Three Stocks to Buy - Kathmandu Holdings + Alumina Ltd + Cash Converters
Oct 27, 2015 | Team Kalkine
Kathmandu Holdings
Enhancing pricing strategy and operational model to get back to the growth track: Kathmandu Holdings Ltd (ASX: KMD) reported a net profit after tax fall to NZ$20.4 million during FY15 against NZ$42.2 million in prior corresponding period (pcp), impacted by higher inventories during FY2015 on the back of heavy clearance activity by the group in first quarter of 2015. On the other hand, KMD delivered a modest revenue increase of 4.2% to NZ$409.4 million during fiscal year of 2015. Aggressive pricing and promotional activity resulted in clearance activity compromise. KMD also delivered a solid online sales growth of 28% year on year (yoy), which now accounts over 6.2% of overall sales, across all its regions, driven by outstanding online growth by 79% yoy in UK. The group’s winter promotion drove same store sales and gross margin against the Christmas and Easter promotions outcome. Meanwhile, KMD shares fell over 27.75% in this year to date (as of Oct 27, 2015) partly due to Briscoe Group takeover battle, wherein KMD urged its shareholders not to accept the takeover bid from Briscoe Group as well as lower consumer spending. On the other hand, the group is aiming to reach 180 stores across Australasia. KMD is opening three new stores as well as relocating its flagship stores in Melbourne and Adelaide CBD’s. Management is also quitting the UK store network during fiscal year of 2016 and targeting the online international brand equity expansion by adopting capital light model.
Same stores performance (Source: Company Reports)
Accordingly, the stock recovered over 13.78% (as of Oct 27, 2015) in the last four weeks due to improving outlook and we believe this momentum to continue. KMD also has a decent dividend yield of 5.04%. We reiterate our “BUY” recommendation at the current stock price of $1.500.
KMD Daily Chart (Source: Thomson Reuters)
Alumina Limited
Solid long term potential: Alumina Limited (ASX: AWC) reported a net profit after tax of US$122 million in the first half of fiscal 2015, against the net loss of US$47 million in the corresponding period of last year. The group incurred US$53 million for restructuring the Alcoa World Alumina & Chemical’s (AWAC’s) asset portfolio during the period as compared to US$74 million in pcp. AWAC’s average realized price of alumina surged by $21 per tonne while AWAC cash from operations rose by $239 million to $321 million during the period, which is after a $300 million prepayment for the Western Australian gas supply agreement. Alcoa recently released the third quarter numbers with alumina segment income of US$212m indicating AWC share of about of US$85m. Meanwhile, AWC estimates a better long term growth with the global aluminum demand estimated to rise at a CAGR of 4.3% during the 2014 to 2024, driven by the electricity transmission in China ad transport in China and RoW. Global capacity utilization improved due to better industry profitability but over 5.4 mtpa merchant capacity was cut in Shandong. On the other hand, although Indonesian ban remains, rising exports in Malaysia would offset this pressure and there may be export in the range of 15 to 20 million tonnes this year. Meanwhile, the stock corrected over 33.7% during this year to date due to highly volatile commodity prices.
Cash Flow (Source: Company reports)
But, Alumina mines are placed among the lowest cash cost of production in the world, and Moody's Investors Service quite recently altered Alcoa of Australia Limited’s (AoA) outlook from stable to developing and even asserted AoA’s Baa2 issuer rating. The group also has an attractive dividend yield of 7.05%. The stock offers an attractive investment opportunity for long term investors, and we reiterate our “BUY” recommendation on the stock at the current price of $1.165.
AWC Daily Chart (Source: Thomson Reuters)
Cash Converters International Ltd
Outstanding dividend yield: Cash Converters International Ltd (ASX: CCV) has an outstanding dividend yield of over 7.62% (as of October 26, 2015) and is trading at a relatively cheaper P/E of 9.26x, as compared to its peers. The group also reported a decent revenue increase of 13.0% on a year over year basis to $374.9 million in the fiscal year of 2015, driven by better personal loan interest of $14.6 million, establishment fees of $7.8 million and corporate store revenue of $18.3 million. Stuart Grimshaw was appointed as acting Non-Executive chairman as Chairman Reginald Webb is retiring by 2016 financial year. The shares of CCV corrected over 48.53% during this year to date (as of Oct 26, 2015) on the back of class action claim on behalf of borrowers resident in Queensland who took out personal loans from the Company’s subsidiaries during the period from 30 July 2009 to 30 June 2013. The court recently approved the NSW class action settlement. Quite lately, the Australian Securities and Investments Commission also accused CCV’s car financier Caboodle for not conforming to the consumer credit laws and ordered a review of respective systems and procedures. On the other hand, the group built a solid online business and developed a wide product range to scale up the business in future. The group recently appointed CACE Partners to design its strategy to address the rapidly changing market. Emerchants signed a multiyear contract with CCV, wherein the group would leverage Emerchants customized prepaid debit cards to disburse cash advance load funds for in store as well as online customers. We believe that this is an opportunity to leverage the recent correction to enter the stock and accordingly we give a “BUY” at the current price of $0.525
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