Written by Jonathan Wilson, with insights from Adrian Ezquerro, Clime Senior Analyst
For most large ASX companies leveraged to the sluggish domestic economy, GDP-plus growth is hard to find.
The slow domestic economy warrants more attention to global equities and Australian companies with offshore growth or leverage to an offshore growth theme.
We highlight three quality Australian companies with offshore growth.
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CSL is world leading provider of blood plasma therapies and one of the largest collectors of human blood plasma. Strong and enduring profitability is the product of CSL’s large scale, its patents and strong brand, and high barriers to entry in the plasma products industry.
CSL’s business is difficult to replicate. Strict licensing requirements relating to blood collection, fractionation and testing procedures mean new entrants face substantial time and financial costs before making a single sale. Even if licensing is attained, new entrants lack CSL’s global network and know-how to compete effectively.
Patents ensure innovative products are protected from competition for a number of years, providing significant pricing power and delivering high margins.
Due to high barriers to entry three players, CSL, Baxter, and Grifols, account for ~85% of supply in the IG products markets. High industry concentration means supply decisions are more likely to be made to ensure industry profitability.
Increasing recognition of the benefits of plasma therapies, expansion into emerging markets, an ageing population in developed markets and new product categories will drive future earnings. Asia accounted for only 10% of 1H15 sales, however Asia will by 2030 have 66% of the global middle class (OECD estimate). Recently CSL became the number two player in the influenza market through the acquisition of vaccine manufacturer Novartis with which it hopes to replicate its success with blood plasma therapies. This month it acquired the rights to influenza treatment Rapivab from BioCryst Pharmaceutical.
Given 90 per cent of its earnings are offshore, CSL benefits from a falling Australian dollar. The stock is attractively priced, trading 8% below our FY15 valuation.
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Two weeks ago we argued Seek’s share price at $16 was modest considering the growth potential of the international business. This week SEK lowered profit guidance (to flat) in 2H15 instead of slightly higher, citing lower enrolments within the learning segment resulting from IT problems at NSW TAFE. SEK’s share price has since plummeted ~15% or ~$800m, which is more than the value we attribute to the entire Learning business, and is currently trading around $14.
Our thesis is unchanged and the stock is looking more attractive as the price declines.
The Learning business will contribute ~10% of operating earnings in FY15, while the Domestic employment classifieds business and the International segment will each contribute ~45%.
Key metrics suggest SEK continues to provide the most effective interface for matching hirers and job seekers in Australia. SEK’s share of online placements about 10 times the closest competitor, and its websites receive about three times the number of visits. SEK’s 100%-owned JobSeeker is also the leading aggregator.
The international growth potential is substantial, and this is the main attraction of the stock. SEK has majority interests in country-leading online employment classifieds businesses Zhaopin (China), JobsDB and JobStreet (South East Asia), Catho and Manager Online (Brazil) and OCC Mexico. SEK now operates in 14 countries with an addressable population of nearly 3 billion and internet penetration below 40%, around half the rate in Australia.
Online usage metrics are improving across the international portfolio. An overlooked detail in this week’s market update was that Zhoapin, in which SEK has a 66% ownership, has for the first time become the market leader in both unique employers and jobseeker visits in China. SEK also reported strong progress on the integration between JobDB and Jobstreet in South East Asia.
The international businesses are on track to achieve similar network effects the domestic business enjoyed over the last decade, which could see substantial earnings compounding from simultaneous volumes increases and margin expansion. This is a medium term story.
SEK is trading slightly below our $14.72 FY15 valuation, which we reduced from $16.13 following this week’s announcement to align with management’s near term guidance. Our valuation is modest considering SEK’s growth trajectory and we think the stock will prove a rewarding investment over the long term.
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CWN has a strong domestic market position and is leveraged long term to the emerging middle class in Asia via its 33.6% equity interest in Melco Crown (MCE), which has operations in Macau and is listed on the NASDAQ.
Monopoly positions in Melbourne and Perth provide consistently strong cash flows that support both dividends and growth. CWN has a significant growth pipeline including Perth Towers (2016), Crown Sydney (2019), Crown Las Vegas, Queens Wharf Brisbane (bid lodged), and Studio City Macau (2015).
Falls in the share price, down more than 30% since the 2014 high of $17.90, largely reflect the market’s anxiety over Melco Crown, which is currently affected by a structural change in the Macau market as the Chinese government’s anti-corruption campaign drives government officials from the lucrative VIP segment.
We think the slow down in Macau is temporary and is disproportionately reflected in the share price.
Although the VIP segment contributed 60% of Macau’s total gaming revenues in 2014, it contributed only 19% of MCE’s operating earnings. The mass segment accounted for 73% operating earnings, and non-gaming 8%.
Room occupancy rates have been full (99%), suggesting the contraction in Macau is almost entirely VIP-related and there is a shortage of rooms.
Macau Gross Gaming Revenues (GGRs) have recently stabilised. Although VIP revenues are expected to fall further, mass-market revenues are expected to rise and should exceed VIP revenues by 2016. Long term mass market growth will be helped by the Chinese government’s desire to transition Macau to a more family friendly, entertainment driven destination.
CWN is exposed to Australian dollar depreciation, which benefits the company via increased tourism to Australia and better translation of Hong Kong dollar revenues and earnings into Australian dollar.
Crown is currently trading in-line with our $12.56 valuation, which assumes steady earnings from the existing Australian businesses and subdued earnings from MPEL. Improving conditions in Macau and additional earnings streams as projects come online provide upside to our valuation. We think CWN is an attractive long-term investment at current prices.
Clime Asset Management owns CSL, SEK, and CWN on behalf of various mandates where it acts as an investment manager.