- Finding cash-rich stocks is not a solid investment proposition, unless well supported by attractive efficiency ratios like return on equity (ROE).
- A high ROE certifies that the company is duly reinvesting cash at a high rate of return.
- The NZX has a hoard of high ROE companies; investors have noticeably been flocking towards them to avail maximum benefits from a market healing from the pandemic ripple effects.
- Spark New Zealand, Pushpay Holdings & The a2 Milk Company bear impressive ROE of over 28%, 34% and 40%, respectively.
ROE measures a company’s profitability against the profit that it has kept for the business (along with any capital injections). A greater profit leads to a greater ROE. This translates into the fact that investors tend to like a high ROE.
Get Kalkine Exclusive ROE Insight HERE- Return on Equity
Two questions that arise next are- First, how can one calculate ROE? The answer is expressed under-
The second question is, where can one find companies to invest that have high ROE? One answer to the latter is the New Zealand stock market (NZX).
The NZX 50 index hit a fresh record high on 8 October 2020, up 1.83 per cent or 219.769 points, at 12,235, surpassing its previous record from February 2020. Positive news from the US as President Trump declared to halt talks on a broad stimulus effort until after the election along with New Zealand finally at level 1, contributed to investors feeling optimistic.
Further, on 9 October, the same index ended again ended in green, up by 0.36% at 12,280.54 points.
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In this backdrop, let us look at three NZX-listed stocks that are renowned to have high ROE-
Spark New Zealand Limited (NZX:SPK)
- ROE is over 28% on a LTM basis (as on 9 October 2020).
- Delivered EBITDAI in the mid-range of its guidance at NZD 1,113 million in FY20.
- Returned to top line growth (up 2.5%) after two years of flat revenue.
- Announced an H2 FY20 total dividend of 12.5 cps, 100% imputed, bringing the total FY20 dividend to 25 cps.
- The Company’s FY23 aspiration is to be mainly wireless, digitally innate and a key cloud custodian.
Spark New Zealand’s stated purpose is to help “all” of New Zealand win big in a digital world. The Company’s latest three-year strategy (FY21 to FY23) continues the momentum of the previous three years, which depicted compound annual growth in shareholder returns of 13%- the highest of Spark’s global peer group.
The Company will focus on a core set of organisational capabilities to attain a competitive edge. The sustained network investment would persist, with an emphasis laid on Spark’s 5G rollout and on creating unrestrained capacity in wireless space. Besides, building a culture defined by its engagement, diversity and inclusion remains a core strategic imperative.
The Company also has the ambition to achieve top-decile Agile maturity and 40:40:20 representation Spark-wide by FY23. It intends to play a key role in supporting New Zealand’s economic recovery and transformation, while improving its sustainability performance and lifting digital equity.
On 9 October, Spark New Zealand’s share price was at NZD 4.70, up by 0.21% from its last close.
Pushpay Holdings Limited (NZX:PPH)
- ROE is over 34% on a LTM basis (as on 9 October 2020).
- In FY20, Pushpay delivered solid revenue growth, expanding operating margins, EBITDAF growth and operating cash flow improvements.
- An award-winning company, Pushpay continues to have a positive outlook and is on the path to innovate and execute on its US market strategy.
- The Company is expecting to achieve EBITDAF for the full year ending 31 March 2021 of between USD 48 million and USD 52 million.
- For longer duration, Pushpay is aiming for more than 50% of the medium and large church divisions, a prospect representing above USD 1 billion in an annual revenue.
Pushpay offers a donor management system (comprising of donor tools, finance tools, a custom community app, to name a few) to the faith sector, NPOs and education providers in the United States and other jurisdictions.
In FY20, the Company increased its total revenue for the year ended 31 March 2020 by USD 31.4 million from USD 98.4 million to USD 129.8 million, an increase of 32%. EBITDAF increased by USD 23.5 million from USD 1.6 million to USD 25.1 million, an increase of 1,506%.
A recent Board addition has been Ms Lorraine Witten, who was appointed as a Director effective 22 September 2020.
The Company will reveal its interim results for the six months ended 30 September 2020 on 4 November 2020.
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On 9 October, Pushpay Holdings last traded at NZD 9.05, up by 0.67% from its previous close.
The a2 Milk Company Limited (NZX:ATM)
- ROE is over 40% on a LTM basis (as on 9 October 2020).
- The premium branded dairy nutritional company continues to see strong underlying consumer demand for its brand in China.
- A recent additional disruption to the daigou (reseller channel), owing to the Stage 4 lockdown imposed on Victoria region is believed to be short term.
- The Company recently made a non-binding indicative offer to acquire a 75.1% interest in Mataura Valley Milk for ~ NZD 270 million.
Uniquely focused on products containing the A2 beta casein protein type, a2 Milk Company’s strong, modern brand has continued to build momentum. In FY20, the Company’s total revenue was NZD 1.73 billion, an increase of 32.8%. EBITDA was NZD 549.7 million, an increase of 32.9% whereas NPAT was NZD 385.8 million, an increase of 34.1%.
Notably, China label infant nutrition sales was noted to be more than double, standing at NZD 337.7 million and distribution extended to ~19,1000 stores. Following suit, the USA milk revenue growth improved by 91.2% and distribution expanded to ~20.3k stores.
For 1H21, the Group revenue is forecasted to range between NZD 725 million to NZD 775 million. For FY21, the Group revenue could range between NZD 1.80 billion to NZD 1.90 billion and EBITDA margin could be in the order of 31%.
Evidently, the above discussed companies continue to advance even in a volatile market. However, investors should be wary of the fact that while ROE is a useful indicator of business quality, a whole range of factors should be looked upon- such as future profit growth, dividend policies, macroeconomic indicators, etc.
Perception around gold has been undergoing a paradigm shift and is now seen as a crucial strategic asset, with changing macroeconomic conditions. A vibrant gold market has a positive impact on companies that are involved in the exploration and mining activities.