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Top three picks - Exchange rate depreciation increasing foreign currency earnings in $A terms

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

How has the exchange rate moved?


Since the onset of the Covid-19 pandemic in late February 2020, there has been a substantial depreciation of the Australian dollar.
As an illustration, as at 26 March 2020, the $US/$A exchange rate is around 0.6007 compared with an average $US/$A exchange rate of 0.6846 over the period I July 2019 to 31 December 2019. If the $US/$A exchange rate averages 0.6000 over the period 1 January 2020 to 30 June 2020, this represents a depreciation of the $US/$A exchange rate of 12.4%. Consequently, this provides a material boost to $US earnings in $A terms which at least partially offsets the negative impact the Covid-19 virus is having on economic activity.

 

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As another illustration, the Trade Weighted Index (TWI) - which measures the average movement in exchange rates based on how much trade Australia does with foreign countries - is 53.7 as at 26 March 2020. This compares with the average for the period 1 July 2019 to 31 December 2019 of 59.0, a depreciation of 8.5%. This depreciation is less than the depreciation of the $US/$A due to the strength of the $US since the outback of the Covid-19 virus. Nevertheless, the depreciation of the TWI, if sustained over the period to 30 June 2020, will provide a material boost to foreign currency earnings in $A terms.


What are 3 stocks that could benefit from the depreciation of the $A

 

Saracen Mineral Holdings Ltd (ASX: SAR)

All commodity producers benefit from the falling $A. However, some commodities like oil have experienced a significant weakening in $US terms so the depreciation of the $A against the $US provides a partial offset. However, gold producers are benefiting from both a rising gold price and a falling $A.


Saracen is an example of a gold stock performing strongly over recent years. It has an interest in 3 significant gold mining projects located near Kalgoorlie in Western Australia. Saracen expects to produce over 500,000 ounces of gold in FY20 and over 600,000 gold in FY21. Saracen has a market capitalisation of around A$3.9 billion.


The gold price in $US terms has remained strong following the outbreak of Covid-19 and is currently trading at US$1,635 per ounce, 23% higher than a year earlier. In $A terms, the gold price is $2,725 per ounce, up nearly 50% on a year earlier.


Saracen is currently trading at A$3.57, which is a fall of around 24% from its peak. Saracen is trading on a forward PE in the mid-teens. Saracen currently does not pay a dividend.


Appen Ltd (ASX: APX)

Appen is a global leader in the development of high-quality, human annotated datasets for machine learning and artificial intelligence. The company has two operating divisions. Firstly, the Relevance Division provides annotated data used in search technology for improving relevance and accuracy of search engines, social media applications and e-commerce. Secondly, the Speech & Image provides annotated speech and image data used in speech and image recognisers, machine translation, speech synthesisers and other machine-learning technologies. Saracen has a market capitalisation of around A$2.2 billion.


In its results announcement released on 25 February 2020, Appen indicated that it expects underlying EBITDA for the year ending 31 December 2020 to be in the range A$125 -$130 million based on a $US/$A exchange rate of 0.70. If the $US/$A exchange rate averages 0.60 over this period, then this provides a boost to earnings. It is also noted that Appen indicated in February 2020 that it expects negligible impact from Coronavirus on FY20 group revenue and earnings so there appears to be relatively low risk on Appen from this event.


Appen is currently trading at A$19.00, which is a fall of around 40% from its peak. Amcor is trading on a forward PE in the low thirties and a dividend yield of around 0.5% (50% franked).


Amcor Plc (ASX: AMC)

Amcor is a global packaging company with operations across Australasia, North America, Latin America, Europe and Asia. AMC offers a range of packaging related products and services, including packaging for beverages, food, healthcare, personal and homecare, tobacco, and industrial applications. Amcor has a market capitalisation of A$12 billion.
Amcor expects that EPS on constant currency terms to increase by 7 to 10% in FY20. Amcor reports in $US terms but from an Australian investors point of view the falling $A boosts this earnings outlook. Amcor is largely a defensive stock but a weakening global economy could have a negative impact on earnings in US terms.


Amcor is currently trading at A$12.80, which is a fall of around 23% from its peak. Amcor is trading on a forward PE in the mid-teens and a dividend yield of around 5% (unfranked).


Disclaimer:


This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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