Top Stocks 2015 by Martin Roth

Top Stocks 2015 iii

Contents

1300 Smiles Limited 20

Adelaide Brighton Limited 22

ALS Limited 24

Amcom Telecommunications Limited 26

Ansell Limited 28

ANZ Banking Group Limited 30

ARB Corporation Limited 32

Aristocrat Leisure Limited 34

ASX Limited 36

Austbrokers Holdings Limited 38

Beyond International Limited 40

BHP Billiton Limited 42

Blackmores Limited 44

Breville Group Limited 46

Cabcharge Australia Limited 48

Caltex Australia Limited 50

Cardno Limited 52

Cedar Woods Properties Limited 54

Cochlear Limited 56

Collection House Limited 58

Commonwealth Bank of Australia 60

Credit Corp Group Limited 62

Crown Resorts Limited 64

CSL Limited 66

CTI Logistics Limited 68

Data#3 Limited 70

Domino’s Pizza Enterprises Limited 72

DWS Limited 74

Euroz Limited 76

Finbar Group Limited 78

Flight Centre Travel Group Limited 80

G8 Education Limited 82

Greencross Limited 84

GUD Holdings Limited 86

GWA Group Limited 88

Hansen Technologies Limited 90

iiNet Limited 92

Infomedia Limited 94

Insurance Australia Group Limited 96

Integrated Research Limited 98

IOOF Holdings Limited 100

IRESS Limited 102

JB Hi-Fi Limited 104

Lend Lease Group 106

Macquarie Group Limited 108

MaxiTRANS Industries Limited 110

McMillan Shakespeare Limited 112

Mermaid Marine Australia Limited 114

Metcash Limited 116

Mineral Resources Limited 118

Monadelphous Group Limited 120

Money3 Corporation Limited 122

Mortgage Choice Limited 124

My Net Fone Limited 126

Myer Holdings Limited 128

MyState Limited 130

National Australia Bank Limited 132

Navitas Limited 134

Preface 1

Introduction 11

PART I: the companies

Top Stocks 2015 BOOK.indb iiiTop Stocks 2015 BOOK.indb iii 30/09/14 4:30 PM30/09/14 4:30 PM

Top Stocks 2015iv

NIB Holdings Limited 136

Nick Scali Limited 138

NRW Holdings Limited 140

Orica Limited 142

OrotonGroup Limited 144

Patties Foods Limited 146

Perpetual Limited 148

Platinum Asset Management Limited 150

Prime Media Group Limited 152

Ramsay Health Care Limited 154

RCG Corporation Limited 156

RCR Tomlinson Limited 158

Reckon Limited 160

Reece Australia Limited 162

Th e Reject Shop Limited 164

Retail Food Group Limited 166

Rio Tinto Limited 168

SAI Global Limited 170

Seek Limited 172

Servcorp Limited 174

Slater & Gordon Limited 176

SMS Management & Technology Limited 178

Sonic Healthcare Limited 180

STW Communications Group Limited 182

Super Retail Group Limited 184

Tassal Group Limited 186

Technology One Limited 188

Th orn Group Limited 190

Toll Holdings Limited 192

TPG Telecom Limited 194

Treasury Group Limited 196

Webjet Limited 198

Wellcom Group Limited 200

Westpac Banking Corporation 202

Woodside Petroleum Limited 204

Woolworths Limited 206

WorleyParsons Limited 208

Wotif.com Holdings Limited 210

PART II: the tablesA Market capitalisation 215

B Revenues 216

C Year-on-year revenues growth 217

D EBIT margin 218

E Year-on-year EBIT margin growth 219

F After-tax profi t 220

G Year-on-year earnings-per-share growth 221

H Return on equity 222

I Year-on-year return on equity growth 223

J Debt-to-equity ratio 224

K Current ratio 225

L Price/earnings ratio 226

M Price-to-NTA-per-share ratio 227

N Dividend yield 228

O Year-on-year dividend growth 229

P Five-year share price return 230

Q Non-interest income to total income 231

R Cost-to-income ratio 231

S Return on assets 231

Top Stocks 2015 BOOK.indb ivTop Stocks 2015 BOOK.indb iv 30/09/14 4:30 PM30/09/14 4:30 PM

Top Stocks 2015 1

It was the best of times, it was the worst of times.

Th e famous opening words of A Tale of Two Cities sum up the frustrations

of many investors. Th e local sharemarket has had a dazzling run, with the

benchmark S&P/ASX 200 index up around 40 per cent between June 2012

and September 2014. As a result, large numbers of stocks look to be very

expensive. It has become hard for sharebuyers to fi nd companies that appear

to off er value. Yet, as I write this, markets keep rising.

In the words of Max Mason, writing in the Australian Financial Review in

August 2014:

Finding value in the Australian sharemarket is becoming

increasingly like walking a wild path in the Amazon jungle with

a machete — there’s a lot to cut through to fi nd El Dorado. Th e

Spanish conquistadors may never have found the city of gold but

there is still a glimmer of hope for local investors — if they look

hard enough.

Th is is the 21st edition of Top Stocks, and guiding investors towards value

stocks has been one of the paramount aims of the book from the very fi rst

edition. Indeed, one of the rationales for the book has always been to highlight

the truth that Australia boasts many excellent companies that enjoy high

profi ts — and growing profi ts — regardless of the direction of the markets.

Despite the title, Top Stocks is actually a book about companies.

So right from the start it has been an attempt to help investors fi nd the best

public companies in Australia, using strict criteria.

Preface

Top Stocks 2015 BOOK.indb 1Top Stocks 2015 BOOK.indb 1 30/09/14 4:30 PM30/09/14 4:30 PM

Top Stocks 20152

Th ese criteria are explained fully later. But, in essence, all companies in the

book must have been publicly listed for at least fi ve years and must have been

making a profi t and paying a dividend for each of those fi ve years. Th ey must

also meet tough benchmarks of profi tability and debt levels. Share prices have

never been relevant.

Of the 96 companies in Top Stocks 2015 — two fewer than in last year’s

edition — 67 reported higher profi ts in the latest fi nancial year ( June 2014

for most of them), while 63 achieved higher earnings per share and 69 paid

a higher dividend.

Of the 67 companies reporting higher profi ts, 43 achieved double-digit profi t

growth, with four companies reporting a triple-digit increase. In addition, 41

of them saw profi ts growing at a faster rate than revenues, implying that their

profi t margins were expanding.

And though, as I wrote above, share prices are not relevant for selection to

Top Stocks, fully 64 of the 96 companies in the book have provided investor

returns — share price appreciation plus dividends — of an average of at least

10 per cent per year over fi ve years. In fact, of these 64 companies, more than

half have provided a return of over 20 per cent.

And fully nine of them — G8 Education, My Net Fone, Greencross, Domino’s

Pizza, Amcom, Breville, Ramsay Health Care, Credit Corp and TPG — have

provided an annual average return over fi ve years of more than 40 per cent.

But to fi nd such stocks it is probably necessary, as much as ever, that investors

are selective in their approach.

With interest rates low, many investors have been seeking stocks off ering high

dividend yields. Th ese are still a worthy target, as they should off er a degree of

protection if the market falls.

However, such stocks have been among the market’s best performers. And

given that the next move in interest rates could be up — even though this

might not happen for some time — many experts have been advising investors

to seek out stocks off ering growth.

So here are some companies to consider from the book that have been growing

well. Of the 96 companies in this latest edition, 31 have average annual EPS

growth over three years of 10 per cent or more. (Note as well that these are

historical fi gures. Th ey do not, of course, mean the growth will necessarily

continue. Some companies on the list certainly appear to have stopped

growing, at least for the time being.)


Top Stocks 2015 3

Growth stocks

Annual average EPS growth over 3 years (%)

Servcorp 90.1

My Net Fone 72.9

MaxiTRANS 59.3

Insurance Australia 50.7

G8 Education 39.1

Greencross 38.6

TPG 35.2

RCR Tomlinson 29.2

Crown Resorts 26.7

Artistocrat 23.7

Prime Media 23.6

Flight Centre 23.3

Seek 20.4

Webjet 18.9

Caltex 18.7

CSL 17.8

Domino’s Pizza 17.3

Credit Corp 17.1

Slater & Gordon 16.6

Macquarie Group 16.5

Amcom 16.2

Beyond International 16.1

Ramsay Health Care 15.3

Breville 15.2

iiNet 15.2

Technology One 14.3

Austbrokers 13.9

Monadelphous 13.5

Lend Lease 12.4

Perpetual 11.9

Mineral Resources 11.3

In Top Stocks 2014, with investors looking for smaller companies with high

dividend yields, I published a list of smaller companies from the book — a

market capitalisation of below $450 million — with a dividend yield of at

least 5 per cent.

Th ere were 22 such companies in Top Stocks 2014. Repeating the exercise this

year produces 15 stocks.


Top Stocks 20154

Dividend yield: small companies

Dividend yield (%)NRW Holdings 8.7

Euroz 8.6

OrotonGroup 8.3

Beyond International 6.9

DWS 6.9

RCG 6.9

Prime Media 6.7

Finbar 6.5

Wellcom 6.3

Integrated Research 5.9

MaxiTRANS 5.9

MyState 5.7

Data#3 5.6

Mortgage Choice 5.4

Patties Foods 5.3

Trends in Top StocksEvery new edition of Top Stocks unveils trends or themes in the market that could

off er potential to investors prepared to study more and do their own research.

In the past I have a number of times put the spotlight on the steady rise of

the healthcare sector within the book. At one time the only healthcare-related

company in Top Stocks was FH Faulding, a drugs manufacturer and distributor.

In the latest edition we fi nd a group of — generally — quite dynamic companies

(though note the relatively low dividend yields).

Top Stocks 2015: healthcare companies

Year-on-year EPS growth (%) Dividend yield (%)

1300 SMILES –21.7 2.4

Ansell 14.3 2.1

Cochlear –29.4 3.5

CSL 20.1 1.7

Greencross 72.2 1.2

Ramsay Health Care 13.7 1.6

Sonic Healthcare 13.4 3.8


Top Stocks 2015 5

Something similar has been happening with high-tech stocks. Th ere was a time

when the only technology-related company in the book was Computershare.

In the latest edition are no fewer than 13 high-tech (from the Information

Technology and Telecommunication Services sectors) stocks.

Top Stocks 2015: high-tech companies

Year-on-year EPS growth (%) Dividend yield (%)

Amcom 7.3 3.1

Data#3 –38.0 5.6

DWS –23.5 6.9

Hansen Technologies 60.5 4.2

iiNet 3.4 2.9

Infomedia 21.3 3.5

Integrated Research –6.8 5.3

IRESS –43.6 3.7

My Net Fone 32.6 1.5

Reckon 4.0 4.2

SMS –41.0 3.1

Technology One 13.9 1.7

TPG Telecom 63.3 1.2

Th e growth in local companies off ering education services is an interesting

development. Australia has a well-developed private education sector

attracting thousands of foreign students. Some of the companies are using

skills developed in Australia to expand into overseas markets.

Western Australian company Navitas is a leader in this business. Recruitment

services specialist Seek is also active. New to the latest edition of the book is

childcare provider G8 Education.

Another trend that certainly becomes evident in the new Top Stocks is

companies that appear to be achieving success in new moves expanding

overseas.

Investors have on occasion been sceptical about Australian companies taking

a big plunge into overseas markets, believing that such moves will invariably

fail. Th ese doubts have sometimes proven correct. Some local corporations,

successful at home, have done poorly abroad. But others have performed very

well. Examples include Cochlear and CSL.


Top Stocks 20156

Here are some companies from Top Stocks 2015 that are making interesting

moves abroad. Note that, among their other attractions, they are generally

benefi ciaries of a weaker Australian dollar:

• Domino’s Pizza Enterprises has been active in France, Belgium and

the Netherlands, and has now expanded to Japan, where it has an

ambitious growth strategy.

• Ramsay Health Care, Australia’s largest operator of private hospitals,

is also active in the UK and is in the process of becoming the leader in

private hospitals in France.

• Seek is realising some excellent growth from its moves into job seeker

markets in Asia and Latin America.

• Slater & Gordon, a law fi rm, is quite aggressively moving into

the British market, acquiring practices there and achieving some

excellent growth.

• Treasury Group, a successful local funds management specialist, plans

to merge with an American asset management business to create a

new global business.

An interesting fi nal trend is the rise of what I dub Th e Consolidators, companies

that are achieving growth — sometimes quite exceptional growth — by uniting

a fragmented industry.

An early example is Sonic Healthcare, which has been buying up pathology

clinics — in Australia and abroad — and, to a lesser extent, doctors’ practices,

and joining them together in a large group. Th is delivers numerous benefi ts

from generating all kinds of economies of scale.

Another example is Austbrokers, which has been buying stakes of at least

50 per cent in insurance brokers around Australia, and then having them

continue operating with the original owners. Th is has allowed the businesses

to preserve their local identity and management, while benefi ting from the

support of a large group. Austbrokers is able to help its members develop their

businesses through growth initiatives, including the addition of new products,

and sometimes through appropriate bolt-on acquisitions.

Other examples from the book are 1300 SMILES (dentistry practices), G8

Education (childcare centres), Greencross (veterinary clinics) and Slater &

Gordon (legal practices).

Who Is Top Stocks written for?

Top Stocks is written for all those investors wishing to exercise a degree of

control over their portfolios. It is for those just starting out as well as for


Top Stocks 2015 7

those with plenty of experience but who still feel the need for some guidance

through the thickets of around 2200 listed stocks.

It is not a how-to book. It does not give step-by-step instructions to ‘winning’

in the stock market. Rather, it is an independent and objective evaluation of

leading companies, based on rigid criteria, with the intention of yielding a large

selection of stocks that can become the starting point for investors wishing

to do their own research.

A large amount of information is presented on each company, and another

key feature of the book is that the data is presented in a common format, to

allow readers to make easy comparisons between companies.

It is necessarily a conservative book. All stocks must have been listed for

fi ve years even to be considered for inclusion. It is especially suited for those

seeking out value stocks for longer term investment.

Yet, perhaps ironically, the book is also being used by short-term traders

seeking a goodly selection of fi nancially sound and reliable companies whose

shares they can trade.

In addition, there are many regular readers who buy the book each year, and

to them in particular I express my thanks.

What are the entry criteria?

Th e criteria for inclusion in Top Stocks are strict:

• All companies must be included in the All Ordinaries index, which

comprises Australia’s 500 largest stocks (out of around 2200).

Th e reason for excluding smaller companies is that there is often

little investor information available on many of them and some are so

thinly traded as to be almost illiquid. In fact, the 500 All Ordinaries

companies comprise, by market capitalisation, more than 95 per cent

of the entire market.

• It is necessary that all companies be publicly listed since at least

the end of 2009, and have a fi ve-year record of profi ts and dividend

payouts each year.

• All companies are required to post a return-on-equity ratio of at least

10 per cent in their latest fi nancial year.

• No company should have a debt-to-equity ratio of more than 70 per cent.

• It must be stressed that share price performance is not one of the

criteria for inclusion in this book. Th e purpose is to select companies

with good profi ts and a strong balance sheet. Th ese may not off er the


Top Stocks 20158

spectacular share-price returns of a biotech start-up or a promising

gold miner, but they should also present far less risk.

• Th ere are several notable exclusions. Listed managed investments — as

defi ned by the ASX — are out, as these mainly buy other shares or

investments. Examples are Australian Foundation Investment

Company and all the property trusts.

• A further exclusion are the foreign stocks listed on the ASX. Th ere

is sometimes a lack of information available about such companies.

In addition, their stock prices tend to move on events and trends in

their home countries, making it diffi cult at times for local investors to

follow them.

It is surely a tribute to the strength and resilience of Australian corporations

that, despite the volatility of the past few years, so many companies have

qualifi ed for the book.

Changes to this edition

A total of 18 companies from Top Stocks 2014 have been omitted from this

new edition.

Th ree companies were acquired during the year and delisted:

• Country Road

• David Jones

• SFG Australia.

One, Hunter Hall International, is no longer in the All Ordinaries index,

a requirement for inclusion in the book. Another, Forge Group, went into

receivership.

Th e remaining 13 excluded companies — fi ve of them mining support companies

— had return-on-equity fi gures that fell below the required 10 per cent:

• Ausdrill

• Austin Engineering

• Bentham IMF (formerly IMF

Australia)

• Bradken

• Cash Converters

• Codan

• Equity Trustees

• Fantastic Holdings

• Gazal

• Incitec Pivot

• Lycopodium

• Melbourne IT

• Sedgman.


Top Stocks 2015 9

There are 16 new companies in this book (although six of them have

appeared in earlier editions of the book, but were not in Top Stocks 2014).

Th e companies are:

• Beyond International*

• Collection House*

• CTI Logistics*

• Euroz

• G8 Education*

• GWA

• IOOF Holdings

• Macquarie Group

• Money3*

• My Net Fone*

• Myer*

• MyState*

• National Australia Bank

• Orica

• Prime Media*

• TPG Telecom*.

* Companies that have not appeared in any previous edition of Top Stocks.

Companies in every edition of Top StocksTh is is the 21st edition of Top Stocks. Just three companies have appeared in

each one of those editions:

• ANZ

• Commonwealth Bank of Australia

• Westpac Banking.

Once again it is my hope that Top Stocks will serve you well.

Martin Roth

Melbourne

September 2014


Top Stocks 2015 11

Th e 96 companies in this book have been placed as much as possible into

a common format, for ease of comparison. Please study the following

explanations in order to get as much as possible from the large amount of data.

Th e tables have been made as concise as possible, though they repay careful

study, as they contain large amounts of information.

Note that the tables for the banks have been arranged a little diff erently from

the others. Details of these are later in this Introduction.

Entry head

At the head of each entry is the company name, with its three-letter ASX

code and the website address.

Share-price chart

Under the company name is a fi ve-year share-price chart, to September 2014,

provided by Alan Hull (www.alanhullbooks.com.au), author of Invest My Way,

Trade My Way and Active Investing.

Small table

Under the share-price chart is a small table with the following data.

Share price

Th ese are prices from early September 2014. Also included are the 12-month

high and low prices.

Introduction


Top Stocks 201512

Market capitalisation

Th is is the size of the company, as determined by the stock market. It is the

share price (again, as of early September 2014) multiplied by the number of

shares on issue. All companies in this book must be in the All Ordinaries

index, which comprises Australia’s 500 largest stocks, as measured by market

capitalisation.

Price-to-NTA-per-share ratio

Th e NTA-per-share fi gure expresses the worth of a company’s net tangible

assets — that is, its assets minus its liabilities and intangible assets — for

each share of the company. Th e price-to-NTA-per-share ratio relates this

fi gure to the share price.

A ratio of one means that the company is valued exactly according to the

value of its assets. A ratio below one suggests that the shares are a bargain,

though usually there is a good reason for this. Profi ts are more important

than assets.

Some companies in this book have a negative NTA-per-share fi gure — as a

result of having intangible assets valued at more than their remaining net assets

— and a price-to-NTA-per-share ratio cannot be calculated.

See table M, in part II of this book, for a little more detail on this ratio.

Five-year share-price return

Th is is the total return you could have received from the stock in the fi ve years

to September 2014. It includes reinvested dividends, bonus stock, rights issues

and capital gain from the stock’s appreciation. It is expressed as a compounded

annual rate of return.

Dividend reinvestment plan

A dividend reinvestment plan (DRP) allows shareholders to receive additional

shares in their company in place of the dividend. Usually — though not

always — these shares are provided at a small discount to the prevailing price,

which can make them quite attractive. And of course no broking fees apply.

Around a third of all large companies seem to off er such plans. However,

they come and go. When a company needs fi nance it may introduce a DRP.

When its fi nancing requirements become less pressing it may withdraw it.

Some companies that have a DRP in place may decide to deactivate it for a

short time.


Top Stocks 2015 13

Th e information in this book is based on up-to-date information from the

companies. But if you are investing in a particular company in expectations

of a DRP be sure to check that it is still on off er. Th e company’s own website

will often provide this information.

Price/earnings ratio

Th e price/earnings ratio (PER) is one of the most popular measures of whether

a share is cheap or expensive. It is calculated by dividing the share price — in

this case the price for early September 2014 — by the earnings per share fi gure.

Obviously the share price is continually changing, so the PER fi gures in this

book are for guidance only. Many newspapers publish each morning the latest

PER for every stock.

Dividend yield

Th is is the latest full-year dividend expressed as a percentage of the share price.

Like the price/earnings ratio, it changes as the share price moves. It is a useful

fi gure, especially for investors who are buying shares for income, as it allows

you to compare this income with alternative investments, such as a bank term

deposit or a rental property.

Sector comparisons

It is sometimes useful to compare a company’s price/earnings ratio and its

dividend yield with those of its sector. Figures used in this book are those of

the S&P/ASX sectors from September 2014.

Company commentary

Each commentary begins with a brief introduction to the company and its

activities. Th en follow the highlights of its latest business results. For the

majority of the companies these are their June 2014 results, which were issued

during July and August 2014. Finally, there is a section on the outlook for

the company.

Main table

Here is what you can fi nd in the main table.

Revenues

Th ese are the company’s revenues from its business activities, generally the

sale of products or services. However, it does not usually include additional

income from such sources as investments, bank interest or the sale of assets.


Top Stocks 201514

If the information is available, the revenues fi gure has been broken down into

the major product areas.

Earnings before interest and taxation

Earnings before interest and taxation (EBIT) is the fi rm’s profi t from its

operations before the payment of interest and tax. Th is fi gure is often used

by analysts examining a company. Th e reason is that some companies have

borrowed extensively to fi nance their activities, while others have opted for

alternative means. By expressing profi ts before interest payments it is possible

to compare more precisely the performance of these companies. Th e net

interest fi gure — interest payments minus interest receipts — has been used

for this calculation.

EBIT margin

Th is is the company’s EBIT expressed as a percentage of its revenues. It is a

gauge of a company’s effi ciency. A high EBIT margin suggests that a company

is achieving success in keeping its costs low.

Gross margin

Th e gross margin is the company’s gross profi t as a percentage of its sales. Th e

gross profi t is the amount left over after deducting from a company’s sales

fi gure its cost of sales; that is, its manufacturing costs or, for a retailer, the cost

of purchasing the goods it sells. Th e cost of goods sold fi gure does not usually

include marketing or administration costs.

As there are diff erent ways of calculating the cost of goods sold fi gure, this

ratio is best used for year-to-year comparisons of a single company’s effi ciency,

rather than in comparing one company with another.

Many companies do not present a cost of goods sold fi gure, so a gross margin

ratio is not given for every stock in this book.

Th e revenues for some companies include a mix of sales and services. Where

a breakdown is possible, the gross profi t fi gure will relate to sales only.

Profi t before tax/profi t after tax

Th e profi t before tax fi gure is simply the EBIT fi gure minus net interest

payments. Th e profi t after tax fi gure is, of course, the company’s profi t after the

payment of tax, and also after the deduction of minority interests. Minority

interests are that part of a company’s profi t that is claimed by outside interests,

usually the other shareholders in a subsidiary which is not fully owned by the

company. Many companies do not have any minority interests, and for those


Top Stocks 2015 15

that do it is generally a tiny fi gure. Th e after-tax profi t fi gure will also usually

incorporate the profi ts (or losses) from discontinued businesses.

As much as possible, I have adjusted the profi t fi gures to exclude non-recurring

profi ts and losses, which are often referred to as signifi cant items. It is for this

reason that the profi t fi gures in Top Stocks sometimes diff er from those in the

fi nancial media or on fi nancial websites, where profi t fi gures normally include

signifi cant items.

Signifi cant items are those that have an abnormal impact on profi ts, even

though they happen in the normal course of the company’s operations.

Examples are the profi t from the sale of a business, or losses from a business

restructuring, the write-down of property, an inventory write-down, a bad-debt

loss or a write-off for research and development expenditure.

Signifi cant items are controversial. It is often a matter of subjective judgement

as to what is included and what excluded. After analysing the accounts of

hundreds of companies, while writing the various editions of this book, it

is clear that diff erent companies use quite widely varying interpretations of

what is signifi cant.

Further, when they do report a signifi cant item there is no consistency as to

whether they use pre-tax fi gures or after-tax fi gures. Some report both, making

it easy to adjust the profi t fi gures in the tables in this book. But diffi culties

arise when only one fi gure — generally pre-tax — is given for signifi cant items.

In normal circumstances most companies do not report signifi cant items. But

investors should be aware of this issue. It sometimes causes consternation

for readers of Top Stocks to fi nd that a particular profi t fi gure in this book is

substantially diff erent from that given by some other source. My publisher

occasionally receives emails from readers enquiring why a profi t fi gure in this

book is so diff erent from that reported elsewhere. In virtually all cases the

reason is that I have stripped out a signifi cant item.

Earnings per share

Earnings per share is the after-tax profi t divided by the number of shares.

Because the profi t fi gure is for a 12-month period the number of shares used

is a weighted average of those on issue during the year. Th is number is provided

by the company in its annual report and its results announcements.

Cash fl ow per share

Th e cash fl ow per share ratio tells — in theory — how much actual cash the

company has generated from its operations.


Top Stocks 201516

In fact, the ratio in this book is not exactly a true measure of cash fl ow. It is

simply the company’s depreciation and amortisation fi gures for the year added

to the after-tax profi t, and then divided by a weighted average of the number of

shares. Depreciation and amortisation are expenses that do not actually utilise

cash, so can be added back to after-tax profi t to give a kind of indication of

the company’s cash fl ow.

By contrast, a true cash fl ow — including such items as newly raised capital

and money received from the sale of assets — would require quite complex

calculations based on the company’s statement of cash fl ows.

However, many analysts use the ratio as I present it, because it is easy to

calculate, and it is certainly a useful guide to how much funding the company

has available from its operations.

Dividend

Th e dividend fi gure is the total for the year, interim and fi nal. It does not

include special dividends. Th e level of franking is also provided.

Net tangible assets per share

Th e NTA per share fi gure tells the theoretical value of the company — per

share — if all assets were sold and then all liabilities paid. It is very much a

theoretical fi gure, as there is no guarantee that corporate assets are really worth

the price put on them in the balance sheet. Intangible assets such as goodwill,

newspaper mastheads and patent rights are excluded because of the diffi culty

in putting a sales price on them, and also because they may in fact not have

much value if separated from the company.

As already noted, some companies in this book have a negative NTA, due to

the fact that their intangible assets are so great, and no fi gure can be listed

for them.

Where a company’s most recent fi nancial results are the half-year fi gures, these

are used to calculate this ratio.

Interest cover

Th e interest cover ratio indicates how many times a company could make its

interest payments from its pre-tax profi t. A rough rule of thumb says a ratio of

at least three times is desirable. Below that and fast-rising interest rates could

imperil profi ts. Th e ratio is derived by dividing the EBIT fi gure by net interest

payments. Some fortunate companies have interest receipts that are higher

than their interest payments, which turns the interest cover into a negative

fi gure, and so it is not listed.


Top Stocks 2015 17

Return on equity

Return on equity is the after-tax profi t expressed as a percentage of the

shareholders’ equity. In theory, it is the amount that the company’s managers

have made for you — the shareholder — on your money. Th e shareholders’

equity fi gure used is an average for the year.

Debt-to-equity ratio

Th is ratio is one of the best-known measures of a company’s debt levels. It is

total borrowings minus the company’s cash holdings, expressed as a percentage

of the shareholders’ equity. Some companies have no debt at all, or their cash

position is greater than their level of debt, which results in a negative ratio, so

no fi gure is listed for them.



Current ratio

Th e current ratio is simply the company’s current assets divided by its current

liabilities. Current assets are cash or assets that can, in theory, be converted

quickly into cash. Current liabilities are normally those payable within a year.

Th us, the current ratio measures the ability of a company to repay in a hurry

its short-term debt, should the need arise. Th e surplus of current assets over

current liabilities is referred to as the company’s working capital.



Banks

Th e tables for the banks are somewhat diff erent from those for most other

companies. EBIT and debt-to-equity ratios have little relevance for them, as

they have such high interest payments (to their customers). Other diff erences

are examined below.

Operating income

Operating income is used instead of sales revenues. Operating income is the

bank’s net interest income — that is, its total interest income minus its interest

expense — plus other income, such as bank fees, fund management fees and

income from businesses such as corporate fi nance and insurance.


Top Stocks 201518

Net interest income

Banks borrow money — that is, they accept deposits from savers — and they

lend it to businesses, homebuyers and other borrowers. Th ey charge the

borrowers more than they pay those who deposit money with them, and the

diff erence is known as net interest income.

Operating expenses

Th ese are all the costs of running the bank. Banks have high operating

expenses, and one of the keys to profi t growth is cutting these expenses. Add

the provision for doubtful debts to operating expenses, then deduct the total

from operating income, and you get the pre-tax profi t.

Non-interest income to total income

Banks have traditionally made most of their income from savers and from

lending out money. But they are also working to diversify into new fi elds, and

this ratio is an indication of their success.

Cost-to-income ratio

As noted, the banks have high costs — numerous branches, expensive computer

systems, many staff , and so on — and they are all striving to reduce these. Th e

cost-to-income ratio expresses their expenses as a percentage of their operating

income, and is one of the ratios most often used as a gauge of effi ciency. Th e

lower the ratio drops the better.

Return on assets

Banks have enormous assets, in sharp contrast to, say, a high-tech start-up

whose main physical assets may be little more than a set of computers and

other technological equipment. So the return on assets — the after-tax profi t

expressed as a percentage of the year’s average total assets — is another measure

of effi ciency.


The companies

PART IPART I


Top Stocks 201520

ASX code: ONT www.1300smiles.com.au

Share price ($) 6.05

12-month high ($) 7.25

12-month low ($) 5.35

Market capitalisation ($mn) 143.3

Price-to-NTA-per-share ratio 17.4

5-year share price return (% p.a.) 20.9

Dividend reinvestment plan No

Sector: Health care Company SectorPrice/earnings ratio (times) 28.7 26.3

Dividend yield (%) 2.4 2.1

Townsville-based 1300 SMILES, founded in 2000, runs a chain of more

than two dozen dental practices in 10 cities and towns of Queensland, and

has also expanded to South Australia and New South Wales. Its main role is

the provision of dental surgeries and practice management services to self-

employed dentists, allowing them to focus on dental services. It also manages

its own small dental business. Th e founder and managing director Dr Daryl

Holmes owns 60 per cent of the company equity.

Latest business results (June 2014, full year)Revenues and profi ts fell, as the company continued to be hit by the ending

of the government’s Chronic Disease Dental Scheme in November 2012.

Th is had been responsible for funding about 20 per cent of dental treatment

revenues. It led to a sharp spike in business before the formal ending of the

scheme, followed by a major downturn during 2013. However, business began

1300 Smiles Limited


Top Stocks 2015 21

Year to 30 June 2013 2014Revenues ($mn) 35.4 30.9

EBIT ($mn) 8.5 7.0

EBIT margin (%) 23.9 22.7

Profi t before tax ($mn) 8.9 7.4

Profi t after tax ($mn) 6.4 5.0

Earnings per share (¢) 26.9 21.1

Cash fl ow per share (¢) 35.8 30.7

Dividend (¢) 18.5 14.5

Percentage franked 100 100

Net tangible assets per share ($) 0.62 0.35

Interest cover (times) – –

Return on equity (%) 23.6 17.4

Debt-to-equity ratio (%) – –

Current ratio 1.7 0.4

a steady recovery during 2014, and the company reported that the June 2014

half saw a pleasant rise in revenues and profi ts over the December 2013 half.

In response to the termination of the Chronic Disease Dental Scheme, the

company in October 2012 launched its own subscription-based Dental Care

Plan, and this has been showing steady growth. By June 2014 it was generating

annual revenues — from membership fees plus treatment charges — of more

than $3 million. In April 2014 the company made its fi rst acquisition in New

South Wales, and in May 2014 it completed its largest-ever acquisition, BOH

Dental in the Brisbane CBD.

OutlookTh e dental business in Australia is fragmented, with a majority of dentists

working in their own private practices. A gradual consolidation is taking place,

with 1300 SMILES one of the leaders in this work. It buys dental practices,

then retains the dentists, who pay a fee to 1300 SMILES for services received.

Th e company continues to seek out new practices to buy, though has strict

benchmarks concerning the price it will pay. A new agreement with Queensland

Health for the treatment of public dental patients is boosting business. Th e

company is also now receiving annualised revenues of some $3 million from the

government’s Child Dental Benefi ts Scheme, while its own Dental Care Plan

continues to show steady grow. It expects its new BOH Dental acquisition to

make an annual contribution to EBIT of at least $1.25 million. In addition,

seven of the 10 BOH dentists are senior specialists, allowing 1300 SMILES

to make referrals within the company.


TOP STOCKS 2015 A Sharebuyer’s Guide to Leading Australian Companies

We hope you have enjoyed this sample from

by Martin Roth

ISBN: 9780730315063Available November 2014RRP AU$29.95 / NZ$33.99

http://au.wiley.com/WileyCDA/WileyTitle/productCd-0730315061.html

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Online Investing on the Australian Sharemarket, 4th editionRoger Kinsky

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Trading in a Nutshell, 10thanniversary ed.Stuart McPhee

Available in print and e-book formats


Th e author and publisher would like to thank Alan Hull (author of Active Investing, Revised Edition, Trade My Way and Invest My Way; www.alanhull.com) for generating the fi ve-year share-price charts.

Th is twenty-fi rst edition fi rst published in 2015 by Wrightbooksan imprint of John Wiley & Sons Australia, Ltd42 McDougall Street, Milton Qld 4064

Offi ce also in Melbourne

Typeset in 10/12.4 pt Caslon

First edition published as Top Stocks by Wrightbooks in 1995New edition published annually

© Martin Roth 2015Th e moral rights of the author have been asserted

ISBN: 9780730315063 (pbk.) 9780730315070 (ebook)

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All enquiries should be made to the publisher at the address above.

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Disclaimer

Th e material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specifi c guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.

Top Stocks 2015 BOOK.indb iiTop Stocks 2015 BOOK.indb ii 30/09/14 4:30 PM30/09/14 4:30 PM

MARTIN ROTH’SB E S T - S E L L I N G A N N U A L

A S H A R E B U Y E R ’ S G U I D E T O

LEADING AUSTRALIANCOMPANIES

STOCKS

2015

TOPTWENTY-FIRST EDITION

AUSTRALIA’S BEST-SELLING SHAREMARKET TITLE IS BACK IN ITS 21ST EDITION

Top Stocks 2015 is the definitive guide to the best stocks to buy on the Australian sharemarket. With all the key information in an easy-to-read format, this book allows even inexperienced investors the chance to build an impressive portfolio. Cut through the noise and hype to find clear, objective information on top Australian companies, with a focus on profitability, debt levels and dividends. You’ll have easy access to each company’s financial data in a format perfect for quick comparison.

This resource profiles the companies that met a meticulous set of criteria, distilled to a concise selection of premium purchases across market sectors. It gives you:

• individual, unbiased analysis of the latest results from 96 of Australia’s leading companies, with a focus on profitability, dividends and debt levels

• comparative sales and profits data, as well as in-depth ratio analysis

• comprehensive research on each company’s overall outlook, and tables ranking all companies according to financial data.

Leave the complex data to the analysts and focus on the clear winners. With Top Stocks 2015, you get the data you need and the expert insight you trust.

MARTIN ROTH is an internationally successful financial journalist. Based in Melbourne, he is one of Australia’s leading authors of investment books.

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