to continue its sales growth whatever economic conditions it is facing. In addition to this, with the company aiming to strip out costs materially and embrace new technologies, I expect its margins to improve over the next decade and support solid earnings and dividends growth. In FY 2021 I estimate that its shares will provide investors with a fully franked dividend yield of 4.2%.

Sydney Airport Holdings Pty Ltd (ASX: SYD)

A final option for income investors to consider is Sydney Airport. Although I suspect its dividends may be limited in 2020 due to the material decline in passenger numbers, I believe they will both bounce back in 2021 and 2022. This could make it worth being patient and buying shares with a long term view. A recent note out of Goldman Sachs reveals that it expects Sydney Airport to pay a 27 cents per share distribution in FY 2021 and then a more normal 37 cents per share distribution in FY 2022. This represents a 4.9% and 6.7% yield, respectively.

More reading

• 5 things to watch on the ASX 200 on Friday
• 4 top ASX 200 shares for blue chip investors
• Leading broker names CBA shares as a sell
• Top brokers name 3 ASX shares to sell right now
• ASX 200 down 0.9%: Xero posts strong growth & Australian economy loses 594,300 jobs

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers 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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Is the Xero Limited (ASX: XRO) share price a buy? Investors didn’t think so yesterday as the Xero share price dropped 4.8% in reaction to the FY20 result.

Xero FY20 result

I thought the FY20 report was actually good from Xero, it’s just that investors were seemingly expecting even more from the result and outlook.

Xero reported that free cash flow increased by 320% to NZ$27.1 million. Net profit after tax (NPAT) came in at $3.3 million, an improvement from the NZ$27.1 million loss in FY19. As free cash flow grows it should mean investors are more willing to pay for a higher Xero share price over time.

Total subscribers rose by 26% to 2.285 million and average revenue per user increased by 2% to NZ$29.93. Operating revenue increased by 30% to NZ$718 million. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 88% to NZ$137.7 million.

One of the most attractive parts to me was that the gross margin increased from 83.6% to 85.2%.

Subscriber number growth was good across the world. North American subscribers grew 24% to 241,000, UK subscribers grew 32% to 613,000, Australian subscribers grew by 26% to 914,000, New Zealand subscribers rose 12% to 392,000 and the rest of the world subscribers rose by 51% to 125,000.

Is the Xero share price a buy?

Xero said that whilst FY20 was strong, trading in early FY21 has been impacted by the coronavirus. Uncertainty meant it would be speculative for the company to say anything else about FY21 expectations.

However, the company did say that it still aims to be a long-term orientated, high-growth business. That’s a good sign, but obviously not surprising. 

After a share price fall of 5% for Xero, I think it looks a bit better at under $80. The question will be how many businesses will permanently fold as a result of the coronavirus crisis. How many subscribers will Xero lose from its total?

Keep in mind that the interest rate in Australia and New Zealand is now incredibly low. This should mean that growth is even more valuable. I’d be happy to buy a small parcel of Xero shares at this price, but I’d be wary about buying too much because of the high expectations built in at this level.

More reading

• ASX 200 drops 1.7%, Xero reports a profit
• Got $5,000 to spend? Here are 5 ASX shares you can buy today
• 2 exciting ASX tech shares to buy right now
• ASX 200 down 0.9%: Xero posts strong growth & Australian economy loses 594,300 jobs
• Why Beach, CBA, Qantas, & Xero shares are dropping lower

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. 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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