Why investors look for stocks that have wide geographical reach?

Leave a comment
Australian Economy, Macro Economics

Diversification in terms of investing means spreading your risks across different assets or asset classes or across geographies while values can be achieved from different zones. If you are an equity investor, one strategy to invest is to look beyond equities that target business in just one country. There are stocks that are either listed in other countries too or have business points in multiple countries which merit some attention. But before adding assets in another currency to your portfolio, think through the pros and cons.

Benefits of investing in international assets, and adding international assets can be done in the form of stocks or you could buy bonds of overseas companies, currencies or even property. While liquidity surplus globally has insured some linkages between financial markets in different economies, the return trend in assets from different countries is still varied. Historical data shows that while Indian equities tend to outperform in an uptrend; when there is bearish sentiment, they almost always fall much more than Europe- and US-based equity indices. By having exposure to the latter, you can smoothen out some volatility in returns. Then there have been years like 2013 when global indices like the MSCI Europe and the S&P 500 were up roughly 25-30% and BSE Sensex fell around 2%.

Another proposition is to look at having exposure to stocks that have fangs in multiple geographies in terms of businesses for benefitting from varied environments in the respective geographies. This on the fall-side, can have some risks as well. Further, the risks at domestic level get mitigated when you look for stocks with a global exposure. In such a scenario, markets like Europe and Asia look a bit cheaper while US provides decent earnings growth. However, individual markets may have their own risks. Thus, investors try to grab stocks that have a balanced domestic and global exposure to benefit from respective cycles and broad-based experience.

Blue-chip with diverse reach: RHC

One health care stock of the above category is Ramsay Health Care Ltd (ASX: RHC), which was seen trading at $61.310 as at opening session on May 29, 2018, and has a market cap of $12.39 billion. Ramsay operates about 235 hospitals, treatment facilities, rehabilitation and psychiatric units and nursing college across six countries. The group is Australia’s largest private hospital operator and has its reach in the United Kingdom, France, Indonesia, and Malaysia. Ramsay is expected to benefit through support from governments towards private health insurance and geographical spread that can help achieve economies of scale. Lately, the company inked an agreement on setting a joint venture with Ascension, which is the largest private, tax-exempt, non-governmental health organisation in the United States to develop a new global supply chain. Meanwhile, its 1H 2018 result entailed a 7.5% rise in Core net profit after tax to $288.0 million while revenue grew 3.0% to $4.4 billion and group EBIT was up 1.5% to $470.4 million in 1H 2018.

inv

Long-term Strategy (Source: Company Reports)

Thus, we see that Ramsay’s Australian and Asian businesses have achieved good revenue and earnings growth while European businesses have been a challenge. Ramsay’s Malaysian and Indonesian facilities now continue to perform well even in challenging circumstances thanks to a focus on cost control. Thus, the group aims to manage its profile through multiple levers with a disciplined approach towards their business. Further, expansion across geographies is expected to add to the growth trajectory going forward.

 A speculative domestic play trying to expand its reach: PFP

Propel Funeral Partners Ltd (ASX: PFP) which is at a market price of $3.01, as at May 29, 2018 and market capitalization of $294.49 million, demonstrated its 1HFY18 revenue growth of 84% to $38.9 million against 1H FY17 figure of $21.2 million. Funeral volumes are up 85% to 5,053 from 2,729 in 1H FY17. Operating EBITDA and NPAT are up 79% and 90% to $11.0 million and $6.3 million, from $6.1 million and $3.3 million. Also, its operating cash flow increased by 73% to $11.0 million from $6.4 million in 1H FY17.

inv2

PFP’s growth trajectory (Source: Company Reports)

The group has lately focused on entering WA via some fruitful acquisitions, expansion in NSW/VIC (Brindley Group), launching a takeover offer for Norwood Park, and delivering on the investment strategy. Given that death volume in Australia grew by 0.9% per annum between 1990 and 2016, and is expected to increase by 1.4% pa from 2016 to 2025 and 2.2% from 2025 to 2050, PFP has some opportunities lined up at domestic front. PFP completed its successful initial public offering in November 2017, raising $131.2 million. Its 1H FY18 operating full year EBITDA of $21.1 million, was up 15% on the prospectus forecast. The company intends to pay dividend payout ratio in the range of 75% to 85% of pro-forma distributable earnings after completion of the year. The group is now using its acquisition strategy to help expand its footprint in other geographical areas.

inv3

PFP’s geographical presence (Source: Company Reports)

Overall, the firms that go beyond the extent of being recognized as local to a geographically dispersed level might add value, though subject to efforts at group level and macro factors.


Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.

Leave a Reply