ASX Weekly Wrap 27/8 - 31/8

Australian markets rebounded strongly after suffering heavy losses the week before. The focus shifted from the chaos in Canberra to earnings and dividends, where were solid to say the least. Global markets were spurred on by the news the US and Mexico agreed to a trade deal. This gave markets hope that US and China could also come to an arrangement sooner rather than later. Commodity prices rebounded slightly as the USD took a breather and bond yields sat tight. The XJO gained 72.20 points or 1.16%. Our low was 6,230.90 on Monday and our high was 6,373.50 on Thursday.

Quiet on the economic front this week with the only notable data coming the way of China and their manufacturing and services PMI from their NBS. Manufacturing was a fairly robust read coming in higher than expected at 51.3, when 51.0 was expected and they had a 51.2 read last month. Remember the NBS stats concentrate on larger companies and producers in China so it seems the economy is still running at a solid pace. The services PMI also came in better than expected with a read of 54.2, up on the 53.8 expected and 54.0 read last month. Lately both sets of data have been softening so it was good to see a slight rebound this month. Once again one set of data does not equal a trend so we would need to see a few positive reads come together before we start getting too excited.

Moving straight into a few earnings, Ramsey Health Care (RHC), has had a horrid year when it comes to share price performance, as is evident from the chart above. It turns out it was the market telling us that earnings were going to be rough and for a stock trading on such large multiples it was always going to get punished. Below is a summary of their earnings:

RHC has faced many headwinds in 2018, mainly from Europe, with most of its growth coming from its Australian hospitals. NPAT was +6.8% on year and EPS was +7.0% which was encouraging. When you split that up you see EBITDA +12.1% in Australia -0.6% in France and -9.8% in the UK mainly due to higher tariffs and leasing provisions. RHC had a lot of costs savings and efficiencies benefit their Australian division as they already operate on an industry best margin. RHC have noted that moving forward into FY19 more savings and cost efficiencies can be found but one has to think how much more is there to be saved when you are already operating at such high margins. RHC also noted the June quarter in Australia had minimal growth due to slowing admissions.

For FY19 RHC have estimated minimal growth with EPS growth at just 2% and core EBITDA at 4-6% growth. Growth in Australia is expected to be slower, whilst Europe is expected to be flat overall. Higher net interest charges and tax rates are expected to eat into earnings.

RHC trades at a current PE of 19.3x and given they are expected not to grow earnings really at all in FY19 that figures stays true. Their current yield of 2.7% should also hold for next year. Despite falling from $76+ less than 12 months ago and 30x PE, at those prices, RHC still looks expensive here to me especially since earnings are not expected to grow in FY19. When you think about it, running hospitals it becoming a tough business. People are living longer and advances in medicine are keeping them away from hospitals as well. Conditions they may have needed treatment at a hospital in the past can be managed by your GP or at home. Operations that used to require a 2-3 day stay now have you in and out in the same day. The government is also directing the elderly away from hospitals for respite to spend their time in nursing homes where it costs them far less to subsidize. RHC is not for me at the moment but I am keeping a keen eye on it as they are a leader in their field. If they were to fall to say 15x earnings, so around $40-$43 I would be interested. I would also like to see admission figures pick up both here and in Europe and margins maintained.

Next DC (NXT) is a data center provider that I don’t think I have covered before but wanted to this time as I feel it’s something I will be looking to enter in the future. We all know how quickly technology is moving and how a lot of services are moving online. If you think about how people used to watch TV and entertain themselves of an evening, just a few years ago, this has dramatically changed. A lot of what we watch these days is streamed or video on demand from the likes of Netflix, Stan and YouTube. These services require vast amounts of server/cloud power and this is just one example. NXT is in a position to provide this type of service. Like many companies they released their earnings for FY18 last week and below is a summary of these:

Key metrics such as revenue, EBITDA, contracted utilization etc. were all up strongly for NXT showing the very high demand for data centers here in Australia. NPAT was well down on FY17 based on a few factors. The first being in FY17 there was a $10.2mill income tax benefit that boosted its NPAT, but also in FY18 NXT suffered from increased costs/pricing in energy, staffing, maintenance, rent and property costs. NXT was able to bring on an extra 8.7MW of server capacity during FY18 and plans to bring forward 8MW of capacity in FY19 citing very strong demand for its services. There are questions over whether or not this extra capacity is or will be contracted since there were no mention of new major contract wins in their earnings report or to the market in general in some time. NXT also only brought on 1MW of extra capacity in the second half of FY18, which in part shows the lumpiness to capex within the industry. Some brokers are also questioning whether or not some of the tenders NXT have put out there are still there or have they been won by their competitors? This is what has caused some softness in the NXT price as it has fallen from peaks around $8.00 to approx. $6.70 today.

I love the exposure NXT gives you to one of the fastest growing industries globally, and a limited exposure we have to it here on the ASX. It’s hard to value NXT, as on an earnings basis you probably wouldn’t touch it, however knowing at where the industry is going and the potential for NXT in the next 5-10 years it should provide big returns.

The NXT story is all about adding that extra capacity and being able to fill it with blue chip companies on long term contracts. Luckily this industry is fairly sticky when keeping clients as it’s not easy moving Petabyte’s (1,000 Terabytes) of data around and keeping services online so once a tender is won you tend to keep that client for the long term. NXT has cashed itself up to add that capacity with a raising, bond issue and extended debt facility all completed in the last few months giving it $1bill+ in funds.

NXT offer a premium service and 3 of their 4 biggest data centers are Tier IV certified by UTI with the fourth expected very soon. They also own the only Gold standard Tier IV standard data center, per UTI, in the southern hemisphere. This is very important as it allows NXT to charge a premium price but also be highly sought after due to this status. UTI is an independent global organization that determines a data centers tier, with tier 1 being the worst and tier IV the best. The tiers are largely determined by the ‘uptime’ of the services offered because obviously no online business wants their services to go down for any amount of time. NXT’s original aim was to get every data center to Tier III, but since has done this and is upgrading all current services to tier IV with all new services to be tier IV as well.

Looking forward to FY19 NXT are forecasting revenue to be $183-$188m (+19%), EBITDA $83-$87mill (+12%) and capex of $430-$470mill. This reflects the strong demand for its services from within the industry. As I said when I started writing about NXT I love NXT and the exposure it gives to the industry, but its chart at the moment is quite toxic. I can see some more downside here unless NXT announce more contract wins soon. My target zone for buying NXT, if it can hold, is between $6.00 and $6.30, which really isn’t that far away. These are previous highs that should act as some support moving forward. It is high on my watch list with a high growth theme and a view to hold for the longer term.

Going to leave this week’s note right there. A short and sweet one that I could have covered a couple more companies of interest, but I try and stick with companies that clients already hold or we are looking to jump in to or exit. A lot of companies going ex-dividend this week so the market will be up against it to get any traction. They earnings season has wrapped up, but there will be a few stragglers here and there reporting their numbers over the next few weeks. October and November is the next major earnings season to come with ANZ, WBC, NAB & MQG all releasing their figures then.

Obviously Father’s day just passed and I had a wonderful day at the Adelaide Zoo with my two boys, wife and family. I was very spoilt with lots of presents and attention throughout the day. I am so very grateful I have the privilege of being the father of two very lovely, kind, healthy and beautiful boys. Becoming a Father is one of the best investment’s I have ever made and no matter how bad markets get being able to spend time with them and see their smiles will always keep me going. I hope all the fathers out there had a wonderful day and enjoyed it as much as I did. I hope you all have a great week and stay safe. I’ll speak to you all soon. Go Crows!

heath@hlminvestments.com.au

0413 799 315

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.